How Luxembourg combats money laundering and other financial crime will come under the microscope over the next 18 months. Both the EU and the OECD will be reviewing Luxembourg’s laws and practices by the middle of next year.
As part of a new procedure, all EU member states will have their anti-money laundering (AML) practices reviewed by the European Banking Authority over the coming years. Luxembourg will be in the first wave of audits in 2019.
Then, in June/July 2020, the OECD’s Financial Action Task Force will be in the country to conduct their routine once-a-decade review of OECD members, 10 years after the last such in-depth study.
The OECD review in particular is “likely to be a thorough process for which we will have to provide highly technical answers,” Claude Marx, director general of the Luxembourg financial regulator CSSF told the Institut Luxembourgeois des Administrateurs’ Directors’ Day conference on 29 November 2018. As well as technical compliance, he expects regulatory effectiveness to be probed, with substantial input sought from regulators and significant market players.
EU AML rules apply to financial businesses and a range of others including lawyers, notaries, real estate agents, auditors, casinos, jewellers and more. None of these should be surprised if they receive a call. Marx pointed out that, during their recent reviews in other countries, the FATF had focused on corporate and trust services providers.
The CSSF is keen to be seen to take this seriously, and they are stepping up their emphasis on AML. Already in August 2018, they published Circular 18/698 which served to clarify money laundering and corporate governance rules for investment fund managers.
Little of this is new, but the financial sector has been put on notice that they have no excuses for not being compliant, or being able to show they have a clear plan to be so and are making substantial progress. More broadly, relevant organisations “should expect visits from the CSSF related to AML this year,” noted Thomas Berger, counsel with the law firm Allen & Overy.
Given this, it was somewhat embarrassing that on 8 November 2018, the European Commission referred Luxembourg to the European Court of Justice for failing to fully transpose the 4th anti-money laundering directive (AMLD4) into national law by the June 2017 deadline. Yet the country was not alone, with Romania and Ireland also having been referred to the EU court, and a further 18 having received notification about perceived lack of compliance.
Rather than this being a sign of member states seeking to avoid rules they themselves put in place, it is more to do with the complexity of the task.
“We are pretty close to full implementation in Luxembourg,” noted Berger. He said the vast majority of AMLD4 has been implemented, but at the turn of the year, two sections remained to be implemented. The first related to the creation of a register of beneficial owners of companies, and the second aspect regards the register of trusts and fiduciary contracts. These rules should be implemented before the EU court considers the matter.
Berger pointed to some of the reasons for these delays. He said that some of the practical details in AMLD4 have been in Luxembourg legislation since 2010 following recommendations from the FATF. “AMLD4 does not require as many major changes as it has for other countries as Luxembourg had already upgraded some years ago,” he said.
He also pointed out that while the full implementation of AMLD5 has not started yet, Luxembourg wanted to anticipate some of the changes and incorporate some aspects directly into the legislation. This added to the delay, but should mean the country will be in time for the 10 January 2020 deadline for the 5th directive.
Moreover, some of the AMLD4 rules have been relatively tricky to implement due to Luxembourg being an international business centre. Almost all beneficial owners are non-resident, and the country’s different cross-border businesses needed to consider a range of implications.
As another effort at preparing the country, the government published a “National risk assessment of money laundering and terrorist financing” on 20 December 2018. This is a sort of stock-taking exercise to demonstrate that the authorities are aware of different threats and vulnerabilities. The publication includes a list of the sectors affected by AML rules and gave each an inherent risk factor.
Private banking and foreign trusts were the only sectors of activity ranked as having “very high” risk. A further two dozen were classified as having “high” risk, including collective investments, custodian banks, retail banks, payment institutions, lawyers, real estate professionals, the hospitality sector and more.
As well as ensuring compliance measures are in place, the country also has to enact AMLD5 rules by the start of 2020. Fortunately, this legislation is an update of existing rules rather than a complete revision.
Highlights of the 5th AML directive
Crypto-currency exchanges and providers of electronic wallets are now included in AML rules.
Anonymous pre-paid cards will have a limit of €150.
Access to the central register of beneficial owners will be widened to the public, where AMLD4 limited this to government agencies, obliged entities and individuals with “legitimate” interest (already foreseen in Luxembourg law). However, the public will only have access to a limited range of data.
Registers of beneficial owners of EU member states will be interconnected
More information will need to be collected regarding all business partners with ties to high risk territories.
Central registries for bank and payment accounts must be created
Facilitating access of national financial intelligence units to information