The challenges of being an RC for third-party funds in Luxembourg – Navigating Anti-money laundering and countering the financing of terrorism (AML/CFT) compliance, client relationships, and regulatory expectations
A third-party fund usually refers to an investment fund that is managed by an external or independent management company, rather than being managed internally by the fund sponsor or initiator.
Luxembourg is a leading financial center in Europe because of its strict regulatory requirements, among others, AML/CFT. The “responsable du contrôle du respect des obligations” (RC) is at the core of this compliance framework and is a representative that is steering the investment funds and investment fund managers (IFMs) to Luxembourg’s regulatory standards. Nevertheless, the job of an RC, especially in supervising third-party funds, is full of hurdles as they have to deal with different levels of complexities and be the person who holds relationships with the clients. This paper talks about these issues and identifies ways in which RCs can solve them and benefit from the latest guidance and best industry practices in Luxembourg.
The evolving role of the RC in Luxembourg
The role of the RC in Luxembourg has expanded significantly, driven in part by the increasingly stringent regulatory requirements set forth by the Commission de Surveillance du Secteur Financier (CSSF).
According to Article 4 of the Law of 12 November 2004, as amended, organizations are required to appoint two key professionals responsible for AML/CFT:
- RR (responsable du respect des obligations): A member of the management body responsible for ensuring compliance with obligations related to anti-money laundering and combating terrorist financing (AML/CFT)
- RC: A compliance officer at an appropriate hierarchical level, mandated if the organization’s size and nature of activities necessitate this role.
In light of the National Risk Assessment’s findings, which particularly highlight the ML/FT risks faced by the sector of collective investments (e.g., Investment Funds), the CSSF reminds all Luxembourg-based Investment Funds and Investment Fund Managers under AML/CFT supervision of their legal obligation to appoint both an RR and an RC.
The RC’s role surround oversight of the AML/CFT framework within the organization, ensuring adherence to both national and EU regulations. Recent guidelines highlight the RC’s critical position and underscore the need for an in-depth understanding of AML/CFT responsibilities and frameworks.
Beyond compliance, RCs in Luxembourg are also tasked with managing relationships with key stakeholders, including clients, fund managers, and service providers. This dual focus on regulatory adherence and relationship management presents unique challenges, particularly when working with third-party funds, making it a highly demanding aspect of the RC’s role.
Key challenges faced by RCs
The management of third-party funds in Luxembourg involves a number of aspects relating to RCs that are unlike the other regions. These issues are not only operational and regulatory but are also reflected in the complicated relationships between clients. Such as:
- Stricter compliance obligations:
CSSF’s guidelines provide a compass to RCs to aid them in the implementation of Luxembourg’s AML/CFT regulations. This is a particularly difficult task when dealing with third-party funds, which must simultaneously comply with legal perspectives and regulations from other countries. RCs assure that these funds comply with Luxembourg’s strict AML/CFT regulations, demanding extra due diligence and constant monitoring, whilst under the supervision of the appropriate supervising authorities.
- Client relationship management:
A critical aspect of the RC’s role is managing client relationships, especially when clients have varying expectations regarding compliance. The clients may prioritize the efficiency of operations or the financial performance even at the expense of compliance issues. The RC has to juggle these expectations in addition to ensuring all the regulatory requirements continue to be met. The RC must constantly communicate with clients to ensure they comply with the applicable AML/CFT laws and the risks of non-compliance, including heavy fines, reputation damage, and lawsuits.
Handling conflicts of interest: Why can conflicts of interest appear? One of the reasons is when the clients’ goals contradict compliance policies. If a client, for instance, wants to fast-track a transaction that requires extra checks under the AML/CFT laws, it can create an issue. The RC must demonstrate the capability to deal with these situations in a manner that satisfies compliance without damaging the goodwill of clients. One of the biggest challenges for companies is to keep the clients fully aware of their AML/CFT responsibilities, otherwise, they can prioritize financial performance over compliance.
- Information asymmetry and data collection:
Accurate information from third-party key performance indicators (KPIs) is essential for compliance, but this is achievable only if all parties are well-informed of their AML/CFT obligations and committed to meeting them. Unfortunately, information asymmetry and inconsistencies in data provided by entities involved in the process (e.g., Transfer Agents, Portfolio Managers, and others) are common, leading to significant compliance gaps that can heighten risk for the RC and the organization. This highlights the importance of the RC’s active involvement in testing delegated AML/CFT activities to ensure data accuracy and to challenge the parties when necessary.
- Creating and maintaining awareness:
The most consistent issue for RCs is developing a constant level of consciousness of AML/CFT judgments across all involved people. This refers to the process of not only the initial training but also continuous education, updates, and reminders. The RC must make sure that awareness is not limited to the compliance team but is extended to all employees, clients, and third-party providers who are part of the AML/CFT framework.
How JTC can help you with your RC obligations
Taking on the role of an RC for third-party funds in Luxembourg is not only a case of complying with regulations, it is also a matter of good coordination with the clients and the operational dependencies.
At JTC, we comprehend the myriad of RC obligations and are ready to accompany you on this AML/CFT compliance journey.
Our fully furnished pack of services is structured in such a way that burdens on RCs are easily shouldered, allowing you to focus on strategic decision-making while we handle the complex, detail-oriented tasks. We offer:
- Our comprehensive, fully furnished service package is designed to alleviate the operational burdens on RCs, Tailored compliance solutions: Our professionals deliver AML/CFT compliance approaches that are the most relevant to Luxembourg’s rules and your business objectives.
- Client relationship management: We assist in the effective management and nourishing of client partnerships by providing clear and direct communication and support, necessary for ensuring that all the players comprehend and submit to their respective regulatory roles.
- Continuous training and development: We provide options for ongoing training programs for your team to update them about the recent currency exchange regulations and bring them up to speed with the best practices of AML/CFT compliance.
JTC acts as your trusted advisor, helping you comply with your AML/CFT obligations and meet them confidently. Let us help you maintain compliance, protect your reputation, and build lasting client relationships in Luxembourg’s dynamic financial landscape.
For more details on how JTC can help you with the RC responsibilities, please contact us.
