AML/CTF obligations of RAIFs

A summary note from the Luxembourg government guide

Introduction

Reserved Alternative Investment Funds (“RAIFs”) are a specific category of investment vehicles in Luxembourg partially regulated via their regulated Alternative Investment Fund Manager (“AIFM”). Recently, the Luxembourg government – Administration de l’Enregistrement, des Domaines et de la TVA (“AED”) published a guide to provide RAIFs with a better understanding of regulatory expectations regarding Anti-Money Laundering and Counter the Financing of Terrorism (“AML/CFT”) obligations applicable to RAIFs.

This proposal (which is not legally binding as it is a guide) invites participants at the fringes of the pure financial sector to consider good behaviors to track, spot, avoid and report potential AML/CTF cases.

The guide is divided in three major sections, which aim to cover:

• The duty of vigilance
• The duty of internal organization
• The duty of cooperation

The guide also includes ways, means and sanctions and a list of templates that could be used.

1. Duty of vigilance

First, the guide recaps the obligation and the three stages of money laundering: placing (deposit), layering (concealing) and integration (giving an appearance of legality), to remind RAIFs and their AIFMs of the crucial steps that should be scrutinized.

This implies the duty of RAIFs to capture all client and ultimate beneficial owner (“UBO”) identification and verification through adequate ongoing documentation, governed by an internal organization, with procedures, training, risk analysis and the appointment of a responsible person to discharge the RAIF’s AML/CTF responsibilities.

These obligations are accompanied by three sub-obligations to cooperate: via information submitted through GoAML, the absolute refrain to transact, and cooperation with the AED. This implies a duty to identify, without ambiguity, who the client is BEFORE any action is taken, as there is an obligation to refrain from engaging in any transaction with potentially suspect counterparts.

The identification process can be achieved with an identification card or passport, or other ways or means that are legally valid. The verification should be done by the RAIFs’ “responsable du contrôle du respect des obligations” (“RC”) and not only should the details be captured, but the context of the meeting should also be documented. The guide insists that this obligation is both to perform and document the client identification in a non-ambiguous way. If performed at a distance, a competent authority must certify the identification document.

This also applies to legal entities, with relevant identification documents such as articles of association or legal entity identifiers. In addition, the guide also requires RAIFs to not only know who the client is, but also to understand their activities so as to evaluate if these correspond with their objective and purpose of the business relationship.

The same applies to the UBO, and if there is no clear identification/verification of identification documents possible, no business relationship should be entered into.

There shall be an ongoing monitoring of the business relationship in place, i.e. the; RAIFs should perform regular checks on the clients to ascertain the continuity of their status and update the corresponding Know-Your-Client (“KYC) documents, information and data.

Finally, the RAIFs must evaluate the potential AML/CFT risk of each business relationship and apply a risk-based approach.
 

2. Duty of organization

The guide also recaps the need to document and have an adequate internal organization to deal with AML/CFT obligations. This should be evidenced in the organization’s hierarchy by appointing a person responsible for the matter. The RAIF must also have a complete procedure detailing the different steps, processes, contact and actions to take, including a training plan for staff at all levels and on a regular basis.

The RAIF must appoint a RC and “responsable du respect des obligations” (“RR”) as any other financial institutions, the split of responsibilities is similar with the RC being appointed intuitu personae by the board of directors of the RAIF. Both (RC and RR) should obviously demonstrate high professional competence and experience in the AML/CFT domain.

Besides training and internal policies and procedures, the RAIF must also assess the risks of money laundering and terrorism financing (“ML/TF”) to which the RAIF is exposed. The risk assessment has to be performed on an annual basis. The RAIF shall also follow a risk-based approach during client due diligence measures including ongoing monitoring of the business relationship.

Criteria of risk classification should consider elements linked to the RAIF, the investors and potential targets or markets. In the risk assessment the RAIF must consider official lists and communications regarding sanctioned countries (or on watch), persons or sectors along official communications (i.e. supra/national risk assessment and communication by authorities regarding AML/CFT).

As for any other financial institutions, the ongoing monitoring process should help evidence unusual practices, or abnormal transactions (e.g., size, direction, origination, typology).

In terms of organization, being aware, prudent and a good caretaker involving and creating awareness of staff is a must have to help the RAIFs in their fight of potential ML/TF cases.
 

3. Duty of cooperation

After the duties to be vigilant and have a proper internal organization in place, the duty to cooperate could be seen as a third and final line of defense against cases of ML/TF.

Cooperation should start as soon as the RAIF spots a transaction that it could suspect is unusual or presents potential risk of ML/FT. The cooperation translates into an obligation to notify/report to the Cellule de Renseignements Financiers (“CRF”) .

The communication should be done as soon as a potential case is identified and if not immediately, at the very least without delay. One of the reasons being to be able to “capture” the person before it could suspect it has been noticed from an AML/CFT point of view.

The notification must be done by the person in charge of AML/CFT, ideally a RC. The notification should be done via the GoAML portal of the CRF. RAIFs must cooperate with the AED/CRF, hence once a case is reported it will notably have to fill some documentations regarding the context of the operation concerned. The guide clarifies which templates must be filled and when.
 

4. Sanctions

The last section before the annex is about sanctions, that could range from a notification to jail and forced closure of the RAIF, plus money fines.
 

5. Annexes and subsequent parts

In the remaining parts of the guide one could find templates to be used, additional indicia of situations of ML/TF and check lists so that RAIFs have at hands all necessary and relevant information to be used when carrying out their AML/CTF obligations.
 

How can Deloitte help?

Deloitte’s subject matter experts can help you design and implement your business strategy in light of the evolution of regulatory frameworks and market trends.

Key Deloitte services include:

• Assessment and guidance with updating AML/CTF control framework and policies
• Assistance with financial crime risk assessment
• Review of client files (KYC) and provision of remediation plan
• AML/CFT training and advice
• DKYC: externalizing KYC processes

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