Latest Developments in Luxembourg AML Regulations

On 19 July 2011, the Luxembourg financial supervisory authority, the Commission de Surveillance du Secteur Financier (the "CSSF") issued CSSF Circular 11/519 on the risk analysis regarding the fight against money laundering and terrorist financing ("Circular 11/519"). Circular 11/519 is addressed to all credit institutions and its purpose is to specify the CSSF's requirements relating to the risk analysis that these credit institutions are required to perform in accordance with the terms of the Luxembourg law dated 12 November 2004 on the fight against money laundering and terrorist financing as amended (the "Law of 2004"). Article 3(3) of the Law of 2004 provides that professionals that are within the scope of the Law "are required to perform an analysis of the risks inherent in their business activities. They must set down in writing the findings of this analysis."

According to Circular 11/519, the management of the credit institution is required to: (1) identify the risks of money laundering and terrorist financing ("ML/TF") to which the credit institution may be exposed; and (2) establish a methodology to categorise these risks and then define and implement measures to mitigate the identified risks.

Identification of ML/TF Risks

Circular 11/519 does not provide a list of potential ML/FT risks. Each institution must identify, categorise, and determine the importance of the particular ML/FT risks to which it considers itself to be exposed.

The following elements should be taken into consideration as they may reveal important information for an institution's analysis and assessment of its ML/FT risks. Such factors generally concern the nature of customers and the nature of the products offered and services provided, and include, but are not limited to:

Nature of Customers

  • the geographical origin and/or the activity sector/ profession of the customer;
  • the means of entering into the business relationship with the customer (e.g., business providers, non face-to-face entry into business relationship); and
  • the degree of complexity of the structure implemented for the benefit of the customer (e.g., use of front companies, trusts).

Nature of Products Offered and Services Provided

  • the volume of cash transactions;
  • the relations with correspondent banks (in particular when they are located in countries that do not apply ML/FT measures considered to be equivalent to those of Luxembourg);
  • any transfers from or to countries that are subject to international financial sanctions;
  • whether there is an offer of products/services facilitating anonymity (e.g., numbered accounts); and
  • whether there is an offer of products/services that are not part of the regular activity of the institution

Measures to Mitigate ML/TF Risks

Following the identification of the risks to which it may be exposed, the credit institution must implement measures to mitigate those risks and must clearly and precisely describe such measures at different levels of its activities, in particular in relation to (the following is a non-exhaustive list) the institution's:

  • acceptance procedure for entering into business relationships;
  • regularisation of incomplete files;
  • account blocking system;
  • procedure to terminate a business relationship;
  • procedure for the regular systematic review of business relationships;
  • system for detecting complex, unusual and suspicious transactions;
  • procedure for training and informing employees about such potential risks; and
  • cooperation with the CSSF.

Self-Assessment Survey Questionnaire

An additional purpose of Circular 11/519 is to compile information regarding the self-assessment performed by each credit institution in accordance with the Law of 2004 and Circular 11/519. The credit institutions are required to answer a questionnaire annexed to Circular 11/519—the answers are intended to afford the CSSF a clear and precise view of the adequacy of the measures implemented to mitigate the risks identified by the concerned credit institution.

New Licensing Requirement for Non-EU/ EEA Professionals Providing Financial Services in Luxembourg

The Luxembourg law of 28 April 2011 (the "Law of 2011") introduced a new licensing requirement for non-European Union ("non-EU") and non-European Economic Area ("non-EEA") financial professionals who do not have a permanent establishment in Luxembourg, to enable them to provide financial services to Luxembourg-domiciled clients. The Law of 2011 amended the Luxembourg law of 5 April 1993 on the financial sector, as amended (the "Law of 1993"), and entered into force on 9 May 2011. The CSSF issued Circular 11/515 on 14 June 2011 to further clarify the application of the provisions of the Law of 2011.

What Activities are Covered?

Pursuant to the Law of 2011, the new licensing requirement applies to "credit institutions and other persons from third countries, carrying on activities of the financial sector, which are not established in Luxembourg but which occasionally and temporarily come to Luxembourg, in particular to collect deposits and other repayable funds from the public and provide any other service under the Law of 1993."

The Law of 1993 regulates a wide range of financial providers and services, including credit institutions/ banks and other professionals of the financial sector ("PFS") that provide, among others, MiFID investment services and ancillary activities.

When is the New License Required?

Circular 11/515 clarifies that the term "come to Luxembourg" indicates that, in order to be subject to the licensing requirement, one or more agents of the non-EU/EEA financial professionals must be physically present in Luxembourg when collecting deposits and/ or providing financial services covered by the Law of 1993. Financial professionals who have Luxembourg-domiciled clients, however, do not ipso facto conduct their activities in the territory of Luxembourg. Pure cross-border activities carried out exclusively through communications (such as telephone, fax, e-mail) initiated from outside of Luxembourg will in principle not be subject to the new licensing requirement.

The CSSF considers that activities preceding (en amont) or following (en aval) the provision of financial services will not be subject to the licensing requirement. Accordingly, activities undertaken while in Luxembourg, such as the simple promotion of, or offering of general information regarding, financial services to the public (e.g., solicitation of clients, courtesy visits to clients and/or organization of road shows) will not trigger any licensing requirements, so long as the potential clients then contact the financial professional, and enter into any contract with the financial professional, in its home country or any other country.

What Steps are Involved in Applying for the License?

The license is delivered by the Luxembourg Ministry of Finance, upon a recommendation by the CSSF. The granting of the license is subject to the condition that the CSSF considers the regulatory and supervisory framework of the home country of the financial professional to be equivalent to the Law of 1993 in certain areas, notably:

  • the requirement to hold a license delivered by a public authority;
  • the professional honorability of the managers;
  • the internal organization (organizational requirements; existence of human and technical resources; setting-up systems, resources and internal procedures); and
  • the existence of conduct of business rules as well as requirements concerning own funds and participation in a deposit guarantee system.

Before filing a license application with the Ministry of Finance, the financial professional must submit to the CSSF a detailed description of the activities exercised by the financial professional in its home country, as well as those envisaged or exercised in Luxembourg.

The CSSF will assess, on a case-by-case basis, whether the contemplated activities come within the scope of the license requirement and if the above-described condition is met. If the CSSF is not satisfied with the information provided, it may also ask for a legal opinion from an independent legal adviser clarifying the equivalence of the supervisory rules of the home country of the financial professional with those of Luxembourg.

The CSSF considers that credit institutions whose home country is represented in the Basel Committee on Banking Supervision (including, amongst others, Argentina, Australia, Brazil, Canada, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa, Switzerland, Turkey and the United States) meet the equivalency and supervisory conditions. The CSSF has not issued any guidance with respect to PFSs.

Circular 11/515 specifies that the financial professionals must also comply with Luxembourg rules of territorial application, such as, for example, the Law of 2004 described earlier in this article, as well as consumer protection rules.

Proposed Changes to Luxembourg Law on Specialised Investment Funds

On 12 August 2011, the Luxembourg Government submitted to Parliament a bill to amend the Luxembourg law of 13 February 2007 applicable to specialised investment funds ("SIFs")(the "SIF Law"). The Government's intent, among other things, is to reflect the "experience" of the CSSF and adapt the SIF Law with respect to the AIFM Directive, which must be implemented into national law by 22 July 2013.

If passed into law, the bill will bring numerous changes to the current SIF regime. The bill provides for changes to the regulatory approval process and includes new provisions with respect to portfolio management, the delegation of certain functions to third parties, risk management and conflicts of interest. Finally, the bill, if passed into law, will introduce into the SIF Law additional flexibilities already adopted for UCITS and non-UCITS retail funds by the Law of 17 December 2010 on undertakings for collective investment. For further information on these proposed changes, please refer to www.dechert.com/Proposed_Changes_to_Luxembourg_Law_on_Specialised_Investment_Funds_09-07-2011/.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.