In April 2024, PwC published its first-ever survey on anti-money laundering (AML) in the Europe, Middle East, and Africa (EMEA) region, led by our anti-financial crime team. The ‘EMEA AML Survey 2024’ gathered responses from hundreds of financial institutions across 40 countries and provided an unprecedented look at how AML teams and regulators are shifting their focus towards effectiveness and measurable progress in combating financial crime. Later on, we released the ‘EMEA AML Survey 2024 – Luxembourg competing for effectiveness’, a Luxembourg-focused edition of the survey offering a granular analysis of responses from key players in the country’s financial sector.
This edition comes at a pivotal time when the EU AML Package is entering into force. The regulation establishing the Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA), a new EU agency to combat financial crime, was published in the Official Journal of the EU in June 2024, along with the AML Regulation and the 6th AML Directive. The Luxembourg financial sector is also increasingly shifting its focus from mere regulatory compliance to achieving tangible effectiveness in its efforts against financial crime.
The fight against money laundering and terrorist financing is both complex and essential for safeguarding Luxembourg’s reputation and economic integrity, especially given the Grand Duchy’s status as a financial centre. Luxembourg’s sophisticated financial services and international scope generally make AML operations more intricate than in other jurisdictions, further raising the stakes.
In this blog, we explore the findings of the Luxembourg-focused survey, highlighting these key challenges while offering insights into the path forward for strengthening the country’s AML framework.
Regulatory challenges and the call for international consistency
One of the most notable findings from the survey is the marked scepticism among Luxembourg respondents regarding both current and upcoming AML regulations (in the Grand Duchy, upcoming regulations refer to the EU AML Package). Respondents also appear to agree on the need for universal AML standards.
Uncertainty over regulatory effectiveness
Luxembourg respondents remain cautious about the practical implementation of new rules given the country’s unique financial landscape. Indeed, only 22% believe that the existing and upcoming AML rules are fully effective for combating financial crime. In contrast, 53% of respondents across the broader EMEA region express confidence in current regulations, while 54% show trust in upcoming AML frameworks.
Furthermore, a significant 78% of respondents in Luxembourg believe that the upcoming AML rules won’t effectively address their challenges, while 31% feel that these regulations lack practical industry guidance that can be applied to their specific needs.
This attitude underscores the unique complexity of the Luxembourg financial system, as regulations that are mainly drafted with retail clients in mind may not fully address the practical realities that Luxembourg AML teams face. Indeed, the Luxembourg financial sector specialises in large, complex, transnational institutional clients in asset and wealth management (AWM), private banking, and corporate banking, which require more sophisticated AML controls than retail sectors.
Universal standards
Given these challenges, a substantial 90% of Luxembourg respondents believe the implementation of universal regulatory standards would significantly enhance AML effectiveness. However, 25% expressed that the upcoming AML regulations lack cross-jurisdictional uniformity.
Inconsistent AML rules can significantly complicate Luxembourg’s many cross-border AML operations and make it difficult for AML professionals to adopt a seamless and standardised approach to AML compliance. For example, establishing ultimate beneficial ownership (UBO) for institutional or corporate clients is a particularly onerous task in Luxembourg which often requires gathering documentation from multiple jurisdictions.
The call for universal standards isn’t simply about reducing the operational burden on financial institutions but also about improving the overall effectiveness of AML measures. When AML regulations vary widely across jurisdictions, it becomes easier for financial criminals to exploit regulatory loopholes and inconsistencies.
Operational challenges in Luxembourg’s AML landscape
Luxembourg faces major operational challenges that are critical for its long-term AML effectiveness. While the country has made significant progress in maintaining high AML standards, its financial institutions must continue investing in both their people and technology to stay ahead.
The current reliance on legacy systems in some institutions and the difficulties in recruiting and retaining skilled staff may become even more pressing as financial crime becomes more sophisticated. Luxembourg shouldn’t only focus on immediate operational needs but also prioritise upskilling its workforce to be able to adopt more advanced AML technologies.
Cost increases
The operational landscape for AML compliance has become increasingly costly over the past two years; AML costs have gone up by 18% in Luxembourg, compared to 13% in the rest of EMEA. Specifically, 69% of Luxembourg respondents reported that their AML costs have increased by at least 10%, while a third of them have experienced cost hikes of 30% or more.
The primary cost drivers over the past 24 months have been the need to recruit more staff and investments in new digital tools. Indeed, a rise in staff is essential for ensuring compliance, especially in a market as complex as Luxembourg’s. In AML, technology alone isn’t enough to ensure proper AML procedures. At the same time, investing in digital tools is necessary for institutions to manage the increasing volumes of data and transactions that need to be monitored to detect and prevent financial crime.
The situation is even more pronounced for institutions using legacy systems—which is the bulk of Luxembourg’s financial institutions. Firms using older systems have seen a 20% increase in costs over the past two years, compared to just 17% among institutions with more modern systems. The difference may seem small, but it highlights a growing divide between firms that have embraced the digital transformation and those that have yet to do so. Institutions with outdated technology may find it increasingly difficult to compete as those with advanced tools pull ahead in both compliance and cost efficiency.
Customer Due Diligence
Interestingly, Luxembourg respondents view customer due diligence (CDD) as the strongest AML control, which contrasts sharply with the broader EMEA perspective. In the survey, 48% of Luxembourg respondents cited CDD as their most effective control measure, whereas many of their EMEA counterparts view it as one of the least effective.
In the last few years, pressure from the Commission de Surveillance du Secteur Financier (CSSF) has made AML professionals focus on CDD, the key first step of any AML process, as a way of creating a virtuous operational cycle. If CDD isn’t carried out thoroughly and correctly, AML teams risk creating a vicious circle where the data that is fed into technological tools may be wrong, leading to a series of cascading errors and setbacks.
Putting people first: upskilling and recruitment
Despite Luxembourg AML professionals appreciating CDD’s critical role, they tend to underestimate the value of upskilling staff. The survey found that 38% of respondents view upskilling their employees as the least effective AML control. This perception may be due to the already high level of expertise among AML professionals in Luxembourg, where the financial sector is more specialised, and compliance teams tend to be highly trained.
However, this view towards upskilling could hinder long-term progress, particularly as the industry continues to evolve. Upskilling remains the most crucial factor for enhancing operational efficiency, especially when it comes to managing the more advanced digital tools now being integrated into AML operations. No matter how advanced AML tools become, they will be largely ineffective without trained staff that understands how to carry out AML processes.
The lack of faith in upskilling is also surprising because in Luxembourg recruiting skilled AML professionals is a major challenge that could easily be addressed by training existing staff. According to the survey, 44% of Luxembourg respondents identified staffing shortages as a major issue, significantly more than in EMEA (24%) and the EU (25%).
Nevertheless, the competitive job market in Luxembourg, coupled with high salary expectations, has made it difficult for many institutions to attract and retain top talent. According to 31% of respondents, salary packages are the primary impediment to expanding their workforce, which has created stiff internal competition for skilled professionals within the Grand Duchy. Respondents also reported that Luxembourg’s attractiveness for employees as a country is also a limiting factor when recruiting new staff. Altogether these factors make Luxembourg a unique outlier among EMEA countries when it comes to AML recruitment.
Embracing new technologies: Luxembourg’s path forward in AML compliance
Technology plays a critical role in modern AML frameworks, yet Luxembourg’s financial institutions face significant hurdles to adopting advanced digital tools. They stem from technical challenges like upgrading older operating systems and increasing data quality, but also from organisational ones like recognising the importance of technology in AML. Luxembourg AML teams shouldn’t rest on their laurels, especially when it comes to technology.
Outdated systems
As mentioned, one of the key challenges Luxembourg AML teams face is the reliance on legacy systems, with 38% of respondents admitting their AML systems are “outdated”. This reliance on older technology hampers the adoption of newer tools like artificial intelligence (AI). Indeed, 65% of respondents reported their systems aren’t currently advanced enough to allow for the implementation of AI.
The Grand Duchy shouldn’t only invest in upgrading its systems but also ensure that its workforce is sufficiently skilled to implement and manage these technologies effectively. As financial crime becomes more sophisticated, the ability to use advanced technology such as AI and cloud-based systems will become critical for maintaining the country’s widely recognised AML effectiveness.
Technological reluctance
One of the hurdles to upgrading technology seems to be a general unwillingness to implement new systems. Although some institutions are making strides in the right direction by setting up new tools, overall Luxembourg AML teams have been slower to adopt new technologies compared to their EMEA counterparts. This institutional inertia may threaten Luxembourg’s competitive edge in the AML space if not addressed proactively.
For example, only 13% of respondents in Luxembourg have implemented cloud solutions, compared to 53% in the broader EMEA region. Similarly, just 53% of Luxembourg respondents are considering the use of AI in their AML operations, while 81% of EMEA respondents are exploring AI adoption. Overall, 13% of Luxembourg respondents said they don’t plan to allocate any of their AML budget to new digital tools over the next two years, compared to just 5% in the rest of the EMEA. This reluctance to embrace new technologies could ultimately hinder Luxembourg’s competitiveness in the global financial market.
The banking sector appears to be the most resistant, with 20% of banks indicating they won’t allocate any budget for technological upgrades. On the other hand, asset managers are more willing to invest, with all respondents from that sector planning to invest in new technologies in the coming years. This divergence indicates a broader divide within Luxembourg’s financial sector: while some institutions recognise the need to invest in technology to stay competitive, others are lagging, potentially risking their long-term effectiveness.
Data quality
Data quality issues, cited by 53% of respondents, are another major barrier. Effective AML operations depend on clean, high-quality data. Without modernised systems and skilled staff to manage these technologies, Luxembourg institutions may struggle to generate the necessary data for accurate AML processes, especially when factoring in the difficulties of cross-border data sharing.
Overconfidence
What is particularly concerning is the overconfidence displayed by some Luxembourg AML teams regarding their existing systems. Despite their outdated infrastructure, 42% of respondents who admitted their systems were outdated also expressed full confidence in those same systems. Moreover, 19% of those who reported being “fully confident” in their operating systems hadn’t actually tested those systems for errors or effectiveness. This complacency could pose significant risks in an industry where the ability to respond swiftly to evolving financial crime tactics is crucial.
Conclusion
Luxembourg’s AML framework is evolving in response to the increasing complexities of the global financial landscape, and there are clear opportunities to be seized for strengthening its capabilities.
On the operational front, the rise in AML compliance costs reflects the growing emphasis on building even more robust teams and investing in modern digital tools. The increase in staffing highlights Luxembourg’s commitment to its long-standing very high compliance standards, ensuring that its institutions are equipped to handle the sophisticated needs of institutional clients and complex cross-border operations.
However, reliance on outdated legacy systems remains a significant challenge for many financial institutions in the country. These systems impede the adoption of advanced technologies that are essential for improving AML processes.
Most importantly, Luxembourg AML teams need to invest in their people and recognise that no AML process can be successful without skilled staff who understand the complexities of financial crime. Luxembourg AML teams want to ensure they constantly upskill their staff to stay one step ahead of financial criminals and retain their competitiveness. Only by doing this will they be able to effectively upgrade their technology.
Ultimately, Luxembourg is well-positioned to lead the future of AML compliance. By combining strong talent with strategic investments, the country will further solidify its status as a global leader in financial services and AML effectiveness.
What we think
Humans, not robots, that can speak AML, business, and technology will be the crucial catalysts of a technological transition. Only by combining a thorough understanding of how to combat financial crime, knowledge of how the complex Luxembourgish financial industry operates, and proficiency with cutting edge technologies, can AML teams reach their full potential.