Recent trends indicate a significant shift towards the regulation of unregulated funds, particularly regarding their anti-money laundering (AML) programs.
With over $3 billion in fines levied globally in the last two months alone, the pressure on these funds to comply is immense. Effective compliance programs must include proper customer identification, due diligence, monitoring, and auditing.
Unregulated funds in Luxembourg have been governed by the RAIF Law of 23 July 2016, and if they are qualified as alternative investment funds (AIFs) under the AIFM Law of 12 July 2013.
Luxembourg funds may also opt for European labels that offer a marketing passport to the fund’s manager, provided they comply with regulatory requirements.
These labels include the European long-term investment fund (ELTIF) under Regulation (EU) No. 2015/760, the European Venture Capital Fund (EuVECA) under Regulation (EU) No. 345/2013, and the European Social Entrepreneurship Fund (EuSEF) under Regulation (EU) No. 346/2013.
Both regulated and unregulated funds are additionally governed by the Companies Law of 10 August 1915, unless superseded by the product laws such as the RAIF Law.
In Luxembourg, unregulated funds report to the Administration des Domaines instead of the CSSF.
The CSSF’s 2020 review revealed gaps in risk analysis and oversight, emphasising that fund managers must better assess money laundering and terrorist financing risks.
Key Compliance Measures
- Fundamentals
Implementing comprehensive customer identification, due diligence, monitoring, and auditing processes is crucial for ensuring compliance. KYC3 provides a fully digitised onboarding portal that simplifies these processes by automating document collection, identity verification, and risk screening. This not only reduces errors but also enhances security and efficiency, ensuring that all compliance requirements are met effectively.
- Outsourcing Oversight
Even when outsourcing AML compliance tasks, it’s essential to retain full responsibility. KYC3 offers solutions that allow companies to manage compliance in-house or via third-party services while maintaining control over the process. This includes detailed audit trails and secure data management to ensure that compliance standards are upheld regardless of how tasks are outsourced
- Risk-Based Approach
Continuously managing and monitoring investment risks requires a dynamic and proactive approach. KYC3’s AI-powered tools enable continuous risk assessment and monitoring by analysing vast amounts of data to detect potential risks. This approach allows for timely interventions and adjustments to manage emerging risks effectively, providing a robust risk management framework
- Sanctions Screening
Daily screening against international sanctions lists is mandatory to avoid regulatory breaches. KYC3 automates this process by integrating data from various official sources such as OFAC, Interpol, UN, and EU. This automation ensures that all counterparties are regularly screened, and any matches are promptly investigated, reducing the risk of dealing with sanctioned entities
Luxembourg-Specific Requirements
Unregulated funds in Luxembourg must annually complete a questionnaire for the Administration des Domaines, outlining their AML strategies. They must also appoint two roles:
– **RR (Responsable du Respect des Obligations)**: Ensures compliance with AML obligations.
– **RC (Responsable du Contrôle du Respect des Obligations)**: Controls compliance activities.
Both positions must be reported, and any changes updated promptly.
Effective Compliance Tools
To manage these requirements efficiently, adopting advanced software tools can automate sanction screenings, manage documentation, and ensure all necessary investor information is accessible for audits and regulatory reviews. This approach can enhance compliance without significantly increasing staff.
For more details on compliance solutions, contact us
