MoJ ¦ ML/TF Vertical Risk Assessment: Virtual Asset Service Providers

Why Luxembourg produced a VASP vertical risk assessment – and what it shows

Luxembourg’s Ministry of Justice, working with the CSSF (the AML/CFT supervisor) and the CRF (the financial intelligence unit), published a vertical risk assessment focused on virtual assets (VAs) and virtual asset service providers (VASPs). The document explains why VAs matter for money-laundering and terrorist‑financing (ML/TF) risk, maps the marketplace, and provides a first structured evaluation of threats, vulnerabilities and existing mitigations. The work responds to earlier National Risk Assessments (NRAs) and to international expectations (FATF and EU) that jurisdictions identify, understand and act on VA-related risks.

Key takeaways from the assessment

The assessment separates the problem into two levels: VAs (the asset types) and VASPs (the businesses offering services such as exchange, custody, transfers and issuance). It rates inherent risk by type rather than attempting a full residual-risk estimate for the Luxembourg market, because as of mid‑November 2020 no VASP completed registration with the CSSF and the local sector profile remained incomplete.

VAs: Pseudo‑anonymous exchange VAs (led by Bitcoin and similar coins) and privacy/anonymous coins (e.g. Monero) are rated very high on inherent ML risk. That follows from their combination of liquidity, usability and anonymity. Platform tokens (smart‑contract platforms and many token economies) are high risk; stablecoins are medium risk. Utility tokens, security tokens and closed‑loop game currencies rank low to very low today, mainly because they have limited exchange liquidity, narrower use cases and, in many cases, lower anonymity.

VASPs: Twelve VASP subtypes are assessed. Centralised exchanges are the highest‑risk VASP subtype because they combine custody, high transaction volumes and the ability to receive fiat currency, which are the very channels that criminals use to place, layer and integrate illicit funds. Peer‑to‑peer (decentralised) exchanges, brokers, custodians, issuance platforms and application providers receive a “medium” inherent‑risk rating in aggregate. VA ATMs and miners/validators are rated lower. The overall VASP sector rating is “medium”, reflecting the mix of high‑risk exchange activity and mitigating features that regulated firms can and must deploy.

Bastian Schwind-Wagner _Follow

"Luxembourg’s VASP vertical risk assessment identifies the highest ML/TF vulnerabilities in pseudo‑anonymous and anonymous virtual assets and in centralised exchanges, while emphasising that effective AML/CFT controls and cross‑border cooperation can materially reduce those risks. The assessment is preliminary pending completed CSSF registrations, so ongoing supervision and data collection are essential to refine mitigation priorities.

Firms offering VA services should implement robust, VA‑aware KYC, transaction monitoring and STR reporting, and adopt blockchain‑analytics tools to detect obfuscation techniques such as mixers and peer‑to‑peer flows. Close collaboration with the CRF and CSSF will speed detection and enforcement and improve overall resilience against financial crime."

Most significant ML threats identified for Luxembourg

The assessment highlights which predicate crimes and operational patterns are of immediate concern for Luxembourg’s VA/VASP space:

• Drug trafficking and darknet markets
  VAs remain a preferred medium for darknet marketplaces. Chainalysis and other industry sources show consistent flows into and out of exchanges, and Luxembourg’s CRF has seen STRs referencing darknet‑linked activity. Exchanges are a common waypoint for laundering those proceeds, so any operator that accepts fiat rails and services EU customers is relevant to this threat.
• Fraud and forgery
  Investment frauds, fake Initial Coin Offerings (ICOs) and phishing schemes that solicit VAs generated large losses internationally; victims’ funds often flow through exchanges and brokers. Forged IDs and documentation are an important enabler of fraudulent onboarding and thus of ML through VASPs.
• Theft and cybercrime
  Centralised custodial platforms and exchanges have been prominent targets for theft. Stolen VAs are highly attractive for laundering because of irreversible transfers and the availability of mixing/obfuscation techniques or multiple exchange hops.
• Terrorist financing
  Although absolute monetary flows tied to terrorist financing via VAs are smaller than for other crime types, the human and security risk is high and sophistication is increasing – for example use of fresh, per‑donor addresses or layered donation tools. CRF reporting included cases with links to sanctioned addresses or clusters.

The report also flags emerging trends: ransomware and extortion payments, evolving use of mixers (and the shift toward non‑custodial mixing techniques), and the potential growth of security token markets as another vector that could become more relevant if adoption accelerates.

How criminals exploit the VA value chain – placement, layering, integration

The assessment applies the classic ML schema to VAs:

• Placement
  Converting fiat proceeds into VAs via exchanges, OTC brokers or VA ATMs, or placing VA proceeds into custody or exchange accounts.
• Layering
  Using transfers, mixers, decentralised exchanges, and multiple VASPs across jurisdictions to obfuscate provenance.
• Integration
  Converting VAs back to fiat via exchanges or brokers, or using them to purchase goods and services. Integration usually touches regulated banks, payment or e‑money institutions at the end.

An important operational point the paper stresses is that criminals can enter the VA ecosystem at multiple points – not just via a local VASP – because many VASPs serve international customers. That makes international cooperation critical.

What mitigations are already in place in Luxembourg

The assessment documents the current and planned prevention, detection and enforcement measures:

• Legal and supervisory framework
  Amendments to Luxembourg’s 2004 AML/CFT Law (Laws of 25 March 2020) brought VASPs within the AML/CFT perimeter and made the CSSF the AML/CFT supervisor for VASPs. Entities established in or offering services in Luxembourg must register with the CSSF and comply with AML obligations.
• Obligations for VASPs
  Firms must perform risk assessments; apply customer due diligence (CDD) and enhanced due diligence (EDD) where appropriate; maintain transaction monitoring tools and recordkeeping; report STRs promptly to the CRF; and implement internal governance and training. Firms should also apply the FATF‑aligned “travel rule” principles by ensuring adequate originator/beneficiary information travels with transfers.
• Supervisory actions
  The CSSF has issued multiple public warnings on virtual assets and entities that falsely claim Luxembourg connections, and it has created a dedicated VASP registration process. The CSSF can inspect, supervise and, where necessary, sanction VASPs for AML/CFT breaches.
• Financial intelligence and operational readiness
  The CRF has received large numbers of VA‑related STRs, has built specific analytic capacity (blockchain tracing and strategic analysis), cooperates internationally, and has operational experience freezing assets when actionable leads exist. Law enforcement and prosecution teams (“Service de Police Judiciaire” (SPJ) and public prosecutors) have also developed VA‑specific capabilities.

Red‑flag indicators and operational guidance

The Luxembourg assessment supplies over forty red‑flag indicators (jointly developed with the CRF) that firms should consider when designing transaction monitoring and STR workflows.

These include patterns such as:
🚩 large flows to or from darknet‑linked addresses;
🚩 rapid exchange of fiat to VA and out again with minimal economic rationale;
🚩 use of mixers or repeated withdrawals to many addresses;
🚩 forged onboarding documents;
🚩 accounts used as collectors; and
🚩 transactions involving sanctioned clusters or known high‑risk actors.

The FATF’s public red‑flag indicators (September 2020) are also referenced.

Remaining gaps and priorities for improvement

Because registration of VASPs had only just been introduced and no Luxembourg VASP registrations were final by the assessment date, the authors treat this as a preliminary sectoral analysis and identify areas for further enhancement:

• Gain a fuller picture of the domestic VASP footprint once registrations are complete so residual‑risk assessments can be done.
• Strengthen private‑sector readiness: firms need appropriate analytics, documented risk assessments, robust KYC/EDD, travel‑rule compliance, and effective transaction monitoring tuned to VA patterns.
• Continue building supervisory capacity: the CSSF needs the operational experience that comes from supervising live registrants, including on‑site work and examinations focused on AML controls and technology.
• Maintain active FIU–private sector engagement: good STR quality depends on clear guidance and timely feedback loops between VASPs and the CRF.
• Enhance international cooperation: given the cross‑border flows and the international base of many VASPs, timely cooperation and information exchange remain essential.

Implications for compliance officers and investigators

✅ Prioritise risk‑based KYC and EDD that incorporate VA types
Treat funds originating in or passing through pseudo‑anonymous and anonymous VAs as higher risk. Where customers transact in privacy coins or use mixers, escalate and require stronger evidence on source and purpose.
✅ Implement VA‑aware transaction monitoring
Use blockchain‑analytics tools that can flag darknet clusters, mixer usage, sanctioned addresses and layering patterns, and embed these signals into alert rules and case management workflows.
✅ Build STRs with rich blockchain context
When reporting to the FIU, include VA addresses, transaction hashes, timelines and the chain‑analysis findings – that materially improves CRF triage and operational response.
✅ Expect the travel‑rule trajectory to evolve
Design onboarding and payment‑rail integrations so originator/beneficiary information can be attached to transfers in a standards‑aware way.
✅ Prepare to respond operationally
Have playbooks for freezing accounts, preserving chain evidence, and cooperating with law enforcement – especially where cross‑border asset recovery will be needed.

Concluding perspective

Luxembourg’s VASP vertical risk assessment lays out a reasoned, conservative approach: it identifies high‑risk VA types and VASP activities, documents existing mitigations, and clarifies how the country will proceed as supervised entities register and the market picture becomes clearer. For compliance teams and investigators, the practical focus is straightforward – treat anonymity and liquidity as the core drivers of VA risk, integrate blockchain analytics into CDD and monitoring, and strengthen collaboration with the FIU and supervisor. The assessment is a useful, jurisdiction‑level example of translating FATF guidance into concrete priorities – and it underlines that the VA ecosystem will remain a dynamic area requiring sustained attention from regulators, firms and law enforcement.

Dive deeper

• CSSF ¦ ML/FT vertical risk assessment: virtual asset service providers, December 2020 ¦ Link