If you have been following the news, you are likely aware that Luxembourg’s neighbours—Belgium, France, Germany and the Netherlands—have been facing a number of terrorist attacks over the years. This and the current geopolitical situation call for an increased level of controls to counter terrorism financing.
In this context, the Financial Action Task Force (FATF) produces detailed country reports that analyse the implementation and effectiveness of measures to combat money laundering and terrorist financing. These are called mutual evaluations because they are peer reviews, with members from different countries assessing another country.
In September 2023, FATF published its fourth Mutual Evaluation Report (MER) on Luxembourg, which assessed terrorism and terrorism financing threats in the country as moderate to low.
In this blog, we share the outcome of the FATF mutual evaluation report regarding terrorism financing in Luxembourg and explain why the country is still at risk of financial terrorism even if the threat level is low. We also dive into the different stages of the terrorist financing process and share best practices to prevent terrorism financing risks from rising in Luxembourg (but they can be applied to any country).
Don’t have time to read the whole blog entry? Then watch our “Blog in 1 minute” video for a quick summary of its main points:
Terrorism Financing: what is it and why you should care
According to the International Monetary Fund, “terrorist financing involves the solicitation, collection or provision of funds with the intention that they may be used to support terrorist acts or organisations”.
The complexity of terrorism financing goes beyond the usual money laundering schemes and the focus on the licit or illicit origin of funds. On the contrary, here it’s mainly about their destination. Additionally, amounts are often less significant and more difficult to detect.
In fact, any crime that results in a profit can be used to finance terrorism. This means that a country may face terrorism finance risks even if the risk of a terrorist attack is low. Indeed, Luxembourg hasn’t experienced any terrorist attacks in many years and no terrorist groups have been formed on its territory. However, as an international financial centre, terrorism financing is still a real risk as funds that are ultimately financing terrorism may be moved through Luxembourg’s financial system.
Insurance frauds, mortgages not repaid, misuse of non-profit organisations, charities or non-governmental organisations (NGOs), and digital currencies are examples of the latest terrorist financing schemes we have seen happening around the globe.
Moreover, legitimate sources such as mutual funds return, antiquities and real estate trading can also be used for these mischievous purposes. That’s why market players, including— but not limited to—financial sector and non-financial businesses and professions (NFBPs) need to have a deep understanding of the terrorism financing risks they may face locally, to prevent them accordingly.
Raising, moving and using funds through the vulnerable sectors, with examples
Similarly to money laundering, the terrorist financing process can be explained in different stages: raising, moving and using.
- Raising funds, through licit sources such as salaries, donations, loans or through illicit sources i.e. criminal activities
- Moving funds, to a terrorist organisation
- Using the funds, i.e. purchasing bombs, weapons or covering expenses of the terror network.
By understanding and disrupting the flow of terrorist funding, you are better prepared to prevent attacks in the future.
The below examples, illustrating the three stages, are based on real life cases.
Financial sector
A well-known bank based in Europe had to block a cryptocurrency account that was being used to gather donations, following a freezing order from the relevant authorities. This account had been reported to be linked to fundraising for a terrorist organisation.
Though using crypto to fund terrorism is less common than fiat currency—a government-issued currency that isn’t backed by a commodity such as gold—it appears that the organisation had been seeking donations through a cryptocurrency address.
This type of fraud, also known as “charity fraud”, occurs when individuals or organisations mislead donors about the purpose, beneficiary, effectiveness or amount of charitable donations to obtain money or other resources.
In this case, the flow of terrorism funding was detected through international cooperation between financial intelligence units (FIUs) and police units, who shared intelligence and analysis.
Non-financial sector – real estate
The authorities of country “A” became aware, during the investigation of a terrorist organisation’s finances in country “B”, that the police of the latter had searched the offices of real-estate agents located in country “A”, which had allegedly been used by the terrorist group to conceal funds by buying property.
It was found that the owners of the real-estate agents had conducted various real-estate transactions between the two countries, either directly or as proxies, using the services of a law firm that had placed its own structure of bank accounts at the disposal of the parties under investigation.
Source: FATF report on MLTF through real estate sector
These examples show how a global network of countries and specialised support can lead to tangible results in investigations.
How to prevent Terrorism Financing risks in Luxembourg
Given that Luxembourg is a large international financial hub with significant cross-border financial flows, international clients and high-risk products and services, the competent authorities and the market players operating in the country should consider additional prevention measures, which can be applied to any country.
1. Acquire a better understanding of the terrorism financing risk exposureYou should assess regularly and continue to monitor your terrorism financing risks, even if there aren’t any known threats for the country.
This is because the absence of terrorism financing and terrorism cases doesn’t eliminate the potential for funds to be transferred abroad. Hence, as mentioned before, jurisdictions without such cases still need to consider that terrorist funds can be raised domestically (including through willing or defrauded donors, transfer of funds and other assets through, or out of, the country in support of terrorism).
When it comes to Luxembourg, FATF concluded in its report after interviewing the country’s competent authorities that it’s challenging for them to identify the intended recipient of funds or make a specific link between the recipient and terrorism.
The FATF report also states that the Grand Duchy has identified the subset of NGOs that engage in development and humanitarian projects abroad (DNGOs) and are likely to be at risk of terrorist financing abuse.
However, the overall understanding of such risk is very low. Currently, the Ministry of Foreign Affairs (MoFA) doesn’t apply a risk-based approach in its supervision of the sector, but some changes in its approach are expected from now on, following the report.
As mentioned, due to the high volume and cross-border nature of assets managed and transferred in Luxembourg, the country may be vulnerable to misuse of funds—through their movement and management—or assets linked to terrorist activity.
Under- or over-invoicing and falsification of trade documents are some of the most common techniques to do this. Such schemes may be particularly challenging to identify as terrorist organisations or individuals are known to rely on complex legal structures to hide the underlying beneficial owner.
Thus, even if there is no “one size fits all” approach when assessing terrorism financing risks, raising the awareness within your company is key to detect such suspicions and escalate it accordingly.
At the minimum, tailored training, policies and procedures reviews should be considered to prevent terrorism financing risks.
Yes, the diverse and multifaceted nature of terrorists’ financial activity makes it very challenging to spot terrorism financing, but don’t despair. Gathering financial and Know Your Customer (KYC) information properly and running background checks are essential in identifying terrorist financing and the movement of terrorist funds through the financial system.
While it may not be immediately apparent to market players, reporting large cash, electronic transfers and cross-border currency transactions could provide law enforcement with invaluable information on terrorist activity. Entities may identify unusual characteristics about a transaction that should prompt the filing of a suspicious transaction report.
Conclusion
Unlike money laundering, terrorist organisations need comparatively little funds, and raising money isn’t the ultimate goal. As a result, market players may have to look harder to detect suspicious activity in a timely manner.
Giving priority to training and amendments to the internal framework is key to raise the awareness and monitor such risks accordingly within your organisation.
At PwC Luxembourg, we have subject matter experts that can help you to increase your awareness and efficiency to mitigate your risk exposure. Visit the Anti-Financial Crime and Forensics page to learn more.
What we think
The FATF assessment of Luxembourg made it clear that, in terms of terrorism financing prevention, there is still work to be done.
Camélia Boudam, Manager, Anti-Financial Crime and Forensics, at PwC Luxembourg
Terrorism Financing goes beyond money laundering as it can be from licit sources. Therefore, assessing the destination of funds is critical.
Alessandro Casarotti, Director, Anti-Financial Crime and Forensics, at PwC Luxembourg
