Raising the Bar: Luxembourg AML Compliance

Luxembourg's Anti-money Laundering ("AML") and Counter-terrorism Financing ("CTF") legal requirements for investment funds are broad in scope and applicable to both regulated and unregulated funds.  With the investment fund sector identified as high risk by the country's 2020 National Risk Assessment, operators of funds of all types and sizes should be keenly aware of their obligations under the law.
 
Under Article 4 (1) of the AML Law of 12 November 2004 as amended on 20 May 2021, professionals operating in the investment fund sector are required to appoint a person from their management body with responsibility for compliance with all rules and regulations in the fight against money laundering and terrorist financing.  This primary role is designated as the responsible du respect des obligations ("RR"). Additionally, a compliance officer must be appointed at the appropriate hierarchical level, defined as the responsible du controle du respect des obligations ("RC"), which is effectively a money laundering reporting officer ("MLRO") or AML compliance officer. These rules represent the underlying AML legal framework in Luxembourg, which applies to various types of financial institutions and investment vehicles. 

Against a global backdrop of heightened risk, these AML and CTF requirements must be taken extremely seriously.  Severe penalties and enforcement actions can be imposed for money laundering infractions. These range from fines of up to €1.25 million with up to five years in prison for an individual involved in a money laundering-related offence, to increasing levels of fines imposed on entities, which can amount to tens of millions of euro.  In an instance where a board member is found to have been in breach of their professional obligations relating to the AML Law, even if they were not directly involved in the money laundering activity, the fines can vary between €12,500 and €5 million.  

Fund sponsors and their fiduciaries, should fully appreciate the immense reputational damage that can occur from being associated with a fund that happened to fall foul of the regulations, or breach any sanctions regimes and the negative publicity that would ensue.  At the same time, investors continue to demand ever-higher standards of corporate governance, including a robust, proactive approach to AML compliance.  In this environment, the appointed RR must be an official of the company with the authority and the ability to effectively oversee AML compliance issues.  The appointment of the RC in Luxembourg, meanwhile, should be carefully considered and, significantly, should be an individual with the right experience and skill-set, along with the backing of institutional-grade infrastructure to add real value to the AML and CTF compliance function.  

With the high risk potential for money laundering exposure from investment funds, identified by the National AML Risk Assessment, perhaps the most critical issue to understand is that all Luxembourg entities registered with the Registre de commerce et des sociétés ("RCS") are subject to the AML Law. Therefore, any non-regulated investment vehicle would also be required to make the RR and RC appointments. In addition to funds, this could also include securitisation entities, and entities of other denominations including, but not limited to, SA, S.a.r.l and SCA.

Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier ("CSSF"), has also stated that the rule of proportionality cannot be applied in Luxembourg, which means that regardless of the size of the fund, these roles must be filled appropriately.  The CSSF, which regulates the financial sector and a significant number of investment funds, further emphasised the responsibilities for professionals in  its FAQ of 25 November 2019 (amended in March 2021), that all Luxembourg investment funds and investment fund managers subject to its AML / CTF supervision are legally required to appoint both an RR and an RC.

With responsibility for the supervision of Reserved Alternative Investment Fund ("RAIF") structures, the Administration de L'Enregistrement, des Domaines et de la TVA ("AED") published its FAQ to formally remind the market of the necessity to make the RC and RR appointments, even where RAIFs are not regulated by the CSSF.  The AED's requirements mirror those of the CSSF, as well as designating the RC as its primary contact. 

Responsibilities of the RC

According to the regulators' guidance, a person appointed to the RC role is required to have sufficient AML /  CTF knowledge and expertise concerning all the applicable regulations in Luxembourg and be able to demonstrate this knowledge upon request, with sufficient work experience and training to perform this function.  It is also expected that the RC will have a good understanding of the investments and distribution strategies of the fund, while being available without delay upon a request by the competent AML / CTF authorities in Luxembourg and having access to all the internal documents and systems that will be needed. 

Given the risk averse climate associated with Luxembourg's large and diverse investment fund sector  and the severe financial penalties that can be involved for any breaches, the above criteria should be seen as a minimum set of standards to follow. Managers and fund operators should ensure that an appointed RC has the ability to not just meet these standards, but to provide constant support and guidance to help the RR fulfil its role.  Such advice can be crucial, for example, where investment fund managers and funds may have connections with other jurisdictions, where such stringent regulations may not apply, presenting a new level of unknown risk.  There is also the need to examine service providers to the fund and perform thorough due diligence on their activities. Undertaking such detailed analysis will place a significant drain on internal resources and take management attention away from their core business activities and, as such, may necessitate the need for third party support

Raising the Bar

Luxembourg-based fund managers and sponsors will find the opportunity to outsource the RC role to a professional fiduciary services provider, such as the Maples Group, compelling.  The Maples Group provides highly experienced and qualified persons to act as the RC to investment funds and other structures.  By outsourcing this role to a professional, managers can ensure not only all relevant AML / CTF compliance standards are met, but with a high level of vigilance, leveraging on a background of expertise in investment funds, which ultimately provides greater comfort for the board of directors and investors.  Through this level of understanding, detailed additional analysis of the investment fund's undertakings and subsequent risks can be performed, including drilling down into the day-to-day activities of the fund.  By performing a holistic, full risk assessment on the fund, particularly where investors may not necessarily be names that are familiar to the public, the RC can build up a good understanding of the manager, the investor base and where the money is being invested to truly appreciate the potential risks of the fund's operations.  The RC would also perform a full review of the administrator's customer due diligence procedures and report back to the fund or company.  This enhanced AML compliance function affords directors of a fund with a level of reporting that allows them to make more informed decisions leading to higher governance standards. Directors can also expect to be furnished with regular updates on any developments in the legal and regulatory environment regarding AML / CTF.

With the Maples Group's strong understanding of the global investment fund industry, our highly experienced professionals fulfilling the RC role in Luxembourg are able to apply this expertise to their in-depth knowledge of the AML Law and the wider regulatory framework in order to proactively identify areas of potential risk, before they materialise.  This is achieved by monitoring regulatory changes in other jurisdictions, leveraging our global network and institutional infrastructure, to anticipate any impact on the local industry or any changes in market practice at an early stage, prior to them being implemented in law.