Luxembourg, awaiting FATF visit, is under the AML spotlight

Luxembourg, awaiting FATF visit, under the AML spotlight

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A crucial test awaits Luxembourg’s financial centre in just a couple of months. The Financial Action Task Force (FATF) – the global anti money-laundering and combatting terrorism financing (AML/CFT) watchdog – plans to visit in November for an in-depth audit. How is the Grand Duchy placed?

The Grand Duchy’s financial sector trades on its reputation as a well-regulated jurisdiction featuring compliance with international rules on combating financial crime. Hence if it were to fail the FATF audit this would not only be bad for business short term, it would also diminish the country’s voice as it argues its corner in EU and other global forums.

Grey list threat

Failure would result in being placed on the organisation’s “grey list” of “jurisdictions under increased monitoring” due to their “strategic deficiencies” regarding AML/CFT. The team of FATF inspectors is due in November, with the results to be assessed formally at a June 2023 plenary session. Failure would see the country ranked alongside 23 countries including the likes of Gibraltar, the Cayman Islands, Türkiye, Albania, Morocco, and Pakistan. Fellow EU country Malta spent 13 months on the grey list until July this year. Only North Korea and Iran inhabit the blacklist.

Being grey-listed “seems objectively inconceivable to me in view of the provisions in force in the Grand Duchy,” Vincent Salzinger, president of the Luxembourg Association of Compliance Officers told the Journal in February. Indeed, the country has had considerable time to put an adequate legal, regulatory and institutional framework in place. More time has been granted as the FATF visit was originally scheduled for the autumn of 2020, with this postponed twice due to the pandemic.

Banks, funds, insurance: high risk

Banking, funds, life insurance, and payment institutions were among 26 sub-sectors of the Luxembourg financial industry judged to be at high risk of money laundering activity (with private banking rated “very high risk”). This is according to the country’s National Risk Assessment, conducted in 2018 under the auspices of the FATF.

The decision to classify the fund sector as high risk was somewhat controversial. Yet the report noted that the sector is characterised by “high market fragmentation in terms of number of providers and intermediaries, the international nature of business.” It also pointed to “a high volume of retail and institutional investors, which all together add to the supervision challenge.” Alternative funds were judged to be particularly vulnerable.

New AML approach

This report marked a change in attitude in the Grand Duchy. In the past, the country appeared to take a relatively passive, foot-dragging approach, hoping that keeping a low profile would be sufficient to avoid trouble. However, this contributed to the country being grey listed by the FATF in 2010 until 2014.

Since then, the authorities have favoured a more proactive approach, seeking to apply EU and international AML/CFT regulations and norms in full. As well, regulators have been equipped with the means to enforce these rules and guidelines.

Industry and CSSF reaction

Financial businesses have responded in turn to this change. A symptom is how the number of suspicious transaction declarations to the Ministry of Justice’s Financial Intelligence Unit rose from 8,306 in 2011 to 40,782 in 2020. Another data point is that French financial intelligence service Tracfin reported an 82% increase in the receipt of notifications from Luxembourg last year.

The CSSF has not shied from naming and shaming (and fining) some of the biggest names in the country for AML/CFT failures. Particularly eye-catching were the €4.6m and €1.32m fines levied on the BIL in 2020, and the Banque de Luxembourg in 2018. Of note is that the former fine was made public by the CSSF, while the latter was kept under wraps until the bank itself disclosed the information. This suggests a changed communication policy by the regulator.

If was the turn of the asset management industry to be rocked in the new decade. Big beast investment fund manager Franklin Templeton International Services was fined €261,000 by the CSSF in 2021 for breaches of AML/CFT provisions of the 2013 law on AIFMs. The same year, major asset services operator RBC Investor Services Bank received a €237,000 penalty for AML failings detected in a 2018 audit.

This contributed to the 4.3 millon euro in total fines levied for a variety of offences by the regulator last year. Most recently, the company domiciliation service provider PFS Maitland Luxembourg was stung in July this year with a €266,000 fine for AML shortcomings.

Luxembourg in the spotlight

Luxembourg itself has had its own AML/CFT issues with its regulators. In June 2021, the European Commission took Luxembourg to the European Court of Justice for having missed the 2017 deadline to transpose the 4^th AML Directive into national law. The government pointed out that it had previously implemented most of these requirements in 2018, with eventually becoming fully compliant in time to escape any sanction. The Ministry of Justice cited “the health crisis and the particular complexity (…) this work required,” as reasons for the delay.

Despite this, it would be a major surprise if Luxembourg were to be grey listed after the FATF visit. It is possible that the in-depth audit might uncover failings in specific areas which may require further attention.

Sharp on-going AML focus

“In the coming years, anti-money laundering rules will remain a focus point and we are likely to see further evolution there,” CSSF director-general Claude Marx told Decision Makers last year. He noted that while other areas of post financial crisis regulation are likely to be left to bed down without substantial change, AML will be the exception.

For example, in July the EU decided to establish an Anti-Money Laundering Authority which will work to up-date rules more proactively, rather than having to wait for the EU to pass fresh directives. Otherwise, the FATF’s new president T. Raja Kumar has pledged to strengthen asset recovery as priority for 2022-24, along with a push to counter cyber-enabled crime and reinforcing partnerships with regional AML bodies.

Meanwhile the European Banking Authority has urged anti-money laundering authorities to be more proactive in their efforts to collaborate. They also underlined the need to recognise the higher risk posed by institutions operating across borders. June also saw EU member states and parliament reach agreement on AML rules for crypto-assets

AML colleges leader

Luxembourg will be under particular focus from the AML/CFT Colleges established in 2020 under the auspices of the European Banking Authority. These will study the activity of financial institutions which operate cross-border into at least three countries. Last year the EBA created 120 colleges of which 42 were focused on the activities of Luxembourg firms, the most for any country. The Lux fund industry accounted for 19 of these, with 16 for banks.

Whack-a-mole on AML

Meanwhile Luxembourg continues to perfect its domestic regime. The country now requires financial sector entities to carry out due diligence assessments before accepting new clients. Last week the ABBL, the Financial Information Unit and the CSSF signed an agreement which will formalise the process by which the industry and regulators work together to understand better how to combat money laundering.

Yet there is a whack-a-mole quality to AML/CFT, given the scope of opportunities available to financial criminals. On 20 September, the government revealed in a parliamentary question that more than 1,200 of Luxembourg’s total 8,661 not-for-profit associations have failed to disclose their beneficial owners on the state register as required by AML law. Efforts by the police and the public prosecutor’s office to fix this have so far fallen short, they said.