Luxembourg is anti-money laundering (AML) and counter-terrorism financing (CTF) compliant. Both matters are, indeed, at the top of its agenda. This isn’t a recent commitment, rather, it dates back almost two decades. This article revisits the country’s developments on the matter.
Unquestionably, the impact of money laundering (ML) and terrorist financing (TF) activities is severe and extensive, and affects businesses, economies and societies locally and globally. The fight against money laundering and terrorist financing is on, shaping the political agenda globally, in Europe and in Luxembourg.
In the last few years, EU institutions have started a renewed effort to crack down on money laundering and terrorist financing. The EU’s revived focus on ML and TF materialised into the creation of a comprehensive 12-month Action Plan that the European Commission adopted on May 7 2020.
FATF-the Financial Action Task Force, remains the key actor in the fight against money laundering and terrorist financing. FATF’s objectives for the 2020-2022 focus on digital currencies and payments, ethnically or racially motivated terrorism, migrant smuggling, environmental crime, and illicit arms trafficking. Locally, the CSSF, the competent supervisory authority of the financial sector, is playing a fundamental role for Luxembourg to move further in AML/CTF matters.
Despite ballooning financial crime compliance costs and fines, the staggering magnitude of money laundering and terrorist financing activities remains. However, the cost of compliance, albeit high, is lower than the cost of non-compliance.
The increased focus on creating rules for understanding business, assessing the risk exposure to being misused for ML or TF, and asking questions as to who is the true beneficial owner of businesses have helped to set the right direction in recent years.
Recent AML developments in Luxembourg
As a member of both the EU and the FATF, Luxembourg is directly affected by the AML/CTF developments in these institutions.
In the asset and wealth management industry, Luxembourg’s first money laundering (ML) / terrorist financing (TF) risk analysis of the collective investment sector, published on January 17, 2020, has driven some important events. This risk analysis applies a granular and systematic approach to the ML/TF inherent risks the sector is facing.
It also looks at risk-mitigating factors applied by investment fund managers and competent authorities, as well as residual risk levels resulting from the application of these risk-mitigating factors.
By issuing updated legislation and regulation starting in December 2019, Luxembourg started implementing the 5th AML Directive into its national legislative and regulatory framework. Ahead of the schedule, though, the country had already begun in early 2019, when it implemented the national register of beneficial owners for all companies domiciled in the country. Certainly, this was a requirement of the 4th EU AML Directive, but Luxembourg anticipated the implementation of the requirements of the 5 EU AMLD and made the content of the register publically available.
To back up this decision, the CSSF Circular 19/732 was published on 20 December 2019, bringing further clarifications on the identification and verification of ultimate beneficial owners’ identity. It is the Luxembourg Business Registers (LBR) that gathers this information.
This forward-thinking willingness shouldn’t come as a surprise to anyone. A large section of Luxembourg’s market isn’t local, so the commitment to transparency is even more necessary.
The cross-border nature of Luxembourg’s financial market triggers the need to apply stringent rules to identify and verify the ultimate beneficial owner’s identity, clearly defining the source of funds or wealth. The larger the amount of money involved, the more intense the control.
Luxembourg’s sound AML compliance was among the strongest arguments the government used to counter recent accusations of failures on AML that involve beneficial ownership issues. Read the Government’s response here.
Luxembourg’s solid legal framework supporting AML/CTF since more than a decade
Because of both, the fact that Luxembourg is one of the largest fund distribution hubs in the world and the nature of cross-border businesses and transactions, the attention to AML legislation is crucial.
By the end of 2018, in line with a EU requirement, Luxembourg issued its National AML/CTF risk assessment, a 24-page document in which the country’s exposure to AML/CTF risks is analysed in detail. It has been updated in December 2020 to take into account the evolution of the market over time.
This, together with the risk assessment analysis on the collective investment sector mentioned above are now an integral part of Luxembourg’s fight against ML, and are thoroughly considered by professionals when they set up or review their own AML/CTF governance framework.
All professionals, including every investment fund and management company or alternative investment fund manager (AIFM,) are setting their AML/CTF risk appetite in writing and assessing AML/CTF risk according to the nature of their business and the size and complexity of their organisation.
This is the base to having AML/CTF internal controls in place to reduce the assessed inherent risk to an acceptable level of residual risk.
CSSF, a national regulator that takes the fight against money laundering and terrorist financing very seriously
The CSSF has set up an off-site and onsite AML/CTF oversight visits model following the same risk-based approach we referred to before. To optimise time and resources, the Luxembourg regulator pays special attention to higher-risk entities (inherent risk) applying even more stringent controls to them. It also runs systematic, yet slightly less man-power intensive, follow ups with entities whose risk rates are lower.
In addition, looking for systematisation and consistency, the CSSF has implemented regular reporting for professionals – that include several mechanisms – in the past few years. We can cite, for instance, the AML/CTF CSSF questionnaire that companies must complete on an annual basis, or the annual compliance and AML/CTF reports and replies to letters, where the CSSF follows up any shortcoming that may have been identified.
On top of these mechanisms, many investment funds are required to issue an annual long-form report, which includes an audit of AML/CTF compliance. This procedure has been running since 2002.
Also, the CSSF is currently working on rethinking how investment funds, management companies and AIFMs are audited overall. This certainly includes AML/CTF matters.
What the CSSF has publicly revealed is that they will revisit the range of investment funds called to comply with the audit report and the nature of the work to be performed. This, to ensure that the measures adapt to the evolution of both the business and the market.
In the upcoming months, we expect more CSSF circulars on this matter that will provide details of the enhanced requirements.
A change of mindset on AML/CTF compliance
Following the latest developments of the Luxembourg AML/CTF framework that followed the 5th EU AML Directive implementation, market players are revisiting their AML/CTF internal controls frameworks.
They are, in fact, upgrading the AML game. An AML/CTF “checking the box” compliance approach is transforming into one that understands the AML/CTF risk exposure to their business, and sets risk-based measures according to the risk assessed and the risk appetite defined.
Through this more coherent and complex approach, market players assess not only if they are complying with regulation, but also how efficient and effective this compliance is.
The digitalisation of processes is with no doubts a key aspect influencing efficiency. The COVID-19 crisis, like in any other industry, is accelerating digitalisation. Authentication processes or the transfer of documents via digital means have become an important concern and need.
More concretely, digitalisation is key to:
- Having a better view on the AML/CTF risk exposure systematically, including real time data access for reporting;
- Offering insights into the effectiveness of the controls, namely, whether their utility and results matches their raison-d’être.
- Ensuring that experts on AML/CTF subject matter within the business can concentrate efforts on value-added work, rather than collecting and collating information and documentation;
- Achieving compliance but based on a better investor onboarding experience.
The EU is currently working on the implementation of its EU Action plan, which was voted in May 2020. This EU Action plan is based on six pillars and is due for implementation in 2021. The initial timeline of the first quarter 2021 which was foreseen at the time is slightly moving, however, the implementation is set to be moving ahead rather swiftly. Learn about the six pillars planned and get out infographic here.
AML in Luxembourg, what’s next?
The pace of AML/CTF regulatory developments won’t slow down and Luxembourg market players are following the evolution closely. The legislation wants to go further and become more granular so ML cases previously not contemplated can be identified and punished.
Luxembourg has deep expertise in AML and has systems in place to precisely deal with the cross-border nature of business. It’s workforce is sophisticated and multilingual too, helping to serve diverse clients.
At EU level, the intention and promise is to create a set of rules, a supervisory regime and an enforcement regime that are coherent and effective across the entire European market. This is a positive spirit that should make compliance with EU AML/CTF rules for all market players easier as the baseline will be defined more coherently. The political determination to make the life of criminals harder is set to be relentless by changing the structure of the regulatory regime.
Our firm and all Luxembourg companies apply sound AML/CTF procedures to guarantee we develop professional relationships with people whose business is actually legal.
What we think
The essence of the fight against money laundering and terrorist financing is not just to try and tick checklist boxes. Professionals need to understand the AML/CTF risk of their business and ensure the measures/internal controls are effective, achieving what they were designed to achieve