AML

AML UPDATE

Mutual Evaluation - FATF: a new start for Luxembourg

In February 2014, the Financial Action Task Force ("FATF") reviewed the progress made by Luxembourg in addressing the deficiencies identified in its 2010 mutual evaluation report. Luxembourg was placed in the regular follow-up process as a result of non-compliant and partially compliant ratings for twelve of the core and key recommendations in its 2010 mutual evaluation report. The February 2014 follow-up report contains a detailed description and analysis of the actions taken by Luxembourg in respect of the 2010 mutual evaluation report.

Among the key measures taken by Luxembourg, FATF acknowledged the amendments made to the AML/CFT regime through the introduction of new legislation:

  • reinforcing the legal framework for AML/CFT (the three laws of October 27th 2010),
  • addressing the deficiencies of the terrorist financing offence (law of December 26th 2012),
  • introducing criminal liability for legal persons (law of March 3rd 2010)
  • adopting Grand-Ducal Regulations (among others, the one of February 1st 2010 specifying some existing obligations provided for in the AML/CFT law of November 12th 2012),
  • and other Regulations (the CSSF Regulation no. 12-02 of December 14th 2012 and the Commissariat aux Assurances Regulation no. 13/01 of December 23rd 2013) to implement the provisions of the AML/CFT Regime.

FATF concluded that Luxembourg has addressed a significant number of material deficiencies under all core and key Recommendations and brought the level of technical compliance with these Recommendations to a level of compliance at least equivalent to largely compliant. Luxembourg has therefore taken sufficient measures to be removed from the regular follow-up process.

Within the framework of the FATF evaluations of February 2014, the Commission de Surveillance du Secteur Financier issued the CSSF circular no. 14/584 on February 17th 2014 regarding progresses made by some jurisdictions on implementation of FATF recommendations.

Guidance

The Basel Committee on Banking Supervision

On January 15th 2014, the Basel Committee on Banking Supervision issued a set of guidelines to describe how banks should include risks related to money laundering and financing of terrorism within their overall risk management framework. The guidelines include cross-references to FATF standards to help banks comply with national requirements based on those standards.

The Wolfsberg Group

The Wolfsberg Group of banks, which is an association of eleven global banks, aims to develop financial services industry standards, and related products, for Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies. The Wolfsberg Group announced the publication of its Guidance Paper (on January 29th 2014) and revised AML Principles and Frequently Asked Questions (February 18th 2014).

A step towards the e-Filing of STR ?

The head of the Luxembourg Financial Intelligence Unit recently announced that the suspicious transactions report form would be revised during the Summer 2014 and that e-filing would be available to professionals subject to the AML laws and regulations.

BANKING & FINANCIAL SERVICES

APPROVAL PROCESS FOR HOLDERS OF KEY FUNCTIONS IN CREDIT INSTITUTIONS AND INVESTMENT FIRMS

In accordance with points 17 and 105 of Circular 12/552 relating to central administration, internal governance and risk management (the "Circular") of the Commission de Surveillance du Secteur Financier ("CSSF") as amended, the CSSF published details of the process (the "Process") to be followed by banks and investment firms supervised by the CSSF in requesting the approval of the appointment of any key function holders as well as the notification of their resignations or dismissals.

The Process applies to credit institutions and investments firms governed by Luxembourg law, including their branches, and to Luxembourg branches of credit institutions and investment firms originating outside the European Economic Area (the "Institutions").

The Process shall apply to the following key officers: directors, authorised managers, chief compliance officer, chief risk officer and chief internal auditor.

With regard to the approval by the CSSF of the appointment of any key function holder, point B of the Process sets out the documents and information that must be notified to the CSSF. In addition, the Institution must confirm in the cover letter attached to the application file that:

  1. the appointment of the relevant person has been approved by the board of directors of the Institution,
  2. the appointment is made in accordance with the principles set forth in points 17 and 18 of the Circular and
  3. an assessment of the relevant person has been made in accordance with the guidelines of the European Banking Authority on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2012/06).

The Institution must also mention any negative information or fact of which it is aware concerning the relevant person and explain why it judged these elements to be insignificant in considering his/her candidature.

In case of renewal of the mandate or any change concerning a person already approved, the Institution should only notify the new information to the CSSF by reference to the initial application.

Any resignation of key function holders must be notified by the Institution to the CSSF as soon as possible. This notification shall contain the reasons for the resignation and a copy of the resignation letter. The Institution shall also inform the CSSF if, and when, the replacement of the resigned person will occur.

The Institution must inform immediately the CSSF of any dismissal of key function holders. Such notification must contain a complete and detailed justification of such decision and should attach a copy of the dismissal letter. The Institution should not omit any argument or reason that influenced its decision or that was invoked towards the dismissed person.

For any appointment, resignation or dismissal of a key function holder, the applications must be sent to the CSSF by registered mail and in original. Within one month following the receipt of the complete file, the CSSF may convene the management body and/or the chairman of the board of directors of the Institution, as well as the concerned person if the CSSF considers that an interview might be useful.

Any appointment by the Institution of a director and of a person of the authorised management is subject to the CSSF's prior express approval. In contrast, the appointment of the persons responsible for the internal control functions (i.e. the chief compliance officer, the chief risk officer and the chief internal auditor) is deemed to be accepted by the CSSF, unless the CSSF advises to the contrary within one month from the date of receipt of the complete file.

The Process entered into effect on February 18th 2014. For all those key function holders appointed prior to this date, other than the chief risk officer, Institutions do not need to re-apply to the CSSF. For the chief risk officer each Institution must notify their nomination to the CSSF in accordance with the Process, including those risk officers appointed prior to the entry into effect of the Process.

The Circular and the Process (only in French) are available at: http://www.cssf.lu/en/laws-and-regulations/circulars/news-cat/44.

REPORTING AND TRANSPARENCY OF SECURITIES FINANCING TRANSACTIONS

Together with the proposal regarding the structural reform of the European banking sector the European Commission adopted on January 29th 2014 a proposal for a regulation on reporting and transparency of securities financing transactions (the "Proposal"). The aim of the Proposal is to prevent banks, once the proposal on structural reform takes effect, from shifting part of their activity to the less regulated shadow banking sector.

Pursuant to the Proposal, firms that engage in securities financing transactions ("SFTs"), irrespective of whether they are financial or non-financial entities, will need to proceed to a reporting similar to that applicable under the European Market Infrastructure Regulation ("EMIR"). SFTs include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions and buy-sell back or sell-buy back transactions.

Transparency

Pursuant to the Proposal, management companies of UCITS, UCITS investment companies and AIFMs shall inform their investors on the use they make of SFTs as well as of other financing structures. Such information will need to be disclosed to the investors in the pre-investment information to be delivered to them, the prospectus and also the annual reports.

Rehypothecation

Rehypothecation is the use of collateral by the collateral taker for its own purposes. Under the Proposal such reuse of collateral is subject to the fulfilment of certain conditions such as (i) obtaining the consent of the providing counterparty and (ii) the disclosure of the risks attached to such rehypothecation which should be clearly explained to the providing counterparties.

Reporting to trade repositories

Details of SFTs shall be reported by the counterparties thereto to a registered trade repository. This information will be centrally stored and easily and directly accessible to the relevant authorities, such as ESMA, ESRB and the ESCB, for the purpose of identification and monitoring of financial stability risks entailed by shadow banking activities of regulated and non-regulated entities.

The trades will need to be reported no later than one working day following the conclusion, modification or termination of the transaction.

This reporting may be delegated.

The above mentioned reporting requirement would apply 18 months after the entry into force of the regulation and the transparency disclosure requirements 6 months after such entry into force which is not expected to happen before 2015.

The text of the Proposal is available at: http://ec.europa.eu/internal_market/finances/docs/shadow-banking/140129_proposal_en.pdf

CAPITAL MARKETS

CSSF FAQ ON TRANSPARENCY REQUIREMENTS FOR ISSUERS OF SECURITIES

On February 25th 2014, the Commission de Surveillance du Secteur Financier (the "CSSF") published an update of its Frequently Asked Questions (the "FAQ") in relation to the law of January 11th 2008 on transparency requirements for issuers of securities, as amended (the "Transparency Law"). New FAQ 48 clarifies in which cases an issuer that benefits from an exemption set out in Articles 7 or 30(6) of the Transparency Law (hereafter "Exempted Issuers"), have to publish periodic information.

FAQ 48 confirms that issuers not subject to, or only partially subject to the periodic information requirements set out in Articles 3, 4 and 5 of the Transparency Law are nonetheless still required to publish any information considered as "inside information" according to Article 6(1) of Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (the "Market Abuse Directive"). We are reminded that the notion of "regulated information" defined under Article 1(10) of the Transparency Law includes inside information.

Of particular interest is that the CSSF clarifies that the following information must be disseminated, made available to an officially appointed mechanism (OAM) for the central storage of Regulated Information and filed with the CSSF:

  • a financial report made available to the public by an Exempted Issuer on its own initiative or in order to comply with another legal or regulatory requirement, is in principle inside information, given the nature of the information it contains;
  • documents made available in the context of a general meeting (e.g. the annual and consolidated accounts, the management report or the auditors' report) that fulfil the criteria of inside information.

The updated FAQ is available at: http://www.cssf.lu/fileadmin/files/MAF/FAQ_transparency/FAQ_transparency_eng_250214.pdf.

ESMA Q&A ON PROSPECTUSES

On January 15th 2014, the European Securities and Markets Authority ("ESMA") published an update of its Questions and Answers (the "Q&A") on prospectuses including two new questions and answers.

The newly added questions and answers, Nos. 91 and 92 concern (i) the format of the individual summary for several securities and (ii) the applicable registration document schedule where a listed issuer proposes to issue convertible or exchangeable debt securities where the underlying securities are the issuer's shares.

Q&A 91 emphasises that if there is an individual summary relating to several securities (as provided for in article 24 (3) (second paragraph) of the Regulation (EC) no. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements, as amended (the "Prospectus Regulation")), the information in the individual summary needs to be easily accessible and the comprehensibility of the summary shall not be affected. In addition, we are reminded that the individual summary is subject to the length constraints set out in article 24(1) of the Prospectus Regulation. ESMA then describes two different formats which may be used for an individual summary relating to several securities, so long as the abovementioned conditions are satisfied.

Q&A 92 clarifies that where an issuer proposes to issue convertible or exchangeable debt securities where the underlying securities are the issuer's shares, a debt registration document can be used where those particular shares arising from the conversion or exchange are already issued and admitted to trading on a regulated market. We are reminded that pursuant to Article 4 of the Prospectus Regulation the use of the share registration document schedule (Annex I) (or Annexes XXIII or XXV if the proportionate schedules are applicable) is required, in cases of convertible or exchangeable securities, provided that these shares or other transferable securities equivalent to shares are or will be issued by the issuer of the security and are not yet traded on a regulated market.

The updated Q&A is available at: http://www.esma.europa.eu/system/files/2014-esma-35_21st_version_qa_document_prospectus_related_issues.pdf

CORPORATE

REFORM OF THE REGIME FOR THE PUBLICATION OF LEGAL NOTICES IN LUXEMBOURG

Draft law number 6624 filed on October 4th 2013 provides for changes to the procedures for legal publications concerning companies and associations in Luxembourg (the "Draft Law"). The explanatory memorandum of the Draft Law explains that its central purpose is to facilitate the access of third parties to information and to reform the system for the publication of official legal information in Luxembourg.

There are two main pillars to the Draft Law: (i) replacement of the Mémorial C, Recueil des Sociétés et Associations (the "Memorial C") by publication in an electronic form on a new central electronic platform to be called the Registre électronique des sociétés et associations ("RESA") and (ii) increased efficiency in terms of reduced waiting periods for publication and cutting costs associated with handling and publishing/filing costs associated with the Memorial C.

The current system for the filing and publication of documents with the Luxembourg Trade and Companies Register ("RCS") is paper based requiring the filing of two different types of documents with the manager of the RCS: one for inscription in the data base of the RCS and the other for publication in the Memorial C. The information is immediately available for consultation in the file of the commercial entity concerned on the website of the RCS (https://www.rcsl.lu) and its content is identical to that which will appear subsequently in the published version of the Memorial C (available on http://www.legilux.public.lu/entr/index.php).

The Draft Law shall amend the existing legislation in order to achieve its stated aim of standardising the requirements for the filing and publication of legal documents in Luxembourg.

Included in the Draft Law are the following principal reforms:

  1. The manager of the RCS shall be responsible for the publication of legal information concerning companies and associations in Luxembourg.
  2. The introduction of a legal obligation to file all documents electronically with the RCS.

     Each document will be published at the moment it is confirmed as validly electronically filed with the RCS.

    The Draft Law provides that the RCS shall make available a help desk for those requiring assistance to make electronic filings. The manager of the RCS shall file those documents manually submitted to it for filing on the basis of a mandate granted to it by the person filing the document.
  3. The Memorial C in its current form will be replaced by a list of publications available on RESA.

     The RCS will become the manager of a 'journal of publications' in an electronic format (a list of publications in PDF format), containing links to the documents filed in electronic format, allowing the user to open each document directly in electronic PDF format. RESA will be integrated into the website of the RCS.

    The internet site of Legilux which hosts the Memorial C in electronic version will not be maintained. The archives of the publications in the Memorial C will however be retained and a link to these archives will be proposed on the website of the RCS.

    It is envisaged that this reform will reduce the administrative costs associated with the formatting and publication of the Memorial C.
  4. Each document will be published at the moment it is confirmed as validly electronically filed with the RCS.

     The filing and publication of legal publications with the RCS will now become a part of the same procedure. This proposed reform shall abolish the current requirement for companies to reformulate the same information in a special document for the sole purpose of legal publication and will remove the current delay between the date of filing and the date of publication with the RCS.

INVALIDITY PROCEEDINGS BROUGHT BY A COMPANY ISSUING BONDS

Decision of the Court of Appeal (Cour d'Appel) of February 1st 2012.

The interim relief judge (Juge des Référés) declared inadmissible the filing by a Luxembourg public limited company (the "Company") requesting a court order (ordonnance) for the cancellation of notifications of bondholders' meetings.

The above request was introduced by the Company in the context of notifications sent by the bondholders' representative convening several bondholders' meetings in order to create a fund to, inter alia, finance legal proceedings in connection with the bondholders' objection to the approved safeguard proceedings (Procédure de Sauvegarde) opened by the Company.

The Company appealed the decision of the interim relief judge.

The Court of Appeal specified that in the absence of specific legal provisions relating to the invalidity of shareholders' or bondholders' meetings, the court may exercise its discretion to assess the validity of a meeting. Furthermore, the Court of Appeal pointed out that principles applying to shareholders' meetings are applicable to bondholders' meetings.

Moreover, the courts will consider a meeting as valid if the non-compliance with the legal and statutory provisions did not, as a result, cause the decision rendered at such meeting to be invalid and, conversely, they will consider such meeting as invalid if such non-compliance altered the meeting's decision.

Finally, the Court of Appeal mentioned that legal doctrine recognises the invalidity of a procedure as a result of a formal defect (nullité pour vice de forme) to the extent that it caused damage to the person relying upon such.

In the case at hand, the Company raised the invalidity of a notice calling for a second bondholders' meeting arguing that (i) the notification for the second meeting should have been communicated subsequently to the holding of the first meeting and (ii) the second meeting should have mentioned the resolutions of the first meeting.

According to case-law, the notification formalities for the holding of shareholders' meetings, including those related to the agenda are expressed in the exclusive interest of shareholders. Thus, a company, not being a shareholder, is not entitled to invoke the non-compliance with the required formalities.

Furthermore, the defects on which the Company based its arguments of invalidity are formal defects (vice de forme). The rules regarding the form of notification are for the protection of the security holders. Thus, this invalidity may be argued only by the shareholders, respectively by the bondholders.

The Court of Appeal concluded that the Company was not entitled to invoke the non-compliance with notification formalities (i.e. the date of notification and the absence of information on the first meeting's resolutions in the second meeting's agenda) and only the bondholders may avail of such non-compliance in its claims (if any).

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