The fact that financial institutions in Luxembourg have frozen some 86.000 investor accounts should not be regarded as a material issue because the Financial Action Task Force has not issued a recommendation on this topic, a senior official at the Grand Duchy’s financial supervisory body CSSF has said.
The Financial Action Task Force, also known as FATF - considered the world’s top body in the fight against financial crime - reported the numbers of blocked accounts in a comprehensive 302-page Mutual Evaluation Report” for Luxembourg that it released in September. Among many other things, the report said 8.31 percent of some 1.03 million investors in Luxembourg-domiciled investment funds had their accounts blocked in 2021, down from 8.71 percent in 2020 and down from 10.42 percent in 2019.
Marco Zwick, CSSF director responsible for supervising investment funds, drew attention to these numbers at a Luxembourg conference last week and said that the supervisor is keen to work with the industry on reducing these numbers and has announced fresh guidelines. Zwick addressed the frozen accounts as one of several topics of CSSF’s work with the sector.
The 28 November Investment Officer article that was based on Zwick’s comments about the frozen accounts also referred to the FATF report, which, among other reasons, cited “deficient CDD” as one of the reasons for the relatively high number of frozen accounts. CDD stands for Customer Due Diligence. When CDD is deficient, as FATF said, it points to shortcomings in the industry.
‘Prudential reasons’
CSSF now has told Investment Officer that it wished to underline that FATF also saw “prudential reasons” as a factor explaining the frozen accounts. Prudential reasons generally refer to decisions that financial institutions take primarily for the sake of caution, safety, or financial prudence. These decisions are often made to mitigate risks or protect against potential negative consequences.
“As I was explaining at the conference, this point was raised by the FATF not as a major issue, but as a note in their report. The FATF issued no recommendation, which they would have done in case of material issue,” Zwick told Investment Officer in an email.
“The CSSF has reviewed this point with the industry and we found out that a large percentage of these accounts are blocked for reasons outside of AML/KYC, so no real issue. The FATF refers to this as ‘prudential reasons’,” Zwick said.
Risks mitigated
The supervisor also drew attention to the FATF’s comment, in the context of the frozen accounts, saying that the risks for the insurance and investment sectors are limited. “The risks are however mitigated as no pay-outs or redemptions to investors would be made if the CDD is incomplete,” the FATF report said.
The FATF in September in general terms praised Luxembourg for having embraced more stringent anti-money laundering efforts over the last decade. It also said that Luxembourg needs to make a bigger effort to supervise the non-financial sector and better scrutinise real estate firms, trust companies, notaries and services firms.
Global competition
Following Zwick’s speech at last week’s conference, several industry actors have commented on the challenges of working with increasingly stringent Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements. Some comments made clear that AML-KYC also has emerged as an element of global competition in offshore and onshore fund finance.
Having the praise from the FATF “is great for Luxembourg,” said Derek Russell, a funds director at JTC, a Jersey-based fund administration provider. “But as a service provider, when we’re on a call with, you know„ a private investor in Greece, or a family office in Brazil, they don’t take a whole lot of comfort from the FATF report in Luxembourg when we’re trying to establish source of funds, source of wealth, and having those kinds of difficult conversations with with investors,” Russell said.
“But then at the same time, we’ve got clients squeezing us to say, you know, ‘fundraising is difficult’. We need to close these guys into the fund as quickly as possible before they change their mind or they go to a Delaware fund or Cayman fund, where maybe it’s a little bit easier for them to get in from an AML perspective.»