AML/CFT controls applied in terms of preventing tax offences
Thematic review November and December 2021
In application of the criminal provisions laid down in the Law of 23 December 2016, the money laundering offence was extended in order to encompass aggravated tax fraud (fraude fiscale aggravée) and tax evasion (escroquerie fiscale). As a consequence, professionals subject to the obligations with respect to money laundering and terrorist financing (hereinafter “AML/CFT”) shall take into account the predicate tax crimes within the scope of their professional obligations, notably customer due diligence and cooperation with authorities.
In this context the CSSF’s “UCI On-site Inspection” department carried out in November and December 2021 a thematic review in relation to the AML/CFT controls applied in terms of preventing tax offences, as further described by Circular CSSF 17/650, as amended by Circular CSSF 20/744. The thematic review targeted different types and sizes of market participants1 (hereafter the IFMs) and included five Luxembourg IFMs. Further details on the focus areas of the thematic review are described below.
The main takeaway of the review was that the overall understanding of the risks associated with ML/TF linked predicate tax offences as well as the related mitigation measures put in place by the entities inspected were satisfactory.
Nevertheless, the thematic review brought out the following key findings:
1. Weaknesses with regard to risk assessment
In some cases, the risk assessment did not cover all relevant aspects of Circular CSSF 20/744.
We remind IFMs that Circular CSSF 20/744, dated 3 July 2020, complemented Circular CSSF 17/650 in particular by providing a list of indicators specific to the collective investment activities and specified the CSSF expectation for the entities under its AML/CFT supervision. IFMs must ensure that their risk assessment includes all relevant tax specific indicators concerning their collective investment activities mentioned by Circular CSSF 17/650, as amended by Circular CSSF 20/744.
2. Shortcomings in the control functions environment
We noted weaknesses regarding verifications performed by the control functions in the context of the AML/CFT predicated tax offences, as in some cases these were not sufficiently covered at the level of the compliance monitoring plan and/or at the level of the internal audit plan.
We remind IFMs to ensure that tax matters are included on a risk-based approach in the compliance monitoring plan as well in the internal audit works, and to ensure that when designing risk mitigation measures these will include in a proportionate manner all relevant tax specific indicators concerning collective investment activities mentioned by Circular CSSF 17/650, as amended by Circular CSSF 20/744.
3. Tax calculation, filing and reporting
Furthermore, we noted weaknesses with regard to delegated subscription tax calculation and filing as well as investor tax reporting, where the IFM was not systematically part of the related contractual arrangements. In another case, we noted that the IFM did not appropriately monitor the tax risks arising from securities lending activities, whereby the entity was not part of the contractual arrangements with the lending agent. Besides, the agreements did not contain any clause relating to the prevention of tax fraud.
In these instances, we noted that the processes surrounding tax compliance were not sufficiently documented.
We remind IFMs to adequately mention their tax compliance obligations (such as with regard to investor tax reporting calculation and filing of the subscription tax declarations to the Administration des Enregistrements et Domaines) in their procedures and to perform adequate monitoring where such activities are delegated.
In the context of our inspection, we also noted best practices for some of the IFMs such as in particular:
- a tax due diligence was performed, documented and endorsed by the governing body of several IFMs prior to performing complex investments;
- risk assessments made in relation with Circular CSSF 20/744 were reported to and endorsed by the governing body.
1 Management company incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010, Alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers (the “2013 Law”), internally managed alternative investment funds within the meaning of point (b) of Article 4(1) of the 2013 Law and registered AIFMs) and registered alternative investment fund manager as defined in Article 3(2) of the 2013 Law.