The 2020 national risk assessment of money laundering and terrorist financing (the “NRA”) was led by the Executive Secretariat of the National ML/TF Prevention Committee, with the input of a wide set of national stakeholders. The exercise was conducted in the first semester of 2020, and compiles an overview of Luxembourg’s current situation as of year-end 2019, using a structured and data-driven approach based on international guidance (e.g. FATF’s guidance, the EU’s anti-money laundering directives, ESA guidance) and peer practice. The report encompasses the latest understanding of Luxembourg’s threats, vulnerabilities, and the mitigating factors it has taken, including those developed since the issuance of the first NRA in 2018, to reduce its ML/TF risks.
Three-step approach of the NRA exercise
Regarding the methodology, the 2020 NRA followed the same approach as the first assessment in 2018: it is conducted in three steps, inherent risk assessment, analysis of mitigating factors and residual risk, and finally, formulation of an updated anti money laundering/countering the financing of terrorism (“AML/CFT”) strategy.
Inherent risk – Threats assessment and vulnerabilities
The first step of the NRA involves assessing the inherent ML/TF risk. The objective of the analysis of threats is to understand the environment in which predicate offences are committed to identify their nature and to assess the exposure to them. The NRA highlights that the primary threats in Luxembourg derive from money laundering of foreign proceeds of crime. The sheer volume of financial flows transiting through and managed in Luxembourg contribute to exposure. On the other hand domestic exposure to money laundering was considered significantly smaller due to Luxembourg’s low crime rate and limited presence of organised crime. The threat of terrorism and terrorist financing were assessed as moderate overall.
In terms of sector vulnerabilities, the report identifies the banking sector and the investment sector as vulnerable to ML/TF risks and places the inherent risk level at “High” for both. Collective investments are highlighted as being particularly vulnerable to be abused or misused for different types of fraudulent practices. The NRA also identified specific threats and vulnerabilities relevant in the context of the COVID-19 crisis. Problems such as cybercrime, cybersecurity, fraud and forgery, corruption and bribery have been considered as growing threats. Furthermore, online purchases as a result of the social distancing measures are also likely to lead to the increase in both the volume and value of online payments services, including the use of internet banking which may create opportunities for illicit funds.
The NRA sets out many case studies to highlight the various threats and vulnerabilities.
Mitigating factors and residual risk
As a second step, mitigating factors and their effects on inherent risk reduction are assessed, resulting in a residual risk level. The mitigating factors section of the NRA looks to identify the impact of AML/CFT controls, which serve to mitigate the inherent risks identified for Luxembourg. In recent years Luxembourg has been strengthening its AML/CFT regime. Factors such as:
- international cooperation at the level of (inter alia) each AML/CFT supervisory authority, the Financial Intelligence Unit and law enforcement agencies;
- the recent expansion of the definitions of money laundering and terrorist financing and the resultant increase in prosecutions;
- the evolution in the role of the Cellule de Renseignement Financier;
- an increase in the awareness and understanding of ML/TF risks and AML/CFT obligations and the carrying out of inspections by supervisors; all work to reduce the inherent risk level to a residual risk level. It was noted that mitigating factors are strongest in the financial sector. The NRA identifies the residual risk level of banks and the investment sector as “Medium”.
National AML/CFT strategy
Looking ahead, the NRA notes that while Luxembourg’s AML/CFT framework is mitigating effectively a significant part of the risks the country is exposed to, it can be further strengthened. The national ML/TF prevention committee has therefore developed a national AML/CFT strategy based on the findings of the NRA, defined at three levels: agency level action plans, a national action plan and four national strategic priorities. Those priorities are:
- further enhancing the prosecution of ML/TF;
- further developing the ML/TF investigation capabilities;
- harmonising the supervision of designated non-financial businesses or professions (e.g. real estate agents, accountants, lawyers...); and
- improving market entry controls of trust and corporate service providers.
The NRA should provide adequate guidance to public-sector institutions and private-sector entities, enabling prioritisation and allocation of resources in line with risks identified and better equip Luxembourg to engage with international institutions in combating ML/TF activities. Furthermore, the purpose of this assessment is also to use the results to inform the national strategy on mitigation of ML/TF risks, addressing any deficiencies in an appropriate and timely manner. The NRA is available on the website of the Ministry of Justice.