How do the AED’s recent clarifications fit into the broader financial crime agenda?

Anti-money laundering (AML) and counter-terrorist financing (CTF) efforts have been fast-tracked globally, in the EU and then locally in Luxembourg, especially in the past few years. As an international financial center with the largest fund industry in Europe, Luxembourg faces certain risks associated with financial crime. This is why the policymakers are working so hard, via their extensive regulatory efforts, to decrease possible exposures to money laundering and terrorist financing (ML/TF) activities. Clarifications made by the AED, some as recent as March 2023, help make it easier for alternative asset managers to navigate AML/CTF compliance.

The Luxembourg Financial Intelligence Unit (CRF) is responsible for receiving and reviewing all suspicious transaction reports in Luxembourg and publishes an annual report summarizing all such key statistics. Criminal tax offenses and fraud are the two areas most reported. According to the Commission de Surveillance du Secteur Financier (CSSF), ten fines valued between EUR 35,000 and EUR 1.3 million were issued in 2021 relating to breaches of AML/CTF regulations¹.

No stone left unturned when it comes to AML/CTF regulatory coverage in Luxembourg

Regulation is one of the main drivers behind many AML/CTF business rules. While the main regulatory efforts kicked off in 2004 with the AML/CTF Law², and subsequent key regulations like CSSF Regulation No 12-02 of 14 December 2012 on the fight against ML/TF, a significant number of new legal texts, guidelines and clarifications have been released in the past five years.

One of the most recent local developments, especially for alternative asset managers, is the release of two FAQs and a guidance on AML/CTF Law by the Administration de l’enregistrement et des domaines (AED), one of Luxembourg’s three tax administration bodies³. The AED acts as a supervisory and control authority for specific categories of professionals, seeking to both prevent and reduce ML/TF activity. While there are a few pre-existing circulars about identification and verification obligations for professionals in scope of the AED, the AED framework has evolved and requirements have been clarified, especially for reserved alternative investment funds (RAIFs) and other AIFs which are not regulated by the CSSF.

Three pillars of professional obligations for AML/CTF and actions to comply

The AED guidance for RAIFs was updated in March 2023, and contains some limited amendments, such as the removal of the requirement to perform systematic enhanced due diligence for customers/investors residing in third countries. Information on the AML/CTF questionnaire and content expected in the RC report are also outlined. In addition, the AED AML framework makes clarifications to align with AML/CTF Law⁴ and the CSSF AML framework:

1. Client due diligence (articles 3, 3-1, 3-2 and 3-3 of the AML/CTF Law): funds must conduct client and ultimate beneficial owner identification checks, client acceptance procedures, record keeping and ongoing due diligence.
2. Adequate internal organization (articles 2-2, 4 and 4-1 of the AML/CTF Law): funds must appoint a responsable du respect des obligations (RR) and responsable du contrôle du respect des obligations (RC), define the term “risk appetite”, conduct an analysis to assess AML/CTF risk scoring, as well as the overall ML/TF risks, design and implement appropriate AML/CTF policies and procedures, and hold training and awareness sessions.
3. Cooperation with authorities (article 5 of the AML/CTF Law): funds must ensure their procedures are in line with the Law (article 5), prepare the RC annual report (to be approved by the board and to be filed with the competent authority) and complete the AML/CTF annual survey.

Be proactive to avoid non-compliance

In April 2022, administrative sanctions were imposed by the AED to professionals in the real estate sector who did not comply with their duties in accordance with the regulatory provisions, in particular the obligation to cooperate with authorities. The recent clarifications from the AED are a step in the right direction: an attempt to make it easier for funds to understand and implement the requirements.

As a start, funds can complete a gap analysis to find potential holes in their existing policies and procedures. Once gaps have been identified, it is easier to know what – or if any – external support is needed to ensure compliance. Remediation support (Know Your Customer/Know Your Transactions/Know Your Distributor/Know Your Investment), staff/BoD training and workshops, onboarding assistance, managed services, and AML tax services are some of the areas where funds regularly benefit from independent advisory or assurance input to strengthen their compliance in a sensitive area where deficiencies can be very harmful for business reputation and sustainability.

How EY can help

Based on our substantial market expertise, EY can help perform a gap analysis of your existing procedures, and/or set up new documentation to ensure you comply with the obligations of the regulatory framework, outlined below.

Our extended assurance AML/CTF services are listed below:

• Gap analysis
• AML/CTF remediation support (Know Your Customer (KYC)/Know Your Transactions (KYT)/Know Your Distributor/Know Your Investment)
• Process and procedure calibration
• Staff/BoD training
• Review of specific relationships (clients, distributors, investors, among others)       
• Onboarding assistance
• Due diligence services
• Managed services (AML/CTF)
• AML tax services (with EY tax department):
  • AML tax impact assessments, KYC and KYT tax onboarding remediation assistance
  • Review of AML tax procedures
  • AML tax workshops on CSSF AML tax circulars 17/650, as amended by 20/744