Luxembourg financial regulator CSSF today announced that it had found “satisfactory” both market participants’ understanding of the risks of AML/CFT activities and the related mitigation measures that they had put into place, in a recent thematic review of money-laundering or terrorism financing checks by its on-site inspection unit.
In November and December 2021 the CSSF’s “UCI On-site inspection” department carried out the thematic review of AML/CFT checks applied in preventing tax offences. The review targeted different types and sizes of market participants and included five Luxembourg investment fund managers.
The review however found weaknesses with regard to risk assessment carried out by some market participants, noting that in some cases the assessment did not cover all relevant aspects of the relevant CSSF circular.
List of indicators
“We remind IFMs that Circular CSSF 20/744, dated 3 July 2020, complemented Circular CSSF 17/650 in particular by providing a list of indicators specific to the collective investment activities and specified the CSSF expectation for the entities under its AML/CFT supervision, ” the CSSF wrote, noting that IFMs must ensure their risk assessment includes “all relevant tax specific indicators” about their investment activities.
The review also found weaknesses in terms of “verifications” performed by the checking functions in relation to AML/CFT offences. “In some cases these were not sufficiently covered at the level of the compliance monitoring plan” and/ or the internal audit plan.
The CSSF reminded IFMs to make sure that tax matters are included on a risk-based approach in the compliance monitoring plan as well as in the internal audit. It also called on them to make sure that all relevant tax-specific indicators concerning investment activities when designing risk mitigation measures.
Tax reporting weaknesses
The CSSF also noted weaknesses in terms of delegated subscription tax calculation and filing as well as investor tax reporting “where the IFM was not systematically part of the related contractual arrangements.”
The CSSF highlighted one case where the IFM “did not appropriately monitor the tax risks arising from securities lending activities”, where the entity was not part of the contractual arrangements with the lending agent.
Best practices highlighted
The review highlighted some best practices, including one case where a tax due diligence was performed, documented and endorsed by the governing body of several IFMs prior to performing complex investments.
Secondly, it endorsed the practice of risk assessments being carried out in relation to the relevant circular
This review took place after criminal provisions laid down in a 2016 law extended money-laundering offence to encompass aggravated tax fraud and tax evasion. The CSSF pointed out that professionals subject to AML and CFT obligations must now take these tax crimes into the scope of their professional obligations “notably customer due diligence and cooperation with authorities.”