10/10/23
In brief
On Wednesday 27 September 2023, the Financial Action Task Force (FATF) on Anti-Money Laundering (AML) and Counter Terrorist Financing (CFT) measures published the fourth Mutual Evaluation report on Luxembourg.
This fourth FATF Mutual Evaluation report on Luxembourg follows the previous 2010 assessment, which resulted in the country being added to the reinforced monitoring list. The evaluation coordinated by FATF and performed by other countries’ evaluators in 2010, resulted in 13 compliant and largely compliant recommendations of technical compliance with 40 FATF recommendations. When we compare 2023 results, Luxembourg has 39 out of 40 areas considered as compliant, or largely technical compliant. The 2023 FATF report states, “Luxembourg has a solid AML/CFT framework and a good understanding of its money laundering and terrorist financing risks, recognised as a “high level of technical compliance”. These overall very good results are evidence of the work that the industry, together with the authorities, have done.
Technical compliance assesses the compliance of laws, regulations and the overall AML/CTF framework. The 2023 report also evaluated how effective the Luxembourg AML/CTF framework is. In this area, the framework is considered effective overall, especially for the financial sector supervised by the Commission de Surveillance du Secteur Financier (CSSF), but also that there is more work to do. In three years, time, FATF will evaluate Luxembourg on this follow-up work. The next full and fifth Mutual Evaluation Round is expected in 2030.
The work will revolve around three axes.
Improvement in the supervision and effectiveness of AML/CTF in the non-financial sector. Strengthening of supervision by authorities other than the CSSF. This will have an impact for example on Trust and Company Service providers, other entities supervised by the Administration d’Enregistrement et des Domaines (AED)
Understanding of the risk of terrorist financing and better implementation of internal controls based on the risks identified.
Effective application of the laws and regulations to evidence that they bear fruit, in light of the fact that the AML/CTF framework has changed significantly in Luxembourg over recent years. This concerns all sectors including the financial sector.
Key takeways
Interviews with obliged entities in most sectors did not reveal any serious concerns about the implementation of their AML/CFT requirements, and they have appropriate mitigation measures in place that are commensurate to their risks. Implementation is stronger for Financial Institutions (FIs), specialised PFS (Professionals of the Financial Sector) (Professionals of the Financial Sector), “professional du secteur de l’Assurance” (PSAs) and Trust and Company Service providers (TCSPs) than for other (Designated non-financial business and professions (DNFBPs) and Virtual Asset Service Provider (VASPs).
It was recognised that supervisors identify and maintain an understanding of ML/TF risks in their supervised sectors and individual professionals. The CSSF and CAA (Commissariat aux assurances) have a well-informed ML/TF risk understanding at a national, sectoral and firms’ specific level.
The key strength of the Luxembourg system is the robust domestic cooperation and coordination. Luxembourg’s Financial Intelligence Unit produces and disseminates a wide range of high-quality financial intelligence products but needs to ensure that it can continue to do so given its limited human resources and increasingly complex role.
International cooperation is vital for Luxembourg It factors into all areas of its AML/CFT framework. Over the review period, Luxembourg consistently provided constructive and decent quality mutual legal assistance and extradition, as confirmed by the positive feedback received from the FATF Global Network. The extent to which supervisory authorities engage in other forms of international cooperation varies. The CSSF and CAA are particularly effective in their engagement with foreign counterparts.
Lack of effective supervision
Poor understanding of Terrorism Financing (TF) and Targeted Financial Sanctions risks
Few investigations leading to prosecution or conviction.
Outcome - How PwC can help.
Since its last Mutual Evaluation report, Luxembourg has taken a range of steps to increase its national ML/TF risk understanding. Many of these changes have occurred over the last three to five years and while some initiatives are beginning to show results, other reforms have been too recent to be assessed on their effectiveness.
Although Luxembourg has strong results on technical compliance with the FATF Standards, the outcome of the report shows that efforts made on the financial sectors in terms of ML have been acknowledged but shall continue to be followed closely, as Luxembourg remains a large international financial hub, with significant cross-border financial flows, international clientele and high-risk products and services.
Meanwhile, further developments are expected in terms of terrorism financing risks and targeted financial sanctions regime.
Also, considering the gaps identified on the non-financial sector, an increasing pressure is to be expected on the Luxembourg market, as supervisors such as the AED will most likely increase the number of onsite visits, findings in terms of governance and policies implemented etc.
The FATF follow-up on effective implementation and weaknesses identified is now three years away, during which Luxembourg needs to continue its strong efforts.
PwC has industry-specialised teams, for example with a focus on transaction monitoring, sanctions, and terrorist financing, with Alternative Investment funds and TCSPS- supervised by the AED - for the Asset and Wealth Management industry to continue in its efforts, as well as for Insurance players who are supervised by the CAA. We also have services that support you as, and when, you need it, but additionally Managed Services who support you on a continuous basis. We aim to help you to increase your effectiveness but also your efficiency, reducing your compliance cost.
Birgit Goldak
Risk Assurance Partner, AML Services Leader, PwC Luxembourg
Tel: +352 49 48 48 5687
Michael Weis
Advisory Partner, Forensics & Anti-Financial Crime Leader, PwC Luxembourg
Tel: +352 49 48 48 4153