In 2004, the International Monetary Fund (IMF) released an assessment on Luxembourg's compliance with the Financial Action Task Force's (FATF) Recommendations on Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). The IMF found Luxembourg to be broadly compliant with almost all of the FATF's recommendations. However, this assessment was based on the 2002 methodology for assessing compliance with the FATF recommendations. In 2004, the FATF released a revised methodology to assess compliance with its recommendations. Since, there has been no comprehensive assessment publicly available as to Luxembourg's compliance with these requirements. A 2007 International Narcotics Control Strategy Report by the U.S. Department of State indicated that Luxembourg had enacted a comprehensive legal and supervisory AML regime, and a 2006 report by the IMF noted that Luxembourg continues to make progress in strengthening its AML/CFT framework. As noted in the 2007 U.S. DoS report, Luxembourg also played a leading role in drafting the Third European Union (EU) Money Laundering Directive, which contains the requirement for all EU member states to implement the FATF's recommendations. However, there is little subsequent information publicly available as to whether Luxembourg adopted the Third EU Money Laundering Directive into domestic legislation. Luxembourg's Financial Intelligence Unit was established within the Ministry of Justice, and AML/CFT activities are criminalized under the 2004 AML/CFT Law.

General Overview

According to a 2004 Report on the Observance of Standards and Codes by the IMF, which is based on the FATF Recommendations, Luxembourg has a "solid criminal legal framework and supervisory system" to fight money laundering and terrorist financing. Furthermore, it is "broadly compliant" with almost all of the FATF's 2002 AML and CFT Recommendations. The IMF report nonetheless identified weaknesses regarding the limited scope of predicate offences, reporting requirements for suspicions related to terrorist financing, the lack of a distinct legal framework for the Financial Intelligence Unit (Cellule de Renseignement Financier, or FIU-LUX), and the low level of local prosecution of money-laundering cases. The IMF report encouraged the Luxembourg's FIU and the regulatory authorities to issue guidelines on the implementation of AML/CFT laws on a regular basis. It further advised establishing a distinct legal framework for the FIU-LUX. However, the 2004 IMF assessment was based on the 2002 (old) methodology for assessing compliance with the FATF recommendations. In 2004, the FATF released its revised methodology and, since then, there has been little information publicly available addressing Luxembourg's compliance with the FATF recommendations.

According to a 2007 International Narcotics Control Strategy Report by the U.S. Department of State (DoS), Luxembourg enacted a comprehensive legal and supervisory AML regime, including practices to help prevent the abuse of its bank secrecy laws. However, important cross-border activity, banking secrecy, private banking, and corporate investment vehicles made it harder for Luxembourg authorities to enforce AML/CFT measures. The 2006 Article IV report by the IMF affirms this conclusion, noting that Luxembourg continues to make progress in strengthening its AML/CFT framework.

Money-laundering and terrorist-financing activities are mainly criminalized under the 1989 AML/CFT Law, which was updated in 2004 to bring Luxembourg into full compliance with the requirements of the EU's Second Money Laundering Directive. The Penal Code and the 2003 Counterterrorism Financing Law No. 4954 also provide AML/CFT regulations, as noted in the 2007 U.S. DoS report. Per the same report, Luxembourg had a leading role in the drafting of the Third EU Money Laundering Directive, which contains the requirement for all EU member states to implement the FATF's recommendations. However, there is little subsequent information publicly available as to whether Luxembourg adopted the Third EU Money Laundering Directive into legislation.

The FIU-LUX was established within the Ministry of Justice (Ministère de la Justice, or MoJ), and is composed of three officials, two serving full-time and one holding a part-time position. The FIU-LUX is responsible for receiving and analyzing suspicious transaction reports (STRs), seizing and freezing assets when necessary, and providing access to up-to-date information on money-laundering or terrorist financing activities. It also cooperates closely with the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier, or CSSF) and the Insurance Commission (Commissariat aux Assurances, or CAA). The CSSF started its activities on January 1, 1999, as an independent agency under the authority of the Minister of Treasury and Budget. It is responsible for the prudential supervision and regulation of credit institutions, including banks, securities markets, undertakings for collective investment, operators of payment or securities settlement systems, and pension funds. According to the 2007 U.S. DoS report, an AML Committee (Comité de Pilotage Anti-Blanchiment, or COPILAB), which is composed of supervisory and law enforcement authorities, the FIU-LUX, and financial services representatives, was formed by the CSSF to strengthen Luxembourg's AML regime. The U.S. DoS report further notes that although the FIU-LUX "does not have direct access to the records or databases of other government entitites,... its requests have proven to be efficient."

Luxembourg is one of the most important financial centers in the world, which creates opportunities for money laundering, tax evasion, and other financial crimes. According to the 2007 U.S. DoS report, STRs mainly arise from operations involving clients from foreign bank subsidiaries, including Germany, Belgium, France, Italy, and Switzerland, which constitute the majority of banks registered in Luxembourg. In 2005, per the same report, 831 STRs were filed, representing a 13 percent decline from the previous year. So far, the first money-laundering prosecution in Luxembourg is still pending, and an additional case was scheduled for trial in 2007. Luxembourg is a member of the FATF, and its FIU-LUX is part of the Egmont Group. As stated in the 2007 U.S. DoS report, the FIU has also concluded Memoranda of Understanding (MoUs) with many countries, including Belgium, Finland, France, Korea, Monaco, and Russia. Luxembourg is a party to the 1988 United Nations (UN) Drug Convention, and the 1999 UN International Convention for the Suppression of the Financing of Terrorism. It has also signed but not yet ratified the 2000 UN Convention against Transnational Organized Crime ("Palermo Convention").

The Principles

1. Legal Systems and Related Institutional Measures

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Although the IMF assessed Luxembourg's observance of the FATF's recommendations, its assessment was based on the FATF's 2002 methodology. In 2004, the FATF issued a new methodology to assess country compliance against FATF recommendations. Since the release of the 2004 methodology, there has been little information publicly available addressing Luxembourg's compliance with the recommendations relating to this principle.

According to the IMF's 2004 report, "Luxembourg's legal and institutional framework provides a solid foundation for the fight against money laundering and financing of terrorism" (p. 5). Furthermore, as stated in the 2007 U.S. DoS report, Luxembourg's financial sector legislation is based to a large extent on EU directives. Money-laundering and terrorist-financing activities are mainly criminalized under the 1989 AML/CFT Law, which was updated in 2004 to bring Luxembourg into full compliance with the requirements of the EU's Second Money Laundering Directive. The Penal Code and the 2003 Counterterrorism Financing Law No. 4954 also provide AML/CFT regulations, as noted in the 2007 U.S. DoS report. This report also indicated that the 2003 Counterterrorism Financing Law is a 'multifaceted' law that extends the definition of money laundering to include new terrorism-related crimes. According to the 2007 U.S. DoS report, "Luxembourg has a comprehensive system not only for the seizure and forfeiture of criminal assets, but also for the sharing of those assets with other governments." Furthermore, Luxembourg law only allows for criminal confiscations and public takings.

The 2007 U.S. report mentions that Luxembourg had a lead role in the drafting of the Third EU Money Laundering Directive, which contains the requirement for all EU member states to implement the FATF's recommendations. However, there is little subsequent information publicly available as to whether Luxembourg adopted the Third EU Money Laundering Directive into legislation. In its 2007 report, the U.S. DoS stressed that important cross-border activity, banking secrecy, private banking, and corporate investment vehicles made it harder for Luxembourg authorities to enforce AML/CFT measures. Therefore, with regards to the FATF Special Recommendation IX on cross-border declaration and disclosure, the U.S. DoS report advised initiating and enforcing cross-border currency reporting requirements, as well as sharing data with the FIU-LUX.

The FIU-LUX, within the MoJ, is composed of three officials, two serving full-time and one serving part-time. It is responsible for receiving and analyzing STRs, which mainly arise from operations involving clients from foreign bank subsidiaries, including Germany, Belgium, France, Italy, and Switzerland, accounting for the majority of banks registered in Luxembourg, as stated in the 2007 U.S. DoS report. The FIU-LUX also has the authority to seize and freeze assets when necessary. The IMF report nonetheless identified weaknesses regarding the limited scope of predicate offences, reporting requirements for suspicions related to FT, the lack of a distinct legal framework for the FIU, and the low level of local prosecution of money-laundering cases. Moreover, while the FIU-LUX is experienced in receiving STRs, it lacks a clear and transparent legal framework and is insufficiently resourced to fulfill its duties. In its 2004 assessment, the IMF recommended establishing a distinct legal framework for the FIU-LUX. In 2005, according to the 2007 U.S. DoS report, 831 STRs were filed, representing a 13 percent decline from the previous year. So far, the first money-laundering prosecution in Luxembourg is still pending, and an additional case was scheduled for trial in 2007.

2. Preventive Measures - Financial Institutions

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The IMF, in its 2004 report, states that Luxembourg is characterized by "a well developed supervisory framework that encompasses AML/CFT preventive measures broadly in line with international standards" (p. 7). Furthermore, as stated in the 2007 U.S. DoS report, Luxembourg's financial sector legislation is based to a large extent on EU directives. The 2004 IMF report notes that legal provisions on STRs are "largely in line with the standard" (p. 8), and the identification of beneficial owners is required under the AML Law, without a distinction between natural and legal persons. However, per the same report, there is a lack of customer due diligence requirements for nonresident financial institutions, which constitute the majority of financial businesses registered in Luxembourg. In its 2004 assessment, the IMF recommended requiring by law the identification of legal entities, as well as provisions for record-keeping of suspicious transactions. Despite the relatively positive assessment by the IMF in 2004, there is little information publicly available as to Luxembourg's compliance with the recommendations relating to this principle, since the IMF assessment was based on the FATF's old (2002) methodology, which has been since revised.

Per the same report, a circular publicizing the 2004 AML/CFT Law and giving advice on suggested best practices was distributed by the CSSF to the financial industry in October 2005. The 2007 DoS report states that, by extending reporting obligations of the financial sector to terrorist financing, the 2004 amendments to the AML/CFT Law bring Luxembourg into compliance with the FATF Special Recommendation IV on STRs. The 2004 amendments, according to the DoS report, also contain requirements on internal controls and impose stricter customer identification requirements, including information on beneficial ownership. Furthermore, the CSSF conducts mandatory annual audits within banks. Moreover, secrecy rules are waived in the prosecution of money-laundering cases under the law. As noted in the 2007 U.S. DoS report, covered institutions which are required to file STRs with the FIU-LUX include banks, insurance companies and intermediaries, as well as pension funds. The U.S. DoS report notes that STRs mainly arise from operations involving clients from foreign bank subsidiaries, including Germany, Belgium, France, Italy, and Switzerland, which account for the majority of banks registered in Luxembourg. In 2005, per the 2007 U.S. DoS report, 831 STRs were filed, representing a 13 percent decline from the previous year. The report also states that "the banking community generally cooperates with enforcement efforts to trace funds and seize or freeze bank accounts." Furthermore, the AML Law contains "safe harbor" provisions that protect entities from legal liability when filing STRs. With regard to record-keeping, as noted in the 2007 U.S. DoS report, a minimum of five years is required for financial institutions, and in some cases, 10 years for banks.

3. Preventive Measures - Designated non-Financial Business and Professions

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As noted in the 2007 U.S. DoS report, the 2004 amendments to the AML/CFT Law broaden the scope of institutions subject to money-laundering regulations. Under the legislation, covered institutions which are required to file STRs with the FIU-LUX include external auditors, accountants, notaries, lawyers, casinos and gaming establishments, real estate agents, tax and economic advisors, domiciliary agents, and dealers in high-value goods. Nonetheless, there is insufficient information publicly available as to Luxembourg's compliance with the recommendations relating to this principle.

4. Legal Person and Arrangements & Non-Profit Organizations

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The identification of beneficial owners is required under the AML Law, without a distinction between natural and legal persons, as noted in the IMF's 2004 report. In its 2007 report, the U.S. DoS notes that while bearer shares are permitted, they do not pose a risk for money laundering due to "know your customer" laws, which require banks to know the identity of the beneficial owner. Furthermore, company directors are publicly listed under a government registry. The MoJ agreed in December 2005 to adopt five principles with regard to implementing FATF Special Recommendation VIII related to the use of non-profit organizations for terrorist activities per the 2007 U.S. DoS report. Nonetheless, there is insufficient information publicly available as to Luxembourg's compliance with the recommendations relating to this principle.

5. National and International Co-operation

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There is insufficient information publicly available as to Luxembourg's compliance with the recommendations relating to this principle. In its 2007 report, the U.S. DoS notes that the government of Luxembourg "cooperates with and provides assistance to foreign governments in their efforts to trace, freeze, seize and forfeit assets." In order to identify and freeze the assets of suspected terrorists, it further "actively disseminates to its financial institutions information concerning suspected individuals and entities." Luxembourg also seeks to make progress on the extradition and mutual legal assistance agreement between the U.S. and the EU member states, which focuses on legal cooperation, and the identification of existing bank accounts in financing of terrorism cases. Since 2001, according to the same report, Luxembourg's Agency for the Transfer of Financial Technology has provided assistance to government and banking officials from Bosnia-Herzegovina, Bulgaria, Croatia, Cape Verde, China, the Czech Republic, Egypt, Macedonia, Romania, Russia, Ukraine, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, El Salvador, Kazakhstan, Laos, Moldova, Mongolia, Serbia and Montenegro, Tunisia, Turkey, Uzbekistan, and Vietnam. Georgia joined the list in 2006, and Azerbaijan was expected to be added in 2007.

Luxembourg is a member of the FATF, and the FIU-LUX is part of the Egmont Group. As stated in the 2007 U.S. DoS report, the FIU-LUX has concluded MoUs with many countries, including Belgium, Finland, France, Korea, Monaco, and Russia. Furthermore, Luxembourg is a party to the 1988 UN Drug Convention, and the 1999 UN International Convention for the Suppression of the Financing of Terrorism. It has also signed but not yet ratified the 2000 UN Convention against Transnational Organized Crime ("Palermo Convention").