Since the first FAQs published by the Commission de Surveillance du Secteur Financier (CSSF) in 2019, the role of the Responsable du Contrôle (RC) in Luxembourg has evolved significantly, particularly in the context of combating money laundering and terrorist financing (AML/CFT). The regulator provided further clarification on the RC’s responsibilities through an FAQ published in March 2022.

Additionally, in a Q&A dated December 16, 2020, the Administration de l’Enregistrement, des Domaines et de la TVA (“AED”) outlined its position on the entities under its supervision, with a specific focus on Reserved Alternative Investment Funds (RAIFs). Since the publication on its website dated 12 October 2022, the AED clarified that of all non-regulated alternative investment funds (“AIFs”), other than RAIFs, are also required to appoint RR and RC.  In practise the RR is usually the Board acting collectively.

The 2024 conferences organized by the Commission de Surveillance du Secteur Financier (CSSF) and the Administration de l’Enregistrement, des Domaines et de la TVA (AED) focused on the role of the Responsible Compliance (RC) officer in anti-money laundering (AML) and counter-terrorist financing (CTF) efforts. These discussions aimed to enhance the effectiveness of AML/CTF frameworks and ensure compliance with regulatory requirements.

Isabelle Erpeldinger emphasizes that, beyond the prerequisites listed in the Q&A and the expectations from CSSF and AED, a thorough understanding of laws and regulations is mandatory. A comprehensive grasp of the legal framework surrounding AML and CTF is crucial, which entails not only understanding current laws and regulations, but also staying informed about any updates or new legislative developments.

Additionally, experience in the fund industry and knowledge of delegated functions are essential. An RC with prior AML/KYC experience in a Central Administrator or a previous Compliance Officer role brings added value to this position, helping the RC understand the specific challenges and requirements of the sector.

Moreover, strong writing skills and the ability to present effectively during board meetings are expected. Proficiency in English is indispensable considering the international nature of the fund industry. Given these requirements, it is uncommon for junior professionals to assume this role.

The capability to draft comprehensive reports and articulate findings clearly during board meetings is crucial. This level of effective communication ensures that the board remains well-informed, enabling them to make sound and strategic decisions.

It is also important to note that the appointment of the RC requires Board approval. The application for the role may be rejected if the Board members determine that the candidate lacks sufficient experience or knowledge.

Armelle adds that the understanding of the AML/KYC guidelines, methodologies of the Transfer Agent is key to analyse their reports, follow-up their remediation processes.

However, the RC qualifications do not only encompass a very good understanding of the AML related to the investors accounts, but they also extend to the AML on the investments.

In the light of the increasing international sanctions, it is necessary to understand how they translate to the portfolio of the portfolio of the Funds. A good knowledge of those sanctions and the necessary reporting to the Ministry of Finance and CSSF is expected from the RC.

in addition to those financial and regulatory skills, the RC should develop a problem-solving mindset to be able to provide pragmatic and efficient solutions to the many challenges encountered by the Fund.

Besides, adopting a project management approach will prove to be very useful for an effective coordination of the RC tasks and timely completion of the action plan.

The appointment of an RC has become a significant daily challenge. As Armelle reminds us, the RC serves as a control, advisory, and reporting function. Clearly and precisely defining the roles and responsibilities allocated to the RC and the RR is essential and must be documented in both contracts and procedures.

To effectively carry out their mission, the RC must ensure that all contracts with the Fund’s delegates are up to date with the latest AML regulatory developments. Additionally, the governance of the Fund, including the escalation process, must be robust and clearly defined in the Fund documents. The procedural framework and risk appetite should be validated by management and communicated to teams within the AIFM/ManCo such as Risk, Portfolio Management and delegates. Furthermore, the RC must have the necessary resources to execute their annual monitoring control plan.

Isabelle acknowledges that the role, responsibilities, and involvement associated with the RC function are far from easy. She emphasizes that the role extends well beyond preparing and presenting a quarterly RAG report. There are numerous constraints and challenges that must be considered, often linked to external factors beyond the RC’s control.

The demands of Board members, regulators, auditors, and other stakeholders add to the complexity. The RC must navigate interactions with Central Administration and Transfer Agents, who may have differing principles, monitoring systems, and reporting tools.

Additionally, time management is a critical factor, influenced by the number of authorized mandates, which are often at maximum capacity, and the complexity of the funds. This complexity can stem from the type of fund (regulated or unregulated) and the delegates involved in providing the necessary information for fund monitoring (KPI/KRI) and the time length to receive all necessary information from those delegates. Isabelle underscores that these multifaceted challenges make the RC role particularly demanding, requiring a high level of expertise, adaptability, and effective communication.

Armelle outlines the challenges linked to receiving sufficiently granular information on investors side, blocked accounts and high-risk accounts.

It might occur that Transfer Agents charge the provision of such detailed information.

Time is of the essence when preparing a RC report and it might turn out into a very demanding exercise when key information is not provided in due time.

The relationship between an RC and the Board is fundamentally built on trust. The RC is chosen not only for their extensive experience in the fund industry, as reflected in their CV, but also for their interpersonal skills. The Board entrusts the RC with a mission of utmost importance, ensuring compliance with laws and regulations affecting the fund. To achieve this, a preliminary consultation between the RC and the Board is crucial to establish an effective and mutually beneficial relationship.

From Isabelle’s experience, the Board expects the RC to be actively involved beyond just quarterly meetings. The RC should keep the Board informed of any potential risks or events that may impact the fund. This requires the RC to take on an advisory and supportive role, continuously escalating relevant and necessary information.

Additionally, the RC has significant responsibilities in drafting his/her reports, revising the AML Policy, conducting AML Risk Assessments, and supporting the Risk Appetite framework. If the relationship between the RC and the Board is not optimal, and doubts or concerns about the RC’s reliability arise, the Board risks approving documents that may not fully meet compliance standards.

In summary, the RC must be a proactive communicator and a reliable advisor, ensuring that the Board is always well-informed and confident in the compliance measures being implemented.

As Armelle also states, a sporting parallel can be drawn: the relationship between the RC and the Board is akin to that of a coach and their player—a contract of trust and a team play.

The coach (the Board) ensures that the player (the RC) is in the best possible conditions to perform their tasks, defines the strategy, provide guiding principles and validates requests when necessary. The player, in turn, ensures that the strategy set by the coach is followed, executes the daily tasks assigned to them, reports relevant information, and proposes solutions for decision-making.

This dynamic highlight the mutual reliance and trust required for effective governance and compliance. The Board provides the strategic framework and support, while the RC implements the strategy, manages day-to-day operations, and keeps the Board informed with actionable insights.

Where the RC faces issues that cannot be solved, they should be escalated to the Board for guidance and/or decision.

The collaboration between the Board and the RC is essential as it ensures that the controls run by the RC and the AML regulatory obligations and framework designed by the RR are aligned.

The roles and responsibilities of each party must be clearly defined in contracts, procedures. While their responsibilities are interconnected, they remain distinct, as Armelle describes. This clarity ensures that each party understands their specific duties and how they contribute to the overall compliance framework. This AML framework requires both the Board’ and the RC’s involvement to allow an effective efficiency of the AML program of the Fund.

Isabelle highlights that the RC, acting in an Intuitu Personae capacity, bears personal responsibility and has obligations towards both the prevailing regulations and the Board, which typically comprises several members. Given the RC’s tasks and the decisions they must make, critical situations may arise where the RC’s stance, or the commitment of their responsibility, is perceived as sensitive.

Despite this, the relationship between the RC and the Board is fundamentally one of trust and communication. This means that in the event of poor decisions or inappropriate actions that pose a risk to their function, the consequences are shared. As the saying goes, “we rise or fall together.”

However, it is not uncommon for the Board to distance itself from the RC, expecting the RC to be the sole decision-maker or position-holder in situations where they must ultimately bear the responsibility. This dynamic underscores the importance of clear communication and mutual understanding to navigate the complexities of the RC role effectively. It is important to note that the Board remains ultimately responsible for its decisions and cannot blame the RC if the RC provides a contrary opinion. For Isabelle, the RC should be viewed not as a troublemaker, but as a Trusted Partner.

Given the rapid growth in the financial market and the evolving landscape of investment funds, the role of the RC is becoming increasingly complex and demanding. This role now requires not only extensive knowledge of AML but also a deep understanding of the intricate strategies employed by modern funds.

As the risk assessment of funds evolves alongside the Risk Appetite framework, the RC must adapt and master these changes. Staying vigilant and well-trained regarding regulatory updates and the expectations of regulators is crucial, as regulators can summon the RC for individual interviews at any time.

Additionally, the RC must monitor the number of fund mandates authorized by the regulator, ensuring this number remains manageable and does not become critical.

Reports generated by the RC are continually evolving to provide greater relevance and granularity. Boards are increasingly demanding more in-depth analyses. Both the CSSF and AED have provided significant clarity on the content to be addressed in these reports, particularly the annual RC report.

During its last conference in May 2024, the AED emphasized that the content of these reports should focus on the fund itself, rather than predominantly on any other service providers. The RC report must align with the investment strategies of the Fund, ensuring consistency and relevance.

This evolution in reporting standards reflects the growing complexity and expectations placed on the RC role, highlighting the need for detailed, fund-specific insights that support informed decision-making by the Board.

Isabelle and Armelle have noted that finding suitable candidates for the RC role is becoming increasingly challenging due to high demand and growing competition. This highlights the importance of developing a robust skill set and staying ahead of industry trends to succeed in this critical position.

Aspiring RCs must continuously enhance their expertise and adapt to the evolving regulatory landscape to meet the rigorous demands of the role.

Armelle, complementing Isabelle’s observations, emphasizes that the primary goal of the RC function is to prevent, identify, detect, and evaluate the risks of non-compliance by establishing a framework that enables professionals to adhere to laws and regulations.

While this core responsibility remains central, the function has evolved significantly due to numerous regulatory changes, emerging societal issues, and the impact of the current pandemic. Consequently, the RC role has become even more integral to the Fund’s strategy and governance.

The RC is now seen as a “facilitator and advisor,” deeply connected to the business. This role involves convincing, influencing, and effectively communicating the “why” and the “how” of compliance, ensuring that all stakeholders understand and embrace the importance of adhering to regulatory standards

Both supervised and non-supervised funds may recognize the value of appointing an RC to proactively manage risks. This ensures they are well-prepared for any potential regulatory changes or compliance issues. By appointing an RC, these funds can enhance their risk management frameworks, improve operational efficiency, and boost investor confidence.

Starting in 2025, the annual reporting requirements for non-supervised funds to the AED will be expanded to include AIFs. This extension means that AIFs will now be subject to an annual reporting campaign, similar to the existing RAIF reporting.

This additional reporting requirement will indeed place an extra burden on the RC, necessitating thorough preparation and anticipation.

However, this reporting will also enhance visibility for the AED and strengthen the involvement of Board Members in their reporting obligations. It is worth noting that the AML/CFT Questionnaire must be reviewed and approved by the RR before submission, ensuring a higher level of oversight and accountability.

On top of the scrutiny from the local regulators, new requirements may be expected from the future European authority for AML and countering terrorist financing (AMLA). AMLA might seek to harmonise the role and qualifications of the RC/MLRO across the EU and require from the RC a dedicated professional certification.

The RCs will definitely need to stay focused on the upcoming regulatory developments, ensuring they are well-prepared to adapt to new requirements and maintain compliance with the Funds. This includes staying informed about changes from both local supervisors and the future European authority, AMLA.

It is evident that the RC function has a promising future, yet it remains challenging on a daily basis.