Luxembourg
Detailed Assessment of Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

I. Overview

A. General

Information and methodology used for the assessment

1. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of Luxembourg was prepared by a team of assessors that included staff of the International Monetary Fund (IMF) and an expert, not under the supervision of IMF staff, who was selected from a roster of experts in the assessment of criminal law enforcement and non-prudentially regulated activities. IMF staff reviewed the relevant AML/CFT laws and regulations and supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions. In addition, the expert not under the supervision of IMF reviewed the capacity and implementation of criminal law enforcement systems.

2. The team consisted of Jean-François Thony and Terry Donovan of the IMF, with Michael Lauber, Head of the Liechtenstein FIU, as the Independent AML/CFT Expert (IAE) to address law enforcement issues and certain other matters beyond the scope of the work of the Fund.1

3. In the course of the assessment, a wide range of meetings was held with the Ministries of Finance and Justice, the Commission du Surveillance du Sector Financiel (CSSF), the Commission aux Assurance (CaA), the Prosecutors Office/Financial Intelligence Unit (FIU), the police, the Bankers’ Association, and a number of banks and other private sector financial institutions and professionals of the financial sector (PSFs). The assessment team would like to express its appreciation for the high level of organizational support, the high standard of cooperation received and the constructive nature of the discussions.

4. The following categories of regulated financial institutions were included within the scope of the assessment: banks, financial market professionals (PSFs, including securities and funds businesses), and insurance companies.

General situation of Money Laundering and Financing of Terrorism

5. Luxembourg’s geographical location, the free movement of capital and persons in the context of EU membership, and the international standing of its financial services sector are among the factors that create the environment for attracting cross-border financial services business. From the early 1980s, the authorities have recognized that private customers often seek confidential financial services, for a wide variety of reasons, and have pursued a policy to attract international financial services business to Luxembourg, based at least in part on the existence of strong bank secrecy laws. While these laws do not stand in the way of disclosure by financial institutions of client details to the appropriate authorities in the case of suspected money laundering or other financial crime, tax offences are not within the definition of crime for these purposes, except when committed within the framework of a criminal organization. Neighboring countries consider that they lose substantial amounts of tax revenue as a result of funds being transferred by their residents to Luxembourg financial institutions, often to branches of their own banks.

6. Discretion was and is one of the key factors in the success of financial services in Luxembourg, attracting legitimate business persons and, on occasion, also less scrupulous individuals. While the scope for development of retail banking in the Grand Duchy is relatively limited, Luxembourg has built up a substantial business in private banking, and is the second largest provider of funds management services in the world (after the United States), and the largest provider to non-resident investors. This brings with it inherent risks of money laundering and terrorist financing that demand the implementation of the strongest level of controls. Historical evidence suggests that these controls have not always been applied evenly across the financial system. Cases such as Jurado-Garcia (involving the drug-trafficking proceeds of the Colombian Cali cartel) and the BCCI collapse illustrate the vulnerabilities.

7. While it is difficult to assess with certainty the quality of day-to-day implementation, particularly in the areas of private banking and funds management, the strong AML/CFT control environment applied to Luxembourg financial institutions limits the scope for its system to be used for the initial placement of the proceeds of crime, although the mission was informed that large deposits of cash still sometimes occur. The main vulnerability is likely to arise at the subsequent layering stage, with the transfer from abroad of funds which have already been successfully introduced into the financial system. While Luxembourg is not without domestic crime, the main risks of money laundering arise therefore from crimes committed abroad, with the proceeds blended with legitimate funds in the Luxembourg system. At this point in the process, laundered money is much more difficult to detect. In Luxembourg, the availability of a variety of corporate structures (and of the service providers to create and manage them) that can be used to disguise the true identity of the beneficial owners of the underlying assets, creates a particular vulnerability. The authorities have put in place controls broadly in line with the international standard.

8. Luxembourg was the subject of a FATF second round mutual evaluation in 1998–99. The report, while broadly positive, indicated that the effectiveness of implementation was difficult to assess, particularly having regard to the low level of STR reporting. It called for a strengthening of AML structures and an improvement in financial analysis conducted by the FIU. Luxembourg has taken a number of steps to address these recommendations.

B. Overview of Measures to Prevent Money Laundering and Terrorism Financing

History of money laundering control in Luxembourg

9. The criminalization of money laundering in Luxembourg appeared for the first time in the legal framework of Luxembourg by the law of July 7, 1989 which set out the offence of the laundering of drug trafficking proceeds. The law provided also that those who facilitated the laundering knowingly or by violation of their “professional obligations”2 could be found guilty of the offence, which was one of the most stringent provisions against money laundering in Europe.

10. In 1993, Luxembourg provided its financial industry with a new and comprehensive legal framework by the law of April 5, 1993 on the Financial Sector (LoFS 93), which established the foundations of the obligations of financial institutions to prevent the abuse of the financial system for the purpose of laundering criminal proceeds: duty to identify customers, to keep record of transactions, to report suspicious transactions, etc. In March 1998, the requirements were extended to a number of other financial businesses under the denomination of “professionals of the Financial Sector” such as asset management companies, financial advisors, brokers, market makers, currency exchange dealers, etc.

11. In August of the same year, the scope of the money laundering offence was extended over the sole offence of drug trafficking to cover in particular offences in relation with organized criminal groups, and on December 23, the Supervisory Commission of the Financial Sector (Commission de Surveillance du Secteur Financier, CSSF) was established as the supervisory authority for financial institutions and related businesses. Domiciliation services providers were regulated by a law of May 31, 1999 and added to the list of those who were subject to AML preventive measures.

12. In 2000 and 2001, two laws, respectively, on mutual legal assistance and on extradition completed the framework for international cooperation in accordance with the treaties to which Luxembourg had become party. Two other laws were adopted in August 2003 to complement the legal framework: one the Financial Sector, which added a number of other financial services-related professions in the list of regulated entities (including financial IT services and company services providers) and one on terrorism and financing of terrorism which added the terrorism-related offences to the list of predicate offences of money laundering.

13. During the time of the mission, authorities were discussing a draft law (referred to in the text as draft law N°. 5165) aiming at bringing the legal framework up to the standards edicted in particular by the European Directive 2001/97/EC of December 7, 2001. Among other things, the draft law was intended to extend the scope of predicate offences including to the financing of terrorism, extending the reach of the law to new businesses and professions, clarifying the role and function of the FIU, and the scope of the prevention measures applicable to the institutions subject to the law. On many accounts, this draft law would be a marked improvement to the legal framework in place. However, under the pressure of the lobbies of the financial and the legal professions, the draft law was substantially amended since the mission and adopted in first reading on May 19, 2004. It is expected to be discussed in second reading during the next session of the Parliament. If the law as adopted in first reading were enacted and implemented in its current form, the AML/CFT framework would be likely to fall short in some important respects of the requirements of the revised FATF recommendations, bearing in mind the published comments of the Legal Commision of the Parliament, which would be expected to influence implementation by the authorities and the financial sector. Among areas of concern are the proposed limitation of the scope of predicate offences, of the “know your customer” procedures,3 and of the powers of the FIU. Unless the necessary adaptations are made to the present law, before it is adopted in second reading, the authorities may have to make some further amendments in the near future to align the legal framework to the international requirements.

14. Since the law was not in force at the time of the mission, its provisions are not assessed as part of the evaluation, but only referred to when the draft law was to change some elements of the existing legal framework. The references to the draft law N°. 5165 relate to the text as it stood at the time of the mission and not as it was later amended.

Main findings—criminal justice

15. Luxembourg’s criminal justice legal and institutional framework provides a solid foundation for the fight against money laundering and financing of terrorism.

16. Luxembourg is a party to the main international instruments addressing money laundering and financing of terrorism except for the Palermo convention. Criminal laws are in line with international obligations, with the important exception of the criminalization of money laundering, where the scope of the offence is too limited to comply with existing standards regarding money laundering-related predicate offences. Crimes such as fraud, embezzlement, and armed robbery do not currently constitute predicate offences for the purposes of the money laundering law.

17. The effectiveness of confiscation laws in money laundering matters is difficult to assess, given the low rate of prosecutions for money laundering and financing of terrorism offences. However, the scope of confiscation is quite broad and its application should not be a problem. To enhance the effectiveness of confiscation measures, Luxembourg could consider alleviating the burden of proof of the origin of the seized assets, as suggested by the Vienna, the Strasbourg, and the Palermo Conventions.

18. With regard to the freezing of assets on the basis of the UN Resolutions, Luxembourg has actively implemented its obligations to search and freeze assets of the persons considered to provide support to terrorist organizations, by issuing circulars to financial institutions. However, today, less than half a dozen accounts have been identified as being related to a person or entity on the list. While the EC regulations provide an adequate legal basis for freezing the assets, the specific nature of these measures, taken outside the framework of a criminal investigation or prosecution, and outside the scope of the exercise of FIU functions, would require the enactment of specific provisions to empower authorities to give full and immediate effect to these obligations.

19. The Financial Intelligence Unit in Luxembourg is one of the judicial model, i.e., under the supervision and operation of a judicial authority, namely the Prosecutor’s office. It benefits from a ten-year old experience in receiving suspicious transaction reports (STRs), and its authority is recognized and unchallenged. Its staff is very committed and maintains close relations with the financial sector. However, it lacks a clear and transparent legal framework to operate, and sufficient means and IT equipment to face the continuous rise in STRs and to fulfill a real analysis function. Financing of terrorism should be added to money laundering as the offences for which suspicion should be disclosed.

20. The FIU and law enforcement and prosecution authorities being the same, many of the comments made as to the FIU could be replicated in relation to the effectiveness of the prosecution authorities. The specialized police authorities and the prosecutor’s office are taking great benefit of the fact that they are combined with the FIU, for a maximum efficiency in prosecutions. However, the number of prosecution is very low, due to the established policy of simply forwarding to foreign central authorities all cases and suspicions of money laundering which relate to persons or funds originating from abroad. The authorities in Luxembourg expect that the foreign central authorities will investigate and pursue the matter, while they themselves consider the matter closed. With regards to proactive investigative techniques, these are limited to wire tapping and other related measures.

21. Given the amount of assets managed or deposited in Luxembourg by foreigners, the number of requests for mutual legal assistance is very important in Luxembourg. The overload of foreign requests and the previously existing procedures often resulted in the past in undue delays and Luxembourg was sometimes criticized by neighboring countries for its low and slow response to their requests. The law of August 08, 2000 has provided for a simpler procedural framework and is praised for its efficiency although petitions opposing the giving of assistance may still be filed on a case-by-case basis. Since its adoption, the number of petitions against measures executed in response to an MLA request, which were filed before for the main purpose of delaying the process, has dropped significantly to a dozen per year. The law is clear and simple, even though the conditions for granting the request and the possibilities for refusal are extensive. The adoption of a law on extradition on June 20, 2001 has completed Luxembourg’s now comprehensive framework for international cooperation. Luxembourg is a party to the international instruments designed to enhance judicial cooperation in criminal matters, apart from the Palermo convention.

Preventive measures for financial institutions

22. Luxembourg has a well developed supervisory framework that encompasses AML/CFT preventive measures broadly in line with international standards. The CSSF is the competent authority for banks, funds management, and a range of financial sector professionals. As noted, the LoFS 93 has provided the main basis for AML/CFT preventive measures. The law has been supplemented by 60 circulars issued by the CSSF (and its predecessors) that, although they do not in themselves have direct force of law, provide useful guidance to financial professionals on implementing provisions of the AML/CFT legislation.

23. There is a culture of strong bank secrecy in Luxembourg, but there are mechanisms to permit access to information needed by foreign and national authorities responsible for financial sector supervision. Some issues have arisen regarding the provision of information by supervised institutions to the FIU and Prosecutor’s Office, which led the CSSF to issue a circular in 2001 reminding banks to cooperate and “refrain from systematically objecting on the grounds of bank secrecy.” The authorities indicate that cooperation has since improved.

24. Anonymous accounts are prohibited in Luxembourg. Customer identification procedures are mandated by law for customers, without distinction between natural and legal persons. CSSF Circulars provide detailed guidance. Banks interviewed in the course of the mission indicated that numbered accounts are used extensively in Luxembourg, particularly in the private banking area. The authorities and banks indicated that they are not treated any differently to nominative accounts as regards customer identification, except that access to the information is confined to those needing to know.

25. The identification of beneficial owners is a requirement of LoFS 93. Financial professionals interviewed identified difficulties in practice in some cases in identifying the ultimate beneficial owner, and indicated that, in the absence of this information, they would not proceed with the business relationship. There is no legal requirement to include originator information in wire transfers. However, banks interviewed indicated that their internal procedures address this issue in line with international standards.

26. Most business of banks and other financial professionals in Luxembourg relates to nonresidents. This business is subject to the same controls for AML/CFT purposes as resident business, but there is no requirement for enhanced due diligence for nonresident business to accord with the international standard. Neither is there any specific guidance relating to the use of corporate vehicles, which are particularly important in Luxembourg. Customer due diligence procedures carried out by a regulated entity in Luxembourg or in a range of other countries are accepted for their purposes by Luxembourg financial services entities. While consistent with the exemption available under the relevant EU Directives and international standards, the scale of the application of this exemption in Luxembourg could create reputational risks, particularly in cases of complicated or obscure ownership structures.

27. Records of customer identification and transactions must be maintained for at least five years, in line with the international standard.

28. Legal provisions on reporting of STRs are largely in line with the standard. It is difficult to assess whether financial professionals are prepared to fully accept their obligations, and the views expressed by the Banking Association point to a reluctance to do so, based at least in part on a concern of potential self-incrimination as a result of reporting.

29. Banks must establish adequate internal control procedures for AML/CFT under LoFS 93, and CSSF requires banks to submit to it a copy of the procedures manual on an updated basis. CSSF carries out a regular program of on-site inspections of banks, including coverage of AML/CFT. These inspections are detailed and have identified significant weaknesses in procedure and implementation, for which remedial action has been required.

30. The legal framework for the insurance sector is based on the Law of 1991 on Insurance Services (LoIS 91), with the implementation of AML/CFT measures currently limited to life insurance products. The competent authority is the Commissariat aux Assurances (CaA). Customer identification requirements are similar to those for banks, albeit with exemptions for low-value business. Life assurance business on behalf of non-residents is a very significant component of the Luxembourg financial services market. It is among the range of products offered for investment purposes to attract the business of medium to high net worth individuals, alongside private banking, funds products, corporate structures, etc. As such, it is similarly vulnerable to abuse by money launderers, particularly at the layering and subsequent stages of the ML process. Typology information published by the FIU, and analyzed independently by the CaA, points to a range of possible abuses of these products, based on the 180 or so STRs filed by the insurance sector to date. Discussions during the mission confirmed a keen awareness of the risks and the existence of a range of controls. The quality of customer due diligence is critical to protecting the system and cannot be assessed directly by the mission. The CaA conducts onsite inspections of life companies, on a 3-4 year cycle, and includes coverage of AML/CFT measures.

II. Detailed Assessment

31. The following detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).4

A. Assessing Criminal Justice Measures and International Cooperation

Table 1.

Detailed Assessment of Criminal Justice Measures and International Cooperation

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B. Assessing Preventive Measures for Financial Institutions

32. The assessment sought to confirm that: (a) the legal and institutional framework is in place and (b) there are effective supervisory/regulatory measures in force that ensure that those criteria are being properly and effectively implemented by all financial institutions. Both aspects are of equal importance.

Table 2.

Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation

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C. Description of the Controls and Monitoring of Cash and Cross Border Transactions

Table 3.

Description of the Controls and Monitoring of Cash and Cross Border Transactions

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D. Ratings of Compliance with FATF Recommendations, Summary of Effectiveness of AML/CFT efforts, Recommended Action Plan and Authorities’ Response to the Assessment

Table 1.

Ratings of Compliance with FATF Recommendations Requiring Specific Action

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Table 2.

Summary of Effectiveness of AML/CFT efforts for each heading

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