The grand duchy’s financial sector needs to do more to combat potential terrorist financing, particularly in industry education and understanding the risks, one of Luxembourg’s top financial regulators has said.
Marco Zwick, a director at Luxembourg Financial Sector Supervisory Commission (CSSF), was speaking at the Association of the Luxembourg Fund Industry’s Private Assets Conference on 28 November 2023.
A large portion of Zwick’s remarks focused on the Financial Action Task Force report issued earlier this year, which was an international assessment of how the country handles anti-money laundering and counter-terrorism financing rules. Luxembourg received a “regular monitoring” score, the best possible result.
Zwick said that while regulators are never fully satisfied, he was satisfied with this year’s FATF report. In the first part of the review, Luxembourg was deemed “compliant” in 28 out of 40 measures, “largely compliant” in 11 fields, “partially compliant” in only 1 section and received zero “non-compliant” ratings, he noted. “I’m not complacent but I dare say that was a superb result,” he said.
In a second set of scores, Luxembourg was judged “a little bit harshly” and Zwick said he was disappointed the country did not achieve a better result in the “11 immediate outcomes”. He noted that the FATF review includes non-financial sectors, which impacted the overall result.
Coming CSSF AML guidance
He addressed 3 criticisms of how Luxembourg’s financial sector approaches AML/CTF procedures. He pointed to the “high number of existing blocked accounts” which he pegged at 86,000. Many of the blocked accounts were not frozen due to AML rules, Zwick said. The CSSF will issue guidelines on how financial firms label blocked accounts, so it is clearer which have been flagged truly for anti-money laundering suspicions or breaches and which for other reasons.
“The team felt more needs to be done” to combat terrorism financing. Not that funds are flowing through, but “more education” to better “understand the risks” are required. The CSSF and other authorities will be issuing more guidelines, he said.
Some observers have said that the CSSF has been “too nice” about publishing details of the administrative sanctions it levies. “We should be more exhaustive” about “publishing shortcoming of companies”, he related. Zwick said the CSSF was currently working on “a new way to communicate weaknesses” so that “the industry can learn from mistakes.”
Delegation & compliance
To the FATF review’s list, Zwick added his own critique. Oversight of delegated compliance functions could be improved, he said, such as the frequency of name screening, and enhanced supervision of distributors. Relying on outsourcers without validating their models “still happens” which the regulator “doesn’t accept”. Firms outsourcing functions still need to check criteria used by the provider. Expect further guidance on this front next year, he said.
Circular 02/77 update
CSSF circular 02/77, which protects investors in case of Nav calculation errors and non-compliance with investment rules, was published back in November 2002. The regulator has been working on an updated version that notably will take into account the growth of private asset funds in Luxembourg. Zwick said he expects the revised circular will be issued during the first quarter of 2024.
Dora
Zwick encouraged financial firms to pay closer attention to the EU’s Digital Operational Resilience Act, which needs to be implemented by January 2025. In a recent CSSF survey of 100 firms, only 11 had started mapping future Dora requirements into their systems. Dora is “coming soon” Zwick told the fund executives in the audience, so the time to address it is now.
