Japan: Countermeasures against money laundering in trust agreements
On July 24 2019, based on a request from the Financial Services Agency (FSA), the Trust Companies Association of Japan – a financial association whose members comprise of financial institutions engaged in trust businesses – proposed sample provisions to deal with the risk of money laundering etc. in trust agreements. The outline of these sample provisions is as follows:
(a) In cases where the trust under the agreement is likely to be used for transactions that violate money laundering regulations, etc., if it is inappropriate to continue this transaction, the trustee may terminate the agreement.
(b) The trustee may make various inquiries and the submission of materials in order to collect information on the settlor, the beneficiary, etc. In the case where no response is provided by the settlor or the beneficiary without a justifiable reason, the trustee may terminate all or part of the agreement, or restrict part of the transaction.
(c) In the case where the trustee considers that there is a possibility of a violation of money laundering regulations, etc. in light of the responses of the settlor or the beneficiary to the various inquiries, etc. under paragraph (b), the trustee may terminate all or part of the agreement, or restrict part of the transaction.
In response to the proposal, some trust banks in Japan have already added these provisions to their template trust agreements. They are expected to become general market practice.
From the perspective of settlors and beneficiaries, the treatment of documents that are subject to obligations of confidentiality or decision-making documents (minutes of meetings of board of directors, etc.) will be an issue. Since (1) there is no restriction on the scope of materials that the trustee may request the settlor or the beneficiary to submit under paragraph (b) above, and (2) it is unclear in what circumstances the settlor or the beneficiary has a 'justifiable reason' to refuse to submit such materials, there is a possibility that the trustee may terminate the trust agreement or restrict part of the transaction if the settlor or the beneficiary refuses to submit such documents even if the settlor or the beneficiary believes that it has a justifiable reason. Accordingly, the operation of these provisions in actual practice (particular in relation to materials requested by the trustee) should be carefully monitored in order to establish and refine good market practice.