Know Your Assets: the last update of the CSSF as a wake-up call to all sectors

Know Your Assets (KYA) is a critical process that involves identifying, assessing and managing money-laundering and terrorist financing (ML/TF) risks posed by the investments, to which professionals of the financial sector, in scope of the law of 12 November 2004 on the fight against money laundering and terrorist financing, as well as professionals of the insurance sector, are exposed. The KYA practice is essential not only for compliance with regulatory requirements but also for effective ML/TF risk management.

On top of the anti-money laundering and counter-terrorist financing (AML/CTF) obligations, there are also implications related to financial restrictive measures, as compliance with these measures extends to assets. In their investment decisions, professionals might, in effect, directly or indirectly release funds to targeted entities, jurisdictions or persons. 

The latest updates from the CSSF, including the insights from the December 2024 Q&A, highlight the need for enhanced reporting and increased scrutiny of asset managers.  

The importance of knowing your assets 

1. Regulatory compliance 

The Commission de Surveillance du Secteur Financier (CSSF) Regulation No. 12-02 requires professionals of the financial sectors to document ML/TF risk assessments on investments (Art. 34.2) and carry out due diligence adapted to their risk assessment. This is particularly relevant for investments in jurisdictions with AML/CTF regulatory frameworks that differ from, or are non-equivalent to, Luxembourg, and this equivalence must also be assessed and documented. 

In addition, Art. 39 (1 bis) of the same CSSF Regulation reminds us that releasing funds to targeted entities through capital investments is a breach of compliance with applicable restrictive measures.  

For the insurance sector, Regulation No. 20-03 of the Commissariat aux Assurances (CAA) brought a similar AML/CTF obligation in its Art. 32 regarding non-quoted assets. While from a restrictive measure perspective, even though Art. 31 of the CAA Regulation does not require insurance professionals to specifically pay attention to their assets, the Luxembourg law of 19 December 2020 on restrictive measures (“the Law”) is clear: compliance with restrictive measures is mandatory, and this obligation is one of results.  

As such, the CSSF Regulation No. 12-02 provision should be viewed as a reminder, as it is common sense to track who benefits from the capital of investments and which activities it supports. It can therefore be said that it is essential that these ML/TF risk assessments be performed upfront and on an ongoing basis. 

2. Risk management 

Understanding  assets allows for better risk assessment and management. Organizations can identify vulnerabilities, assess the potential impact of asset loss, and implement strategies to mitigate risks. A proactive approach can safeguard against financial losses and enhance overall stability. In addition, it mitigates the exposure of firms from reputational risk if some investment restrictions or other criminal infringement were to be committed, e.g., terrorism financing or restrictive measures breaches. 

3. Strategic decision-making  

Accurate asset knowledge enables informed decision-making. Organizations can allocate resources more effectively, identify investment opportunities and optimize their portfolios. This strategic insight is crucial for long-term growth and sustainability. 

4. Enhanced transparency 

Knowing your assets fosters transparency within organizations. Stakeholders, including investors, regulators and customers are more likely to trust organizations that demonstrate a clear understanding of their asset universe. This transparency enhances reputation and builds stronger relationships with stakeholders. 

Q&A from CSSF dated 13 December 2024 

In a recent Q&A document issued by the CSSF on 13 December 2024, significant clarifications were provided regarding the obligation to implement KYA practices deriving from the CSSF Regulation No. 12-02, particularly distinguishing between securities negotiated on regulated markets and assets not admitted to trading on regulated markets, which includes those traded over-the-counter (OTC). The CSSF emphasized the following key points: 

• Differentiation of markets: The CSSF highlighted that the obligations surrounding KYA practices differ based on whether assets are negotiated in a regulated market or OTC. While traded on regulated markets, assets are not subject to specific compliance requirements except to keep evidence of the negotiation on stock exchange, OTC assets require ML/TF risk assessment and due diligence which has to be described in the procedures of the professionals 
• Assessment and validation for non-traded assets: The CSSF expects professionals to conduct thorough assessments and validations of these assets upfront, particularly from an AML/CTF perspective and restrictive measures. This upfront assessment becomes a game-changer in a dynamic asset management environment, requiring professionals to ensure they understand the nature and risks associated with non-traded assets before engaging in transactions 
• Ongoing monitoring: Financial institutions are required to continuously monitor their assets and associated risks, regardless of the market in which they operate. This ongoing diligence on all assets is crucial for maintaining compliance and protecting against potential financial crimes in case of changes in the configuration of the non-traded assets (e.g., shareholding structure) 
• Documentation and reporting: The CSSF reiterated the importance of maintaining comprehensive documentation for all assets. This includes ensuring that all asset holdings, transactions and associated risks are adequately recorded and reported to comply with regulatory standards 

While it all might seem quite straightforward, there is room for oversight. A few questions arise:  

• Is the obligation laid down in Art. 39 of the CSSF Regulation No. 12-02 about the restrictive measures on assets applicable to assets admitted to trading on a regulated market or not?  
• Actually, how should one comply with the binding restrictive measures on all assets in the insurance and financial sectors, specifically on assets admitted to trading on a regulated market?  
• Can we assume the stock exchange would suspend the quotation if the security became a targeted entity and therefore rely (or outsource?) on the foreign stock exchange for the compliance of restrictive measures obligations?  

For the latter, this has still to be verified as the stock exchange may not be subject to the same binding list of restrictive measures, of which the Law explicitly includes the Luxembourg list on the panel. Even though the Luxembourg list is a temporary list, which must be confirmed at the EU level within 90 days, professionals might still be financing a targeted entity or person during that period if the stock exchange does not perform a namecheck on such list. The same may apply for non-European stock exchanges if not bound by the EU stock exchange list.  

Restrictive measures are rule-based, not risk-based. We may say “a criminal sentence is at stake” but looking at this more closely, the objective of the restrictive measures in the EU is related to our Common Foreign and Security Policy which aims to safeguard the EU’s values, supporting democracy and preserving peace. The current geopolitical situation might trigger some further concerns about which assets are being invested in and which industries are being financed, and as a result a deeper reflection on KYA practices may be warranted. 

Potential impact on the Luxembourg regulatory environment 

This CSSF Q&A has the benefit of clarifying one thing: due diligence on assets is necessary, specifically upfront as far as non-traded assets are concerned. 

In a dynamic investment environment, the necessity for upfront assessments will undoubtedly require operational changes. Organizations will need to enhance their due diligence processes to pre-trade screening, invest in training for staff and potentially adopt technologies to facilitate effective asset validation and risk assessment at onboarding and on an ongoing basis. Rethinking the tools at disposal for such due diligence and resources will matter. 

Increased scrutiny of asset managers 

The CSSF has ramped up its oversight of asset management firms, particularly in relation to their KYA practices (as seen in the annual AML report and integrated in the CSSF survey). Firms are expected to demonstrate a thorough understanding of their asset portfolios, including the risks associated with different asset classes at all stages of the acquisition. This scrutiny aims to enhance investor protection and maintain market integrity. 

Emphasis on technology and innovation 

Professionals might leverage innovative solutions such as data analytics and artificial intelligence to improve asset tracking, risk assessment and compliance monitoring if due diligence and oversight on tools are performed. 

Note: As far as insurance professionals are concerned, and mainly insurance undertakings, they should review their AML/CTF and sanction frameworks from a KYA perspective as they are the owners of the underlying assets of the life insurance contracts. 

Key takeaways 

• Enhanced compliance obligations: Investment funds will face heightened scrutiny from regulatory bodies, necessitating thorough due diligence processes and robust record-keeping systems to ensure compliance with regulatory expectations 
• Operational changes: Funds may need to revise their operational processes to incorporate AML/CTF due diligence as a standard practice before any transaction (pre-trade). This will involve creating new workflows, enhancing existing compliance frameworks, and integrating further due diligence components into the investment decision-making process 
• Impact on investment strategies: The requirement for upfront due diligence may result in delays in executing transactions, potentially affecting liquidity. Funds might become more limited in their asset acquisitions, focusing on those with clearer compliance profiles 
• Risk management enhancements: The requirement for due diligence will necessitate a more comprehensive understanding of the risks associated with target assets, leading to better-informed investment decisions and improved overall risk management practices 
• Stakeholder relationships: Enhanced due diligence practices can bolster investor confidence, as stakeholders will appreciate the fund's commitment to compliance and risk management  
• Market competitiveness: Funds that effectively implement AML/CTF due diligence processes may gain a competitive advantage by demonstrating their commitment to compliance and risk management, differentiating themselves in a crowded market 
• Geopolitical strategy: ML/TF risk factors as well as restrictive measures compliance should be integrated in geopolitical risk assessments of investments 

Conclusion 

The concept of Know Your Assets is more critical than ever in the current financial environment. As regulatory requirements evolve, organizations must prioritize their KYA practices to ensure compliance, manage risks effectively, and make informed strategic decisions. The latest updates from the CSSF, including the insights from the December 2024 Q&A, highlight the need for enhanced reporting and increased scrutiny of asset management firms. By embracing these changes and leveraging technology, organizations can strengthen their KYA processes and position themselves for success in a dynamic financial landscape.