Navigating the Rising Tide: Insurance companies facing increasing AML tax requirements

The Anti-Money Laundering (AML) landscape has undergone substantial changes in recent years, driven by the need to address increasingly sophisticated financial crimes. This includes the introduction of new AML Counter-Financing of Terrorism (CFT) regulations and directives, enhanced reporting and customer due diligence requirements, and increased expectations for tax risk management. As a result, financial services organizations are now subject to rigorous regulatory scrutiny.

A significant milestone in this evolution was Luxembourg's 2017 tax reform, which introduced two predicate tax offenses, namely aggravated tax fraud and tax evasion. In response, the Comission de Surveillance du Secteur Financier (CSSF) published Circular 17/650, introducing 21 tax indicators that professionals must monitor to detect potential Money Laundering (ML) and Terrorist Financing (TF) risks. Non-compliance can result in public warnings or fines, with clear reputational impacts.

But what has the insurance sector to do with a CSSF Circular?

The CSSF's tax risk indicators, initially aimed at financial institutions under its supervision, were expanded by the Financial Intelligence Unit (FIU) Circular of March 31, 2017, to include life insurance providers and insurers offering credit or guarantee services. These entities must incorporate the primary criminal tax offenses into their internal risk assessments. To support professionals in the insurance sector, the Association des Compagnies d’Assurances et de Réassurances (ACA) has created a list of 18 indicators that align with the CSSF's guidelines while addressing the specific characteristics of insurance activities.

While the FIU Circular was published nearly eight years ago, the signs are that some insurance companies still struggle with compliance, as audits by the insurance regulator, the Commissariat aux Assurance (CAA), have shown – making increased efforts in this area more important than ever.

So, what exactly is expected from insurance companies?

The tax indicators outlined in the CSSF Circular require due diligence toward clients and cooperation with authorities. Insurance companies must incorporate these tax indicators into their internal risk assessments and implement appropriate risk mitigation measures, where necessary.

The expectations extend beyond the mere review of tax indicators. The CAA has issued various Circulars and Regulations to establish standardized procedures, including new harmonized questionnaires for life insurance companies to evaluate their exposure to ML/TF risks. In particular, Circular Letter 18/9 and a qualitative questionnaire on AML/CFT reinforce these obligations by incorporating tax-related questions to ensure a comprehensive risk assessment framework.

The CAA is stepping up its regulatory oversight of the fight against ML/TF, particularly within the insurance sector. This includes thorough audits and reviews, placing a strong emphasis on tax procedures. Recent reports have revealed that major players in the Luxembourg insurance market have faced serious repercussions for failing to meet compliance standards.

As part of its procedures, the CAA closely examines whether professionals are effectively implementing the following key considerations in relation to tax AML risks:

• Impact Assessment: Examining whether insurance firms are assessing tax-oriented indicators in relation to their clients’ business models and whether they are conducting comprehensive impact assessments. These assessments should enable targeted and efficient reviews and remediation of tax risks. Companies are expected to formalize their methodologies, clearly demonstrating how they identify and address potential tax risks.
• Clear and Updated Internal Procedures: Scrutinizing insurance companies’ internal procedures, role allocation, and remediation and escalation processes to mitigate tax risks.
• Available and Trained Staff: Considering whether insurance companies are allocating appropriate resource and providing ongoing staff training for the effective identification of tax risks and implementation of mitigation measures outlined in procedures.

These expectations underscore the necessity of implementing a comprehensive tax strategy. Organizations should not merely address tax obligations in isolation on a case-by-case basis, but proactively embrace a holistic approach to tax management. 

At KPMG Luxembourg, we have extensive experience in working with insurance companies and the specialized knowledge needed to help ensure compliance with evolving AML regulations.

Our strategy is centered on creating tailored documentation that aligns with the company’s specific business activities. This documentation serves as a vital defense tool to meet CAA requirements and facilitates a smoother audit process with supervisory authorities.

• Impact Assessment and Mitigation Measures: Our team can assist you in conducting a comprehensive impact assessment of the tax indicators published by the CSSF and their equivalents published by the ACA. Based on the impact assessment, appropriate risk mitigation measures will be formalized, covering relevant roles and responsibilities.
• Staff Training: Our experienced team of professionals is experienced in delivering targeted training sessions for relevant employees. These sessions cover both the technical tax principles and their practical implementation, helping ensure that your team is well-prepared to manage compliance effectively.
• KPMG’s Mock Exercise: We offer insurance companies the opportunity to evaluate their readiness under conditions similar to an internal audit or a real regulatory review by the CAA and tax authorities. This helps identify potential weaknesses, strengthen tax control frameworks, and ensure ongoing compliance with evolving regulatory expectations.

At KPMG, we stand ready to help your organization adeptly manage the complexities of increasing AML tax requirements, bolster your compliance framework, and proactively address tax risks.

Don’t hesitate to contact us to discuss how we can assist you in navigating the rising tide of AML tax requirements. Together, we can ensure your organization is well-prepared to meet the ever higher expectations of regulators and tax authorities.