Luxembourg’s financial watchdogs are stepping up their scrutiny of terrorist financing amid concerns that the Grand Duchy’s status as an international financial hub makes it vulnerable to abuse by illicit actors, in particular from the Middle East and Africa.
Financial supervisor CSSF and CRF, Luxembourg’s financial intelligence unit, recently addressed the banking and asset management industry and outlined a sophisticated picture of the risks posed by terrorist financing in a jurisdiction famed for its global reach.
While Luxembourg’s domestic terrorism threat remains low, the authorities made clear that the country’s financial infrastructure is exposed to terrorist financing risks due to its geographic and financial ties with high-risk jurisdictions. This vulnerability, regulators argued, requires a “calibrated approach” that balances rigorous oversight with the efficiency expected of a global financial centre.
Legal specialists pointed out that certain parts of Luxembourg’s financial system are more at risk than others. Payment institutions, e-money providers, and non-profit organisations face a relatively high risk, said Geoffroy Hermanns, a financial services attorney and partner at Norton Rose Fulbright Luxembourg.
ManCos ‘less at risk’
Management companies, or ManCos, supporting the thousands of investment funds domiciled in Luxembourg are “potentially less at risk”, according to Hermanns, thanks to the Grand Duchy’s tightly regulated environment. The slower cash flows associated with these firms are subject to multiple layers of scrutiny—through the management company itself, the fund administrator, and the custodian.
However, when engaging with specific jurisdictions in the Middle East or Africa, Luxembourg’s ManCos must enhance their due diligence processes. Hermanns highlighted the dangers of broadly categorising these regions, noting that Africa comprises 54 nations and the Middle East 17, each with distinct legal frameworks and varying standards for financial regulations and anti-money laundering (AML) compliance. This diversity, he said, demands a nuanced approach to risk assessment.
‘Small cells, big risks’
The CSSF’s vertical risk assessment, presented in the 8 November seminar, identified a spectrum of TF actors, ranging from lone operators and small cells, requiring less than 10.000 euros, to well-funded international terrorist organisations, according to presentations made public following the seminar. The seminar itself was not open to the press.
The official analysis highlighted that Luxembourg’s banking sector, particularly retail and business banking, is susceptible to abuse for raising and moving small amounts of funds. While these transactions may seem innocuous, they can be critical for financing lone-wolf attacks or supporting foreign terrorist fighters (FTFs).
“Luxembourg’s role as a transit jurisdiction for TF flows, especially involving the Middle East and North Africa, cannot be underestimated,” noted a CRF slide during the seminar.
Risk-based approach recommended
One of the challenges facing Luxembourg’s authorities is ensuring that state-backed vigilance does not stifle legitimate business. The CSSF outlined expectations for financial institutions to adopt a “risk-based approach”, focusing on sectors and clients with higher exposure to terrorism finance risks. This includes enhanced due diligence for non-profits involved in humanitarian projects abroad and tighter controls on crowdfunding platforms.
Private-sector participants at the seminar, including representatives from Amazon Payments Europe and PayPal, underscored the difficulty of navigating compliance requirements while maintaining service efficiency. Automation and AI-driven transaction monitoring are increasingly seen as essential tools to balance these demands, according to the slides.
US Ofac rules and extraterritoriality
Luxembourg’s regulatory arsenal is built on adherence to United Nations and European Union sanctions regimes. However, the seminar also highlighted the complexity of dealing with extraterritorial sanctions, such as those imposed by the United States’ Office of Foreign Assets Control (Ofac). Firms operating internationally often find it prudent to consider Ofac lists and other foreign sanctions to mitigate risks.
Real estate
The discussion extended beyond financial flows to Luxembourg’s real estate market, where regulators flagged potential vulnerabilities linked to money laundering and TF. High-value property transactions, if inadequately monitored, could serve as vehicles for obfuscating illicit funds. The CSSF stressed the importance of real estate agents and notaries adhering to anti-money laundering (AML) and counter-terrorist financing (CFT) obligations.