Key Governance Developments - January 2024

EU financial institutions could yet be subject to value chain due diligence reporting requirements
Negotiations between the European Parliament and EU Council may reopen the issue of whether banks, asset managers and insurers should have to comply with reporting requirements under the proposed Corporate Sustainability Due Diligence Directive. Under the draft legislation, larger companies would have to report on the risk of or actual violations of environmental and human rights standards by suppliers in their value chains. The exclusion of financial institutions was agreed under a stop-gap deal in December, but a joint document issued by the parliament and council now says that financial institutions, like companies in other sectors, should contribute to the protection of human rights and the environment. The European Commission will now decide on whether and how future requirements should apply across various business sectors including financial services, with the deadline for a new legislative proposal set for June 1, 2025.
Best source: Bloomberg

CSSF fines family office Reference Financial Services €114,000 for serious AML and governance shortcomings
The CSSF has issued a fine of  €114,000 to family office firm Reference Financial Services for significant breaches of anti-money laundering and terrorist financing legislation as well as for internal governance failings. The financial regulator says an on-site inspection identified inadequacies in verification of client information, transaction monitoring and internal governance practices, noting that the penalty reflects the seriousness and duration of the failings while taking into account remedial action that Reference Financial Services has undertaken.
Best source: Luxembourg Times
See also: Delano
See also: Paperjam (in French)
See also: CSSF

UK regulator to draw up stricter rules on protection of client assets after finding that payment firms fall short
The UK's Financial Conduct Authority says the failure of payment firms to protect customer funds require it to impose more stringent rules, according to Matthew Long, the regulator's director of payments and digital assets. He says 85% of licensing applications in the sector were rejected, withdrawn or refused in the past year, and some firms left the governance section of their application blank. Long says payment businesses have been failing to reimburse clients promptly when they entered insolvency.
Best source: Reuters (free registration)

International accountancy ethics body proposes updated code to help auditors avoid complicity in greenwashing
The International Ethics Standards Board for Accountants has proposed a revised ethics code to help external auditors avoid complicity in greenwashing through the ESG claims made by their corporate clients. The organisation's chairwoman, Gabriela Figueiredo Dias, says that amending and supplementing its ethics standards for corporate audit sustainability information should help improve industry practice. The proposed ethics code is open for consultation until May.
Best source: Reuters (free registration)

UK court upholds appeal against restructuring plan of Luxembourg-domiciled real estate business Adler Group
The UK's Court of Appeal has overturned approval of a proposed €6bn restructuring plan for the loss-making Luxembourg-headquartered real estate business Adler Group, which owns thousands of residential properties across Germany. The ruling in favour of a group of creditors, including DWS Group and Greenwich, Connecticut-based hedge fund manager Strategic Value Partners, is expected to lead to a second phase of restructuring and could undermine Adler's attempts to sell assets to pay off creditors.
Best source: Luxembourg Times

European Court of Justice rules earnings of independent director Yves Prussen not subject to domestic VAT
The European Court of Justice has ruled in favour of Yves Prussen, one of the founders of the law firm Elvinger Hoss Prussen and an independent member of its board of directors, who had appealed against a decision by Luxembourg's indirect tax agency, the Registration Duties, Estates and VAT Authority, that his earnings as a director were subject to value-added tax. The ruling by EU's top court clarifies the application of the EU's VAT directive to the activity of independent directors. Independent directors whose emoluments have been incorrectly subjected to VAT in the past can retroactively reclaim payments since 2018.
Best source: Delano
See also: Paperjam (in French)
See also: Delano

Increasing number of private investors stretching AML and KYC compliance capacity of fund businesses
Alternative asset management businesses are struggling to carry out required anti-money laundering and know-your-customer due diligence processes even with only modest increases in client numbers stemming from increased investment by private individuals, according to Derek Russell, funds director for Luxembourg at Jersey-based service provider JTC. Speaking at ALFI's Private Assets Conference at the end of last year, he said that JTC finds it difficult to hire sufficient additional staff to ensure the funds' compliance. Camille Seillès, secretary-general of the Luxembourg Bankers' Association, says that member institutions also report that the burden of regulation is growing and that KYC requirements for intermediary companies in holding chains involve supervisory expectations which are somewhat more prescriptive than in other jurisdictions.
Best source: Investment Officer (subscription required)

US energy regulator investigates potential conflicts of interest arising from ETFs’ stakes in energy utilities
The US Federal Energy Regulatory Commission says it is conducting a review of the ownership of stakes in energy utilities by large asset managers including Vanguard, State Street and BlackRock. Although in May the regulator extended an authorisation for large index funds to hold utilities' shares, it says it has launched an inquiry into whether and how to revise its policy on investment funds' ownership of electric utilities. Commissioner Mark Christie says big power and water companies often operate as local monopolies with public service obligations, which could conflict with investors' interests in areas such as profitability and utilities' environmental responsibilities. The three asset managers tend to be among the biggest investors in S&P 500 companies such as big power utilities, prompting concern across the political spectrum about the firms' impact on markets and corporate governance.
Best source: Reuters (free registration)

Amazon challenges Luxembourg data regulator over record GDPR penalty
Amazon has retaliated against the €746m penalty it received in 2021 for violating the EU's Global Data Protection Regulation, submitting an appeal in a Luxembourg administrative court in which it accuses regulators of seeking punishment rather than data protection. The e-commerce giant claims the Luxembourg data regulator CNPD did not seek a resolution and issued unfounded accusations in bringing the case, which stems from a 2018 complaint about Amazon processing user data for targeted advertising without consent. Vincent Wellens, a lawyer for the Luxembourg data commission, rejected claims that the regulator acted too fast, saying GDPR is clear and it was up to the firms concerned to comply.
Best source: Bloomberg (subscription required)
See also: DPA

Investor group launches legal action against Luxembourg companies connected to illiquid H20 funds
Lawyers representing investors in H20 Asset Management funds have filed a legal case at the Paris Commercial Court against Luxembourg-based H2O Asset Management Holding and H2O AM, along with BPCE group subsidiary Natixis Investment Managers, which was the majority shareholder in the London-based fund manager, auditor KPMG Luxembourg and depositary bank Caceis. The action seeking compensation over the freezing of the funds' assets was launched by Collectif Porteurs H2O, which represents 6,077 private investors who invested around €717m in H2O funds between 2015 and 2020. In June 2019, a report of liquidity problems with H2O funds, which then held assets totalling €1.9bn, prompted investors to apply for redemptions. Following an investigation, French regulator AMF fined H2O €75m and co-founders Bruno Crastes €15m and Vincent Chailley €3m in December last year.
Best source: Paperjam (in French)
See also: Delano
See also: Letzebuerger Journal (in French, subscription required)

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What boards must do to upgrade cyber resilience
Interview with Astrid Wagner, Partner in the IP, Communication & Technology practice area of Arendt & Medernach