US fund sponsors launching Luxembourg fund sleeves: mind the AML requirements – New York office Snippet

When US fund sponsors aim for an EU capital raise, European investors typically request a Luxembourg special limited partnership (SCSp) to commit to. EU anti-money laundering (AML) and counter terrorist financing (CTF) rules apply for onboarding investors. These rules are more intrusive than the non-EU AML/CFT requirements US sponsors are used to when onboarding investors to an US or offshore fund vehicle.

In practice this disconnect often causes frustration between the EU AML/CTF service provider and the US sponsor. It may also cause frustration between the US sponsor and prospective investors, especially when these investors are not EU based. Like US sponsors, non-EU based investors are often not familiar with the EU AML/CTF rules. The foregoing usually does not apply to EU based investors, which tend to be familiar with the EU AML/CT requirements. Some of them even find comfort in the application of the EU AML/CTF rules as they secure that other investors in the fund have been fully vetted.

To avoid frustration, US fund sponsors must be aware beforehand of what to expect in terms of EU AML/CTF and should timely share this with investors. Luxembourg counsel and AML/CTF service providers should manage expectations.

How to manage these expectations? Going into detail about the EU AML/CTF rules makes little sense. It would not lead to a “golden list” of documents needed for the onboarding process. The Luxembourg AML/CTF law sets the bar high for identification but remains generally subject to a risk-based approach, reasonable measure concepts and uses many definitions open to interpretation.

It is crucial to explain that AML/CTF requirements are a blocker for onboarding if not complied with. The process is all about the verification of the investors and their ultimate beneficial owner(s) (UBO) and sometimes also the source of funds. The verification of the identity of the UBO(s) cascades all the way up to any individuals with an interest of at least 25% in the investor (but sometimes identification below that threshold is applied in practice e.g., 10% threshold) or UBOs with a dominant influence over the investor). If no such UBO can be identified, the senior management of the investor is to be identified.

Investors other than individuals should generally anticipate sharing a signed structure chart showing each corporate layer, as well as certified copies of IDs and utility bills of the investor’s representative(s) and the UBO(s).

In summary, when launching an SCSp, it’s important to ensure the AML/CTF rules do not come as a surprise to the US sponsor and its investors. Managing the AML/CTF expectations early in the fund launching process is key as it smoothens the investor onboarding.