Financial Crime World

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Luxembourg Introduces Risk-Based Approach to Financial Crime

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In a bid to stay ahead of the evolving tactics used by financial criminals, the Luxembourg regulator CSSF has introduced a risk-based approach to combating money laundering and terrorist financing (AML/CTF). The new approach aims at enhancing the effectiveness of anti-financial crime measures in the country’s investment fund sector.

The Growing Threat of Financial Crime

Since the onset of the COVID-19 pandemic, fraudsters have taken advantage of the economic uncertainty and accelerated technological advancements to launder money on a larger scale and with greater speed. To counter this threat, the CSSF has issued three circulars - 21/788, 21/789, and 21/790 - which reinforce regulatory requirements for investment fund managers (IFMs) and investment funds under its supervision.

Key Changes Introduced by Circular 21/788

  • The requirement for independent auditors (REAs) to verify responses provided by IFMs in their annual CSSF AML/CTF survey.
  • REAs will also need to perform sample testing or specific procedures, with the sample size determined by the CSSF using a risk-based approach.

Luxembourg’s Existing AML and CTF Regulations

Luxembourg’s existing AML and CTF regulations for investment funds are already extensive and apply to both regulated and unregulated funds. However, fraud, tax evasion, and corruption continue to be areas of concern for banks, asset managers, insurers, and regulators alike.

Protecting Investors from Financial Crime

To protect themselves and their investors from financial crime, IFMs must comply with regulations and implement robust, secure, and advanced technological solutions that automate manual tasks and safeguard against risks. Adopting sustainable and compliant frameworks regarding AML/CTF and tax can also help mitigate the risks.

The CSSF’s Annual AML/CTF Survey

The CSSF’s annual AML/CTF survey is one such approach aimed at collecting key information on money laundering and terrorist financing risks, as well as measures taken by IFMs to mitigate these risks. The survey must be completed by compliance officers or individuals responsible for compliance with professional obligations.

Additional Layer of Governance

To further combat financial crime, the CSSF has added an additional layer of governance by requiring REAs to draw up an AML/CTF report to validate the responses submitted by IFMs.

Impacted Entities and Timeline

The new process is applicable to all Luxembourg IFMs, including registered AIFMs and Luxembourg investment funds supervised by the CSSF for AML/CTF purposes. However, Luxembourg investment funds managed by a foreign IFM are excluded from the scope of the circular. As entities approach their financial year-end, now is a good time for IFMs to evaluate their preparedness for the changes stipulated in Circular 21/788.

Conclusion

In conclusion, Christophe Wintgens, Wealth & Asset Manager Leader at EY Luxembourg, notes that while we have witnessed much change over the past decade, the next ten years are expected to be even more transformative. The CSSF AML/CTF survey acts as a great starting point for IFMs across Luxembourg - and Europe - to holistically consider both their approach to protecting their investors’ assets as well as their contribution to promoting and protecting the financial market.