Agefi Luxembourg - novembre 2024

AGEFI Luxembourg 34 Novembre 2024 Fonds d’investissement By Nessym Jules TIR, Avocat/Partner, Global Compliance & Regulatory Investigations, Wolff & Partners SCS, Attorneys at law A year ago, we looked at the Eu- ropeanCommission’s series ofmeasures to strengthen the European legal framework in the fight against corruption. (1) As a reminder, the firstmeasure is to promote communication in the fight against corruptionwithin the EuropeanUnionwith the objective of spreading the culture of ethicswithinMember States and introducing the fight against corruption into Europeanpublic action. The second level of this regulatory package is to use the legal weapon of the sanctions regime of theCommon Foreign andSecurity Policy (“CFSP”) in the fight against corruption. Aproposal for a directive on theway The third level of these measures is a proposal for a Europeandirectivebymeansofcriminallaw (2) which aims to harmonise anti-corruption mechanisms within the Member States and to avoid the pitfall of regulatoryfragmentationwithintheEuropeanUnion. Indeed,theEuropeanParliamentaryResearchService publishedanupdatedbriefingnote on24 September 2024 which states, “Based on Articles 83 and 82 of the Treaty on the Functioning of theEuropeanUnion, the pro- posaldefinescriminaloffencesandsanctionsrelatingtocor- ruption, one of the ‘areas of particularly serious crime with a cross-border dimension’ for which the European Parliament and the Council may establishminimum rules bymeans of directives. The proposal seeks to update the fragmented EU legislative framework, including by incor- poratinginternationalstandardsbindingonthe EU. It addresses corruption in both the public and private sectors”. (3) This directive proposal would also make it possibletoalignthequantumofsanctions within all Member States. The pro- posal requires that the maximum penaltiesfornaturalpersonsbeset at aminimumof between4 and6 years,dependingonthetypeofof- fence. These penalties will be higher than those provided for in Frame- work Decision 2003/568/JHA on combating the punishment of 1 to 3 years. Inaddition, itmandatesminimumlimitationperiods of 8 to15years, dependingon the typeof offence. For legal persons, the proposal retains the principle of criminalliability,particularlyintheeventofanoffence committed by any person acting on behalf of such legal person, with a penalty of aminimumof 10%of the company’s total turnover. (4) The definition of criminal offences covers both active andpassive corruption. Moreover, this proposal aims to harmonise the defi- nitions of the offence of corruptionwithin theMem- ber States and could include influence peddling, embezzlement, obstructionof justice, or illicit enrich- ment related to the crime of corruption. The Com- mission’s proposal provides that a Member State should limit its jurisdiction over corruption offences toanoffence committed in its territoryor committed forthebenefitofalegalpersoninitsterritoryandthat the perpetrator of the offence shouldbe a national of thatMember State. (5) The dedicated compliance program? The proposal for a directive does not distinguish between the public and private sectors, and it should be noted that aggravating circumstances have been retained, such as the involvement of a public decision-maker during a call for tenders, and mitigating circumstances suchas theuse ofwhistle- blowing signals. Any person reporting corruption offences and “providing evidence or otherwise co- operating in the investigation, prosecution or trial of such offences should be afforded protection in the light of the Directive (EU) 2019/1937 (the EU Whistle-blowers Directive). (6) The need for an efficient internal control program in thefight against corruption is provided for in the text asaresult, (7) despitethefactthatinternalcontrolorthe dissemination of a culture of ethics are considered to be mitigating factors for the infringements retained. However, the implementation of a compliance pro- gram it is not clearly explicit, contrary towhat can be observed inother international legal standards. (8) The difficulty with making such a reference results from the fact that the proposed directive mentions criminal liability in the event of a lack of supervision or control, and presupposes criminal liability for the implementation of a compliance programwhich is notclearlyexplained,withtheknowledgethattheEu- ropean trilogue could adjust certainprovisions. In Parliament, the Committee on Civil Liberties, Jus- tice and Home Affairs adopted its report in January 2024. TheCouncil confirmed its position in June. The newParliamentnowneedstoconfirmitspositionbe- fore trilogue negotiations can take place. (9) Finally, anti-corruption obligations, particularlywith regard to the non-financial transparency of compa- nies, are requiredby theCorporate SustainabilityRe- porting Directive (“ CSRD”). Indeed, from 2025, companiesfallingwithinthescopeofapplicationwill have to include precise indicators on their measures topreventandcombatcorruptionintheirextra-finan- cial reporting. 1) NJ. TIR, a holistic vision of corporate compliance in Europe? AgefiLuxembourg,12/2023 2)ProposalforadirectiveoftheEuropeanParliamentandofthe Councilonthefightagainstcorruption,replacingCouncilFrame- work Decision 2003/568/JHA and the Convention on the fight against corruption involving officials of the European Commu- nities or officials of the Member States of the European Union, and amendingDirective (EU) 2017/1371 of the European Parlia- mentandoftheCouncil 3 )https://lc.cx/F1qYqz 4) Proposal for an anti-corruptiondirective of the EuropeanPar- liament and of the Council, replacingCouncil FrameworkDeci- sion 2003/568/JHA and the Convention on the fight against corruption involving officials of the European Communities or officials of the Member States of the European Union, and amendingDirective(EU) 5) Proposal for an anti-corruptiondirective of the EuropeanPar- liament and of the Council, replacingCouncil FrameworkDeci- sion 2003/568/JHA and the Convention on the fight against corruption involving officials of the European Communities or officials of the Member States of the European Union, and amendingDirective(EU) 6 )https://lc.cx/xRrutn 7)Article18 8)FCPA,UKBAorSapinIIlaw 9 )https://lc.cx/xRrutn Anticorruption EU Directive: a sharpening frame Arendt’s first Interactive Regulatory & Compliance IFM Seminar “It is essential for IFMs to stay ahead of these challenges” A rendt announce the release of a detailed document summarising the key take- aways from its first Interactive Regulatory&Compliance IFM Seminar, held on 17 September. This document offers a compre- hensive overviewof themost pressing compliance challenges facing the investment fundman- agement (IFM) sector today, in- cluding retailisation, handling NAV and operational errors, and delegation under evolving regula- tory frameworks. The seminar,whichwas attended largely by investment fund managers, was de- signed to facilitate interactivediscussions on the latest regulatory developments. Participants used live polls to engage withexpertsoncriticalcomplianceissues, followedby insightful panel discussions. Key takeaways from the seminar in- clude: 1. Retailisation The seminar explored how Luxembourg has leveraged its competitive advantages to emerge as a leader in retailisation. Pan- ellistsdiscussedtheincreasingimportance ofdistributionstrategiesforsuccessinthis area, with a spotlight on structuring op- tions such asUCI Part II andELTIFs. 2. HandlingNAVand operational errors Discussions around Circular CSSF 24/856 highlighted key regulatory up- dates, including new requirements for indemnifying end investors and stricter rules for money market funds. Despite progress, participants acknowl- edged that there is significant work to be done to meet the upcoming January deadline. 3. Delegationunder scrutiny As delegation rules face heightened scrutiny under AIFMD II, panellists shared insights on the implications for fund managers, particularly with re- gard to third-party delegation and AML/KYC obligations. The majority of participants expressed concern over the added compliance burden, though some see potential for AI-driven solu- tions to streamline processes. “In an era where regulatory complexity continuestoescalate,itisessentialforIFMs to stay ahead of these challenges,” said Stéphane Badey, Partner atArendt Regu- latory&Consulting.“Thisconferenceand its takeaways reflect our commitment to helping industry players navigate the evolving compliance landscape.” More information :https://lc.cx/XibOiX ©Arendt By Fabio MARTIS, Head of Risk Management, Pharus Management Lux SA I n today’s financial landscape, automa- tion has become an integral part of risk management systems and processes. They play a critical role in helping organiza- tionsmitigate risk, optimize performance, and enhance decision-making processes. But automation becomes increasingly ubi- quitous: first software automation provi- ding automatic calculation and reporting, nowalso complex legal documents can be generated in one click. Wehavenodoubtsaboutthebenefits:itreducesope- rational costs, streamlines complex workflows, and eliminates repetitive tasks, all while significantly im- proving both speed and accuracy.Automationmini- mizes human error and enhances data processing, providing real-time insights and faster decision-ma- king. Furthermore, automation tools can handle in- creasinglycomplexcalculations,generatingpredictive models and reportswithgreater precision. We need to understandwhich underestimated im- pact this can create, to do so I ask you: would you sleep in a self-driving car? Imagine sleeping inyour self-driving car on thewayback toyour family after a busy day at work, completely relying on algo- rithms and automation. Just as in a self-driving car, financial professionals nowheavily rely on automated systems. This is the concept behindwhat is often referred to as “driver- less finance”. Everything is becoming almost hands-free, leaving us to rely on algorithms that manage vast amounts of data with incredible speed and precision. But while we appreciate the efficiency and promise of risk reduction, we must confront the underlying question: Are we truly safer? The first wave of automation in finance began with calculationsheetsfollowedbydedicatedsoftwarefor specific activities. As algorithms become more and morecomplicated,theriskmanagersandtheirteams areobligedtomakedecisionsbasedontheseoutputs. Financial institutions rely on software providing numbers anddecisions: buy vs sell, approvedvs not approved, high risk vs low risk. Automation is now at all levels. Risk management systems are heavily using algo- rithms: fromidentification to reportingviameasure- ment, mitigation and monitoring. The very complexity of these systems can obscure human judgment, making it harder to discern where the greatest risks lie. Reliance on similar algorithmsmay increase correlation across portfolios, across firms or institutionsleadingtosystemicvulnerabilities.Diver- sificationstrategiesmayfailtoaccountforsystematic risks, especiallywhen automated systems group in- vestments into similar asset classes. For risk mana- gers,it’scrucialtounderstandandmitigatethesecor- relation risks beyond traditional regulatory controls. The risk assessment is biasedby tendencies tounde- restimate low-probability but high-consequence tail risks (which are the very risks that aremost likely to cause financial crises). Themonitoring is biased by a cognitive trapwhere riskmanagersmayuncritically accept the conclusions of algorithms, assuming they are infallible. Sometimes also acting against their judgment avoiding challenging the results provided bythemachine.InLuxembourg,whereinvestorpro- tection is paramount, such biases can be particularly dangerous. This complexitymeans that the traditional skill set of the riskmanagersmust evolve. Risk managers need to develop skills to question and critically evaluate automated outcomes, rather thandeferring to them. It requires understandingof algorithms and their limits and implications, aswell as datamanagement and IT. Regularmanual review, cross-referencing algorith- mic resultswith traditional riskmetrics andmanual checks, implementing stress testing algorithms and often reverse stress tests to ensure they account for tail risks are essential steps that riskmanagersmust implement. Riskmanagers canno longer solely rely on outputs fromautomated systems without inter- rogating the underlying processes. Theymust work closelywith IT departments to un- derstand the coding and logic behind these systems and shouldpush for regular audits of the algorithms used in riskmanagement. Butwhensomething fails, are they the one to blame? As automation grows increasingly complex, there is aquestionofresponsibilitywhenthesesystemsfalter. Are risk managers, who are not necessarily experts incomputerscience,trulyequipped—orevenexpec- ted—to understand these algorithms in depth? Just asdoctorsrelyonpharmaceuticalcompaniesandre- gulators to ensure drug safety, can riskmanagers si- milarly trust their tools? Currently,riskmanagersandtheirdepartmentsbear much of the accountability. But as financial software becomesmore advanced andpervasive, perhaps it’s timetoreevaluate.Couldtherebevalueinregulating software providers? If riskmanagement tools had to meet stringent regulatory standards, risk managers coulddependonthesetoolswithoutbearingsoleres- ponsibility for their outcomes. Automationhas also transformed riskmanagement, but aswe embrace these tools, the question remains: are we really safer, and who’s accountable when thingsgowrong?Iinvitecolleagues,industryexperts, and anyone involved in financial risk to share their views on this pressing issue about automation and responsibility. Let's open a dialogue on howwe can buildaregulatoryframeworkthatalignswithtoday’s technologieswhile protecting financial integrity. Risk Management in theAge of Automation: AreWe Really Safer?