US managers of private funds (USFM) use unregulated Luxembourg special limited partnerships (Fund) to raise EU capital. To benefit from an EU marketing passport, USFM often appoint a Luxembourg host alternative investment fund manager (Host AIFM) to manage the Fund. The Host AIFM usually delegates the portfolio management to the USFM.  

During the Host AIFM selection and onboarding process, USFM focus on the role of the Host AIFM in the deal process. In its role as risk manager, the Host AIFM’s involvement is a requirement to get a deal through. In its role as portfolio manager, the Host AIFM usually also requires pre-deal checks.

It is important that USFM realize that the Luxembourg financial regulator requires the Host AIFM to conduct anti-money laundering and counter terrorist financing (AML/CTF) checks on the Fund’s unlisted assets and transaction counterparties. Pursuant to the delegated portfolio management agreement between the Host AIFM and the USFM, the USFM can only execute the deal if the Host AIFM confirms that AML/CTF was cleared.

In the context of asset level AML/CTF, two types of controls must be performed: (i) risk-based due diligence controls on counterparties (e.g. sellers, buyers and borrowers), intermediates (e.g. agents, tenants) and the asset itself, whereby the key focus is the identification and identity verification of those parties and (ii) targeted financial sanctions on counterparties, intermediates and the assets. The Host AIFM must assess the findings of those controls and the gathered documentation against the Fund’s AML/CTF policy, procedures and its AML/CFT risk appetite statement.

In practice, the Host AIFM and the portfolio management team of the USFM work together to gather the required documentation when a new deal is in the pipeline.

The Association of the Luxembourg Fund Industry has published guidelines regarding the AML/CTF aspects of the above controls, which are generally recognized as the market standard. They provide guidance for different investment strategies such as private equity, credit and real estate.

To secure that AML/CTF checks do not create frustration or deal delays, USFM usually discuss this process with the Host AIFM when first onboarding the Host AIFM. Topics discussed include (i) the key principles and rules for asset level AML/CTF, (ii) the documents required by the Host AIFM to provide AML/CTF sign‑off on a deal and (iii) the AML/CTF clearance process in terms of timing, turnaround times and “who does what”.

USFM should be aware that the legal framework and industry guidelines regarding the AML/CTF process tend to be in motion and the agreed AML/CTF processes may therefore be subject to change over time.

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