Background
Although some provisions of the 5th EU Directive have already been transposed under the law of 13 January 2019 regarding the establishment of a register of beneficial owners, on 25 March 2020 the Luxembourg legislator adopted 2 separate laws to implement the remainder of the provisions set out in the 5th EU Directive. The first law, the Law of 25 March 2020 transposing certain provisions the 5th AML Directive in Luxembourg, introduces a serie of amendments to the Law of 12 November 2004 in the fight against money laundering and terrorist financing, as amended (the “AML Law”), hereinafter the “2020 Law”. The second law, the Law of 25 March 2020 establishing a central data retrieval system concerning IBAN accounts and safe-deposit boxes is also amending the AML Law. Both laws entered into force as of 30 March 2020.
Primary change
The most notably changes to the AML Law are:
- The scope of professionals subject to AML/CFT obligations has been extended to include, Inter alia, real estate developers, exchange platforms for virtual currencies (including exchanges dealing with fiat currency and virtual currency), custodian wallet providers, rental brokers (when the value of the monthly rent is equal or superior to 10.000 Euros), art dealers (or persons who act as intermediaries in the trade in works of art including galleries and auction houses,when the amount of the value of the transaction(s) is equal to or exceeds 10.000 Euros) in the scope of the AML Law;
- Clarification and extension of customer due diligence (CDD) measures and enhanced due diligence (EDD) measures to be applied, most notably, regarding high-risk countries;
- Further specifications clarifying the methodology for identification and verification of beneficial owners (following CSSF Circular 19/732);
- Additional details regarding internal management requirements and group-wide policies and procedures;
- Enhanced cooperation framework between the various competent authorities and self-regulated bodies.
Key points
Summary of the changes having the most impact for IFMs and UCIs:
Customer and Enhanced due diligence measures
- PEP: The notion that institutions should not consider persons who have ceased to be entrusted with a prominent public function for over one year as a Political Exposed Person (PEP) has been erased, therefore institutions now need to continue to take risk-sensitive measures for each PEP and preceding PEP for at least 12 months and evaluate accordingly the continuing risk posed by that person. The risk-sensitive measures have to be taken until that person does not pose any further risk related to his/her PEP status.
Furthermore, the definition of PEPs has been extended to include natural persons appearing on the list published by the European Commission (the “EU PEP List”). This list has not yet been published at the date of this article. Institutions will thus be obliged to include this new EU PEP List in their customer screening processes.
- High-risk Jurisdictions: The definition of a high-risk country has evolved. The current changes now consider that a high-risk country should at least include countries considered to be a) high-risk third countries by the European Commission, b) higher risk countries by the International Financial Action Task Force (FATF), c) high risk countries by the Luxembourg supervisory authorities. Additionally, the professional shall take into consideration reports established by international organizations and standard-setting bodies responsible for preventing money laundering and combating the financing of terrorism, with regard to the risks certain countries hold.
Furthermore, it has now been clarified that for each country considered as high risk, enhanced due diligence measures should be applied which include, at least:
- Obtain additional information on the Beneficial owner(s) and update the identification data more frequently of;
- Obtain additional information on the envisaged nature of the business relationship;
- Obtain information on the origin of funds/assets of the client and beneficial owner;
- Senior management authorization;
- Obtain information on the reasons for planned or already performed transactions;
- Enhanced monitoring of the business relationship (incl. increasing number and frequency of checks and determining transaction patterns that require further examination).
The 2020 Law also foresees that professionals apply, where appropriate, additional enhanced measures to persons and entities that execute transactions involving high-risk countries.
- Correspondent Banking relationships: The 2020 Law has removed the notion that additional measures for correspondent banking relationships should only be taken in case of higher-risk situations. Instead, now, the risk rating of the respondent financial institution is irrelevant and the additional customer due diligence measures should be taken in each case. Professionals should, therefore, review their current portfolio to understand whether there are cases for which further information/documentation should be requested to satisfy regulatory requirements.
- New factors evidencing high risk are added to the Annex IV of the AML Law:
o A third-country national customer applying for residence rights or citizenship through capital transfers, the purchase of property or government bonds, or investments in private companies.
o Transactions relating to petroleum, arms, precious metals, tobacco products, cultural goods and other objects of value archaeological, historical, cultural and religious, or of rare scientific value, as well as ivory and protected species.
Customer due diligence measures
The 2020 Law clarifies the measures which are related to any person acting on behalf of the customer/investor specifically related to the authorization required to act in place of this person as well as the identity and verification requirements that apply.
Secondly, a framework has been introduced to provide flexibility in the electronic identification and verification of the customer/investor (EU Regulation 910/2014 on electronic identification and trust services for electronic transactions in the internal market).
Lastly, the 2020 Law also has introduced measures that are in line with the CSSF Circular 19/732 for the identification and verification of beneficial owner information. This includes as well the obtaining of proof of beneficial ownership through an extract of the relevant BO register in Luxembourg or abroad (where accessible).
Third-party due diligence
A clarification has been introduced concerning situations in which a third party can be used to perform due diligence procedures including the certainty that third parties provide, without delay, upon request, the necessary documents concerning CDD, including identification and verification data obtained by electronic means. The same eligibility criteria as set out under the AML Law still apply including that the third party should be subject to regulations and uphold document retention mechanisms that are compatible with the AML Law.
Lastly, the 2020 Law provides for a new aspect for professionals using their group program. Such professionals should, in addition to the conditions already set out, mitigate risks linked to high-risk countries following the AML Law.
How can we help?
- Gap analysis of internal processes and procedures
- Support with workshops and tailor-made learning events
- Remediation exercise for high-risk cases including PEPs
- Process and procedure calibration
- AML/CFT robotic process automation
- Managed services (AML/CFT) through EY PFS
Link to the Law of 25 March 2020 transposing certain provisions the 5th AML Directive in Luxembourg
Law of 25 March 2020 establishing a central data retrieval system concerning IBAN accounts and safe-deposit boxes
