Towards greater transparency for alternative funds in Luxembourg
An analysis of recent regulatory changes in the alternative investment fund industry to facilitate better oversight by authorities and avoid money laundering risks.
Introduction
Luxembourg has been a key financial centre in Europe for decades, and its alternative funds industry has grown significantly in recent years, driven by global trends shifting investors away from public markets and other traditional asset classes towards private equity. This growth has been facilitated by a stable and predictable business environment, as well as effective cooperation between industry and government.
To ensure that this growth remains aligned with international standards and to guard against financial and reputational risks, the country has made the fight against money laundering and terrorist financing one of its priorities. Luxembourg has strengthened its anti-money laundering regulatory framework in response to increasingly restrictive European Union directives and various international standards. The recent visit of the Financial Action Task Force (FATF) has underlined the importance of these measures, highlighting the need to focus more on money laundering investigations and prosecutions, as well as asset recovery.
This article examines some recent regulatory developments in the Luxembourg alternative funds industry, including changes to business registers to promote transparency and cross-checking, as well as enhanced anti-money laundering supervision with new obligations for alternative funds.
Changes to commercial registers
One of the most notable regulatory developments in Luxembourg has been the reform of commercial registers. The Luxembourg government has introduced new measures to improve transparency and facilitate cross-checking of information contained in the different registers.
The Act of 19 December 2002 on the register of commerce and companies (RCS) and the accounting and annual accounts of undertakings, and the law of 13 January 2019 establishing the register of beneficial owners (RBO), have been amended to improve the accuracy, transparency and efficiency of both registers, bringing them in line with international standards and enhancing their role in anti-money laundering and counter-terrorist financing efforts.
Creation of the LNIN
As of 12 November 2024, the Luxembourg Register of Commerce and Companies (RCS) has implemented a new mandatory requirement: the introduction of the Luxembourg National Identification Number (LNIN) for all natural persons registered with a registered entity. This new system will significantly improve the consistency and quality of information related to the identification of natural persons collected by the RCS and the Registry of Beneficial Owners (RBO). In addition, it will allow for automatic cross-checking of data, facilitating more effective supervision and reducing the administrative burden for registered entities.
“Luxembourg has demonstrated a strong commitment to improving transparency and anti-money laundering in its alternative funds industry.”
Automatic updating of records
In principle, it is the responsibility of registered persons and entities to keep their records up to date by notifying the RCS administrator of any changes that have occurred. However, with the new reforms, the RCS administrator will be able to register such changes directly in the RCS or RBO if they are informed by other registers about the modification of certain information. For example, if a Luxembourg national changes their surname, this change will automatically be reflected in the RCS or RBO without the need for intervention by the person or entity concerned.
Monitoring and oversight policy
The RCS administration will monitor the data entered in each RCS and RBO database and may request from the registered entity any evidence to justify the accuracy of an entry. This will allow for more effective oversight and ensure that the information in the records is accurate and up to date. If erroneous or incomplete records are detected, registered entities will be subject to fines of €40 per day until the erroneous information has been rectified.
Increased anti-money laundering supervision
The fight against money laundering and terrorist financing is a priority for the Luxembourg authorities, who want to avoid the reputation Luxembourg has had in the past as an opaque jurisdiction. In response to increasingly stringent European Union directives and international standards, Luxembourg has strengthened its anti-money laundering regulatory framework.
The recent FATF visit has underlined the importance of these measures. The FATF noted that Luxembourg has a solid anti-money laundering framework and a good understanding of its money laundering and terrorist financing risks. However, it also noted the need to focus more on money laundering investigations as well as on asset recovery. The FATF also recommended enhancing oversight of non-financial sectors, such as trust and company services, the real estate sector and notaries.
“The need to comply with new transparency and anti-money laundering obligations has forced institutions to review and strengthen their internal policies, enhancing Luxembourg’s reputation as a transparent and safe financial centre.”
New obligations for alternative funds
As part of these efforts, alternative funds in Luxembourg are now subject to stricter obligations regarding the monitoring of their investors, the identification of beneficial owners of each investment and the ongoing monitoring of transactions.
Alternative funds must implement robust policies and procedures to identify, assess and mitigate money laundering risks. In addition, alternative funds are required to submit regular reports to regulatory authorities on their anti-money laundering activities and measures.
These reports must include details of suspicious transactions and actions taken to address any possible illicit activity.
Training and raising awareness
Another crucial aspect in the fight against money laundering in Luxembourg is training and raising awareness. Entities involved in the management of alternative funds must train their staff in the detection and prevention of money laundering. This training includes recognising red flags and understanding the procedures for reporting suspicious activity. Ongoing training helps to ensure that staff are aware of the latest threats and best practices in the fight against money laundering and are able to report suspicious transactions to the authorities.
Impact of the reforms
All these reforms, as well as the extension of obligations that previously only applied to CSSF regulated or semi-regulated funds to purely alternative funds supervised by the EDA, have had a significant impact on the alternative funds industry. The need to comply with new transparency and anti-money laundering obligations has forced institutions to review and strengthen their internal policies. While this has entailed additional costs and resources, it has also enhanced Luxembourg’s reputation as a transparent and safe financial centre. Moreover, these reforms have helped Luxembourg to align itself with international standards and best practices, which is crucial for maintaining investor confidence and protecting the integrity of the financial market.
How to deal with these reforms
The best way to address these obligations is to choose a good fund administrator with a solid foundation for managing these responsibilities. A competent and experienced fund administrator will not only ensure compliance with existing regulations, but will also implement robust policies and procedures to identify, assess and mitigate the associated risks. It is also crucial that administrators are aware of all regulatory obligations and assist funds to proactively comply with them. This involves staying informed about regulatory changes, participating in ongoing training and working closely with regulatory authorities. A good fund administrator will provide regular reports to regulatory authorities, ensuring continuous and effective oversight of transactions. In this way, the fund’s integrity is protected and investor confidence is maintained.
Conclusion
Luxembourg has demonstrated a strong commitment to improving transparency and anti-money laundering in its alternative funds industry. Changes to business registers and increased anti-money laundering supervision are important steps to ensure that the country remains a trusted financial centre. As the alternative funds industry continues to evolve, we may see further regulatory developments in the future to address new challenges and maintain the high standards Luxembourg has set.
These measures not only strengthen the country’s regulatory framework, but also contribute to the stability and integrity of the global financial system. As Luxembourg continues to implement and refine these reforms, it will serve as an example for other jurisdictions seeking to improve their own regulatory practices in the alternative funds industry.
Authors
