The inspections are meant to see how well the country’s regulator and financial companies are following global financial crime rules.

Delano asked Birgit Goldak, a risk assurance services partner at the consultancy PWC in Luxembourg, about what this shift means for financial firms in the grand duchy and how financial outfits are coping with the coronavirus.

Aaron Grunwald: The previous plan was for onsite inspections to take place in June and July this year and the initial report to be released in February 2021. Last week, Luxembourg’s justice ministry said the initial report will now be discussed in October 2021. Do you have any indication on when onsite inspections could now be conducted?

Birgit Goldak: Indeed, the government announced that the FATF Mutual Evaluation Report (MER) discussion will be moved to the FATF plenary session of October 2021 due to the impact of covid-19. It has, to my knowledge, however not been confirmed that the actual visit, which was foreseen in late autumn of this year, will be moved as well.

Typically, there are about six months between FATF actual onsite visits and the discussion of the report in the FATF plenary session. The typical delays are stated in the FATF Methodology Assessing Technical Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems as updated in October 2019. It foresees a minimum delay of 27 weeks between the end of the onsite visit and the discussion of the MER in the plenary session.

It is therefore possible that the FATF visit may move into early/spring 2021, but there is also the possibility, that they could decide to do it virtually. At this point we cannot be entirely sure.

From your point of view, does this delayed timeline change anything about the inspection process itself? Will the inspectors be checking different procedures and probing for different risks than previously anticipated?

The FATF mutual evaluation methodology is defined and published. The benchmarks are the FATF recommendations and FATF will evaluate the compliance of the Luxembourg [anti-money laundering/counter-terrorist financing] legal and regulatory framework, as well as the effectiveness of this framework. The mutual evaluation reports follow this methodology to allow an objective understanding of the criteria used and an effective evaluation.

The [Luxembourg regulator] CSSF has recently issued a covid-related AML circular (CSSF 20/740), which includes a summary of covid-related AML risks, mitigating factors and actions as well as how the CSSF addresses the issue.

Any advice or recommendations for fund firms on actions to take during this extension period?

Covid-19 is an exceptional time for all of us. The majority of financial services employees are now working from home. The economic impact of this health crisis is being discussed and we are starting to see impacts in organisations in terms of future recruitment or delay or cancelation of planned projects.

However, generally, from a fight against money laundering and terrorist financing point of view, this is no time to lower your guard or relax your controls. On the contrary, we are witnessing an increased risk of fraud, cybercrime and attempts to undermine or outsmart internal controls from the outside.

Is the delay putting an additional burden (such as staff time and cost) on financial firms?

The attention that Luxembourg players of the financial sector have been putting on matters related to the fight against financial crime, including money laundering and terrorist financing has been enormous.

We saw a clear focus on ensuring that the AML/CTF governance framework is following the most recent AML/CTF laws and regulation. This was partly due to the upcoming visit, but also due to updated laws and regulatory texts. The FATF visits certainly contribute to keeping the pressure on.

On the other hand, we will see important regulatory developments at the European level with the 5 and 6 EU Money Laundering Directive, both being voted in 2018 and to be implemented in 2020. Currently, there are discussions at the European level about enhancing the European AML/CTF governance framework and establishing strengthened EU regulatory actions and supervisory powers.

So, to me, it looks as though AML/CTF will remain a subject that will keep us all busy for the next few years.

Have you observed, since the lockdown measures went into place, increased money laundering and terrorist financing activities?

This is clearly a time where all of us learn to work differently and that is becoming our new normal. Of course, while adjusting to the new normal, criminals have quickly caught on to specific vulnerabilities. The CSSF highlights in their recent AML covid-19 circular cybercrime, fraud, insider trading and market manipulation are threats and distressed clients and distressed investment products, as well as the delivery of aid through non-profit organisations as examples of new vulnerabilities.

How are firms responding to increased risk of money laundering and terrorist financing during the lockdown period?

The lockdown measures have forced all of us to work differently. Some players of the financial sector were already working at a high level of automation, using system-approval processes, electronic evidencing of internal controls and workflow-embedded visualisation of documents. Other players who worked in a less fully integrated environment needed to rethink their ways of working and documentation of controls.

Clearly, the latter group had a bigger challenge, as more potential loopholes needed to be closed. Overall, industry players have been working on strengthening their controls specifically adapted to this new environment and the risks identified. The first two weeks were more challenging, but we are looking at a more stabilised environment now.