The exact arrival dates of the Financial Action Task Force on-site assessors in Luxembourg remain a secret, so expect them to arrive anytime soon. The two weeks these unnamed individuals will spend this month in Luxembourg are just a fraction of the 18-month audit to which Luxembourg’s anti-money laundering rules and practices are currently undergoing.
The task force, known as FATF, is the global money laundering and terrorist financing watchdog, established by the G-7 countries in Paris in 1989. It currently has 37 member countries. The coming FATF inspection of Luxembourg has been flagged for some time. The previous inspection, held in May 2009, found that Luxembourg was partially compliant or non-compliant with most of the 40 FATF recommendations, and only compliant with a single one.
Asked about this year’s visit, neither FATF nor the Luxembourg Ministry of Justice were willing to give a hint of when the visit would take place, other than confirming that it would be in November. “The assessment team will consist of five to six assessors from different countries,” said the ministry’s spokesperson.
Nor was Investment Officer able to get any on-the-record quotes about preparations from a range of professional associations in Luxembourg, nor even representatives of the normally talkative Big Four consultancies. None, it seems, wants to put a foot wrong before the on-site visit.
Wide range of sectors
The “FATF mutual evaluations” are peer reviews of not just the existence of anti money-laundering and combatting financing terrorism regulations, but also the effectiveness of their implementation. This is more than just a challenge for the financial sector. Legal professionals, accountants, casinos and gaming sector, dealers in precious metals and stones, and real estate agents are all named by the FATF as being worthy of assessment. Of course, Luxembourg has its fair share of operators in these sectors.
Yet it is the financial sector in all its diversity which will probably be top of the assessors’ lists. On its website, FATF mentions “the following areas as presenting the greatest ML vulnerabilities in the securities industry: wholesale markets; unregulated funds; wealth management; investment funds; bearer securities; and bills of exchange.”
Also under the spotlight are other Luxembourg specialities: the life insurance sector, trust and company service providers, and banking activities. The country also has a smattering of money or value transfer services, virtual asset service providers, and providers of prepaid cards, mobile payments and internet-based payment services, which too are being assessed.
White, grey or black lists
“We must do all we can to avoid appearing on a black list,” said Pierre Gramegna, the previous finance minister, last year, in one of the few public comments by a politician on this audit. Although this might appear to set the bar quite high.
The unofficially named FATF AML “blacklist” (officially known as “call for action”) features only pariahs such as Iran, North Korea and Myanmar. It is the so-called “grey list” (“jurisdictions subject to increased monitoring”) that is potentially in play if consistent failings are identified. This latter currently features 20 countries such as Albania, Cayman Islands, UAE and Turkey. Malta was removed from this list in June, after 12 months of increased monitoring.
However, there is a purgatory state between the white and grey lists. For example, FATF said of Germany in August that it had “enhanced its systems to tackle money laundering and terrorist financing, particularly regarding asset recovery. However, it must make major improvements including in the use of financial intelligence and risk-based supervision.”
18 month process
The on-site visit is just the tip of the iceberg. The “technical review” of the grand duchy would typically have started in the spring, with the country’s authorities providing information about its laws and regulations, and this information being checked by FATF assessors. A draft report on technical compliance regarding 40 FATF recommendations will have been made, and a “scoping note” of identified areas of focus for the on-site visit. The Luxembourg authorities will have been given a month to comment on these documents, and it seems likely that this process is currently on-going.
Based on this, the assessors travel to the country for two weeks “to meet with the public and private sector to see how the laws work in practice and look for evidence that they are effective.” This relates to 11 areas of policy, enforcement and practice. This starts with risk, policy and coordination, coupled with international cooperation.
Then there is a requirement for appropriate supervision, preventative measures, and the prevention of legal persons from engaging in ML/FT. FATF specifically cites beneficial ownership information being available. Then there are six elements related to enforcement, from financial intelligence, to confiscation, prosecution, and prevention.
Anyone could be visited
The FATF site gives a guide to who can expect to be contacted: and it could conceivably be anyone. “Meetings with representatives of the assessed country, the private sector or other relevant non-government bodies or persons” says the website.
Furthermore, “time may have to be set aside for additional or follow-up meetings, if, in the course of the set schedule, the assessors identify new issues that need to be explored, or if they need further information on an issue already discussed.” In other words, FATF reserves the right to return.
Normally, two months after the visit - hence January/February 2023 - a draft mutual evaluation report will be published covering both technical compliance and effectiveness. This report will be discussed and reviewed by the assessed country and independent reviewers before the FATF Plenary session, which in Luxembourg’s case would be around June.
From this a report will be published with recommendations for action, which itself will undergo a two-month assessment period when the 198 members of the FATF Global Network will review the findings. A final report will then be published in the early autumn of 2023.
Next steps if gaps found
If shortcomings are identified there will be post-assessment monitoring. This can include anything from regular reporting of improvements for countries that are already largely compliant and demonstratively committed to addressing the remaining few shortcomings, through to issuing a public warning against a country that makes insufficient progress to address key deficiencies.
Originally slated to come in October 2020, the pandemic delayed the visit by a couple of years. Many in the financial sector will have noticed the uptick in regulatory activity and industry compliance pressure during this period, including a few high profile fines of big name players. The coming months will tell us if this has been enough to keep the country on the whitelist. Although failure is unlikely to have a dramatic, quick impact, greylisting would tarnish the country’s image with peers and potential investors.
The Mutual Evaluations Process at the FATF:
