Insurance briefingWhat is going on in the insurance industry?

November 2017

IntroductionDear readers,

Table ofcontent

Welcome to the latest edition of the KPMG Insurance Briefing, in which our teams of experts discern and analyse the major developments affecting the Insurance industry in Luxembourg.

This issue addresses the following topics:

— The fundamental changes to international insurance accounting brought about by the new insurance contracts standard IFRS 17

— Overview of the new professional requirements for IDD

— Identification of the opportunities presented by InsurTech

— Reason behind Luxembourg’s popularity among Insurance companiespost-Brexit and their strategy implementation

— Our AML and Tax experts’ views on the current AML and Tax transparency issues

— The audit reform:Insights on audit committees and their new reporting requirements

We hope you will find this publication insightful and useful — happy reading!

Stanislas ChambourdonHead of Insurance

1 Introduction

2

3

4

5

6

7

8 Audit Committees

IFRS 17 – New accounting model for insurers

Are you ready to provide training sessions under IDD?

Innovation imperative in the insurance sector

More insurers to set up in Luxembourg post-Brexit: why is the Grand-Duchy so popular? What is adequate substance?

Brexit strategy implementation

AML and tax transparency: closer than ever

IFRS 17 – New accounting model for insurersIntroduction and objectiveIn May 2017, the International Accounting Standards Board (IASB) published the expected IFRS 17 Insurance Contracts, the second international accounting model for all insurance contracts, after more than 20 years of development. The long lead time reflects the complexities around the implementation, which is considered a major milestone for the insurance industry.

IFRS 17 will give users of financial statements a whole new perspective. For the first time, insurers will be on a level footing internationally. It will open up the “black box” of current insurance accounting. The way in which analysts interpret and compare companies will change. Increased transparency will give users more insight into an insurer’s financial health than ever before.

This new standard will provide stakeholders more useful information, particularly more relevant information about profitability and performance.

IFRS 17 will enable insurance companies globally to stand on comparable grounds through the same accounting framework. It will also permit comparability with non-insurance products.

Among them, companies will measure insurance contracts at the current value, reflecting the time value of money in estimated payments to settle incurred claims where only the liabilities will be measured. In addition, companies will provide consistent information about components of currentand future profits from insurance contracts, at the expense of fewuses of non-GAAP measures.Last, investment components are excluded from insurance revenue and service expenses, and entities can choose to present the effect of changes in discount rates and other financial risks in Profit and Lost or OCI to reduce volatility.

Insurers must apply IFRS 17 no later than 2021 and can voluntarily apply it beforehand in case they also apply IFRS 9 and 15.

The IASB had developed the General Measurement Model (GMM)also known as the Building Block Approach (BBA) that must be applied by default:

The GMM is the sum of the Best Estimate of the liabilities (fulfilment cash flows at initial recognition), which are defined as the present value of probability-weighted expected cash flows, plus an explicit Risk Adjustment for insurance risk, and the Contractual Service Margin (CSM), which is the expected profit from the unearned portion of the group of contracts.

IASB defined also two alternative models to take account the specificities of certain contracts:

— The Variable Fee Approach (VFA) is mandatory. It considers the variable fee associated with direct participating contracts. At the transition date, the CSM is equal to the Fair value of the group of contracts minus the Fulfilment cash flows) As this approach is linked to IFRS 13, the fair value evaluation of the cash flow of the groups of contract should follow this directive. Itis a relatively simple solution to implement; however, it isassumed to negatively affect the CSM due to its simplicity. This approach can not be used for reinsurance contracts issued and or held.

— The Premium Allocation Approach (PAA) is an optional and simplified alternative to the BBA approach applicable to the liabilities for remaining coverage (pre-claims liabilities) only and mainly permitted for contracts with a coverage period of 12 months or less, or where the measurement of the liability for remaining coverage would not differ materially from the liability estimated with the BBA.

Awareness training and initial project setup

Effective date 2021

Project planning

Assess impacts

Gather and validate data

Implement system and processess

Dry run and comparatives

The following illustration depicts the different steps to carry out before implementation:

1

3

4

5

6

2

Transitional approach: from IFRS 4 (local Gaap) to IFRS 17The transition from the IFRS 4 accounting methods to IFRS 17 can be realised by three methodologies:

— Full retrospective approach (application as if IFRS 17 had always been applied)This is the most challenging approach: A lot of information from the initial recognition of the contracts has to be determined (expected cash in and outflows development, actual cash inand outflows development

How KPMG can help

As an all-new, complex regulation, IFRS 17 will impact the closing process, systems and Financial statements of insurers concerned.It will lead to significant changes and will require a long implementation process. All services are expected to be affected by the changes and as such, 2021 is tomorrow.

In this context, KPMG can help insurers ensure compliance with this new IFRS in accordance with the specific business ofthe company at each step of the implementation:

Assessing the expected impact now will ensure a more effective planning process, increasing the likelihood ofa successful implementation. A structured approach to IFRS 17 project planning will help overcome challengesand maximise opportunities.

Sven MuehlenbrockPartner - Head of Risk Advisory

T: +352 22 51 51 6819E: sven.muehlenbrock@kpmg.lu

Colette LemariéSenior Manager - Audit

T: +352 22 51 51 6932E: colette.lemarie@kpmg.lu

Bertrand SeguiSenior Manager - Risk Advisory/Actuary

T: +352 22 51 51 7992E: bertrand.segui@kpmg.lu

etc). The volume of data will be significant. This approach will require significant interactionbetween all the services in an insurance company, from the actuarial function to the pricing team, the investments and the tax/accounting teams.

— Modified retrospective approach (application as if IFRS 17 had always been applied; however, only the actuarial historical cash flows since initial recognition is required)

This approach should be the most used since it maximises the use of reasonable information available without undue cost

— or effort. Nonetheless, the complexity of this approach remains high since the insurance company would still need to calculate the CSM for each group from inception.

— The Fair Value approach (FVA)If the two above approaches are impracticable, the Fair Value Approach will be the solution.

Initially, KPMG canprovide customised

training for employees andmanagement toensure a proper understanding of

the financial impacts, theaccounting

decisions to betaken, and to

understand how to proceed after theimplementation.

Followed by theimplementation

of the accountingmodel with the

validation of data, the estimation of

the different items in the

financial statements andthe assessment of the impacts.

In addition, it canperform a preliminary

analysis includingdefinition of the

governance of theIFRS 17 project,

preparation of an initialassessment and the

project plan review ofthe profitability of the

contracts.

The Insurance Distribution Directive (IDD), often called “the MiFID of the insurance business,” must be transposed into national legislation by 23 February 2018.The law amendment transposing the Directive is expected to be published in Luxembourg at the end of 2017. It is therefore time, now, to make sure you’re prepared, because the IDD, which repeals the directive on insurance mediation, imposes strict new professional requirements: in this article we will provide an overview of what these are.

What kind of professional requirements?

Are you ready to provide training sessionsunder IDD?

What should the training include?Annex I of the Directive gives an indication of the content of the training and development; namely, it introduces requirements for the minimum professional knowledge and competence needed. These requirements revolve around different types of insurance products, i.e. life and non-life insurance products, as well as insurance-based investment products (IBIPs).

For non-life insurance products, the IDD requires competency in the following:

— the terms and conditions of policies offered, and the ancillary risks— the applicable laws governing the distribution of insurance products (consumer protection tax, social, and labour

laws)— claims handling— complaints handling— consumer needs assessment— insurance market knowledge— business ethics standards— finance knowledge

The IDD’s general principle requiresinsurance andreinsurancedistributors—i.e. employees of insuranceand reinsuranceundertakings that carry out distributionactivities—to possess the knowledge andability needed to performtheir duties adequately.The level of eachemployee’s professionalknowledge needs to match the level ofcomplexity of thedistribution activity.

The IDD introduces aminimum of 15 hours of professional training anddevelopment per year inorder to reach this goal. Member States are allowed to adjust therequired conditions with regard to knowledge andability in line with theparticular activity of insurance or reinsurancedistributors and theproducts distributed.Ancillary insuranceintermediaries, for example, would havedifferent conditions to (re)insuranceundertakings.

Additionally, the content of the 15hours’ training must vary from year to year in order to reflect progress. Learning opportunities could includecourses, e-learning, and mentoring, and will differ according to thenature of the products offered, thetype of distributor, and the role andactivities performed by theemployees.

Member States are not obliged to apply this requirement to all natural persons employed by insurance andreinsurance undertakings that carryout distribution activities, but it willbe mandatory for all the relevantpersons within the managementstructure who are responsible fordistribution and all those directlyinvolved in distribution.

Training sessions are a key part of the IDD, considering the extensive list of topics that must be covered and that they must vary from year to year. Internally planning anddeploying a training programme may require significant time, which, when the daily business needs running and other regulations implemented too, could be challenging. In this context, entities may needto seek the services of third-party training providers, so as to concentrate on business needs while meeting the new requirements.

For life insurance products, the IDD requires competency in the following:

For IBIDs, the IDD requires competency in the following:

— the policies, terms, conditions, guaranteed benefits, and ancillary risks of the policies

— the organisation and benefits guaranteed by the pension system of the Member State

— the applicable insurance law (contract, consumer protection, data protection, anti-money laundering, tax, social, and labour laws)

— knowledge of the insurance market and other relevant financial services markets

— complaints handling— consumer needs assessment— conflicts of interest management— business ethics standards— financial knowledge

— specific product information including terms and conditions, net premiums, and guaranteed and non-guaranteed benefits

— the advantages and disadvantages of different investment options— the financial risks of the products— the policies covering life risks and other savings products— the organisation and benefits guaranteed by the pension system— the applicable laws governing the product distribution (consumer

protection and tax laws)— knowledge of the insurance market and the saving products market— complaints handling— consumer needs assessment— conflicts of interest management— business ethics standards— financial knowledge

Geoffroy Gailly Partner - Advisory

T: +352 22 51 51 7250E: geoffroy.gailly@kpmg.lu

Filip Oller Senior Adviser

T: +352 22 51 51 7530E: filip.Oller@kpmg.lu

Innovation imperative in the insurancesector

Investor interest in insurtech, the cutting-edge technologies helping to change the face of insurance, is exploding, and is poised for more growth in the coming years.

For insurance companies, innovation is no longer a choice but an imperative. Consumers themselves are demanding better options. They recognise the new value they are receiving as a result of innovations in banking and other sectors, and they want their insurance providers to give them the same level of value and customisation.

Rapid rise in insurtech investmentInsurance companies have started realising the importance of innovation. A reflection of the growing significance being placed on industry transformation has been the rapid rise in venturecapital (VC) investment in insurtech globally, much of which has involved corporate investors.

In 2015, VC investment in insurtech was US$590 million — a considerable sum compared to US$404 million in 2014. However,investment in insurtech skyrocketed in 2016, doubling the previous year’s total investment to break the US$1 billion mark by a significant margin.This will only put more pressure on insurance companies to either embrace innovation or find ways to take advantage of what other companies are doing.

Established players in the insurance and reinsurance market are increasingly investing in or forming partnerships with insurtech startups.

The success stories of joint ventures in 2017 include a EUR 45 million investment of HSB Ventures Inc, the VC subsidiary of German reinsurer Munich Re, into Trov, a US-based insurtech that provides on-demand insurance. Allianz Global Corporate & Specialty SE (AGCS), the corporate insurance unit of Allianz SE, formed a partnership with Praedicat, a US-based insurtech analytics firm, tobetter predict key catastrophe liability risks.

Identifying opportunities presented by insurtech Over the past few years in thebanking sector, fintech innovation has somewhat led to a dissolution of the banking value chain. A number of technology startups have shorn off a part of the banking operations (e.g. payments, lending) and developed niche, tailored service offeringsfor either businesses or individual consumers.

In today’s technology-enabled world, the insurance industry is on the cusp of a major renaissance. Innovative technologies and business models are changing the way people think about insurance —giving rise to new products, services and opportunities to enhance customer value.

Source: https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/06/frontiers-in-finance-v19.pdf

2014 2015 2016

Source: Pulse of Fintech Q4`16: Global Analysis of Investments in Fintech, KPMG International

The insurance industry is facing a similar dissolution, with insurtech companies looking to unpack different areas of the insurance value chain to create opportunities. Many traditional insurers recognise they need to up their game in order to respond to these challengesto retain market share. For these companies, one of the strongest opportunities presented by insurtech is the ability to disrupt and enhance the insurance business model; e.g., by opening new channels for insurance products, by speeding up claims processes orby providing mechanisms to tailorinsurance products based on dataanalytics.

As a starting point, companies should consider the following activities: define current problems, identify insurtech opportunities, address integration challenges and bring together the right partners.

VC Investment in insurtech

$590 million

$404 million

> $1 billion

What’s next?

Insurtech companies are today a way for insurers to offer new services,to grow and to be sustainable.To do so, insurance companiesneed to leverage and integrateinsurtech solutions within theirown corporations. While they face significant challenges, those that are able to make the most out of working with insurtech companies—through acquisitions, direct investments, innovation labs or services agreements — will be well positioned to be industry leaders in the years to come.

Focus on the futureTo achieve long-term competitive advantage, insurance companies should be aware of the following technological trends:

Technology enablement:Replacing legacy systems with integrated, automated and smart solutions, both at the front as well as back-end

Cross-industry applicability: Convergence of the insurance sector with other sectors (e.g. banking), resulting in new entrants as well as new opportunities

Proactive technologies: Innovations that allow for new serviceofferings (e.g. through data by wearables)

3

Improved customer4 experience: Biggest

pain point; this is where many insurtech companies aim to provide solutions that are customer friendlier and more convenient than current solutions

21

Alice Danoy Manager - Advisory

T: +352 22 51 51 7426E: alice.danoy@kpmg.lu

Ekaterina Iuraga Senior Advisor

T: +352 22 51 51 7420E: ekaterina.iuraga@kpmg.lu

Among the other reasons why Luxembourg has been so popular for insurance companies post-Brexit is its stable and favorable tax system. As an illustration, Luxembourg’s insurance premium tax (IPT) has proven to have several advantages:

More insurers to set up in Luxembourg post-Brexit: why is the Grand Duchy sopopular? What is adequate substance?Brexit and the insurancesectorBrexit is a major change at manylevels. This is true in many fields,and in particular in the economicfield. Today, London is one of theworld’s leading financial markets. It is therefore logical that among the first players to position themselves and to consider alternative solutions post-Brexit are many players of this sector.

Among the first major players to have announced that they have a Brexit plan and, what is even more interesting, where they will go post-Brexit are an important number of insurers. The phenomenon is quite obvious when one looks at the list of those large organisations of thefinancial sector to have already made an announcement in this respect.

A Moore Stephens survey quoted by the American Insurance Association has revealed that over 40% of UK insurance firms intend to change their operation models due to the UK’s exit of the European Union (EU)1. It is therefore fair to ask the question why. Why are insurers among the first movers when it comes to the establishment of a post-Brexit strategy?

There are probably a number of factors, but two important elements are probably on the one hand the long-term relationship existing between the insurer and its client and on the other hand the fact that theinsurer, unlike the banker for instance, cannot put an end to this relationship on its own initiative. The combination of these two elements requires a higher level of anticipation in the design of a post-Brexit strategy.

For many insurance companiesBrexit does not only represent a challenge for future business written after Brexit is effective but also for current business. Findinga post-Brexit solution for the back book, to ensure that the company will still be able to settle claims on policies that are existing today, is thus of paramount importance.

Why Luxembourg? Luxembourg is already today an important player in the insurancesector in the EU and worldwide. This is true in the field of reinsurance, for example, but also in the field of life insurance. It is therefore natural that

— Luxembourg has one of the lowest IPT rates in Europe (4% in general in 2017: 0% for life-insurance and 6% for Fire Brigade Tax).

— No adverse changes in the applicability of the Luxembourg tax regime are foreseen.

— These rates have been stable since 1937.

— Subsequent to recent changes in the law, no tax representative is needed anymore in Luxembourg for insurance companies operating within the freedom of services regime. This translates into a cost reduction for such insurance companies.

— From an operational point of view, classical setups involving a Luxembourg head office with branches in other EU Member States need only register for IPT purposes at the level of the Luxembourg head office - no separate registration is needed at the level of the branches. The Luxembourg IPT authorities being quite experienced and organised, this is generally a smooth and easy process.

— On the compliance side, only one IPT return per legal entity (including branches) needs to be filed.

Source: American Insurance Association, ‘Brexit’ For Insurers:

Luxembourg is on the list of possible destinations for players considering a relocation of their head office post-Brexit.

Luxembourg is also one of the few countries to have maintained a triple A rating at any point throughoutthe financial crisis. Beyond that, Luxembourg offers an ecosystem virtually unique in the world in the financial sector. As an illustration, Luxembourg is the world’s second largest investment fund center and the first European. It is also an actor for the private banking sector. Luxembourg is also investing heavily in innovative sectors such as FinTech.

Luxembourg’s other significant assets are its geographical location in Europe, the quality of life in the country, but also its well trained and multilingual workforce. Groups that are considering coming to settle outside the UK post-Brexit are those that serve all European markets today. Having an experiencedstaff who can potentially work in their mother tongue with Group employees in Germany, Belgium, France, Spain and Portugal is an important advantage. Together with the quality of the ecosystem and the engagement of the country in the promotion of the FinTech, thegeographical location of Luxembourgand its talented and multilingual workforce are among the factors thatare the most regularly mentionedby CEOs of groups having alreadychosen Luxembourg.

Luxembourg’s strong double tax treaty network (the Grand Duchy signed double tax treaties with all EU Member States with the exception of Cyprus) is also an asset. Indeed, a typical post-Brexit group organisation involves a (Luxembourg) head office and its branches across Europein order to take benefit of the EU passport. The elimination of the double taxation via the exemption methods (generally foreseen by Luxembourg’s double tax treaties in line with the OECD model convention) is thus of importance.

Finally, in Luxembourg, the supervisory authority for the insurance sector (i.e. the Commissariat aux Assurances (CAA) remains today an authority distinct from that in charge of the financial sector. The expertise and responsiveness of the Luxembourgregulator is recognized internationally.

What will be the impact of the Brexit for the Grand Duchy? The coming to Luxembourg of large and prestigious institutions such as AIG, FM Global or Hiscox represents an opportunity for the country. This reinforces the financial servicesecosystem and the market place and supports the positive, attractive and dynamic image of the country. Highly qualified staff are likely to move to Luxembourg in this context, which can only be positive.

What substance level do insurers moving toLuxembourg post-Brexit need?Moving house triggers questions of substance. What’s the adequate level of substance for insurance companies in a new country? This is, paradoxically, both an easy and a tricky question: easy because the answer is simply that an adequate level of economic substance is that which is “suitable, proportionate and appropriate to the insurancebusiness performed.” Tricky because what does that mean, exactly?

Role of the managing director(dirigeant agréé)In a regulated environment like the insurance sector, having a levelof economic substance deemed adequate depends largely on regulatory requirements.

Under article 273 of the Law of 7 December 2015 on the insurance sector, each Luxembourg insurance undertaking and each branch of a foreign insurance undertaking must be headed by an officer (calledthe managing director or dirigeantagréé) who has been approved bythe Minister having Supervision ofthe insurance sector. Ensuring theworthiness and competence ofapplicants for this status is, in practice, the job of the authority supervisingthe insurance/reinsurance sector, i.e. the CAA.

This provision ensures that the undertakings in question are headed by persons who fulfil the qualification and good repute requirements for the proper management of the insurance undertaking, as well asfor safeguarding policyholders’ interests. It also aims to facilitate communication with the supervisory authority, the authorised officer being responsible for all contact between the insurance company and the CAA.

Being true to Solvency II Furthermore, with the introduction of the Solvency II Directive, European insurance companies have to meet many new requirements. On topof the quantitative requirements foreseen in the first pillar of the Solvency II Directive and the disclosure obligations provided in the

third one, the second pillar contains requirements relating to the way insurers organise their businesses. In this context, insurance companies must have an effective system of governance in place to provide for sound and prudent management.Specifically, they must have four key functions in place:

A “function”, in Solvency II Directive terms, means the internal capacity to undertake practical tasks. Executors of these functions must meet the “fit and proper” requirements, comply with certain reporting requirements, and be able to perform their tasks and exercise the authorities given to them.

Although, the fact that the managing director and most of the persons exercising the above four key functions are resident in Luxembourg (or potentially in theclose neighbouring countries (grande région) is in principle required, it should be conceivable in certain cases that one of the executors of the above four key functions does not.

More generally, it appears that the delegation of certain tasks intra-group or to third parties is permitted. This kind of delegation can even be considered as forming part of the DNA of the Luxembourg financial sector. Indeed, as a result of the Luxembourg market’s limited size, alongside the country’s longstanding European history, Luxembourg’s financial sector (including its insurance sector) has long goneto the European and International markets to both acquire and sell goods/services.

KeyFunctions

Be wise: analyseA detailed analysis of which tasks/ roles can be delegated in which situations (even those of the executors of the aforementioned four key Solvency II functions) must be performed on a case-by-case basis and be ultimately validated by the CAA. This analysis must consider various factors like the business performed, the business plan, and the current organisation of the group (including the delegation of certain tasks before the Brexit move andthe structure pre- and post-Brexit,i.e. as pertains to subsidiaries, branches, services performed under freedom to provide services, etc.) How to best balance these factors whilst considering the global picture will take experience and market intelligence. It will also be informed by the fact that the adequate level of substance will increase proportionally to the business. What’s “adequate” on day one might, 4-5 years later, no longer be, if (and only if) the business has significantly developed in the meantime. This is in line with the current practice of the CAA.

What about tax? and archives, appropriate business offices and furniture, physical

It’s generally said that what’s locations of board meetings, and adequate from a regulatory others, have become elements perspective should also be worth considering. Along with adequate from a tax perspective, the substance required for tax since the tax law does not require purposes, transfer pricing aspects certain functions/roles to be should always be considered as exercised by persons resident in well.Luxembourg or its neighbours. This statement remains largely true today. However, the economic substance requirements for tax purposes have increased, and will continue to do so, in light of the ongoing implementation of the action plan on Base Erosion and Profit Shifting (BEPS) developed by the Organisation for Economic Co-operation and Development (OECD).

Besides having to have employees with effective managementpower as discussed above, some very concrete elements like the storage of financial statements

Referring to the OECD, it is also important to note, that the fact that Luxembourg is fully compliant with and is an early adopter ofthe various initiative taken by the OECD and the EU in the field of tax transparency and exchange of information in tax matters (via the ongoing implementation of some BEPS recommendations and the already effective implementation of FATCA and the Common Reporting Standard, to name the most well-known examples) played a positive and important role in the renewed attractively of the country for major players of the financial sector.

Emilien LebasAssociate Partner -Tax Financial Services

T: +352 22 51 51 5472E: emilien.lebas@kpmg.lu

Brexit strategy implementation

Pre-Brexit business

model

Talent— Define steps to retain key

talent

— Prepare employee ongoing communication plan

— Review Luxembourg remuneration

— Package / relocation assistance

— Change employment contracts, tax and social security

— Set up family support plan, e.g. housing, school

Outsourcing model— Understand and establish sufficient

substance in Luxembourg

— Prepare post-brexit business process/task allocations between UK and Luxembourg operations

— Define corporate structure model in Luxembourg

— Consider direct and indirect tax implications and filings

— Design information flows / person roles to enable proper oversight

Authorisation and ongoing supervision

— Meet the local regulator to present business plan

— Obtain regulatory license

— Monitor capital requirements

— Adapt existing UK documentation (e.g. procedures) to new Luxembourg operations

— Design streamlined regulatory reporting to cover UK/ Luxembourg needs

Operational setup in Luxembourg

— Establish migration plan (people, processes, systems)

— Think of IT and data architecture setup in Luxembourg, including cloud computing

— Prepare for new legal and regulatory environment

— Recruitment of new talent

— Secure building facilities

Keeping access to EU Single Market

Post-Brexit business model

RegulationSubstanceTalent

OperationsCustomers

— Change existing products / structures

— Factor in business model changes, e.g. e-distribution

— Change distribution / legal contracts

— Communicate with investors

— Prepare contingency plan (where necessary)

On the Brexit JourneyBrexit transformationagenda

On 27 April, KPMG Luxembourg hosted a conference about anti-money laundering and tax transparency. How come?

Emilien Lebas: We have recently seen change on an unprecedented scale in the financial sector. Market turmoil following the economic crisis was compounded by a tsunami of regulation that had two objectives:to fight against money laundering and against the financing of terrorism (“AML/CFT”), and to gain more tax transparency by demanding more information from financial sector actors. The main purpose of our conference was to show how these two areas are now becoming linked more and more tightly. The success of the conference went far beyond our expectations, which shows that this topic remains high on the agendas of many professionals in Luxembourg. It’s on the minds of compliance officers and tax experts, certainly, but also CEOs and CFOs, private bankers, and wealth planners.

Sandrine Periot: Nowadays there is absolutely no question about it: financial sector actors, and their advisors too, simply have to be concerned with the tax compliance of their clients. Tax and AML/CFT requirements have grown considerably over recent years and months, meaning more obligations and responsibilities in this area.

Which headlines from this “regulatory tsunami” are forefront in your minds?

Emilien Lebas: One answer to this question might be the law of 23 December 2016 on implementation of the 2017 tax reform. Since 1 January this year, we have distinguished between simple tax fraud, aggravated taxfraud, and serious tax fraud (or a “tax swindle”). Whereas simple tax fraud is punishable by an administrative fine, aggravated tax fraud and serious tax fraud are criminal offences and can involve sentences of imprisonment ranging from 1 month up to 3-5 years. Tax fraud will only be “aggravated” if the amount of tax evaded exceeds certain thresholds. Finally, reprehensible acts that are committed “by the systematic use of fraudulent acts intended to conceal facts relevant to the authority or to persuade it of inaccurate facts” will constitute serious tax fraud. In the case of simple tax fraud, attempts, complicity, or facilitation in fraud are not reprehensible, whereas for aggravated tax fraud and serious tax fraud these three acts may be retained by the judge against the person. The general tax law (“Abgabenordnung”) (paragraphs 396 and 397), the law of 28 January 1948

on the fair and exact collection of registration and inheritance rights (respectively Article 29) and the law on VAT (article 80) have all been amended to include both aggravated tax fraud and serious tax fraud.

Sandrine Periot: The offence of laundering the proceeds of, or an object originating from, tax fraud is now fully recognised in Luxembourg. More precisely, offences of aggravated tax fraud and serious tax fraud (committedor attempted in the fields of direct taxes, registration and inheritance, or value added tax have been included in the list of predicate offences designated under article 506-1 of the Criminal Code and may be penalised (1-5 years’ imprisonment and/or a fine of between €1,250-1,250,000). Simple tax fraud does not constitute a predicate offence and is, as such, only punishable administratively.

These new provisions have been applicable since 1 January 2017. Money laundering (ML) offences derived from tax fraud will be punishable for tax fraud committed after 1 January 2017 (principle of non-retroactivity of criminal law).

It remains possible, however, for this offence to have been perpetrated in Luxembourg or abroad without the application of the minimum thresholds required by the Luxembourg law, in cases where the offence constituted a predicate offence both in Luxembourg and abroad in accordance with the principle of double incrimination.

The Financial Intelligence Units and the CSSF drafted jointly a new circular ( CSSF Circular 17/650 ) which provides more details on the professional duties relating to tax crimes that professionals should apply.

What is the impact for financial sector professionals?

Sandrine Periot: Professionals subject to AML/CFT obligations will now have to take account of these new primary tax offences as part of their business relationship with customers gained after 1 January 2017, but also to consider them with regard to existing customers'relationships, and resident and non-resident taxpayers: this will de facto affect their professional obligations of customer due diligence.

Additional measures would also need to be implemented by professionals to properly address the new requirements, such as updating procedures

AML and tax transparency: closer than everWe asked our experts Emilien Lebas (Associate Partner, Financial ServicesTax) and Sandrine Periot (Director,AML and Forensics) to weigh in on current AML and tax transparency issues.

to include tax offences; taking into account the list of indicators in the customer’s risk assessment with a determination of which due diligence process to apply (in particular in terms of information/documentation tocapture and request as well as transactional monitoring in order to allow professionals to demonstrate thatthe origin of the funds that are kept is not linked to a tax offence); performing a complete customer review and setting up priorities with a risk-based approach (for instance high-risk clients, sampling, complex structure, etc.); involving tax experts according to the level of risk and the complexity of the file; and raising awareness of, and performing adequate training for, employees.

Could you elaborate on the link between AML and the FATCA and CRS regulations on the exchange of information?

Emilien Lebas: The recent discussion has brought to light the correlation between the obligations of financial sector professionals regarding AML andthe regulations concerning exchanges of information in tax matters. Since 2014, the Foreign Account Tax Compliance Act (“FATCA”) has led to the establishment of a system for the exchange of information amongst financial institutions in jurisdictions that have signed an intergovernmental agreement (“IGA”) with the United States regarding their US customers. The Organisation for Economic Cooperation and Development (“OECD”) has subsequently put in place a similar system of exchange of information on financial accounts through the common reporting standard (“CRS”) in order to combat tax evasion by financial account holders in more than 100 jurisdictions around the world.

Sandrine Periot: This link has always existed, although the purposes of AML and FATCA/CRS are fundamentally different: the former is the reduction of money laundering and terrorism financing risk, whereas the latter is the identification of tax evaders/fraudsters. The information that both AML and FATCA/CRS aim to obtain isusually part of the Know Your Client (KYC) process of professionals. With the introduction of tax fraud as a predicate offence to money laundering, the customer due diligence obligations of the professionals defined under the AML legislation are now extended to tax obligations. In other words, this link has been reinforced and formally recognised.

At the conference, Chris Davidson from our UK office spoke about the future of corporate criminal offense: can you explain what it is and why it’s relevant for Luxembourg actors?

Emilien Lebas: The UK is currently in the process of developing new legislation that goes even further in the level of responsibility for actors in heritage management. This will have, as a main consequence, the possibility of professionals being condemned for failing to prevent a person associated with the organisation from facilitating tax fraud. Since this upcoming legislation will have an extraterritorial effect, it is directly relevant for numerous actors of the Luxembourg market, i.e. those with a branch in the UK, or those working for UK tax-resident clients. But, what is more, this new way to approach the topic of criminal offense in tax matters could give ideas to other jurisdictions. When an institution implementsa compliance programme, the most efficient approach is often to do the exercise on the basis of the higher standard, so as to avoid having to do it again and again several times. It is thus interesting what could be next.

How would you summarise the key take-aways of the conference?

Emilien Lebas: Confronted with these challenges, actors in the wealth planning sector in general must be ready to comprehensively assess the risks that are associated with their customers. Such an assessmentrequires extensive documentation of customers, as well as the establishment of AML procedures that ensure both a “reasonable and necessary” response in cases of suspicion of fraud from a client. It also requires that the reflection process that led to the adoption, and consequent implementation, of these procedures be recorded.

Sandrine Periot: The second key message we wanted to spread is that, ahead of this avalanche of new requirements, the obligation of professionals remains nevertheless an “obligation of means”.

Emilien Lebas:Building on this belief that tax rules and AML rules are now intimately linked and require a collaborative and coordinated approach, KPMG Luxembourg has put in place a multidisciplinary team composed of practitioners and experts to help itscustomers to find their way in a complex and problematic landscape with multiple dimensions. There are challenges to discuss, but also solutions, best practices and market experience to share. We look forward to meeting our insurance clients in the coming weeks and months to discuss this topic in detail.

Emilien LebasAssociate Partner -Tax Financial Services

T: +352 22 51 51 5472E: emilien.lebas@kpmg.lu

Sandrine PeriotExecutive Director - AML & Forensic

T: +352 22 51 51 7220E: sandrine.periot@kpmg.lu

EU Audit reformAudit committeeThe Law of 23 July 2016 does not only impact the audit profession. It also introduces new requirements for Public Interest Entities (PIEs) and namely the obligationto establish an audit committee.

Am I a PIE?According to the Law, PIEs include:

— Luxembourg entities whose transferable securities are traded on a regulated market of any Member State; according to the CSSF, investment funds having their units admitted to trading on a regulated market are PIEs

— Credit institutions

— Insurance and reinsurance undertakings (except for pension funds and captive companies)

Do I need to establish an audit committee? Indeed, PIEs are required to establish an audit committee.

Does my company benefit from any exemption? The following exemption will apply to Luxembourg insurance companies and non-captive reinsurance companies:

— Companies that are controlled by a parent undertaking if certain EU requirements are met at a group level.

It will be the responsibility of the Board of Directors to ensure that the company complies with the Law.

If the exemption does not apply to my company, I will be required by law to establish an audit committee in Luxembourg. This audit committee may benefit from the simplification principle if my company fulfills the criteria of a small or medium sized entity.

What is the role of the audit committee?

Providing information tothe BoD/Supervisory

Board on the outcome of the audit

Monitoring the audit

Monitoring the financial reporting

process

Monitoring the selection of the audit firm and

recommendation of the audit firm to be

appointed

Monitoring the effectiveness of the

undertaking’s internal quality control and risk management systems and, where applicable,

its internal audit

Reviewing and monitoring the independence of the

audit firm, and in particular the appropriateness of

the provision of non-audit services

What is the role of the audit committee?

Stéphanie Smets Partner - Audit

T: +352 22 51 51 6623E: stephanie.smets@kpmg.lu

KPMG Luxembourg, Société coopérative39, Avenue John F. Kennedy L-1855 Luxembourg

T: +352 22 51 51 1

kpmg.com/lu

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurateas of the date it is received or that it will continue to be accurate in the future. No one should act on such information withoutappropriate professional advice after a thorough examination of the particular situation.

© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rightsreserved.

Contact usStanislas Chambourdon Partner - Head of Insurance

T: +352 22 51 51 6206E: stanislas.chambourdon@kpmg.lu

Sven MuehlenbrockPartner - Head of Risk Advisory

T: +352 22 51 51 6819E: sven.muehlenbrock@kpmg.lu

Anne Sophie Minaldo Partner - Head of Regulatory

T: +352 22 51 51 7909E: anne-sophie.minaldo@kpmg.lu

Stéphanie Smets Partner - Audit

T: +352 22 51 51 6623E: stephanie.smets@kpmg.lu

Geoffroy Gailly Partner - Advisory

T: +352 22 51 51 7250E: geoffroy.gailly@kpmg.lu

Emilien LebasAssociate Partner -Tax Financial Services

T: +352 22 51 51 5472E: emilien.lebas@kpmg.lu

Sandrine PeriotExecutive Director - AML & Forensic

T: +352 22 51 51 7220E: sandrine.periot@kpmg.lu