Luxembourg recently published two important bills to combat money laundering and terrorism financing – one transposes the EU AML4 Directive1 into Luxembourg law; the second establishes a central register of beneficial owners, which aims to enhance transparency but creates an operational challenge for the Luxembourg fund industry. In a separate development, the Luxembourg Company Law has been reorganised and renumbered. These developments are discussed below.
Luxembourg Bills Concerning the Fight against Money Laundering and Terrorism Financing
The Luxembourg government has deposited two bills relating to the transposition of the AML4 Directive, an EU directive aimed at combatting money laundering and terrorism financing. The first bill2 transposes the main part of the AML4 Directive through the amendment of the Luxembourg AML Law3 on 26 April 2017 (AML4 Bill). The second bill4 introduced the act of the beneficial owners register (Registre nationale des bénéficiaires économiques, abbreviated as REBECO) on 6 December 2017 (REBECO Bill)5.
General AML4 Directive Transposition
The main purpose of the AML4 Bill is to transpose the AML4 Directive into the Luxembourg legal framework. Although the deadline for the implementation of the AML4 Directive was 26 June 2017, the AML Law has not yet been amended accordingly. It may be expected that the legislative process to approve the AML4 Bill will be completed within the first months of 2018.
In line with the risk-based approach that governs the AML4 Directive, the AML4 Bill provides that all professionals subject to the AML Law (Professionals) have the obligation to take appropriate measures6 to identify and evaluate the risks of money laundering and terrorism financing to which they are exposed. In this regard, Professionals must take into consideration various risk factors (e.g., relating to their clients, geographical areas, services, and transactions). Professionals must document, update and make available such risk assessments to the relevant competent authorities7 and self-regulatory bodies8. The risk-based approach is not new for Luxembourg, as CSSF Regulation 12-02 of 14 December 2012 required such an approach by following the 40 recommendations of Financial Action Task Force.9
Customer Due Diligence
Professionals are required to adapt their customer due diligence in accordance with the risks identified through this assessment. To provide guidance as to the risk assessment process and the determination of an appropriate level of customer due diligence, the amended AML Law shall include non-exhaustive lists of: (i) risk variables to be considered by Professionals when determining appropriate customer due diligence measures (e.g., regularity or duration of the relationship); and (ii) risk factors (relating to clients, services, transactions, or geographical areas) that may be indicative of the level of risk of money laundering and terrorism financing. For example, a potentially lower risk might be posed by a company listed on a stock exchange and subject to transparency obligations, whereas a higher risk might be posed through the use of nominee shareholders or bearer shares.
Adequate Internal Organization
Professionals are required to establish policies, controls and procedures to mitigate and effectively manage the risks of money laundering and terrorism financing. In connection with this obligation, Professionals must take measures to make their employees aware of applicable professional obligations and data protection requirements, including through participation in ongoing training programs to recognize operations that may be related to money laundering or terrorism financing, and how to respond in such cases. In this regard, Professionals must have in place appropriate procedures for their employees to report breaches of professional obligations internally through a specific, independent and anonymous channel.
REBECO is the Luxembourg iteration of the beneficial ownership register introduced by the AML4 Directive. The entities concerned will have six months from the effective date of the law that will implement the REBECO Bill, to file the required information about their beneficial owners.
According to the AML4 Directive, the purpose of establishing a central register of beneficial owners is to enhance transparency in order to combat the misuse of legal entities. The deliberately wide purpose of establishing this register underestimates the operational impact of maintaining such a register in contrast to the added value in the fight against money laundering, terrorism financing, tax crimes and corruption.
The REBECO Bill covers a variety of entities, including those often used by investment funds. These include: commercial companies, such as public companies (sociétés anonymes); common limited liability partnerships (sociétés en commandite simple); special limited partnerships (sociétés en commandite spéciale); foundations (fondations); and all other entities whose entry in the Luxembourg commercial and companies register (Registre de Commerce et des Sociétés, or RCSL) is provided for by a law. However, listed companies10 are expressly excluded, and the common fund (fonds commun de placement, or FCP) is omitted from the categories of entities specifically covered.
Individuals within Beneficial Owner Definition
The REBECO Bill has not created a specific definition of the beneficial owner, but relies on the provisions of the AML Law to determine which individuals are within this definition. Under the AML Law, any natural person who ultimately owns or controls the entity and/or any natural person on whose behalf a transaction or activity is being conducted is considered a beneficial owner. The current version of the AML Law considers a holding of at least 25% as sufficient to presume that an individual owns an entity. However, a question may be raised as to whether the 25% threshold can be applied generally, including in cases where an individual holds less than 25% but is a high-risk person or comes from a high-risk jurisdiction.
Information to be Included in REBECO
The information registered includes, among other things, the beneficial owner’s name, address, holdings, and national ID number. This information must be filed one month after the relevant event (e.g., subscription or transfer of shares or interests). Updating REBECO could prove burdensome for certain entities whose ownership may fluctuate, such as investment funds.
Access to Information on Register
Different levels of access are granted to relevant competent authorities and self-regulatory bodies, and to those with a legitimate interest. The access requests by those with a legitimate interest is subject to a specific procedure. The REBECO Bill also provides a procedure to be granted a kind of “high-risk exemption” (i.e., access to the information might be restricted in cases where the beneficial owner is a minor or a risk of fraud or kidnapping would arise as a result of the unrestricted access).
Responsibility and Penalties
Governing bodies of the relevant entities (e.g., boards of directors, general partners) are responsible for ensuring that complete, correct and up-to-date information is provided to the RCSL for the REBECO. Penalties range from EUR 1,250 to EUR 1,250,000.
As Europe's largest domicile for investment funds, and due to differing ways in which beneficial owners throughout the world invest in investment funds (including through nominee relationships), the implementation and continuous monitoring of REBECO will most likely constitute an operational challenge for the Luxembourg fund industry.
Company Law Reorganised and Renumbered
A Grand Ducal Regulation dated 5 December 2017 and published on 15 December 2017 coordinates the Luxembourg Company Law11. The Company Law was modernized by two laws adopted in 2016, to provide greater flexibility for boards and shareholders and to increase legal certainty by codifying established market practices. For further information regarding the reform of the Company Law, please refer to the Dechert OnPoint New Legislation Modernizes Luxembourg Company Law.
The Company Law is not further amended by this Grand Ducal Regulation, but is completely reorganized (with new titles, chapters and sections) and is renumbered with new articles. The new organization and numbering are applicable as of 19 December 2017. However, there is no specific obligation to update the constitutive documents of a Luxembourg vehicle that includes references to the old numbering. A table of concordance between the new and the old numbering is annexed to the Grand Ducal Regulation.