AML

AML/CFT supervision of unregulated alternative investment funds (excluding RAIFs) by the AED

The Luxembourg Registration Duty, Estate and VAT Authority (in French, l’administration de l’enregistrement, des domaines et de la TVA or “AED”) has under its anti-money laundering and counter financing of terrorism (“AML/CFT”) supervision Luxembourg alternative investment funds being unregulated and not supervised financial vehicles by any other Luxembourg supervisory authority (“unregulated AIFs”).

In such respect, the AED has recently added a specific section on its website regarding these unregulated AIFs (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia.html). Indeed, the AED requests the unregulated AIFs to complete and file:

(i) an identification form related to (a) the person responsible for the control of the compliance of the AML/CFT obligations at the appropriate hierarchical level (in French, “responsable du contrôle du respect des obligations” or the “RC”) and (b) the responsible for the compliance with the professional obligations as regards the AML/CFT (in French “responsable du respect des obligations” or the “RR”) (the “RR/RC Form”) (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia/rr-rc-identification.html) ; and

(ii) a yearly AML/CFT Questionnaire covering the financial year 2021 (the “Questionnaire”) (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia/aml-cft-questionnaire.html).

In order to correctly complete the RR/RC Form and the Questionnaire, the AED has published frequently asked questions and guidelines documents on its website.

Certain unregulated AIFs have received communication from the AED asking them to complete and file the RR/RC Form and the Questionnaire by 12 November 2022 at the latest. In case you have not received such a communication, it is recommended to anticipate AED’s request and, therefore, to prepare the RR/RC Form and the Questionnaire together and to submit such documents in advance to the AED. In addition, the RR/RC Form must be transmitted to the AED without delay in the following situations:

  • Initial appointment of the RC and/or RR of the unregulated AIF; and
  • Change of the RR and/or RC of the unregulated AIF.

As a general reminder, all Luxembourg investment funds and Luxembourg investment fund managers shall establish an AML_CFT governance framework (AML_CFT policy, risk assessments, appointment of RR/RC etc.).

Please feel free to contact our investment management team concerning the completion of the Questionnaire and the RR/RC Form or any further questions on this matter.


CSSF update of FAQ market entry form for investment funds and IFMs

The CSSF updated on 4 October 2022 its Frequently Asked Questions regarding the AML/CFT market entry form for investment funds and investment fund managers (the “IFMs”) (the “FAQ”). A market entry form shall be completed by supervised funds (UCITS, UCI Part II, SIF, SICAR, or when asking authorization of a label (ELTIF, EUSEF, EUVECA or MMF) in relation to the set-up but also in case of approval of new sub-fund. It shall also be completed for the set-up of an authorized IFM or the registration of an IFM and adapted by such IFM in case of (i) approval of an additional license, a license extension including the request to manage an ELTIF, (ii) entry of a qualified shareholder in the shareholding structure of the IFM and/or (iii) merger (only if the merger leads to a change to the information provided in the Market Entry Form for the absorbing IFM). 

The FAQ aims to assist with the proper completion of the AML/CFT market entry form on eDesk.  

The updated FAQ clarifies the situation of the reporting of indirect shareholders, each holding less than 10% of the shareholdings of an IFM. In such a situation, it is not required to report such shareholders to the CSSF, but the CSSF requests to be provided with the following:  

  • A written confirmation (from the IFM, the shareholder, the proposed acquirer or its representative) that each non-reported indirect shareholder is individually and, on an aggregate basis, holding less than 10% of the indirect shareholding of the IFM; 
  • The maximum percentage that the most non-reported shareholder(s) is/are holding in the IFM;  
  • A written confirmation that there is no shareholder agreement in place at the level of non-reported shareholders;  
  • A written confirmation (from the IFM, the shareholder, the proposed acquirer or its representative) that there has been no AML/CFT sanction over the last five years for the indirect non-reported shareholders; and 
  • Any other document requested by the CSSF. 

Feel free to contact our investment funds team regarding the completion of the AML/CFT market entry form. 


sustainable finance

CSSF fast-track procedure for visa-stamping regarding SFDR RTS

Introduction

The CSSF issued communications, respectively on 27 July and 6 September 2022, to the investment fund industry relating to (i) the regulatory requirements concerning Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”) and the upcoming entry into force of SFDR Level 2 provisions (the “SFDR RTS”), and (ii) the SFDR RTS confirmation letter.

The SFDR RTS requires financial market participants to present by 1 January 2023, for financial products subject to Articles 8 and 9 of SFDR, precontractual and periodic disclosure information in the format of templates set out in the annexes of the SFDR RTS. A fast-track procedure relating to the visa stamp of the issuing documents is now available concerning articles 8 and 9 regulated funds, in other words, UCITS and regulated AIFs (alternative investment funds).

As a reminder, the SFDR RTS also precise mandatory website product disclosure requirements applicable to financial market participants through the need for a separate website section titled, ’Sustainability-related disclosures’. Regulation (EU) 2020/852 of 18 June 2020, on the establishment of a framework to facilitate sustainable investments (the “Taxonomy Regulation”) requires financial market participants, for those financial products subject to Articles 8 and 9 of SFDR, to provide by January 1, 2023, for transparency in pre-contractual documents and periodic reports concerning the environmental objectives referred to in Article 9, points (c) to (f) of the Taxonomy Regulation.

Q.1 What is the fast track process relating to SFDR RTS?

The CSSF expects to receive the updated pre-contractual documents by October 31, 2022, at the latest, for financial market participants who have not yet submitted to the CSSF the required updates to the issuing documents of UCITS and/or regulated AIFs under the SFDR RTS and the Taxonomy Regulation. If submissions following the filing procedure in Q.3 are compliant and received by the CSSF by 31 October 2022, the CSSF will endeavour to release the visa stamp before 31 December 2022.

Q.2 What are the conditions?

The CSSF will give priority for visa stamping to the issuing documents and may release the visa stamp before 31 December 2022, if the following conditions are fulfilled:
– changes made to the pre-contractual documents are limited to the insertion of the templates according to the annexes of SFDR RTS and that for all the sub-funds subject to Article 8 or 9 SFDR;
– the updated filed prospectus is accompanied by the RTS confirmation letter and the related table, duly filled in and signed by authorised persons; and
– any other changes made apart from changes made about the insertion of the standardised annexes pursuant to SFDR RTS must be minor, of editorial nature only and not entail a material change for investors.

Moreover, on an indicative basis, the precontractual and periodic disclosure templates shall not be amended except as foreseen under Article 2 of the SFDR RTS, i.e. the size and font type of characters and the colours. If a financial market participant deems sections of the pre-contractual or periodic template not relevant for a given fund or sub-fund/compartment, those sections shall still be maintained in the precontractual and periodic disclosure template and shown as being not applicable.

Where a notice is foreseen to inform investors of an update of the issuing documents, this notice shall also be uploaded and submitted to the CSSF. Regarding UCITS, the RTS confirmation letter shall be duly filled out and merged with the prospectus in the track change version.

Q.3 What is the procedure?

– Each duly updated UCITS prospectus, including only the sustainability-related disclosure changes, should be filed for visa stamp with an accompanying RTS confirmation letter. A template of the RTS confirmation letter is now available for UCITS from 6 September 2022.

– Each AIF regulated by the CSSF, which, on the basis of Article 6(3) of SFDR, is obliged or intends to publish the pre-contractual disclosure templates in an annexe to its issuing document, shall submit the issuing document to the CSSF within the set deadline. The RTS confirmation letter template for regulated AIFs is now available from 6 September 2022.

The updated pre-contractual documents for visa stamping shall be filed electronically with the CSSF under the provisions set out in Circular CSSF 19/708 relating to the electronic transmission of documents to the CSSF.

Finally, after submission for examination, the CSSF may ask for prompt clarification or confirmation, if needed, with potential reiteration until completion and consent on disclosures to be inserted. Thus, obtaining the visa stamp may also depend on the ability of the applicant to communicate relevant information requested by the CSSF after the first submission of the updated version of the issuing document including the templates, the RTS confirmation letter, and the related table.

Please feel free to contact our investment management team concerning the update of your issuing documents and completion and filing of the RTS confirmation letter and the relevant annexes pursuant to SFDR RTS.


Amendment to the Luxembourg AML Law - Time to update your AML policies

The law of 29 July 2022, which entered into force on 12 August 2022, amended the Law of 12 November 2004 on the fight against money laundering and terrorist financing, transposing Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering (the AML Law).

Following such amendments, professionals in the scope of such legislation will need to update their AML policies and procedures, in particular regarding customer due diligence, to provide, amongst other things, for the following obligations :

  • To determine the extent of the customer due diligence requirements according to the assessment of risks relating to types of customers, countries or geographical areas and particular products, services, transactions or delivery channels;
  • To compare the information collected with that in the registers (i.e. register of beneficial owners, if available) in order to detect any erroneous data or the absence of all or part of the data or the lack of registration, amendment or deletion. Professionals shall proceed in the same way in the context of the exercise of constant vigilance of the business relationship;
  • To retain copies of the documents, data and information collected as part of the due diligence process;
  • To apply enhanced due diligence requirements where a customer or a person purporting to act on behalf of or for the customer or beneficial owner is a PEP, i.e., to:

(a) have appropriate risk management systems, including risk-based procedures, to determine if the customer, the person purporting to act on behalf of or for the customer or beneficial owner is a politically exposed person;

(b) obtain senior management approval for establishing or continuing, for existing customers, business relationships with such persons;

(c) take reasonable measures to establish the source of wealth and source of funds that are involved in the business relationship or transaction with such persons;

(d) conduct enhanced ongoing monitoring of the business relationship.

Please get in touch with our investment management team if you wish assistance.


sicar

CSSF issues updated FAQ on SICAR

The CSSF has published on 10 June 2022 an updated version of its Frequently Asked-Questions (“FAQ”) regarding the société d’investissement en capital à risque, i.e. SICAR, an investment company whose purpose is to invest in risk capital.

The list of questions indicated in such FAQ are set out below:

1. What steps are to be taken to submit an authorisation request for a new SICAR?
2. What criteria shall the directors of a SICAR fulfil?
3. What are the CSSF’s requirements regarding the prospectus of SICARs?
4. What does the CSSF require for the central administration of SICARs?
5. What does the CSSF require for the depositary bank of SICARs?
6. What is the procedure in case of replacement of a director or service provider?
7. Which requirements regarding prudential reporting does the SICAR have to comply with?
8. What are the obligations for SICARs as regards information to be submitted to the investors and the dissemination method?
9. Which requirements are the SICARs subject to as regards the drawing-up, approval, statutory audit and publication of annual accounts?
10. To which particular requirements as regards the drawing-up, approval, audit and publication of the annual accounts are SICARs with multiple compartments subject?
11. Which general characteristics shall investment policies of SICARs present?
12. Under which conditions may SICARs carry out real estate investments?
13. Can SICARs invest in infrastructure projects?
14. Can a SICAR have an accessory investment policy which does not comply with the criteria of risk capital?
15. Can SICARs make indirect investments through intermediary investment vehicles or special purpose vehicles?
16. Can SICARs act as feeder fund in a master-feeder structure?
17. Under what conditions may a SICAR invest in securities listed on a stock exchange?
18. Under which conditions can a SICAR invest in derivative financial instruments?
19. In which manner can a SICAR invest its liquidity awaiting investment and reinvestment in risk capital as well as funds awaiting distribution?
20. Can SICARs make investments in commodities?
21. Can a SICAR invest in ABS and CDOs?
22. Under which conditions can a SICAR invest in Distressed Debt securities?
23. What are the SICARs’ obligations with respect to risk management?
24. What requirements are SICARs subject to regarding due diligence in relation to their investments?
25. What requirements are the SICARs subject to regarding management of conflicts of interest?
26. What are the conditions to comply with in case of data transfer by a central administration or a depositary to another service provider?
27. Who to contact for further information?

The updated FAQ is available in English and can be found here.


CRS reporting

New reporting obligations for RAIFs and unregulated AIFs - Update of the CRS FAQ by the Luxembourg tax administration

Key takeaway

RAIFs and unregulated AIFs (e.g. SCSp and SCS) are now considered reportable financial institutions since they can no longer benefit from the exempt CIV status. They must file a (nil) report by 30 June 2022 to avoid penalties.

Introduction

On 4 April 2022, the Luxembourg direct tax administration (“ACD”) updated its frequently asked questions (“FAQ”) on the common reporting standard (“CRS”). Such FAQ now includes two new questions, providing a list of Investment Entities (I) and a clarification relating to the scope of the exempt Collective Investment Vehicle (“exempt CIV”) status (II). They are important, in particular, for reserved alternative investment funds (“RAIFs”) and unregulated alternative investment funds (“AIFs”). As a reminder, CRS is an automatic exchange of information relating to financial accounts in tax matters with the Member States of the European Union and the other partner jurisdictions of Luxembourg as implemented by the amended law of 18 December 2015 relating to the automatic exchange of information in tax matters (“CRS Law”). The CRS Law requires Reporting Financial Institutions (“RFIs”) to declare some information in relation to certain accounts and the holders of such accounts. The RFIs are defined as all financial institutions which are not non-reporting financial institutions (“NRFIs”). One element of the definition of the NRFIs is the exempt CIV status. Therefore, such exempt CIVs do not have to report to the ACD concerning CRS matters. The updated FAQ narrows the scope of the exempt CIV status, which was interpreted as including RAIFs and other unregulated AIFs until now.

Please find below the two Q&A of the ACD in the updated FAQ on CRS.

I) A non-exhaustive list of Investment Entities (Q 2.3)

Except in special circumstances, the following entities are, in principle, considered Investment Entities:

– any undertaking for collective investment subject to Part I or II of the amended law of 17 December 2010 relating to undertakings for collective investment;
– any specialized investment fund subject to the amended law of 13 February 2007 relating to specialized investment funds;
– any venture capital company governed by the amended law of 15 June 2004 relating to venture capital companies (SICAR);
– any securitisation undertaking subject to the authorisation and supervision of the Commission de Surveillance du Secteur Financier (the “CSSF”) in accordance with the amended law of 22 March 2004 relating to securitisation;
– any RAIF falling within the scope of the amended law of 23 July 2016 relating to reserved alternative investment funds;
– any AIF whose management falls within the scope of the amended law of 12 July 2013 relating to alternative investment fund managers;
– any pension fund governed by the amended law of 13 July 2005 relating to institutions for occupational retirement provision in the form of SEPCAV and ASSEP;
– any pension fund governed by the amended Grand-Ducal Regulation of 31 August 2000 implementing Article 26, paragraph 3, of the amended law of 6 December 1991 on the insurance sector and relating to pension funds subject to the prudential supervision of the Commissariat aux assurances;
– any management company subject to part IV of the amended law of 17 December 2010 relating to undertakings for collective investment;
– any manager of alternative investment funds governed by the amended law of 12 July 2013 relating to managers of alternative investment funds; and
– any investment firm governed by the amended law of 5 April 1993 relating to the financial sector which carries out any of the following activities: (i) execution of orders on behalf of clients, (ii) portfolio management.

II) Unregulated entities such as RAIFs and other unregulated AIFs and the exempt CIV status (Q 2.4)

The ACD indicates in the FAQ that unregulated entities can no longer benefit from the exempt CIV status, as only entities directly supervised by the CSSF may opt for this status if the other applicable conditions are fulfilled.
As a result of the answers mentioned above, the RAIFs and the unregulated AIFs should now submit every year a nil report to the ACD if there is no CRS reportable account. Indeed, RAIFs and unregulated AIFs may not qualify as NRFI anymore. Therefore, RAIFs and unregulated AIFs qualifying as RFI must respect the reporting and due diligence CRS obligations. They should review their CRS qualifications and applicable CRS reporting obligations.

Based on the fact that neither the CRS law nor the ACD refer to the legal form of the entities, the same reasoning applies to unregulated AIFs under the form of a common limited partnership (société en commandite simple – SCS) or a special limited partnership (société en commandite spéciale – SCSp). RAIFs and unregulated AIFs should, in principle, have no CRS reportable accounts. If so, a nil report should be filed by 30 June 2022 for the two fiscal years 2020 and 2021 in order to avoid any penalties.

There are two types of penalties:

– a Luxembourg RFI omitting to comply with due diligence rules or to introduce procedures in view of reporting is liable to a penalty up to EUR 250,000; and
– a Luxembourg RFI omitting to file the required report or if it files a late, incomplete or inaccurate report, it may be liable to a penalty of 0,5% of the amounts that should have been reported, with a minimum of EUR 1,500.


Luxembourg administrator

CSSF Circular 22/811 on UCI administrators

On May 16, 2022, the CSSF issued a new circular 22/811 regarding the authorisation and organisation of entities acting as UCI administrator (the “Circular“) replacing Chapter D of Circular IML 91/75. The Circular clarifies the activity of UCI administrators by specifying the principles of sound governance, the CSSF requirements on internal organisation, and good practices applicable to them.

What are the activities covered by the Circular?

The UCI administration activity may be split into three main functions:

(i) The registrar function

The registrar function encompasses all tasks necessary to maintain the UCI’s unit-/shareholder register. The reception and execution of orders relating to units/shares subscriptions, redemptions, and income distribution (including the liquidation proceeds) are part of the registrar function.

(ii) The NAV calculation and accounting function

The NAV calculation and accounting function covers legal and fund management accounting services, valuation, and pricing (including tax returns).

(iii) The client communication function.

The client communication function is comprised of the production and delivery of the confidential documents intended for investors.

To whom does the Circular apply?

The Circular applies to all entities carrying out the activity, or part of the activity, of UCI administration as listed above.

It should be noted that the following UCIs (undertaking for collective investment) and IFMs (investment fund managers) are eligible to act as UCI administrator :

– Management companies incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for

collective investment, as amended (the 2010 Law);

– Management companies incorporated under Luxembourg law and subject to Chapter 16 of the 2010 Law;

– Alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers, as amended (the 2013 Law);

– Foreign IFMs pursuing the activity of UCI administrator for UCIs established in Luxembourg;

– Regulated Luxembourg UCIs, for themselves but not to other UCIs.

Luxembourg reserved alternative investment funds (RAIFs) and non-regulated alternative investment funds (AIFs) are not within the scope of the Circular if they have internalised the UCI administration unless they use an external UCI administrator which is subject to the Circular.

The UCI administration activity may further also be performed by the following external service providers established under the Law of 5 April 1993 on the financial sector, as amended (the 1993 Law):

– Credit institutions authorised under Part I, Chapter 1 of the 1993 Law;

– Luxembourg branches of credit institutions governed by foreign laws and authorised under Part I, Chapter 3 of the 1993 Law;

– Registrar agents authorised under Part I, Chapter 2 of the 1993 Law;

– Client communication agents authorised under Part I, Chapter 2 of the 1993 Law, but only for the client communication function as described in section 2.2.5 of the Circular; and

– Administrative agents authorised under Part I, Chapter 2 of the 1993 Law, only for the NAV calculation and accounting function and client communication function as described, respectively, in sections 2.2.4 and 2.2.5 of the Circular.

Before acting as an administrator for a given UCI, the preceding entities and service providers must assess whether the carrying out this activity by them is permitted, taking into account applicable legal provisions.

What are the requirements in terms of organisation?

The UCI administrator must have an adequate internal organisation (including an adequate and appropriate environment of control) and sufficient resources (e.g. human resources, technical infrastructure and IT means). The UCI administrator must act independently and be functionally and hierarchically separated from the depositary. Its name shall be disclosed in the offering documents of any UCI for which the UCI administrator acts in such capacity.

The UCI administrator’s premises must be of sufficient size, adequate and secure. Access must be restricted to its staff and approved persons such as clients or visitors. To that effect, physical documents and records must be kept secure to warrant data confidentiality and protection. It is the responsibility of the UCI administrator to keep and safeguard physical records for the UCIs it services.

The data necessary to keep adequate records of the UCI’s activity and encompassing the core UCI documentation shall be retained on a medium that allows for the storage of information in a way for it to be accessible for future reference by the UCI, the IFM when applicable, the statutory auditor of the UCI and the CSSF or any other national competent authority of the UCI. The UCI administrator must keep all accounting and other documents that constitute the core UCI documentation and are necessary to properly perform its obligations. The documents mentioned above of the UCI may be kept electronically by the UCI administrator. A UCI administrator must establish, implement and maintain systems and procedures that are adequate to safeguard the security (confidentiality, integrity and availability) of information, taking into account the nature of the information in question.

The UCI administrator must be organised so as to minimise potential or actual conflicts of interest. Where such conflicts of interest cannot be avoided, they must be disclosed to the management body of the UCI, its IFM, when applicable, and where appropriate and relevant, to investors in order to prevent them from adversely affecting the interests of those parties.

The UCI administrator may delegate to third parties (i.e. delegates) the performance of one or more of its UCI administration tasks (but is shall not create additional or increased risks for the UCIs, in particular legal or operational risks or be detrimental to it notably in terms of quality and/or costs). The delegation of tasks must be detailed in a dedicated written contract. The delegation of tasks does not relieve the UCI administrator of its responsibilities. In particular, with respect to the delegation in the area of the NAV calculation and accounting function, any final NAV, respectively its publication, must be controlled and validated by the UCI administrator.

A written contract must be concluded between the UCI administrator and the UCI and/or the IFM, when applicable. The agreement must clearly state each party’s roles, responsibilities, rights and obligations. Such contract must not prevent the UCI or its IFM, when applicable, from giving instructions at all times to the entity to which UCI administration functions have been delegated or from withdrawing the mandate with immediate effect when this is in the best interest of investors. The UCI administrator must grant a right of access for the UCI and, when applicable, the IFM, the statutory auditor of the UCI, the liquidator, the CSSF or any other national competent authority of a UCI, where applicable, to the documents and data relating to its administration upon simple request. Moreover, the UCI administrator must allow the UCI or its IFM, when applicable, to conduct on-site visits at a frequency and under the terms to be laid down in the contract for exercising its due diligence and ongoing monitoring activities. The UCI administrator must communicate proactively the information, documents and data necessary to perform its duties to the UCI or its IFM, when applicable.

When does the Circular come into force?

The Circular entered into force with immediate effect on May 16, 2022. However, the requirement of authorisation set in section 2.2.1 of the Circular does not apply to entities already acting as UCI administrator at the date of entry in force of the Circular.

Additionally, a grandfathering period until June 30, 2023 has been granted to entities already acting as UCI administrators at the date of entry in force of the Circular to comply with the remaining provisions of the Circular. Starting from June 30, 2023, the UCI administrators must also file their annual reporting regarding their business activities and resources at the latest five months after their financial year-end.

The Circular is available by clicking on the following link: https://www.cssf.lu/wp-content/uploads/cssf22_811eng.pdf

Don’t hesitate to contact our investment management team if you need our assistance to verify that your central administration set-up and your central administration agreement comply with the requirements of the Circular.


AED guide on the AML/CFT professional obligations for RAIFs

In order to prevent and raise awareness among reserved alternative investment funds (“RAIFs”) which are all subject to the law on the fight against money laundering and terrorist financing of 12 November 2004, as amended from time to time (the “AML/CFT law”), the Administration de l’enregistrement, des domaines et de la TVA (“AED”), in its capacity as supervisory and control authority, has just published a guide, in order to better assist RAIFs in the implementation of their AML/CFT professional obligations (the “Guide”). The Guide has an indicative nature describing the minimum requirements for RAIFs. The purpose of the Guide is first and foremost to raise awareness among FIARs of the risks of money laundering and terrorist financing, but also to provide guidance to RAIFs to avoid transactions linked to risk of money laundering and terrorist financing, which could result in liability.

Access to the Guide (in French): https://pfi.public.lu/content/dam/pfi/pdf/blanchiment/prevention-et-sensibilation/guides/pour-en-savoir-plus/guide-version-2022-fonds-dinvestissement-alternatif-reserve.pdf

Should you need our assistance in respect of AML_CFT requirements for RAIF including RR and RC requirements, please contact our investment management team.


STO, security token offering

Security tokens now admitted on Luxembourg exchange’s Securities Official List

What are security tokens?

The Luxembourg Stock Exchange defines security tokens as “financial instruments that are issued and exist on a distributed ledger, allowing for a fully digital issuance and servicing process. Financial instruments issued as security tokens offer investors similar investment characteristics to financial instruments issued in a more conventional way”.

Issuance of financial instruments using distributed ledger technology – popularly known as blockchain – is intended to make transactions more secure and resilient. It offers the potential to improve efficiency and transparency in capital markets significantly as a growing number of market participants adopt the technology (see our article on the CSSF’s white paper on risks and opportunities of blockchain at https://www.cs-avocats.newtonagency.be/investment_management/cssf-publishes-white-paper-on-risks-and-opportunities-of-blockchain-technology/).

What is the benefit of registering a security token on the official list?

Registering a security token on the exchange’s Securities Official List provides issuers with enhanced visibility. The security tokens and investors benefit from the dissemination of indicative prices and guaranteed access to the token’s information notice.

What kind of security tokens can be admitted?

Only crypto-assets qualifying as debt financial instruments can be admitted on the official list for the time being. Security tokens cannot be traded on the regulated Bourse de Luxembourg market nor on the exchange-regulated Euro MTF market.

What conditions apply to the admission of security tokens on the official list?

Security tokens that qualify as debt instruments must be priced in fiat currency and offers must be limited to qualified investors as defined by the EU’s Prospectus Regulation of June 14, 2017 and/or issued in wholesale denominations (i.e. €100,000). Only experienced issuers or applicants with a proven track record can use the new service. All security tokens must respect the Securities Official List rulebook and the exchange’s guidelines for the registration of blockchain instruments on the Securities Official List.

What information should be disclosed when issuing distributed ledger technology securities?

The information notice should contain the following additional information:
• The processes.
• The distributed ledger technology used.
• Confirmation that a contingency procedure exists in the event of a failure in the distributed ledger technology that allows identification of securities holders, as well as a responsibility and liability statement.
• Reasoned confirmation that the financial instruments qualify as bonds or other debt securities issued by a company, a state or its regional or local authorities, or by an international public body, under the governing law of the instruments.
• Description of the parties involved in issuance, recording, safekeeping, transfer and verification of the financial instruments.
• Description of the payment process if such process encompasses the transfer of settlement tokens.
• Description of the risk factors linked specifically to the financial instruments, the settlement process and the underlying technology.
• Environmental considerations regarding the technology used.

What information on environmental considerations should be disclosed by the issuers of security tokens?

As a minimum, the information notice should state distributed ledger technology used, the consensus mechanism used by this blockchain, and how it is used, whether it provides specific environmental benefits or disadvantages, and/or reasons why this may not need to be considered. This information will be examined by LuxSE.

What are the next steps?

The exchange plans to adapt and improve its services to meet the needs of customers and the emergence of new technological opportunities. For example, the guidelines already cover the use of central bank money in tokenised forms as settlement tokens, although this is not yet available for the time being.


New CSSF FAQ on AML/CFT RC reports for Luxembourg investment funds and managers

The CSSF published on March 18 a new frequently-asked questions document on the completion and transmission of the AML/CFT compliance officer’s summary report, as defined in articles 42 (6) and 42 (7) of the amended CSSF Regulation 12-02 of December 14, 2012 on measures to curb money laundering and financing of terrorism.

Who is required to prepare and submit the report?

The compliance officer (in French, responsable du contrôle) of Luxembourg AIFMs, Luxembourg-domiciled investment funds that have appointed a foreign AIFM and self-managed funds are required to prepare the report and present it to the entity’s management board, and submit it to the CSSF. The report must be dated and signed by the compliance officer (RC). It must be prepared even if the inquiries and due diligence carried out by the RC revealed no shortcomings.

When and how should the report be submitted?

The AML/CFT RC report must be submitted within five months following the end of the entity’s financial year either via e-file or Sofie for entities subject to CSSF Circular 19/708, or via the edesk module for registered AIFMs.

What should the report contain?

The AML/CFT report should be a consistent and accurate description of the work performed by the RC and of related findings.

For entities subject to CSSF Circular 18/698, the report must at least:

  • Results of the identification and assessment of money laundering and financing of terrorism risks and measures taken to mitigate them, as well as the AIFM’s risk level tolerance.
  • Results of due diligence conducted on clients, fund initiators, portfolio managers to whom management is delegated and investment advisers, including ongoing due diligence.
  • Results of enhanced due diligence conducted on intermediaries acting on behalf of their clients in accordance with the provisions of article 3 of CSSF Regulation 12-02, including ongoing due diligence.
  • Results of enhanced due diligence on individuals identified as politically exposed persons in according to article 3-2(4)(d) of the amended law of November 12, 2004 on money laundering and financing of terrorism.
  • Results of due diligence conducted on fund assets, including ongoing due diligence.
  • Monitoring any positions blocked due to AML/CFT concerns in the registers of fund unit-holders and/or intermediaries involved in the marketing of funds.
  • Periodic review of all business relationships according to their risk level.
  • In cases of delegation of tasks relating to professional obligations to third parties, results of monitoring carried out on the compliance of services provided by the third parties, not only with legal and regulatory provisions but also the contractual provisions; and where relevant, reasons why the fund manager has chosen new third parties during the year.
  • Statistical history concerning transactions identified as suspicious that inform the number of suspicious transaction cases reported to the Financial Intelligence Unit by the fund manager, as well as the total volume of funds involved.
  • Statistical history concerning transactions reported due to financial sanctions relating to financing of terrorism and those relating to implementation of United Nations Security Council resolutions and acts adopted by the European Union as well as the volume of funds involved.
  • The number of identified breaches of AML/CFT professional obligations, even if the number is zero.
  • The number of AML/CFT actions carried out notably as a result of Circular CSSF 18/698, from the work of the RC, the internal audit, external audit or CSSF’s inspections., with a description of the main actions, and the deadline for their implementation, under article 7(2) of the Grand-Ducal Regulation of February 1, 2010 and article 42(5) of CSSF regulation 12-02. If the number is zero, this must be clearly stated.

The report must be accompanied by documentation on the identification, assessment and mitigation of money laundering and financing of terrorism risks.

For entities not subject to CSSF Circular 18/698, the AML/CFT RC report should cover at least cover the following:

  • Overall residual money laundering and financing of terrorism risk assessment, including risk appetite, identified risks and mitigation measures put in place, emerging risks and their severity in terms of impact.
  • Results of AML/CFT due diligence on investors.
  • Results of AML/CFT due diligence on high-risk clients such as politically exposed persons, if any.
  • Results of AML/CFT due diligence on fund initiators, including group initiators.
  • Results of AML/CFT due diligence on investment advisors, if any.
  • Results of AML/CFT due diligence on distributors, if any.
  • Results of AML/CFT due diligence on delegates and service providers such as registrars and transfer agents or external portfolio managers, if any.
  • Results of AML/CFT due diligence on cross-border intermediaries, if any.
  • Results of AML/CFT due diligence on assets.
  • Results of AML/CFT due diligence on blocked accounts, if any.
  • Results of targeted financial sanctions screening.
  • Outcome of verification by the RC that all appropriate staff have been trained on AML/CFT issues.
  • List of co-operation with Luxembourg authorities on AML/CFT issues.
  • Dedicated money laundering and financing of terrorism shortcomings section, including remediation plan, if any.

What is the RC’s liability in the event of failure to submit the report?

A professional who fails to provide the AML/CFT report may be subject to sanctions as detailed in article 8-4 of the amended AML law of November 12, 2004.

If a recently appointed RC identifies that the outgoing RC failed to file the annual AML/CFT report, the CSSF expects the incoming RC to ensure that the report is submitted. Additionally, if the new RC finds that the exiting RC has performed no AML/CFT due diligence, the CSSF expects the entity’s board to submit a letter to explain the situation and the oversight performed by the board or compliance manager (RR) on the work of the outgoing RC.

What about entities being dissolved and placed in non-judicial liquidation?

Entities being dissolved and placed in non-judicial liquidation must submit the AML/CFT report to the CSSF until the effective start date of liquidation. AML/CFT reports are no longer required after the start of liquidation. However, since money laundering and financing of terrorism risks remain present during the liquidation, the liquidator is responsible for the entity’s AML/CFT controls, notably regarding co-operation with the authorities.

The CSSF’s FAQ can be found at: https://www.cssf.lu/wp-content/uploads/FAQ_RC_Report.pdf