A New Era In The Fight Against Money Laundering
By the law of December 23, 2016 implementing the tax reform 2017 (“The Act “), the Grand Duchy of Luxembourg has profoundly modified its tax infrastructure.
From the system of taxation of cross-border workers to the tax credits mechanism by way of company’s tax regime, all the tax issues affecting Grand Duchy citizens’ live and companies established there have been addressed and dealt with by Luxembourg authorities and implement the fight against money laundering.
In this vast reform project, the fight against tax evasion, combating money laundering and counter financing of terrorism has not been neglected.
The Act contains several new criminal provisions which provide the judicial authorities with new enforcement instruments (2). Alongside this renewed legislative framework, new “Due Diligence” and “KYC-KYT” procedures have been developed jointly by the Commission de Surveillance du Secteur Financier (C.S.S.F.) and the Luxembourg Financial Intelligence Unit (“F.I.U.”) and published in the circular “CSSF 17/650”.
1. Two new primary offenses …
Transposing the revised FATF standard 2012/2013 and the European Parliament and Council Directive 2015/848 of 20 May 2015 on anti money laundering and combating the financing of terrorism, the Act created two new primary offences: Aggravated Tax Fraud and Tax Swindle.
These two new primary offenses require two components. A certain gravity, on one hand (the Act sets quantitative thresholds) and fraudulent maneuvers (concealment, lies), on the other.
The sanctions imposed on tax defrauders and all those who helped them to launder the proceeds of these frauds are particularly severe. People convicted of fraud and/or money laundering face fines ranging from €1,250 to €1,250,000 and sentences ranging from one month to five years’ imprisonment.
However, the Luxembourg authorities did not merely focus on extending the perimeter of the laundering offense.
The members of the F.I.U. and the specialists of the C.S.S.F. have developed a “Due Diligence” and “KYC-KYT” framework specifically adapted to the new definition of the laundering offense.
2. …. and a updated “Due Diligence” and “KYC-KYT” Framework
Circular “CSSF 17/650” sets out the general principles of the new “Due Diligence” and “KYC-KYT” Procedures to be implemented and followed by the Entities and the Professionals under the supervision of the C.S.S.F.
Not claiming to be exhaustive, we shall only underline the salient features of the framework set up by the circular.
a. Non-Retroactive Application
The new customer and transaction identification procedures will apply only to business relationships established after 1 January 2017. There are, however, two exceptions to this principle. Professionals must ensure genuine follow-up of the business relationship. In addition, certain transactions on dormant accounts will warrant thorough reviews.
b. In Luxembourg and Abroad
The “KYC-KYT” and “Due Diligence” Principles imposed on Professionals and Entities supervised by the C.S.S.F. relate to the tax obligations of Luxembourg resident taxpayers but also to the tax obligations of non-resident taxpayers. In the latter case, however, Professionals/Entities will not be required to have a thorough knowledge of foreign tax law.
c. Awareness and Appropriate Training Obligations. Updating of Internal Procedures and Policies
Professionals/Entities supervised by the C.S.S.F. must raise awareness and provide appropriate trainings to their employees regarding the challenges resulting from the extension of the perimeter of the laundering offense.
Professionals/Entities supervised by the C.S.S.F. will also have to adapt their internal structure. A Risk Assessment/ Risk Management and “KYC-KYT” Identification Structure shall be established. Furthermore, procedures allowing the Identification and Gathering of critical information shall be implemented.
d. A Duty of Cooperation
The circular “CSSF 17/650” impose an obligation to cooperate.
To which Contact Entity have Professionals to turn ?
Professionals/Entities have to report their suspicions to the Financial Intelligence Unit (F.I.U.), set up within the Parquet Economique et Financier de Luxembourg.
When the Reporting Duty arises ?
Professionals will be required to report their suspicions at the end of a two-step evaluation process.
1°) When confronted with a transaction that raises questions, professionals/Entities will refer to the 22 indicators which may be indicative of a laundering operation of proceeds derived from aggravated tax fraud or of tax swindle.
2°) If one or more of its indicators is causing doubt, Professionals/Entities will have to conduct a thorough “KYC-KYT” and “Due Diligence” analysis. If the doubt persists at the end of the second phase, Professionals/ Entities has an obligation to declare its suspicions.
Does the obligation to report suspicions apply in the case of primary tax offenses committed abroad?
There is no doubt that Professionals/Entities are submitted to a Reporting Obligation when the transaction is likely to constitute a laundering proceeding of primary tax offences committed in foreign territory.
The efforts of the Grand-Ducal authorities to extend the perimeter of the laundering offense to certain primary tax offenses must be welcomed.
Through this reform, Luxembourg aligns its anti-money laundering and terrorism financing mechanisms with the highest international standards. Moreover, Luxembourg is catching up with its neighboring countries regarding this matter.
Luxembourg has also avoided the pitfall of incomplete reform. Indeed, in parallel with the legislative reinforcement, a new framework specific to the “Due Diligence” and “KYC-KYT” Procedures has been elaborated and implemented. This new framework, which is a necessary complement to the legislative reform that has taken place, will undoubtedly ensure the effectiveness of the fight against money laundering and terrorism financing in the years to come.