The upcoming external audit of Luxembourg’s anti money-laundering (AML) stance is a major test for the country, its financial sector and the regulators. While the CSSF continues to maintain a low public profile, it has ramped up its work behind the scenes to respond to new demands by the Financial Action Task Force (FATF), an intergovernmental body set up to fight money laundering. The regulator is encouraging the industry to adopt best practices.
Luxembourg’s concern about the impending FATF audit ticked up a couple of notches last autumn. In October, the FATF ruled that Iceland has “strategic deficiencies” in its approach to AML, placing the country on a so-called “grey list” along with the likes of The Bahamas, Panama and Yemen. Although the move involves no direct sanctions, this will damage the country’s standing with international investors, partners, regulators and lawmakers.
Risk of reputational hit
Luxembourg could not afford such a hit to its reputation. What is more, the Grand Duchy is a specialist in certain types of financial services that the FATF has ruled have an elevated likelihood of featuring money laundering activity. The risk in wealth management and international trusts is judged by the FATF to be “very high”, with the likes of collective investments (funds), custodian banks, real estate professionals and other judged to be at a “high” risk.
The country has sought to adopt a national strategic response. The Ministry of Finance published its “National risk assessment of money laundering and terrorist financing” in December 2018 detailing where attention needed to be paid. The Ministry of Justice has a dedicated team in place, and the regulators have been working to clarify regulations and raise awareness. However this was not before the Chamber of Deputies missed the deadline for the full implementation of the 4th EU AML directive. The majority of the details of the directive were transposed into national law in 2018. However this process was not completed until 7th January 2020, meaning the deadline was missed by 18 months. This delay had earned the country a reference to the European Court of Justice, along with a handful of other member states.
Practical application required
Yet while previous FATF AML audits were largely based on simply checking technical compliance and the legal framework, now it focuses on ensuring that businesses, regulators and the legal system also have adequate processes in place. The FATF wants to see concrete plans and wants to know how they are being implemented. In particular, they advocate a “risk-based approach”.
“This is about defining what risk appetites are, plus understanding and segregating the investor base,” said Michael Delano (pictured), an assurance partner with PwC Luxembourg specialising in the fund industry. This means making an assessment of the different risks represented by each client and business partner, where-ever they are in the world. For example, assets flowing through a Luxembourg-regulated entity represent lower risk than a distributor in a more exotic location. “A risk-based approach is about making an assessment of where to focus efforts,” he added.
The CSSF has sought to go with the grain of this outlook. For example it has just published national risk assessments for both the private banking and fund sectors. “I would strongly recommend that business decision makers read these reports and make a comparison with their own company’s stance,” said Delano. “If there is a difference, players will need to be able to give clear reasons why,” he added.
Increased CSSF openness
Such moves represent a new, more open stance for the regulator. “I have been struck recently by the CSSF’s willingness to engage with the community, participate in conferences, hold their own events and pass key messages,” Delano noted.
The days are gone when the CSSF sought to simply adopt as low a profile as possible and hope for the best.
It is especially the CSSF’s added willingness to engage with the industry to highlight areas of concern and encourage best practice that is new. The launch in November of the E-Desk Portal for the online filing of licence applications and regulatory reports is another step towards greater transparency, as well as efficiency. It gives players greater visibility about where their procedures can be sharpened.
On alert
For example, the message is out that everyone from the C-suite, to business executives, to board members should not be surprised if a member of the FATF team asks for an interview during their evaluation visit between 26th October and 11th November this year, said Delano. If these people can give clear evidence of a well thought-through risk-based approach to identifying financial crime, the likelihood is that the investigators will be reassured.
The FATF audit is a test for the country’s holistic approach to intensive scrutiny. The days are gone when the CSSF sought to simply adopt as low a profile as possible and hope for the best.