31 October 2020

RJ GAITO Transaction and Regulatory News


AML in the context of international transactions

Jul 15 2018

13 February 2018 - Luxemburg has, in part, transposed the 4th AML Directive (2015/849) into its national law, and thereby modified it by the Law of 12 November 2004.

AML practical advice

General principles of application

The Luxembourg prevention of money laundering and terrorist financing is embodied in the Law of 12 November 2004 and recently amended by the Law of 13 February 2018 (the 'AML Law').

The AML Law firmly reinforces the requirements of inter alia, financial institutions and a variety of service providers such as lawyers, trust service providers, auditors and accountants to identify the beneficial owners of their customers. This is often referred to as 'Know-Your-Customer' ('KYC') and also requires such service providers to make a risk assessment of money-laundering and fund originations now often referred to in the banking industry as 'Know-Your-Transaction' ('KYT').

The key changes and considerations that should be taken into account are as follows:

Extension of the definition of 'Beneficial Ownership'

For corporate entities. The natural persons holders of (directly or indirectly) 25% of the shares or ownership interest are treated indicatively as the ultimate beneficial owner ('UBO'). Therefore, technically even UBOs with a lower ownership percentage could be treated as the UBOs. Where the UBO cannot be positively identified, the senior management person may be treated as the UBO.

These rules further extend beyond client identification and are extended to transactions conducted by entities or natural persons.

It should be noted that listed entities on a regulated market that are subject to disclosure requirements consistent with European Union law, or subject to equivalent international standards which ensure adequate transparency of ownership information, are generally exempt from the disclosure requirements.

Trusts and similar arrangements.

In practical terms, without regard to the percentage of ownership, all parties to these arrangements should be identified, such as the trustee, the settlor and beneficiaries as well as any natural persons exercising the ultimate control over the trust (whether exercised directly or indirectly). The prior notion of a threshold of 25% ownership is now no longer applicable.

Enhanced risk assessment obligations

All professionals targeted by the AML Law are obliged to undertake appropriate measures to identify risks, taking into account various risk factors listed by the Law. One important example is the geographic risk factor and the jurisdiction from which funds originate.

Professionals have to document, and make available, the risk assessments for the relevant authorities and self-regulated bodies, and be able to demonstrate that such documentation is adequate and appropriate.

The obligation to conduct the KYC commences for transactions with a minimum threshold of €15,000 and was reduced to €1,000 for fund transfers and €2,000 for providers of gambling services. For traders of goods the AML Law sets a new threshold of €10,000.

Simplified and enhanced due diligence

The AML Law envisages two approaches to the KYC: (i) 'Simplified'; and (ii) 'Enhanced'. In determining which approach to take, the AML Law sets out the risk factors to be taking into account (Appendix II). The Law provides the criteria for the risk assessment but does not specify the mechanism or methodology that distinguishes the 'Simplified' and 'Enhanced' approach.

Requirements regarding a politically exposed person ('PEP')

AML Law has expanded the concept of 'politically exposed persons'. There is no longer a distinction between national and international PEPs. The definition of PEP has been extended to include siblings of the PEP in question as they are family members. Note that 'directors, deputy directors and members of the board or equivalent function of an international organisation' are now considered as PEPs.

Adequate internal procedures and whistleblowing Professionals are required to:

  • set up internal procedures, controls and policies in order to mitigate and manage effectively any risk of money-laundering and financing of terrorism at international, European, national, branches and own levels;
  • demonstrate the ability to conduct: risk assessment; customer due diligence; retention of documents; internal control; compliance with the AML Law; and, if necessary the appointment of a responsible relevant person within the organisation;
  • if necessary – dependent on the size and nature of the activity – have an external audit to monitor those proceedings;
  • take adequate measures to ensure that all employees are aware of these obligations;
  • establish protocols for employees to report violations of professional misconduct confidentially; and
  • within group affiliates based outside the EU, establish procedures and policies which are at least equivalent to the AML Law; and cooperate with the relevant Luxembourg authorities.

Supervisory authorities' powers

The relevant authorities listed under the AML Law have, inter alia, the following powers:

  • investigatory powers;
  • to temporarily prohibit professional activities;
  • to establish effective mechanisms to encourage whistleblowing;
  • to impose administrative sanctions ie warnings, reprimands and, in certain circumstances, fines up to €5 million or 10% of annual revenue;
  • to publicise sanctions which are no longer subject to judicial review; and
  • to inform European counterparts of all sanctions and administrative measures taken.

It should be noted that administrative sanctions need to be challenged following their notification.

Criminal sanctions

The AML Law increased the penalties for infringement of the legal provisions by imposition of fines of €12,500 to €5 million.

IN PRACTICE, our recommendations for cross-border transactions:

  • KYC should not be regarded as a pure administrative task; it should be treated as a project and handled by suitably trained staff.
  • Cooperate with the banks at all times because they will not hesitate to close down an account. Nothing is confidential today.
  • Possess at all times a corporate group chart that is accurate and can be delivered to relevant persons promptly.
  • Possess at all times recent financial statements and tax returns of relevant entities and their UBOs.
  • KYC and KYT are equally important. For each transaction, clear fund transfers with banks prior to a transaction and ensure that they are able to receive funds, and then send funds to their final recipient's destination.
  • Geographical risk factors need to be taken into account and recipients of funds need to weigh the risk of receiving funds from countries that do not have effective money laundering laws.
  • Assess if any investor or UBO is a PEP; conduct enhanced due diligence on such person and clear them in advance with the financial institution.
  • Apply an internal risk assessment for your own purposes and evaluate the potential treatment of your business by the financial institutions.
  • Although the AML Law provides for simplified due diligence, the banks are likely to apply a full due diligence process to all persons concerned or to all persons they may consider as being a higher risk.

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