Luxembourg’s financial supervisor CSSF has concluded that investment fund managers are increasingly aware of the risks associated with the financing of weapons of mass destruction (WMD’s), yet many of their internal safeguards remain underdeveloped.
The overall proliferation financing risk identified for the Luxembourg fund industry is “estimated to be low,” said CSSF.
The findings follow a thematic review initiated in 2024 that examined how five Luxembourg-based investment fund managers assess and manage exposure to proliferation-financing risks. The review, published 17 November, placed particular focus on investments tied to dual-use goods—those with both civilian and military applications—and on assets such as vessels, shipping and transport-related infrastructure.
This review was prompted by the Financial Action Task Force’s updated recommendations, which since 2020 have required financial institutions globally to assess and mitigate the risk of breaches or evasions of sanctions related to the financing of weapons of mass destruction.
FATF’s mandate includes the enforcement of targeted financial sanctions regimes tied to North Korea, Iran, and other entities. In response, the CSSF sought to establish how well the Luxembourg fund industry has internalised these expectations, particularly within their risk frameworks and compliance controls.
Maturing frameworks
While the CSSF concluded that the overall proliferation-financing risk in the Luxembourg fund sector is low, it found that IFMs’ control frameworks are still maturing. Most firms surveyed have begun to incorporate proliferation-financing risks into their risk assessments and internal policies, though not always in a consistent or comprehensive manner.
The regulator found that some managers had adopted more advanced practices than others, including the inclusion of specific proliferation-risk sections in ant-money laundering frameworks, consideration of jurisdictional risk using international indicators such as the ‘Peddling Peril Index’, and incorporation of proliferation-related scenarios into annual compliance training programs.
The Peddling Peril Index is a ranking system that assesses the effectiveness of countries in implementing strategic export controls to prevent the spread of weapons of mass destruction.
Screening vessel-related investments
At the level of transactions and asset-level due diligence, the CSSF observed that some fund managers have begun screening vessel-related investments against UN and EU sanctions lists prior to acquisition. These screenings sometimes extend to monitoring shipping routes using maritime tracking systems and evaluating the jurisdictions and ultimate beneficial owners of counterparties. While Luxembourg law does not require screening against U.S. Office of Foreign Assets Control (OFAC) lists, some firms have voluntarily done so, a practice the CSSF describes as a sign of industry leadership.
The CSSF’s findings come as European regulators increasingly tighten their expectations around proliferation-financing risk management. Across the EU, the 2024 AML Regulation now explicitly includes proliferation-financing under the scope of required institutional risk assessments.