ML/TF Sub-sector Risk

Assessment

COLLECTIVE INVESTMENT

SECTOR (UPDATE 2025)

ML/TF Sub-sector Risk Assessment

COLLECTIVE INVESTMENT SECTOR (UPDATE 2025)

TABLE OF CONTENTS

1.

2.

3.

4.

Foreword................................................................................................................... 3

Caveats and reminders................................................................................................ 4

Purpose and scope of the document.............................................................................. 5

Methodology .............................................................................................................. 6

4.1. Stakeholders & process ............................................................................................ 6

4.2. Scope and taxonomy................................................................................................ 6

5.

Evolution of the Luxembourg CIS landscape................................................................... 7

5.1. General overview – IFMs & products........................................................................... 7

5.2. Supervision novelties since the 2022 SSRA ................................................................. 7

6.

ML risk assessment evolution since 2022 SSRA .............................................................. 8

6.1. Evolution of Money Laundering threats ....................................................................... 8

6.2. ML inherent risk evolution......................................................................................... 8

6.2.1. UCITS ManCos................................................................................................... 8

6.2.2. AIFMs ............................................................................................................... 9

6.3. Mitigating factors and residual ML risk assessment..................................................... 10

6.3.1. UCITS ManCos................................................................................................. 10

6.3.2. AIFMs ............................................................................................................. 11

6.4. Red flags of ML in the CIS....................................................................................... 12

7.

TF risk assessment in the Luxembourg CIS.................................................................. 14

7.1. Introduction.......................................................................................................... 14

7.2. TF threats in the Luxembourg CIS............................................................................ 14

7.3. TF vulnerabilities in the Luxembourg CIS .................................................................. 15

7.4. Specific work performed between 2021-2024 by the CSSF on TF in the CIS .................. 15

7.4.1. Project Alpha ................................................................................................... 15

7.4.2. Project Bravo................................................................................................... 16

7.4.3. Project Charlie ................................................................................................. 16

7.4.4. Project Delta (financial intermediaries)................................................................ 17

7.4.5. Project Echo (Assets)........................................................................................ 17

7.5. Red Flags of TF in the CIS....................................................................................... 18

8.

Concluding remarks .................................................................................................. 19

8.1. Anti-money laundering analysis ............................................................................... 19

8.2. Counter terrorism financing analysis......................................................................... 19

9.

Way forward ............................................................................................................ 20

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their

AML/CFT

efforts,

ensuring

that

Luxembourg remains a robust and secure hub

for the thriving CIS.

1. Foreword

This update of the Sub-sector Risk

Assessment (SSRA) – Collective Investment

Sector (CIS), following the 2020 and 2022

reports, highlights the continued success of

the efforts made by the private and public

sectors in mitigating the risks of money

laundering and terrorist financing (ML/TF)

within the CIS.

******************, Director, CSSF

We encourage readers to consider this update

alongside previous reports, as it does not

repeat general messages already covered, but

instead focuses on recent developments,

bringing attention to emerging ML/TF threats

and vulnerabilities that are increasingly

relevant to Luxembourg's fund industry.

This risk assessment serves as a valuable tool

for all stakeholders, offering deeper insights

into the ML/TF risks specific to the CIS and

outlining effective measures to mitigate them.

Supervised entities are encouraged to use this

assessment to enhance their understanding of

these risks and implement proportionate,

effective controls. With a new presentation

format designed for ease of use, the SSRA

aims to guide professionals in adopting best

practices, addressing common supervisory

findings,

and

implementing

targeted

recommendations. The CSSF will continue to

monitor adherence to these recommendations

through its supervisory activities.

Following the adoption of the 4th Mutual

Evaluation Report of Luxembourg by the

Financial Action Task Force (FATF), I would

like to extend my sincere thanks to all those

who contributed to this exercise, especially

the members of the Expert Working Group on

AML with the private sector (which was

transformed into a Public-Private Partnership

in 2024). This enhanced SSRA should

empower financial actors to further strengthen

of the offsite and onsite supervisory

measures performed by the CSSF

case officers during the year.

2. Caveats and reminders

Results shown in this report relate to a

snapshot in time and are performed through

computation at cluster level. Consequently,

within the same cluster, entities may have

different scorings.

•

The scoring also takes into account

triggers, such as adverse media or

presence

of

politically

exposed

persons (PEPs) in the structure of the

entity.

The reader is furthermore reminded that the

assessments and outcomes presented in the

2025 SSRA, along other risk assessments,

shall be embedded by supervised entities in

their ML/TF risk assessments pursuant to

Article 2-2 of the Law of 12 November 2004

on the fight against money laundering and

terrorist financing, as amended (AML Law).

The CSSF draws the attention of its supervised

entities to the fact that on top of regular risk

criteria, specific trigger events must be taken

into consideration. For instance, especially

with regard to financial sanctions and

embargoes, geopolitical crisis must be taken

into consideration in the ML/TF risk

assessment of supervised entities depending

on

their

exposure

to

involved

markets/entities.

The CSSF has been contacted multiple times

by entities seeking information to understand

their AML/CFT risk scoring presented on eDesk

in the General Information section of the

AML/CFT external report (Circular CSSF

21/788). The CSSF therefore provides the

following clarifications:

•

The risk scoring that is mentioned on

the eDesk platform for the AML/CFT

external report is a residual risk

scoring, as determined by the CSSF.

It is calculated using the numerous

data points relevant for AML/CFT

purposes that have been provided by

the entity to the CSSF in reports or

survey, mostly the yearly Financial

Crime Survey. This automatic scoring

is then enriched with the conclusions

•

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stakeholders of the investment sector, it

focuses on Investment Fund Managers

(IFMs), considering their specific AML/CFT

roles and responsibilities.

3. Purpose and scope of the

document

In January 2020, the CSSF published its initial

SSRA on ML/TF risks faced by the CIS and

updated it in 2022.

The present document is designed for public

dissemination⁴and fulfils the following three

main objectives:

The conclusions drawn in these assessments

were based on quantitative data collected

through different initiatives, in particular the

annual Financial Crime Survey, and qualitative

assessments by the CSSF as part of its onsite

and offsite AML/CFT supervision.

•

Promote exchanges between the

public and private sectors;

Improve

understanding of ML/TF risks; and

Strengthen CSSF AML/CFT

supervision in the CIS.

the

CIS

participants'

In line with its AML/CFT supervisory strategy,

the CSSF hereby updates its 2022 CIS ML/TF

risk assessment using quantitative and

qualitative data related to the years 2022 and

2023.

In

the

European

Supra-National

Risk

Assessment published in October 2022¹, the

retail and institutional investment sector’s

vulnerabilities have been assessed as

Significant/Moderately

Significant

in

relation to the money laundering (ML) risk and

the threats in relation to terrorist financing

(TF) as Non-Relevant². It is however

important to note that this evaluation relates

to the whole EU and not just Luxembourg.

In its “Opinion on money laundering and

terrorist financing risks affecting the EU’s

financial sector” published in July 2023, the

European Banking Authority (EBA) provided

an overview on the ML/TF risks of the CIS

assessed by the EU National Competent

Authorities (NCAs). The majority of NCAs

concluded to a Moderately Significant

inherent and residual risks for the Investment

Fund Managers³.

While the scope of this assessment

encompasses all Luxembourg regulated

1

3

https://www.cssf.lu/wp-

content/uploads/EN_Supranational_report_-

2022_risk_assessment_MLTF.pdf

https://www.eba.europa.eu/sites/default/files/doc

ument_library/Publications/Opinions/2023/105833

5/EBA%20Op%202023%2008%20Opinion%20on

%20MLTF%20risks%20EBA%20REP%202023%20

21.pdf

2

https://www.cssf.lu/wp-

content/uploads/EN_Annex_to_Supranational_repo

rt_-2022_risk_assessment_MLTF.pdf

4

The figures provided in this document are as of 31

December 2024.

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Since 2023, new members have joined the

Expert Working Group on AML, namely the

Luxembourg Institute of Administrators (ILA)

and the Luxembourg Association for Risk

Management (ALRiM).

4. Methodology

The present risk assessment methodology has

been modified from the previous ones,

following

discussions

with

numerous

stakeholders including at the level of AML/CFT

Colleges.

Moreover, to simplify the understanding of the

risks faced by supervised entities of the CIS

and, in particular, the differences between ML

and TF, the structure of the report has also

been modified.

4.2.

Scope and

taxonomy

For the sake of clarity and consistency with the

National Risk Assessment (NRA), the risk

scoring categories have been updated to align

with the NRA's structure.

This translates into the design and

computation of new risk and mitigation

indicators considering the new data points

available notably pursuant to the AML/CFT

external reports (Circular CSSF 21/788).

Therefore, the buckets used in this report are:

•

Very High;

High;

Medium;

Low; and

Very Low.

Regarding the structure of this report, two

separate sections have been created to

distinguish between ML and TF risks.

Furthermore, to harmonise with the practices

of other EU Member States, the taxonomy has

been simplified to distinguish between two key

categories: UCITS Management Companies

(UCITS ManCos) and Alternative Investment

Fund Managers (AIFMs). This revision

4.1.

Stakeholders &

process

For comparability purposes, the stakeholders

and the process to update the SSRA remained

in line with the 2022 exercise. The report was

prepared by the CSSF and discussed with the

Public-Private Partnership on AML, which is

provides

for

greater

consistency

and

transparency to risk assessments across the

board.

composed

of

representatives

of

the

Association of the Luxembourg Fund Industry

(ALFI), the Luxembourg Private Equity and

Venture Capital Association (LPEA), the Real

Estate Association of Luxembourg (LuxReal),

the

Compliance Officers (ALCO), the Institut des

Réviseurs d’Entreprises (IRE), the

Association

Luxembourgeoise

des

Luxembourg Bar (Ordre des Avocats du

Barreau de Luxembourg), the Luxembourg

Institute of Internal Auditors (IIA Luxembourg

Chapter), as well as the ABBL Depositary

Banking cluster, the Administration de

l’Enregistrement, des Domaines et de la TVA

(AED) and the Financial Intelligence Unit (FIU-

LUX).

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Furthermore, the CSSF introduced a new

template for the Summary Report of the

Responsable du Contrôle (SRRC) in Circular

CSSF 24/854 of 29 February 2024. CSSF

supervised funds, which have appointed a

foreign IFM, have the obligation, since 31

5. Evolution of the

Luxembourg CIS

landscape

December

2023,

to

provide

the

5.1.

General overview –

aforementioned report on eDesk. The CSSF

will use the content of this report to identify

potential shortcomings in the design and the

effectiveness of the AML/CFT framework at

the level of the product with a focus on the

oversight of outsourced AML/CFT activities.

IFMs & products

Since the publication of the 2022 SSRA, the

landscape of Luxembourg CIS supervised by

the CSSF has not significantly changed. It is

dominated by UCITS in terms of assets under

management (AuM), but it is evenly split

between UCITS and alternative investment

funds (AIFs) in terms of number of structures.

In parallel, the CSSF strengthened its

cooperation with the NCAs of these IFMs via

bilateral exchanges of information on a bi-

annual basis.

Luxembourg continues to offer a wide range

of undertakings for collective investment

(UCIs). These products take a variety of

forms, depending on their category, regime

and structure, as detailed in the initial SSRA.

The type of product offering for regulated UCIs

has not significantly changed since the initial

SSRA.

CSSF

supervised

UCIs

31/13/2021

31/12/2024

TNA

€ 5,859 billion € 5,821 billion

3,492 3,143

Number

5.2.

Supervision

novelties since the 2022

SSRA

A number of Luxembourg investments funds

have elected to appoint a foreign IFM in the

European Union. Considering that the CSSF

has no authority over the IFM located abroad,

the CSSF has strengthened its AML/CFT

supervision at the level of these investment

funds, notably via the introduction of a

mandatory AML/CFT section in the Separate

Report of the Statutory Auditor as per Circular

CSSF 21/790.

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This holistic approach allows the CSSF to

comprehensively evaluate the risk landscape

in the CIS.

6. ML risk assessment

evolution since 2022

SSRA

6.2.1.

UCITS ManCos

6.1.

Evolution of Money

Laundering threats

The SSRA published in 2022 provided an

overview of emerging ML threats for the

Luxembourg CIS.

Geographical Risks

The initiators of UCITS are primarily based in

Germany, Switzerland, and Luxembourg,

presenting a lower inherent risk of ML

regarding the origin of the products managed

by UCITS ManCos. Luxembourg is known for

the cross-border distribution of UCIs,

particularly UCITS, which are marketed

globally. Based on CSSF data, the main

countries for UCITS distribution, in terms of

AuM, are Luxembourg, Germany, the UK and

France, presenting a lower ML risk.

Purchase of businesses by

Cybercrime

organised criminal groups

Abuse of Crypto Assets

Geopolitical crisis

The CSSF has not observed additional threats

since the publication of the latest SSRA.

UCITS ManCos typically have branches and

subsidiaries outside Luxembourg, with most of

these being located within the European Union

and used mainly for marketing activities.

6.2.

ML inherent risk

evolution

This section presents the results of the

inherent risk assessment conducted by the

CSSF concerning: UCITS ManCos and AIFMs.

Product/Service/Transaction Risks

The assessment is based on data reported by

these supervised entities to the CSSF,

ensuring a detailed understanding of the risks

involved.

The assets held by UCITS carry a Low inherent

risk of ML, as they largely consist of securities

admitted to trading on regulated markets and

money market instruments. These assets

inherently have high levels of transparency,

reducing their exposure to financial crime

risks, including ML.

The evaluation incorporates several critical

risk criteria, including (1) the market

structure, which assesses how the sector's

organisation may impact exposure to risk; (2)

geographical risk, focusing on regions where

The number of UCITS ManCos offering

Discretionary Portfolio Management services

has remained stable since the last SSRA.

Additionally, there has been a decrease in the

provision of Trust and Corporate Service

Providers (TCSPs) services by UCITS ManCos

to the funds they manage.

these

entities

operate

(investors

/

investments); (3) customer risk, analysing

the profiles of the investors involved; (4) the

nature of products, services, and transactions

offered by these entities; and (5) the channels

of delivery, which include the methods used

to distribute and manage financial products.

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AIFs typically invest for the long term, which

may limit certain ML or TF typologies that

require quick exits to access laundered funds.

However, AIF investments are diverse and

often not admitted to trading on a regulated

market, including assets such as Private Debt,

Private Equity, Real Estate, Real Assets, and

Crypto Assets. These investments inherently

present a higher ML risk compared to

securities admitted to trading on regulated

markets.

Customer Risks

The customers of UCITS are typically retail or

institutional investors.

Distribution Risks

Luxembourg is characterised by its global

cross-border distribution of UCITS, which is

highly intermediated through fund platforms

with remote subscription of units and shares.

These platforms are primarily based in the

European Union and act as gatekeepers for

AML controls on underlying investors.

Customer Risks

The investors in AIFs often exhibit higher ML

risk characteristics than those in UCITS. AIF

investors often participate through legal

entities, which can be structured in ways that

may qualify as complex. The CSSF has

furthermore observed that most investors

identified as PEPs are more frequently found

in AIFs rather than UCITS, further increasing

the inherent risk profile.

Considering the above-mentioned risk factors

updated with data as of 31 December 2024,

the CSSF concludes that UCITS ManCos

present a Medium inherent risk of ML.

6.2.2.

AIFMs

Geographical Risks

The initiators of AIFs are primarily located in

Germany, Switzerland, and Luxembourg,

which are considered lower-risk jurisdictions

in terms of ML for the origin of the products

managed by AIFMs.

Distribution Risks

AIF distribution is more diverse compared to

UCITS. While some AIFs are distributed

through intermediaries, similar to UCITS

products, there are other cases where AIFMs

engage with investors during roadshows,

adding a more direct approach to distribution.

However, some AIFs include assets that are

not admitted to trading on a regulated market

in countries that present a higher inherent risk

of ML.

Considering these risk factors and the updated

data as of 31 December 2024, the CSSF

concludes that AIFMs present a Medium

inherent risk of ML. Nevertheless, AIFMs are

more exposed to ML risks than UCITS ManCos

in particular due to the assets they manage.

Product/Service/Transaction Risks

AIFMs manage

a

variety of AIFs in

Luxembourg, such as SIFs and SICARs. AIFs

are generally closed-ended and based on

investor commitments where funds are called

by AIFMs before being allocated to specific

investments.

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6.3.

Mitigating factors

AML due diligence

and residual ML risk

assessment

AML due diligence conducted by UCITS

ManCos on their fund investors, who are often

financial

intermediaries,

is

frequently

This section evaluates the risk mitigating

factors, combining both supervisory measures

and entity-level controls, and determines the

resulting residual risk for UCITS ManCos and

AIFMs, specifically from an AML perspective.

delegated to Registrar and Transfer Agents

(RTAs). The CSSF has not detected significant

weaknesses with respect to legal compliance

with requirements, particularly in cases

requiring enhanced due diligence on the

relationship between the intermediary and the

underlying investors. It was noted that UCITS

ManCos typically engage with large financial

institutions acting as RTAs.

6.3.1.

UCITS ManCos

For UCITS ManCos, the implementation of

AML controls had already achieved a high level

of maturity in the last SSRA. The CSSF

UCITS ManCos are also responsible for the

distribution channels of their funds. The

distributors' due diligence processes reviewed

by the CSSF's offsite supervision team

uncovered only a few issues related to the

formalisation of such due diligence, primarily

in long-standing relationships. This was

corroborated by sample testing performed by

statutory auditors in the AML/CFT external

reports.

observed

minor improvements in the

application of AML controls across the

spectrum of professional obligations.

Additionally, the number of letters of

observation issued by the offsite inspection

team declined between 2021 and 2024.

The CSSF also identified some instances

where the origin of funds was insufficiently

formalised for UCITS ManCos offering

Discretionary Portfolio Management services.

Even though such occurrences were rare, the

CSSF emphasises that establishing the origin

of funds is a vital component of customer due

diligence.

Risk-based Approach and Risk

Appetite

Risk Assessment and the Risk-based Approach

are implemented across UCITS ManCos.

While UCITS ManCos receive Key Performance

Indicators (KPIs) from their delegates, CSSF

supervision revealed that not all of them make

effective use of these KPIs. CSSF inspections

revealed that the risk appetite of UCITS

ManCos is generally Low and has been

properly formalised.

Ongoing Monitoring

Following its review of the investor due

diligence process on AML service providers by

UCITS ManCos, the CSSF noted that some

KPIs related to name screening and

transaction monitoring were outside peer

ranges for certain UCITS ManCos, based on a

peer comparison. However, the CSSF notes

that the overall framework remains robust.

The majority of UCITS ManCos have self-

assessed their ML residual risk with a variance

of no more than one category compared to the

CSSF's evaluation of the CIS, demonstrating a

strong understanding of their risks and the

effectiveness of their mitigation measures.

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While the number of letters of observation

issued by the offsite supervision team

decreased between 2021 and 2024, it remains

higher than for UCITS ManCos.

Procedures and Trainings

All UCITS ManCos have reported the

implementation

of

up-to-date

AML

procedures, a fact confirmed by both CSSF

inspections and statutory reviews in the

AML/CFT external reports. UCITS ManCos also

indicated that they conduct annual AML

training and the CSSF confirmed this during its

inspections.

Risk-based Approach and Risk

Appetite

The CSSF observed that the risk appetite for

AIFMs was typically defined and that the risk

assessments were performed by taking a

granular approach, in particular due to the

higher exposure to ML risks associated with

the AIFMs' investment strategies.

However, the offsite supervision team

observed a growing trend of UCITS ManCos

opting for generic e-learning courses from

third-party service providers. While these

tools are useful, the CSSF encourages UCITS

ManCos to supplement them with theoretical

and practical case studies reflecting the UCITS

Manco’s business and internal processes. This

ensures the training is tailored to the entity's

specific risk appetite and procedures,

enhancing the overall effectiveness of staff

preparedness.

However, with respect to registered AIFMs,

these risk assessments often lacked formalism

and depth. To address this, the CSSF

introduced AML orientation meetings with

newly registered AIFMs to emphasise the

importance of formalising risk assessments

and

risk

appetite

statements.

Since

implementing this measure, the CSSF noticed

a perceptible improvement in the formalism

and quality of risk assessments.

Residual Risk Assessment

After evaluating both inherent risk and

mitigation factors, the CSSF concludes that

UCITS ManCos present a residual risk level of

Medium. Indeed, following the application of

mitigation measures, the residual risk scoring

of UCITS ManCos decreases which reflects the

AML due diligence

In addition to performing AML due diligence on

investors, which is similar in design and

effectiveness to UCITS ManCos, AIFMs are

exposed to ML risks on the asset side as well.

Given the higher ML risks posed by certain

investment strategies, the CSSF placed

particular emphasis on AML due diligence

concerning assets. The CSSF found that AIFMs

had implemented appropriate due diligence

measures for their portfolios, as confirmed by

AML/CFT external reports from statutory

auditors.

quality

of

the

mitigation

measures

implemented within this group and highlights

the effectiveness of their risk management

efforts.

6.3.2.

AIFMs

AIFMs continue to be closely supervised by the

CSSF due to the additional risks posed by the

asset side. In line with this, the CSSF has

conducted various sample tests on assets to

evaluate the existence and adequacy of ML/TF

risk assessments and related due diligence

processes.

Ongoing Monitoring

The CSSF noted that some AIFMs using

medium to small service providers relied on

their name screening and transaction

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monitoring systems. The CSSF reminded

AIFMs that oversight of AML service providers

includes reviewing the adequacy of these

systems.

AIFMs present a residual risk level of

Medium, similarly to UCITS ManCos.

Following the application of mitigation

measures, the residual risk score of AIFMs

decreases albeit in a more nuanced trend.

Despite both UCITS ManCos and AIFMs being

in the same risk bucket, AIFMs presents

additional ML risk factors notably in relation to

the assets that are not admitted to trading on

a regulated market they manage. Additionally,

based on the outcome of the CSSF’s

Furthermore, in several cases, where AIFMs

delegated AML controls to sister or parent

companies, due diligences were insufficient

because group AML

procedures were

presumed to be in place. The CSSF reiterated

that the existence of group AML procedures

does not guarantee their effectiveness, and

proper oversight is still required. Affected

AIFMs have since implemented appropriate

remediation plans.

supervision, the

quality

of

mitigation

measures of AIFMs remains generally less

effective than those of their UCITS

counterparts.

Procedures and Training

6.4.

Red flags of ML in

The CSSF did not identify significant issues

with the AML procedures of AIFMs but

reminded them that these procedures should

be updated if there is a change in investment

strategies.

the CIS

•

Unusual Transaction Patterns:

Investors who frequently make large,

unexplained transactions, or whose

investment activities show a pattern

inconsistent with their profile or

financial situation, can be a red flag.

For example, an investor with a

moderate income suddenly making

large-scale investments without a

clear source of funding.

Unlike UCITS ManCos, some AIFMs conduct

AML trainings less frequently, often every two

years or less frequently. After interviewing

these entities, the CSSF understood that this

approach was taken because these AIFMs

managed a limited number of closed-ended

funds with long-term investments. However,

the CSSF still recommends that AIFMs

perform annual AML training to stay updated,

amongst others, on new ML typologies.

•

Overuse

of

Wire

Transfers:

Additionally, similar to UCITS ManCos, the

CSSF noted an increasing trend of AIFMs using

generic third-party e-learning platforms for

AML training. The CSSF encourages AIFMs to

supplement them with theoretical and

practical case studies reflecting the AIFMs’

business and internal processes as well as

their specific risks, especially those related to

their investment strategies.

Frequent incoming or outgoing wire

transfers, especially from or to

countries known for higher risks of ML

or TF, without clear business rationale

or economic activity.

•

Use of Intermediaries to Obscure

Identity: Investments made through

intermediaries,

companies set

trusts,

offshore

up

as

“shell”

companies that serve to obscure the

identity of the true beneficial owner

can indicate an attempt to launder

money.

Residual Risk Assessment

After assessing both, inherent risk and

mitigation factors, the CSSF concludes that

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•

High-risk Countries: Investments

connected to countries considered

High risk for ML or TF, especially those

•

Rapid Movement of Funds: Quick

turnover of investments, such as rapid

buying and selling of securities

without concern for gain or market

conditions, can be indicative of an

attempt to integrate/reintegrate illicit

funds into the financial system.

without

adequate

anti-money

laundering

or counter-terrorism

financing frameworks.

•

Evasive Behaviour

Regarding

•

Mismatch

Between

Investor

Taxes: Investors who express undue

concern about tax evasion or seek

advice on tax evasion strategies may

be attempting to use the investment

fund to launder money.

Profile and Activity: An investor’s

transactions that are inconsistent with

their known legitimate business or

personal investment behaviour, such

as a retail investor suddenly engaging

in complex derivative transactions

typically reserved for sophisticated

investors.

•

Complex or Unusual Structures:

The use of complex or unusual

structures involving multiple layers of

transactions, companies, or cross-

border activities designed to obscure

ownership, source of funds, or

ultimate beneficiaries.

Reluctance

Information: Investors that are

reluctant to provide complete

information about the purpose of an

investment, the source of

to

Provide

funds/wealth, or the identities of the

beneficial owners.

Adverse Media Reports: Negative

media reports or publicly available

information

suggesting

criminal

activity, corruption, or involvement in

money laundering/circumvention of

targeted financial sanctions (TFS) by

the investor or entities associated with

it.

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assess the residual TF risk in the CIS as

being Low, which is explained by several

factors:

7. TF risk assessment in the

Luxembourg CIS

•

Short-term and transitory cash flow

requirements to move cash from one

7.1.

Introduction

party

to

another

(especially

A dedicated vertical risk assessment on TF has

been published in May 2022⁵. It exclusively

focuses on TF risks in order to deepen the

understanding of its drivers, following the

approach outlined in the FATF TF Risk

Assessment Guidance (2019) for assessing TF

risks in jurisdictions with financial centres and

low domestic terrorism risk⁶, which is suitable

for Luxembourg’s particular situation.

uncommon and unrelated parties) are

less compatible with an industry

generally

medium

focused

on

individual

asset

to long-term

appreciation;

•

Relying on transfer methods outside

of the regulated banking system (e.g.

Hawala, cash couriers) is incompatible

with the custodian’s obligations;

Low value financing requirements do

not match the common higher

minimum subscriptions. The CIS’s

exposure to TF is more relevant for

wealthy terrorism sponsors outside

the EU than for lone actors or small

terrorist cells operating within the EU.

TF encompasses the raising, movement and

use of funds by terrorist actors and is

considered as one of the most important

threats to global security.⁷However, the risk

of terrorist financing in collective investments

is Low. As reported by the FATF, there has

been “relatively little evidence of the securities

industry being used to finance terrorism”⁸.

This

is

particularly

true

for

discretionary management mandates

which typically cater to High-Net-

Worth Individuals; and

Similarly, in the European Supra-National Risk

Assessment published in October 2022⁹, the

retail and institutional investment sector has

been assessed as Low risk in relation to TF.

•

Investment decisions are generally

taken on

a

discretionary basis

meaning that investment decisions

are taken by the professional and not

by the client itself.

The main TF risks for Luxembourg emanate

from the threat that terrorists, terrorist

organisations and their financiers might

exploit the vulnerabilities of certain sectors,

essentially for moving funds.

Indeed, there is limited evidence that the CIS

is misused for TF purposes, as reflected also

by the very low number of TFARs and TFTRs¹⁰

submitted to the CRF (FIU).

7.2.

TF threats in the

Luxembourg CIS

Both the 2020 NRA, as well as the 2022

dedicated vertical risk assessment on TF,

5

https://mj.gouvernement.lu/dam-

⁸FATF, Money Laundering and Terrorist Financing in

the Securities Sector, 2009.

assets/dossiers/blanchiment/tf-vra-2022-en.pdf

6

9

FATF, Terrorist Financing Risk Assessment

https://eur-lex.europa.eu/legal-

Guidance, 2019, paragraph 39.

content/EN/TXT/PDF/?uri=CELEX:52022SC0344

7

FATF, International standards on combating

money laundering and the financing of terrorism

and proliferation – the FATF recommendations,

2012.

10

https://justice.public.lu/dam-

assets/fr/publications/rapport-activites-crf/rapport-

crf-2021-2022.pdf (page 36)

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previous SSRA, as further elaborated in the

following sections.

7.3.

TF vulnerabilities in

the Luxembourg CIS

The objectives of these projects are to ensure

that the risks identified are mitigated. In

particular, regarding the following potential

vulnerabilities of the sector:

Notwithstanding the fact that the threats of TF

are considered Low for the CIS in

Luxembourg,

some

vulnerabilities

are

highlighted and need to be mitigated.

•

Illiquid assets in Luxembourg funds;

Use of financial intermediaries in

Luxembourg funds;

•

The volume of AuM in the Luxembourg

CIS makes it difficult to spot small

transactions that could be linked to

terrorist financing;

•

Sharia funds; and

Non-resident

investors’ base

in

The Luxembourg CIS is partly focused

on illiquid assets such as real estate,

real assets, private equity. When

buying these assets, the funds may

deal with persons acting as terrorist

financiers;

Luxembourg funds.

7.4.1.

Project Alpha

•

As

mentioned

in

international

literature¹¹, Sharia funds, some being

incorporated in Luxembourg, may be

abused by terrorist financiers or by

rogue governments for the benefit of

terrorist organisations;

Objective

Assess the CIS’ exposure to investors with

nexuses to higher risk countries from a TF

perspective.

The

Luxembourg

number

CIS

of

uses

a

significant

financial

intermediaries investing on behalf of

underlying investors. This set-up

commonly used worldwide in the fund

industry may be abused by terrorist

financiers;

Methodology

The CSSF reached out to the 10 largest

registrar and transfer agents (based on the

AuM of the funds to which they provide

Transfer Agency services) and has requested

a list of all investors in investment funds

supervised by the CSSF as of 31 December

2022, along with unique identifiers, their

countries of nationality and residence and the

countries of their subscribing bank accounts.

•

The investors in the Luxembourg CIS

are mostly non-resident.

7.4.

Specific work

performed between

2021-2024 by the CSSF

on TF in the CIS

A list of higher risk countries for terrorist

financing factors was established internally by

the CSSF, by taking into account international

literature, based in particular on countries

identified by reliable and independent sources

as being state sponsors of terrorism or known

to harbor terrorist organisations.

In order to confirm the Low residual risk

scoring for TF in the Luxembourg CIS, the

CSSF has initiated several specific projects

dedicated to CTF since the publication of the

11

https://www.imf.org/external/pubs/ft/wp/2016/wp

1642.pdf

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After identification of the investors as being

residents of, or having a bank account in, a

higher TF risk jurisdiction, the OPC AML Team

requested the holdings of all of them, to also

assess how much AuM they represented.

Outcome

No distribution in Palestine was identified at

the time of the project (November 2023).

No investor national, resident of, or having a

bank account in, Palestine was identified.

Outcome

7.4.3.

Project Charlie

The data provided by the registrar and

transfer agents was mapped against the

above-mentioned list and the CSSF OPC AML

team computed the number of investors who

were residing in or having a bank account in

such countries.

Objective

Assess adequacy of AML/CFT framework of

IFMs managing Sharia funds to specificities

and typologies of Sharia funds and ensure that

proper mitigations are in place to avoid Sharia

funds of being abused by terrorist financiers

or rogue governments for the benefit of

terrorist organisations.

The sample of all investors collected

represented over a third of the investors in

CSSF-supervised Luxembourg funds.

The final calculation revealed that less than

0.05% of the investors in the sample were

residents of, or had a bank account in, a

higher TF risk jurisdiction.

The CSSF conducted onsite inspections at 5

Luxembourg IFMs managing 16 Sharia funds.

The onsite inspections comprised sample

testing and focused on several facets of the

mitigation framework relating to Sharia funds

covering both, procedural and operational,

aspects. As such, the CSSF OPC AML team

checked, amongst others, the exhaustiveness

and formalisation of ML/TF risk assessments

and the coherence of the IFMs’ AML/CFT risk

appetite with the respective AML/CFT risk

scores of the managed Sharia funds. Tests

were also performed on the approval process

for High-risk ML/TF relationships and on the

management information received at Board

and senior management levels with respect to

Sharia funds. CSSF inquiries also focused on

Sharia-specific AML/CFT trainings as well as

on name screening aspects.

7.4.2.

Project Bravo

Objective

Assess the exposure of CSSF supervised funds

to distribution in Palestine following the

Hamas terrorist attacks of 7 October 2023 in

Israel.

In case of identification of distribution in

Palestine, the aim was to identify the investors

and to perform specific due diligence in order

to identify potential red flags of TF.

Methodology

The CSSF analysed the reports made by the

CSSF supervised funds in which the countries

of distribution were indicated.

Outcome

The CSSF did not identify any major

shortcomings. Certain findings of lesser

importance and not relevant from a TF risk

perspective were, however, identified and

appropriate remedial action was taken.

The OPC AML team also used the data

collected as part of Project Alpha to search for

investors located in Palestine.

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7.4.4.

(financial

intermediaries)

Project Delta

7.4.5.

Project Echo

(Assets)

Objective

Assess whether assets held by CSSF

supervised funds may be linked to terrorist

financing.

Assess whether terrorist financiers or

individuals with known ties to terrorist

organisations invest in CSSF supervised funds

or funds managed by Luxembourg IFMs by

investing via financial intermediaries.

Methodology

Through offsite supervision, the CSSF

performed sample testing of name screening

on assets to assess the quality of the related

due diligence files.

Methodology

Between 2021 and 2024 year-ends, the CSSF

has on a risk-based approach and in line with

its supervisory planning, performed 38

supervisory measures related to distribution

oversight, each composed of multiple

samples. This specific type of supervisory

measure consisted of reviewing the types of

measures used by supervised entities to

perform their AML/CFT due diligences on

distributors (e.g. onsite visits, desk-based

reviews of distributors’ AML/CFT policies &

procedures and name screening framework,

sample testing, etc.) and on the formalisation

and validation of the respective due diligence

and oversight reports. On the other hand, this

supervisory measure also focused on

shortcomings identified by supervised entities

as well as on the relevant corrective actions

taken to remediate such shortcomings.

Between 2022 and 2024, a sample of nearly

200 due diligence files on assets was

reviewed. The sample focused primarily on

securities not admitted to trading on a

regulated market.

A particular emphasis was given to assets

located in jurisdictions presenting a higher TF

risk.

Outcome

The main finding of the CSSF in that project

was that in the sample of IFMs and related

funds, almost no assets were located in a

jurisdiction considered having a higher TF risk.

Out of the whole sample, the OPC AML team

only identified a minority of cases (four) where

the due diligence on assets was not

commensurate with the risk attributed to said

assets. Those instances gave rise to

observation letters and the IFMs remediated

those shortcomings.

Outcome

Based on the reviewed sample, the CSSF has

not identified any apparent shortcomings that

would allow terrorist financiers or individuals

with known ties to terrorist organisations to

subscribe units and shares of CSSF supervised

funds or funds managed by Luxembourg IFMs

via financial intermediaries, nor has the CSSF

OPC AML team identified instances where such

subscriptions took place.

The OPC AML team also identified that several

IFMs had delegated the screening and due

diligence on assets to their external portfolio

managers. However, the CSSF noted that the

KPIs provided by those delegates were often

high level and did not provide sufficient details

in particular regarding the results of the name

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screening against TFS lists (which include

some entities related to terrorism). The CSSF

also wishes to remind the fact that TFS

screening is rule-based and not risk-based.

with no apparent legal or economic

purpose, designed to obscure the

origin, destination, or ownership of

funds.

To mitigate the risk of TF on the assets side,

the OPC AML team noted that the entities in

the sample had chosen to have a very Low risk

appetite when it came to TF risks and

•

Anonymity or Use of Pseudonyms:

Attempts to invest or conduct

transactions anonymously, or using

pseudonyms, or other methods that

prevent identification of the true

beneficial owners.

therefore

refrained

from

investing

in

jurisdictions bearing a higher TF risk.

•

Mismatch Between Activity and

Customer Profile: An investor’s

transactions are inconsistent with

their known legitimate business,

personal activities, or risk profile,

especially if funds are directed

towards known or suspected terrorist

entities.

7.5.

Red Flags of TF in

the CIS

•

Transactions linked to High-risk

Jurisdictions:

Investments

or

transactions

involving countries

known to have a High risk of terrorist

activity, or that are subject to

sanctions, embargoes, or other

measures due to terrorism financing

concerns.

•

Frequent Changes in Account

Details: Frequent changes in account

information, such as authorised

signatories or beneficial owners,

without a clear explanation.

•

Contributions in Kind: contributions

in kind which cannot be logically

explained or that are inconsistent with

the investor's profile or business

activities.

Donations to NPOs with Ties to

Terrorism:

Investments

or

transactions that include donations to

NPOs, where there are indications that

the NPOs may be a front for financing

terrorism.

Use of Third Parties Without Clear

Reasons: Use of intermediaries or

third parties to conduct transactions

when it does not seem to be based on

•

Evasive Behaviour: Investors who

a

legitimate

business

purpose,

are evasive or reluctant to provide

especially if these parties are located

in High-risk jurisdictions.

additional

transactions, or who seem to be

attempting to evade reporting

requirements or monitoring.

information

about

•

Rapid Movement of Funds: Quick

movement of funds in and out of

accounts

or

between

different

•

Adverse Media: Negative news

reports that link the investor or

entities involved in the investment to

terrorist activities, organisations, or

individuals known to be associated

with terrorism.

financial institutions without clear

business reasons, especially if these

transactions

jurisdictions.

involve

High-risk

•

Complex or Opaque Financial

Structures: Investments involving

complex structures or transactions

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8. Concluding remarks

8.1.

Anti-money

laundering analysis

The data collected and analysed for the

drafting of this updated report showed that

the professionals of the Luxembourg CIS

continue to adapt and strengthen their AML

controls to mitigate ML everchanging threats.

8.2.

Counter terrorism

financing analysis

Multiple projects performed by the OPC AML

team confirm the Low level of residual TF risk

for the Luxembourg CIS.

Nevertheless, considering the size of the

Luxembourg financial sector at large, both the

CSSF and the supervised entities will need to

continue to monitor this risk in the CIS, to

ensure that it will be adequately mitigated

should it increase.

ML

TF Residual

Residual

risk

UCITS

Medium

Low

ManCos

AIFMs

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9. Way forward

In line with the commitments made in the

SSRA 2020 and the updated SSRA 2022, the

CSSF will continue its proactive approach by:

Promoting

the

understanding

of

AML/CFT obligations and ML/TF risks, as

well as the risks of circumventing TFS.

The CSSF actively supports the fund industry’s

efforts to enhance their comprehension of

AML/CFT obligations and associated risks. To

further develop this, the CSSF will maintain

several ongoing initiatives, such as regular

meetings of Public-Private Partnership.

Additionally, the CSSF will continue to

organise AML/CFT conferences with the

private sector and issue further guidance

where relevant.

Enhancing the effectiveness of AML/CFT

supervision within the CIS.

The CSSF recently provided the sector with a

template for the SRRC on eDesk. This

structured format aims to improve the CSSF’s

ability to analyse the report and identify

weaknesses at both micro and macro levels,

on which the CSSF will provide feedback.

Moreover, the CSSF will continue its active

participation at international level, including

leading several AML/CFT Colleges, as outlined

by the EBA guidelines from December 2019.

The CSSF will also continue to engage in FATF,

IOSCO, and EU AML/CFT forums, and

contribute to workshops focused on the

establishment of AMLA.

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