Luxembourg prepares for money laundering review with host of new laws

Luxembourg has adopted a host of new laws which will speed up investigations for financial crime cases, enhance surveillance of suspects and hand down automatic prison sentences for offences, as the country prepares for a review of its progress by the global anti-money laundering watchdog next year.

The moves are a response to recommendations by the Financial Action Task Force (FATF) after an in-country inspection carried out at the end of 2022, with a report published the following year.

The changes, adopted by parliament last month, involve amendments to the country’s existing Penal Code and Code of Criminal Procedure. They include an order “that trial judges do not systematically grant suspended sentences to those convicted for the first time to a sentence exceeding two years’ imprisonment.”

Although a response by the government to criticism from campaigners representing domestic violence and rape victims, the amendment is also designed to address recommendations from FATF regarding those convicted of money laundering offences.

Luxembourg’s “frequent application of suspended sentences and the low level of fines imposed are neither proportionate nor dissuasive” for money laundering offences, FATF said in its 2023 report.

A total of 950 people convicted of money laundering offences such as fraud and forgery in the years between 2017 and 2022 in Luxembourg were given suspended prison sentences, according to data from the global anti-money laundering watchdog, compared to just under 1,300 who were jailed.

Overuse of suspended sentences

CSV deputy Laurent Mosar, the rapporteur for the amended law, said the changes were “necessary for the financial sector”, despite criticism from opposition parties and the Bar Association, which represents the country’s lawyers and which said there “should always be an obligation to provide specific reasons” for refusing to grant a suspended sentence, rather than the other way round.

“This is perhaps a weakness with our whole system. I think we have perfect laws […but] I am a bit worried about the number of sentences,” Mosar told the Luxembourg Times. “It is important for the government, and for the majority parties, that for crimes there will again be a prison sentence as the principle.”

Luxembourg’s decision to automatically impose prison sentences by default is “a brave move” and one which “will send a strong message”, said Nicolas Ryder, a law professor and expert in financial crime from the University of Cardiff.

However, Ryder said the move would be open to legal challenge and judges would have to work out how to deal compassionately with cases such as vulnerable people being sentenced for “money mule” offences, whereby they allow their bank account to be used to transfer laundered funds.

As is standard for countries which receive a broadly positive inspection report, like Luxembourg, FATF carries out a “regular monitoring” process, which involves a follow-up review three years after the publication of the initial report to check whether recommendations have been implemented.

Next year’s review, expected to take place over the summer, would involve Luxembourg sending a report to FATF outlining what action has been taken since 2023, said Ryder. This would be followed up by talks between the body and Luxembourg government ministries, with the possibility of on-site visits, he added.

“If FATF are not content with the follow-up, then Luxembourg would be put on the enhanced monitoring list. If that is not taken on board, then they would end up on the grey list,” said Ryder.

Previous FATF inspections

FATF’s 2010 inspection report for Luxembourg resulted in the country being put on the “grey list”, an unwanted status which can cause economic and reputational damage and leads to enhanced monitoring by FATF for up to 18 months.

CSV deputy Laurent Mosar, who was the rapporteur for the law in parliament © Photo credit: Anouk Antony

FATF’s 2010 inspection report for Luxembourg resulted in the country being put on the “grey list”, an unwanted status which can cause economic and reputational damage and leads to enhanced monitoring by FATF for up to 18 months.

In the 2022 inspection, Luxembourg failed to achieve the highest possible score for the effectiveness of its anti-money laundering measures in any of the 11 areas assessed. However, the country scored highly in other areas of the report, such as its technical compliance, and was credited for its co-operation with international counterparts.

A total of seven recommendations were laid out in the report, including calling on Luxembourg to strengthen oversight of its non-financial sector, enhance resources of government agencies involved in asset recovery and step up its efforts to detect and prosecute high-profile dirty money cases.

The amendments approved by Luxembourg parliamentarians also include enabling the state prosecutor to speed up proceedings by leading a “mini-investigation” without the need for an investigating judge, and the ability for prosecutors to proceed with charges if a suspect fails to turn up for questioning.

“The person is then considered to be charged with the offences specified in the arrest warrant,” the law states.

Bar Association criticism

The Bar Association expressed alarm at the move to expand the “mini-investigation procedure”, stating it would reduce the role of an investigating judge to “an actor serving only as a rubber stamp for the will of the public prosecutor’s office.”

“By using the ‘mini-investigation’ procedure, the defendant also loses all rights to actively participate in the investigation and to provide their version of events, evidence or exculpatory observations, meaning they will have to present all these elements before the trial court,” the Bar Association said in its feedback to the draft law.

In a bid to address the concerns around the rights of the defence, parliament also passed a motion at the time of the adoption of the changes, in which deputies invited the government to “submit to the Chamber of Deputies, no later than the end of 2026, a bill strengthening the rights of the defence regarding access to the file within the framework of criminal proceedings.”

However, the speeding up of procedures is “a welcome addition to tackle all types of financial crime”, said Ryder.

“If you look at the globalisation of fraud, the investigations are very time consuming, because data shared is key to resolving financial crime,” he said. “It is important to allow financial crime investigators to take a step back and look at the bigger picture.”

A separate amendment, adopted in parliament in December, aims to expand “digital surveillance and wiretapping measures”, previously restricted to issues defined as matters of national security, as an essential tool in the fight against cross-border financial crime.

“It should also be noted in this context that neighbouring countries have the legal option to order the recording of audio and video of premises and vehicles, as well as the interception of computer data in cases of serious crime,” the amendment states.

“Luxembourg is often criticised for its restrictive legal framework in this area, which can prove particularly detrimental to international police and judicial cooperation,” the bill adds.

Then Finance Minister Yuriko Backes, then Justice Minister Sam Tanson and Michel Turk, then head of the country’s delegation to FATF, discussing FATF’s report following its 2022 inspection of Luxembourg, at a press conference in September 2023 © Photo credit: SIP/Luxembourg government

“Luxembourg is often criticised for its restrictive legal framework in this area, which can prove particularly detrimental to international police and judicial cooperation,” the bill adds.

Financial crime ultimately “poses a significant threat to everyone’s national security”, said Ryder, citing the example of cybercrime backed by the likes of China and Russia.

“It is becoming more and more important for financial crime to be classified as a national security issue,” he said, but added that Luxembourg would need to put safeguards in place to ensure the expanded powers were not abused.

Hiring judicial staff

Luxembourg has unveiled plans to step up hiring of judicial staff in the years since the FATF report, with former Attorney General Martine Solovieff telling the Luxembourg Times in January that current funding and staffing for tackling financial crime is “not in proportion with the importance of the financial centre”.

The move to hire staff could be classified as “a token gesture” to FATF, said Ryder, with resources constantly lagging behind the scale of the problem.

Research in the UK has shown that police forces would need another 20,000 to 30,000 officers to deal effectively with financial crime, the University of Cardiff academic added.

Competition for staff from Luxembourg’s law firms is also harming the judiciary’s recruitment efforts, said CSV deputy Mosar.

“It is not easy to find the right people for these posts. We know that in Luxembourg we have many law firms and that is a big competition […] In those firms you often earn more than in the judiciary,” he said.

In Ryder’s view, an essential next step for Luxembourg would be to address another of FATF’s recommendations and introduce stronger oversight of non-financial sectors – such as real estate – with property portfolios a favoured tactic for money launderers trying to hide their assets.

“I still think it is entirely wrong that AML directives do not apply to the real estate sector,” he said.