FATF’s positive assessment of Luxembourg’s AML/CFT measures: Enduring commitment advised
The Grand Duchy of Luxembourg recently received a positive evaluation in the 4th mutual evaluation report conducted by the Financial Action Task Force (FATF) and published on September 27, 2023. The report acknowledges the quality of Luxembourg’s framework for the fight against money laundering and the financing of terrorism (AML/CFT) while also providing recommendations for further improvements. As a result, Luxembourg will be under regular monitoring by the FATF, which is considered a good outcome. The report specifically praised Luxembourg’s financial sector and its supervision by the CSSF, highlighting the effectiveness of AML/CFT supervision. The CSSF’s supervisory approach was commended for being well-developed and risk-based. The report also noted improvements in the AML/CFT supervisory regime and the robustness of controls during licensing and registration processes. However, there is room for improvement in addressing terrorism financing risks, enhancing communication about sanctions against deficient professionals, and reporting suspicious activities to the Financial Intelligence Unit. Overall, the report acknowledged that professionals in the financial sector have solid controls and a good understanding of their AML/CFT obligations and related risks. However, the FATF’s report suggests a need for a better understanding and response to this risk, building on the information provided by the 2022 vertical risk assessment report on terrorism financing adopted in Luxembourg. The report also suggests that the CSSF should improve the way it communicates sanctions imposed on professionals found deficient. More detailed press releases could help make information about the nature of deficiencies and sanctions more accessible to the financial sector. In summary, Luxembourg’s 4th mutual evaluation report by the FATF acknowledges the country’s strong efforts in combating money laundering, with particular praise for its financial sector supervision and regulatory framework. While there are areas for improvement, the overall evaluation result is positive, leading to regular monitoring by the FATF, which is a desirable outcome. Please feel free to reach out to our investment management team if you have any questions.
Law of 21 July 2023: Modernizing Luxembourg's Investment Fund toolbox and its impact on RAIF, SIF, SICAR, AIFM & UCI
Luxembourg has taken a significant stride towards modernizing its investment fund laws with the entry into force of the law of 21 July 2023 on 28 July 2023. It adopted Bill 8183 by the Luxembourg Parliament. This law introduces amendments to several pivotal fund laws, including the Law of 2010 on Undertakings for Collective Investment (UCI Law), the Law of 2007 on Specialized Investment Funds (SIF Law), the Law of 2004 on Investment Companies in Risk Capital (SICAR Law), the Law of 2013 on Alternative Investment Fund Managers (AIFM Law), and the Law of 2016 on Reserved Alternative Investment Funds (RAIF Law). These amendments are designed to update and strengthen the country’s fund-related regulations, bolstering the competitiveness and attractiveness of Luxembourg’s financial centre.
The adopted amendments encompass several significant changes, including inter alia:
1. Undertakings for Collective Investment (UCITS and UCI Part II)
| New regime introduced by the law of 21 July 2023 | Previous regime under UCI Law | |
|---|---|---|
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 12 months for UCIs Part II. | The period for achieving subscribed capital was 6 months for UCIs Part II. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period during which there is no depositary; or - when the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Formation | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA), corporate partnerships limited by shares (SCA), common and special limited partnerships (SCS/SCSp), private limited liability companies (SARL), as well as cooperatives organized as public companies limited by shares (SCoSA). | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA). |
| Issuance share/interests | Closed-ended UCIs Part II may issue shares/interests at a price other than the NAV, provided it is stated in the constitutive documents. | Closed-ended UCIs Part II may issue shares/interests at a NAV price. |
| Tax | i. UCIs Part II authorized as ELTIF are exempted from subscription tax ii. UCIs Part II reserved to PEPPs are exempted from subscription tax iii. UCIs Part II may benefit from the reduced subscription tax of 0.01% provided that certain conditions are met. |
2. Specialized Investment Funds (SIFs)
| New regime introduced by the law of 21 July 2023 | Previous regime under SIF Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SIFs. | The period for achieving subscribed capital was 12 months for SIFs. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Marketing | Marketing of AIFs in the form of a SIF to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SIF was permissible only to professional investors. |
| Tax | SIFs authorized as ELTIF are exempted from subscription tax as well when they are authorized as MMFs considering some certain conditions apply. |
3. Investment Companies in Risk Capital (SICARs)
| New regime introduced by the law of 21 July 2023 | Previous regime under SICAR Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SICARs. | The period for achieving subscribed capital was 12 months for SICARs. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Marketing | Marketing of AIFs in the form of a SICAR to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SICAR was permissible only to professional investors. |
| Tax | All in-kind contributions in a SICAR should be backed up by a valuation report drawn by an auditor. | Under the previous regime, there was no explicit obligation for the contributions in kind to be backed up by a valuation report drawn by an auditor. |
4. Reserved Alternative Investment Funds (RAIFs)
| New regime introduced by the law of 21 July 2023 | Previous regime under RAIF Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for RAIFs. | The period for achieving subscribed capital was 12 months for RAIFs. |
| Formation formalities | The formation formalities for RAIFs have been streamlined. The requirement for a Luxembourg notary to acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days has been eliminated for RAIFs established through a notarial deed, though it still applies to RAIFs established through a private deed. | Luxembourg notary shall acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days for RAIFs established through a notarial deed or a private deed. |
| Marketing | Marketing RAIFs to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of RAIFs was permissible only to professional investors. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period to replace a depositary was previously foreseen. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Tax | RAIFs authorized as ELTIF are exempted from subscription tax. |
5. Alternative Investment Fund Managers (AIFMs)
| New regime introduced by the law of 21 July 2023 | Previous regime under AIFM Law | |
|---|---|---|
| Tied Agents | Authorized alternative investment fund managers are permitted to utilize tied agents as defined by article 1, point 1 of the law of 5 April 1993 on the financial sector. Where an AIFM decides to use tied agents, the AIFM shall, within the limits of the activities permitted under this law, comply with the same rules as those applicable to investment firms under Article 37-8 of the amended law of 5 April 1993 on the financial sector. | The appointment of tied agents was foreseen under the previous regime for pre-marketing purposes. |
| Marketing | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs to well-informed investors established or residing in Luxembourg even if they do not fall in the scope of the definition of a professional investor. | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs only to professional investors. |
Should you have any inquiries or require expert guidance pertaining to the information provided, our investment management team is available to assist you.
AIFMD II – European Parliament and Council reach provisional agreement on the alternative investment fund managers directive
The press release relating to the Provisional Agreement on new rules for alternative investment fund managers (“AIFMs”) was published on 20 July 2023. The Provisional Agreement pertains, inter alia, to the amendment of the alternative investment fund managers directive as amended from time to time (“AIFMD”) with the aim to improving the European capital market and bolstering investor protection within the EU.
The European Parliament and the Council have agreed to enhance the availability of liquidity management tools (“LMTs”) with new requirements to be provided when activating these LMTs. This measure is designed to ensure that AIFMs can handle significant outflows during periods of financial turbulence or turmoil.
Additional requirements have been agreed upon for loan origination funds. These requirements aim to address risks associated with financial stability and investor protection.
In the Provisional Agreement, the rules about the delegation by AIFMs to third parties have been expanded to further strengthen supervision and maintain market integrity.
Moreover, the European Parliament and the Council have agreed, among other things, on enhanced data sharing and cooperation between the national competent authorities and the EU authorities. They have also established new rules to identify undue costs that might be charged to alternative investment funds and rules against names that could be potentially misleading to investors.
Please note that the Provisional Agreement has not yet been published and is subject to further negotiations and confirmation by the Council and the European Parliament before the formal adoption and publication.
Access the press release related to the Provisional Agreement here.
Discover our AIFMD II timeline here.
Should you have any inquiries or require expert guidance pertaining to the information provided, our investment management team is available to assist you. Please feel free to contact us.
