Are naturalized people subject to more scrutiny from financial institutions?

The system for how Japanese banks reports Americans

Unfortunately, the answer to this is "sometimes." And this includes Japanese financial institutions, even though it's not Japan's fault: their hands are tied by international financial agreements.

For the case of Japanese and other countries financial institutions treating naturalized citizens differently, we can blame America.

People who have opened a bank or other financial account that can hold money recently (within the last half decade) in Japan may have noticed an odd question:

"Do you possess U.S. citizenship or possess U.S. LPR (Lawful Permanent Resident) status?"

You might ask yourself: why does Japan (or any other country)'s banks need to ask this? Japan is a sovereign nation. Its banks are subject to Japanese Law and private and not any other countries' business, no?

Well, technically yes. Practically, no.

The reason is because almost every major financial institution in the world needs to perform financial transactions with the United States for one reason or another.

One's duty to be a citizen and follow the laws of one's country does not stop just because you're not living on its soil anymore. And that includes tax laws. Almost all countries do give private citizens exemptions and breaks on things such as income tax when they're not resident within its territory. While the United States does give its citizens living overseas significant exemptions of federal and state income tax, it is far stricter than other countries when it comes to forcing citizens to disclose their income and assets, even when that income and assets are not on U.S. soil.

America leverages its position as center of the world when it comes to international trade and finance by compelling all the banks of the world that want to do business with it (which is everybody) to follow some of its rules, or pay hefty fees to opt out. 

One of these American rules that it forces banks, including Japanese banks, to follow is called "FATCA".

"FATCA", in simple English, is a policy that forces non-U.S. banks to inform America's tax bureaucracy of any and all accounts that are held by U.S. citizens (or non-U.S. citizens with permanent resident status) so that it's harder for Americans to hide wealth from U.S. tax authorities.

No bank that cares about profits (which is by definition, all of them) is going to opt out of FATCA and pay huge fees on every transaction with the U.S. just to protect its minority American customer's privacy.

But doesn't that mean naturalized Japanese who renounced or relinquished their U.S. citizenship will be left alone?

Yes and no. An American who gives up their U.S. citizenship to become Japanese legitimately (meaning, not for tax evasion and assuming they aren't rich) never has to file a U.S. income tax form or pay U.S. taxes ever again.

The problem is that some people that obtain another country's citizenship never give up their U.S. citizenship, yet they will claim to authorities, when convenient, they they no longer possess U.S. citizenship.

The U.S. government is wise to this deception, and they've educated other countries' financial institutions about it as well.

This means that sometimes, when opening a bank account, if the financial officer suspects that you are naturalized, they may ask for documentation (such as your family register) proving what your previous (or current) nationalities are. And if you were American, you will have to provide your CLN (Certificate of Loss of Nationality) proving that you indeed relinquished your U.S. citizenship.

If you are unable to provide that documentation, you may be required to fill out a U.S. W-9 tax form declaring the existence of the account, what it's for, and how much money is in it.

But I Was Never American!

Unfortunately, if you're naturalized, they may require you to prove that. That can be done with a full-form Japanese family register, which will list your previous nationalities.

But I Gave Up My American Citizenship!

Unfortunately, you may be asked to prove it, either with a U.S. Certificate of Loss of Nationality, which everybody gets, or possibly with a cancelled U.S. passport containing a 349A.1 stamp indicating you expatriated.

How often does this happen? Which banks do it?

While I don't have hard data, I do have anecdotal experience. While I have lived in Japan for decades and most of my bank accounts are decades old and pre-date me becoming Japanese, I have opened two new bank accounts (with major national Japanese banks) in the last two years. In both cases I was subject to extra scrutiny because they discovered or suspected I was naturalized. Conveniences such as being able to do the process entirely online were denied to me because they had to manually check the proof of my loss of nationality.

I should note though, that once the inconvenience of proving that I was 100% Japanese-only from a citizenship perspective, I was not discriminated against in any way, and I qualified for the lowest loan rates and approved for all the lines of credit that any other Japanese is entitled to.