Financial Crime World

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Luxembourg Embarks on Risk-Based Approach to Financial Crime

The Financial Action Task Force (FATF), an intergovernmental body, has issued a series of recommendations aimed at mitigating money laundering and terrorist financing risks. As an integral part of Luxembourg’s national laws and regulations, these guidelines serve as the foundation for the country’s financial crime prevention efforts.

Understanding the Risks

At the heart of FATF’s recommendations is the need for countries to identify, assess, and understand the risks associated with money laundering and terrorist financing. This involves a detailed review of threats and vulnerabilities, which Luxembourg has achieved through its National Risk Assessment and will continue to refine via sector-specific risk assessments.

Sector-Specific Guidance

In addition to this, FATF has released guidance documents tailored to specific sectors, including the securities industry. The Guidance for a Risk-Based Approach in the Securities Sector, published in October 2018, offers valuable insights into the nature of securities transactions and the role of intermediaries in these dealings.

Relevance to Investment Funds

For the investment fund industry, this guidance is particularly relevant, as it highlights the importance of understanding the client base and performing risk-based due diligence at multiple levels. Fund managers are required to conduct enhanced due diligence on regulated distributors before opening omnibus or nominee accounts and must also implement measures to mitigate risks associated with:

  • Clients
  • Initiators of UCIs (Undertakings for Collective Investment in Transferable Securities)
  • Portfolio managers
  • Investment advisers

Strengthening Operational Distribution Models

In a bid to strengthen operational distribution models, the CSSF Circular 18/698 outlines the need for investment fund managers to perform enhanced due diligence on regulated distributors. The circular also stresses the obligation to apply due diligence measures on the assets of the funds they manage.

Luxembourg’s Commitment

Luxembourg’s commitment to a risk-based approach is aimed at demonstrating the effectiveness of measures put in place to combat financial crime, marking a shift away from mere technical compliance. By adopting this proactive strategy, the country aims to stay ahead of emerging threats and maintain its reputation as a leader in financial regulation.

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