CSSF ¦ Counter Proliferation Financing Thematic Review

Counter-Proliferation Financing: What Luxembourg’s IFMs Are Doing – and Where Gaps Remain

The Luxembourg supervisory authority (CSSF) recently completed a thematic review focused on counter-proliferation financing controls across five Luxembourg-based investment fund managers (IFMs). The review targeted the specific risk that fund investments might be used to raise, move or make available economic resources that contribute to the proliferation of weapons of mass destruction (WMD). The CSSF examined exposure at asset level with emphasis on dual-use goods (DUGs) and investments in vessels, shipping and other transportation means. The assessment considered risks linked to North Korea, Iran and non-country-specific sanctions regimes and was carried out in the context of FATF’s enhanced expectations on proliferation financing risk assessment and mitigation, together with Luxembourg’s Law of 19 December 2020 implementing restrictive financial measures.

Why this matters for fund managers

FATF defines proliferation financing as the provision of funds or other economic resources for purposes of WMD proliferation, including means of delivery and related materials such as dual-use technologies. Since 2020, FATF Recommendations have required both states and private sector entities to identify and address proliferation financing risks in a risk-based manner and to implement targeted financial sanctions under UN Security Council resolutions. Luxembourg’s national law gives firms specific obligations to apply restrictive measures – including freezing funds and assets – and establishes reporting lines through the Ministry of Finance and the CSSF. In addition, the Luxembourg criminal code now includes an offense related to failure to comply with restrictive financial measures, increasing the legal and reputational stakes for non-compliance.

Bastian Schwind-Wagner _Follow

"The CSSF review highlights growing supervisory focus on proliferation financing risks within the fund sector, especially for dual-use goods and maritime investments. Luxembourg IFMs are beginning to build tailored controls, but implementation varies and requires further strengthening to meet evolving FATF expectations and national legal requirements.

Robust, documented risk assessments and asset-level due diligence are essential to reduce exposure and demonstrate compliance with targeted financial sanctions. Continued training, enhanced screening (including adverse media and jurisdictional checks), and active supervisory engagement will help IFMs keep pace with increasingly sophisticated sanctions evasion and proliferation-financing schemes."

What the CSSF found: positive practices

The IFMs reviewed showed awareness of proliferation financing and had started to integrate relevant measures into their compliance frameworks. Notable practices observed by the CSSF included explicit treatment of proliferation financing in AML/CFT risk assessments, policies and procedures; the integration of geographic indicators relevant to proliferation into country risk lists; and the inclusion of proliferation topics and targeted financial sanctions (TFS) in annual compliance training. Several firms performed screening of parties against EU and UN sanctions lists and adverse media, and some extended screening to U.S. OFAC lists as a best-practice measure even though Luxembourg law only requires screening against EU/UN and national lists (the latter of which currently has no entries).

Specific asset-level controls were highlighted for higher-risk exposures. For investments involving vessels and shipping, IFMs performed pre-acquisition screening against TFS lists, validated destination and shipping routes, and monitored vessel movements through AIS tracking. For assets with potential exposure to dual-use goods, effective practices included maintaining an asset register, conducting asset-level risk assessments, verifying the underlying client and ultimate beneficial owners, establishing jurisdictional risk ratings, and performing comprehensive sanctions and adverse-media screenings across sellers, buyers and UBOs. Several firms also sought to ensure controls aligned with EU Regulation 2021/821 governing trade and transfer of dual-use goods.

Where controls are still maturing

Although the sampled IFMs had taken meaningful steps, the CSSF concluded that their measures were still evolving. The Luxembourg fund industry’s overall proliferation financing risk is assessed as low, and the CSSF’s review reflected that state: firms demonstrated awareness and initial implementation, but controls were not uniformly advanced or consistently embedded across all processes and asset types. The regulator will continue public-private dialogue and coordination with other authorities to lift market-wide standards and provide more guidance where needed.

Practical implications for IFMs

IFMs should treat proliferation financing as a distinct risk stream within AML/CFT frameworks and ensure it receives proportionate governance, resources and testing. This requires documenting the firm’s exposure in risk assessments, reflecting proliferation indicators in country- and asset-level risk matrices, and embedding TFS screening and incident reporting into operational processes. For investments in logistics and maritime assets, pre-deal due diligence on vessel ownership, flagging and routes plus post-acquisition AIS monitoring provide practical mitigants. For assets tied to dual-use technologies, asset registers, EU dual-use compliance checks, enhanced client and UBO verification, jurisdictional risk ratings and broad sanctions screening (including adverse media and, where appropriate, OFAC lists) were all identified as effective measures.

Regulatory guidance and next steps

The CSSF emphasized FATF’s 2021 Guidance on Proliferation Financing Risk Assessment and Mitigation and drew attention to FATF’s June 2025 report on complex proliferation financing and sanctions evasion schemes. Luxembourg’s Law of 19 December 2020 establishes specific TFS obligations, reporting channels and supervisory powers that IFMs must integrate into their compliance frameworks. The CSSF also reminded supervised entities that the Law of 20 July 2022 criminalized laundering proceeds linked to breaches of restrictive financial measures, reinforcing the need for robust controls.

Conclusion

The CSSF’s thematic review demonstrates that Luxembourg IFMs are generally aware of proliferation financing risks and are taking steps to respond. Good practices are emerging – particularly in how firms approach vessel investments and dual-use exposures – but controls remain a work in progress. Given evolving FATF expectations and heightened sanctions complexity, IFMs should continue to mature their frameworks: incorporate proliferation-specific risk assessments into governance, broaden and deepen TFS screening and sanctions due diligence, document asset-level controls for dual-use and shipping exposures, and ensure staff are trained and incident reporting channels are clear. Continued supervisory engagement and cross-border coordination will be essential as proliferation financing schemes grow more sophisticated and sanctions evasion techniques evolve.

Dive deeper

• CSSF ¦ Counter Proliferation Financing Thematic Review ¦ Link
• CSSF ¦ Law of 20 July 2022 ¦ Link
• FATF ¦ Guidance on Proliferation Financing Risk Assessment and Mitigation ¦ Link
• FATF ¦ FATF Report highlights major gaps in global response to Proliferation Financing and Sanctions Evasion ¦ Link