LawFlash

Japan Introduces New Requirement to Identify Companies’ Beneficial Owners

January 17, 2019

In an effort to increase transparency in the control of Japanese companies—and to prevent organized crime and terrorists from misusing companies—Japan has recently introduced a requirement that, in order for a company’s articles of incorporation to be notarized, a declaration must be submitted to identify the persons with substantial control of the company.

Due to the amendments mandated by the Ordinance for Enforcement of the Notary Act (the Amendments) with respect to Japanese stock company (kabushiki kaisha), a declaration setting out persons who have substantial control of Japanese companies (Beneficial Owners) is now required during the procedure to notarize the articles of incorporation of that company upon its establishment. The new requirements took effect as of November 30, 2018.

Background and Purpose of the Amendments

The Amendments were introduced to increase transparency in the control of Japanese companies and to prevent members of organized crime groups and international terrorist organizations (Organized Crime Group Members, etc.) from misusing a company for illegal purposes (e.g., money laundering or terrorist financing) by identifying its Beneficial Owners. Following the recommendations of the Financial Action Task Force (FATF), Japan was urged to improve procedures to identify persons who have substantial control of Japanese companies to bring the country up to international standards. Japan needed to complete this task before the FATF Fourth Round of AML/CFT Mutual Evaluations scheduled in 2019.

Definition of “Beneficial Owners”

“Beneficial Owners” includes all persons that are in a relationship that enables the Beneficial Owner to control the management of a company’s businesses[1] in practice. For a Japanese company, a Beneficial Owner will include

  1. an individual who directly or indirectly holds more than 50% of the company’s shares;
  2. an individual who directly or indirectly holds more than 25% of the company’s shares (if there is no individual identified under (i));
  3. an individual who has predominant influence on the company’s business activities through investment, financing transactions, or any other relationship (if there is no individual identified under (i) nor (ii)); or
  4. the company’s representative directors where there is no Beneficial Owner under (i), (ii), or (iii).

Please note that (a) foreign companies listed or registered in a foreign country that have been designated by the National Public Safety Commission or the Financial Services Agency of Japan; and (b) their respective subsidiaries, are regarded as “natural persons” for the purposes of the application of the Amendments.[2] For example, where a parent company of a newly incorporated Japanese company is a foreign listed company or a foreign registered company, that parent company will be treated as the Japanese company’s Beneficial Owner.

Coverage and Scope of Reporting Under the Amendments

Type of Corporate Entities Subject to New Requirements

The Amendments only apply to three types of corporate entities in Japan: (i) a company; (ii) a general incorporated association (ippan shadan hojin); and (iii) a general incorporated foundation (ippan zaidan hojin). Thus, identification of the Beneficial Owner is not required when establishing a Japanese limited liability company (godo kaisha), or the branch of a foreign company.

Scope of Required Disclosure

If an individual is treated as the Beneficial Owner of a company, their name, address, nationality, gender, date of birth, ratio of total voting rights, and whether the Beneficial Owner falls under the definition of an Organized Crime Group Member etc. must be set out in the declaration form concerning Beneficial Owners (Declaration). In addition, documentation evidencing the basis for the Declaration as Beneficial Owner must be attached. Similar documentation is required where a corporate entity is treated as a Beneficial Owner.

Amended Notarization Procedure

Under the Amendments, a notary cannot notarize the articles of incorporation without submission of the relevant Declaration. Where a person who is declared to be a Beneficial Owner falls or may fall under the category of an Organized Crime Group Member, etc., the notary must request a further explanation from the person that has requested notarization of the articles of incorporation (Requester)[3] or directly from the Beneficial Owner. If the notary concludes that the Beneficial Owner is not an Organized Crime Group Member, etc., the notary may notarize the articles of incorporation, including the statement, “The Requester has declared that [the name of person] as the Beneficial Owner is not an Organized Crime Group Member, etc.” If the notary concludes that a Beneficial Owner should be treated as an Organized Crime Group Member, etc., the notary must not notarize the articles of incorporation.

Access to Declarations Submitted to a Notary

The Declarations submitted to the notary must be maintained at the notary public’s office for 20 years. The Declarations so maintained are not publicly available. However, the Requester, or a person that has demonstrated to the satisfaction of the notary a legal interest in the activities of the company, may request examination of the Declaration and may be permitted to inspect the Declaration[4].

Post-Notarization Changes in the Beneficial Owner

The Amendments do not require any further action where there have been changes in the Beneficial Owner of a company following its formation. Thus, where the shares of the company are sold to a third person, there is no need to report that fact to the relevant notary or any other person under the Amendments.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers and registration professionals (shiho shoshi):

Tokyo
Tomoko Fuminaga
Christopher P. Wells
Derek I. Simmons
Yasuyo Gonda (shiho shoshi qualification holder)


[1] Article 11, Paragraph 2 of the Enforcement Regulations of the Act on Prevention of Transfer of Criminal Proceeds (“Enforcement Regulations on Criminal Proceeds”).

[2] Article 4, Paragraph 5 of the Act on Prevention of Transfer of Criminal Proceeds, Article 14, Item 5 and Item 6 of the Order for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds, Article 11, Paragraph 4 and Article 18, Item 11 of the Enforcement Regulations on Criminal Proceeds.

[3] Often this person will be a “registration professional” (shiho shoshi) handling the registration.

[4] Article 44 of the Notary Public Notice Act.