Criminal enterprises appear to be increasingly relying on regional financial institutions for money laundering because oversight on overseas money transfers is less stringent than at the nation's megabanks.

Financial authorities have uncovered a string of suspicious transactions from accounts held at those institutions since early this year.

As of late September, more than 2 billion yen ($17.85 million) had flowed out of the country, fueling suspicions the money may be funding terrorist or other nefarious activities.

Favored institutions for money laundering are regional banks and shinkin banks, of which the latter function as credit unions.

Mixing ill-gotten proceeds with general transactions gives the appearance that everything is aboveboard.

In a rare move in September, the Financial Services Agency (FSA) began on-site inspections at more than 10 regional financial institutions deemed to have insufficient measures in place to prevent money laundering. It is almost unheard of for the agency to target so many banks at one time in a money-laundering crackdown.

Given global concerns about the flow of "dirty" money across national borders, the FSA is pushing financial institutions to do more to stop money laundering.

EXAMPLES OF SCAMS

Saitamaken Shinkin Bank, a leading bank in its field, notified the agency in March about 23 suspicious overseas transfers totaling 1.9 billion yen from a single account between May 2016 and January 2018.

The bank's headquarters is in Kumagaya, Saitama Prefecture, outside Tokyo.

The transactions were made by a trading company run by a Bangladeshi national.

The trader based in northwestern Saitama Prefecture used to use his account to receive proceeds from used car exports but had begun transferring large sums to Hong Kong and elsewhere under the pretext of being an intermediary in exports of secondhand vessels and agricultural products to Bangladesh from such areas.

The businessman turned up at the bank's Ranzan branch with tens of millions of yen on several occasions and transferred the money to Hong Kong and other destinations through his company's account at the bank.

He apparently told the bank that he was an agent for a trading company in Bangladesh and the funds were to cover export costs of secondhand vessels, rice, sugar and other products to his mother country from Hong Kong and elsewhere.

The frequency and amounts of overseas remittances spiked from last December, according to a bank official.

The true nature of the money transfers has yet to be ascertained as the trader refused to disclose documents on the transactions to the bank.

Officials from the bank's head office met with the man in January to confirm the validity of the transactions before allowing him to continue sending large sums of money overseas.

However, in February, the bank's audit division blocked the transactions on grounds the source of the remittances had not been established.

In response to bank's decision to notify the FSA in March about its suspicions, the agency determined that the transactions almost certainly amounted to money laundering, which, in turn, led the agency to conduct on-site inspections at the shinkin bank in mid-September.

When contacted for comment by The Asahi Shimbun, a representative of the bank refused to discuss individual cases but pledged to tackle increasingly sophisticated illegal money transfers.

After the incident came to light, Saitamaken Shinkin Bank contacted U.S. monetary authorities through an international lawyer and set up a task force to look into the issue of money laundering.

The Bangladeshi trader used a small auto-repair shop in northwestern Saitama Prefecture as the address of his trading company in making the money transfers.

When contacted by an Asahi Shimbun reporter, the owner of the garage said that a "friend of a friend" wrote down the address when registering the trading company, adding that the individual did so without his permission. He said he didn't know anything more about the matter.

When the reporter visited the home of the Bangladeshi trader, a man identifying himself as a cousin explained that his relative is overseas.

Another acquaintance of the Bangladeshi trader said he used to export secondhand cars several years ago and had recently started having trouble getting in touch with him.

“I have no idea what he is doing right now,” the man said.

Other dubious international money transfers that FSA officials said likely involved North Korea were uncovered at Ehime Bank in Matsuyama, Ehime Prefecture, early this year.

The FSA and investigative sources said that a bank account holder transferred more than 500 million yen to Hong Kong on five occasions from May to June 2017.

LAX CHECKING SYSTEM

In both cases, suspicious transfers were integrated into general transactions by individuals holding accounts at regional financial institutions.

Given their lack of expertise, systems and other factors in transferring large sums overseas, regional financial institutions often ask megabanks to do so on their behalf.

The FSA said megabanks tend to be less strict in scrutinizing overseas remittance requests sought by regional financial institutions that are in the same line of business as theirs, despite being required by law to prevent illegal transfers.

The FSA fears that small regional financial institutions could be targeted for money laundering by criminal groups because they likely would be one step behind in dealing with the problem.

Financial institutions are obliged under the Law for Prevention of Transfer of Criminal Proceeds to ascertain whether the transaction is a mask for money laundering.

Even so, a senior FSA official said the agency realizes that regional financial institutions are limited in their capability to establish their own systems to counter money laundering.

“The financial industry as a whole is required to support them," the official said.

The agency is pushing megabanks to exercise more care when they are entrusted by regional financial institutions to handle overseas transactions.

The FSA argues that closer scrutiny at megabanks would prevent illicit transfers that exploit accounts at regional financial institutions.

One megabank executive seemed put out by the FSA's stance, saying: “We are doing what we should do in undertaking remittances. Any assessment on whether transfers are appropriate should be made by the financial institutions that are commissioned by customers."

The Financial Action Task Force (FATF), a global organization dedicated to cracking down on money laundering, is scheduled to examine steps taken by Japanese financial institutions to prevent the activity.

Experts cautioned that international trust in Japan's financial industry could be eroded if there are any delays in dealing with the problem.

(This article was compiled from reports by Hirotaka Yamaguchi and Tomoya Fujita.)