Written in collaboration with Carla Santos, a member of The Blog team.
In 2022, Luxembourg’s foreign direct investment stock accounted for 1,400% of its Gross Domestic Product (GDP), far exceeding the EU average of 62%. Moreover, the country’s financial and insurance sectors contributed about 23% to the national GDP, underscoring its role as a global financial hub.
As Luxembourg grows as a leading international financial centre, it takes on greater responsibilities in tackling Money Laundering (ML) and Terrorism Financing (TF) risks. The latest Financial Action Task Force (FATF) evaluation shows that the country has a solid understanding of such risks due to various assessments, including national and sectoral risk assessments.
However, authorities have mainly focused on smaller-scale terrorism financing risks, paying less attention to larger-scale risks. As the FATF Mutual Evaluation Report, published in September 2023, states:
“Most authorities’ overall TF risk understanding is predominantly focused on smaller-scale TF. However, findings related to larger-scale TF stemming from Luxembourg’s status as an international financial centre have not been sufficiently communicated to relevant public and private sector stakeholders. Key strengths of the Luxembourg system lie in its robust domestic co-ordination and co-operation on AML/CFT issues at both the policy and operational levels.”
In the insurance sector, smaller terrorism financing risks could involve misuse of life insurance policies, such as early surrenders or small premium payments, to funnel money to terrorist groups. Larger-scale risks, on the other hand, often exploit the sector’s international nature. Sophisticated schemes may use opaque structures, like shell companies, to move large sums through life insurance policies or cross-border transactions with beneficiaries in high-risk jurisdictions.
However, terrorism financing risks aren’t confined to the life insurance sector. The non-life insurance sector also faces vulnerabilities, particularly with the increase of larger non-life operators in Luxembourg following Brexit.
Given their international reach and scale, these entities may be targeted for exploitation by those seeking to facilitate terrorism financing. Therefore, it is important to scrutinise TF risks in the non-life sector, as certain non-life insurance products like trade credit insurance or large-scale policies might also be susceptible to misuse for illegal purposes.
These examples show the dual challenge Luxembourg faces in tackling terrorism financing risks of different scales and complexities. To address this, the FATF recommends that Luxembourg enhance its understanding of terrorism financing vulnerabilities linked to its role as a transit jurisdiction and financial centre. This includes conducting more qualitative assessments of its legal entities, their connections to higher-risk jurisdictions, and relevant intelligence from law enforcement.
The intergovernmental organisation also stresses the importance of clearly communicating Anti-Money Laundering and Countering Terrorism Financing (AML/CTF) priorities so that authorities and stakeholders can allocate resources effectively. Additionally, Luxembourg needs to ensure its AML/CTF framework is supported by well-staffed and adequately resourced authorities to address the risks tied to its global financial position.
In this blog, we examine the terrorism financing risks Luxembourg currently faces, highlight the specific challenges financial institutions and insurance companies encounter, and provide recommendations to help them strengthen their defences.
Terrorism financing: a real risk for Luxembourg?
Terrorism financing is often seen as a secondary threat in Luxembourg, given its strong financial services sector and absence of recent terrorist incidents. Adding to this perception, the number of Terrorist Financing Activity Reports (TFARs)* and Terrorist Financing Transaction Reports (TFTRs)** filed in Luxembourg has remained relatively low.
In fiscal year 2023, 223 TFARs/TFTRs were reported, reflecting a modest increase of just three compared to 2022. At first glance, these figures may seem small and combined with the lack of major terrorist activity, might suggest that Luxembourg isn’t a significant target for terrorism financing.
However, the country’s position as a hub for significant international financial flows makes it vulnerable to such threats, which might not always be visible or high-profile, but the risk persists. In fact, statistics from the Luxembourg Financial Intelligence Unit (FIU/CRF) highlight these vulnerabilities and stress the need for vigilance.
Notably, 39% of TF-related reports filed by the insurance sector between 2017 and 2023 were associated or initiated by open-source indications and information. These open sources include publicly available data such as press articles, public reports, databases, or online research. This finding underscores the importance of using open-source intelligence to detect and report suspicious activities, particularly in a jurisdiction like Luxembourg where such activities may otherwise go unnoticed.
As for the underreporting, it might not necessarily indicate low risk but could reflect limited awareness or recognition of terrorism financing activities. A common misconception, for instance, is that terrorism financing only involves high-profile extremist groups such as the Islamic State in Iraq and Syria (ISIS) or the Revolutionary Armed Forces of Colombia (FARC). In reality, it can involve a much broader range of actors, including local or smaller-scale groups, or even individuals who indirectly support terrorist activities.
Luxembourg’s financial system, while vigilant on large-scale transactions, can overlook smaller or dispersed activities that fund terrorism, including financing propaganda or recruitment for lesser-known groups. These small amounts can more easily evade scrutiny, despite their potential to support terrorist causes.
One pressing concern is the use of seemingly legitimate financial transactions to acquire resources that directly enable terrorist acts. For example, funds can be channelled to buy weapons or vehicles later used in attacks. Several incidents in the last decade underscore this chilling reality. Tragically, such incidents can happen anywhere. The 20 December 2024 car attack at the Christmas market in Magdeburg, Germany, and the 14 July 2016 vehicular attack in Nice, France, demonstrate how ordinary resources can be turned into tools of devastation.
These examples also highlight that terrorism financing isn’t limited to large-scale operations. Even minor, seemingly routine transactions can accumulate into meaningful contributions to terrorist activities, leading to catastrophic consequences. As you will see, this also applies to the insurance sector.
Small frauds, big threats: how insurance scams can fund terrorism
As mentioned earlier, the insurance sector isn’t immune to terrorism financing. Fraudulent claims, often dismissed as minor infractions, can inadvertently fund activities that support terrorist operations. Even seemingly insignificant amounts can be redirected to purchase materials or cover logistical and operational costs for terrorist cells.
Recent cases from European insurance schemes revealed that fraudulently obtained funds—through fabricated accident or damage claims—were channelled to criminal organisations with ties to extremist groups. Although not linked to major attacks, these funds still supported smaller terrorist cells or financed the operational needs of extremist factions.
These examples show how minor fraud can have far-reaching consequences, posing significant risks to both national and international security. This concern is especially relevant for Luxembourg, where the financial system’s global reach and efficiency and strong insurance sector make it attractive for both legitimate and illicit activities. The threat of terrorism financing, therefore, is a real risk for the country.
As such, a comprehensive approach is essential to safeguard Luxembourg’s financial system from being exploited for malicious purposes. This includes maintaining constant vigilance, enhancing due diligence practices, and implementing robust monitoring systems, especially within the insurance and financial sectors. However, before we dive into these measures, it is important to highlight the challenges that stand in the way.
Challenges to addressing terrorism financing in Luxembourg
Terrorism financing is often difficult to trace directly to a specific person or group because funds are typically moved through multiple layers of financial transactions across several countries before reaching their destination. These transfers may look like routine international payments or even legitimate business deals.
For instance, Luxembourgish insurance companies may receive or process funds that initially appear legitimate. But as these funds pass through various layers—such as shell companies, offshore accounts, or multiple bank accounts—their true purpose becomes obscured.
This is why insurance companies play a pivotal role in monitoring suspicious transactions and identifying ultimate beneficiaries. Under the supervision of the Commissariat aux Assurances (CAA), they are required to implement due diligence processes that go beyond simply identifying the origin of funds.
In practice, insurance companies can’t just focus on the immediate sender or receiver of funds. They have to examine the entire flow of money to detect suspicious patterns that could indicate terrorism financing risks. This task becomes even more challenging when beneficiaries are concealed behind intricate corporate structures or linked to high-risk countries.
Moreover, investigating frozen assets and suspicious activities before reporting requires significant resources. While it’s impossible to completely avoid such investigations, they can be made more efficient by implementing robust internal procedures and efficient screening systems. However, smaller financial institutions may lack the in-house capacity to manage these efforts, leading to inconsistencies in enforcement and a potential need to rely on external specialists when necessary.
One of the biggest vulnerabilities arises during the client acceptance phase. For example, a client might approach an insurer with an apparently legitimate request, like buying a policy or managing a brokerage portfolio. If the insurer fails to carefully assess the true purpose and legitimacy of the business relationship or conduct thorough due diligence from the outset, they could inadvertently facilitate the transfer of funds that may later be used to finance terrorism.
CAA’s inspections have revealed serious gaps in this area. Recent examples illustrate the real-world consequences of overlooking these challenges. Between 2023 and 2024, the CAA implemented administrative measures against five entities in the insurance sector for breaching the amended Law of 12 November 2004 on AML/CTF. One company faced penalties for failing to comply with the amended Law of 19 December 2020, which sets the rules for implementing financial restrictive measures in brokerage activities.
So, how can Luxembourgish insurance companies prevent terrorism financing and ensure compliance with sanctions regimes? The Luxembourg Financial Intelligence Unit provides crucial guidance and resources to help institutions identify potential red flags.
Additionally, insurance companies need to implement robust internal controls and advanced, real-time monitoring systems. These tools help signal suspicious transactions early and enable businesses to focus their investigations on high-risk cases. However, companies also have to be proactive in ensuring these systems remain up-to-date and effective.
Now, let’s focus on the role of compliance teams, who are essential in identifying, reducing, and managing risks. They do this by using a combination of tools and procedures. This responsibility is made even more difficult because of the complex and ever-changing regulatory environment they need to navigate.
In the Luxembourgish insurance sector, recurring risks such as asset misappropriation and insurance fraud often trigger compliance alerts. Tackling these risks requires strict adherence to regulatory standards and the implementation of preventive measures.
For countering the financing of terrorism, FATF’s guidelines are a cornerstone, though they present distinct challenges for compliance teams. The success of these efforts depends heavily on the strategies set at the management level, as well as comprehensive training programmes and practical case studies.
Recommendations for combating terrorism financing in Luxembourg
As a global financial hub, Luxembourg plays a pivotal role in international financial flows, which comes with significant responsibility in addressing terrorism financing risks. While the country has made progress in mitigating money laundering vulnerabilities, the challenges associated with funding terrorist activities remain complex and diverse, particularly given Luxembourg’s position as an intermediary jurisdiction.
Effectively countering these risks requires a comprehensive strategy centred on awareness, knowledge sharing, and innovation. We can’t stress enough how crucial it is to disseminate terrorism financing risk assessments to both public and private stakeholders. Clear communication, supported by national and sector-specific evaluations, ensures that companies are better equipped to detect and report suspicious activity, reinforcing their defences against such threats.
Companies also need to foster a culture of vigilance. This involves enhancing employees’ understanding of terrorism financing risks at all levels—from frontline staff to decision-makers—and providing them with the expertise needed to identify and address these risks. Key skills include analysing threats, understanding regulatory frameworks, and applying enhanced due diligence measures.
Focused training on transaction monitoring, compliance management, and sector-specific risks empowers staff to identify suspicious activities. Tailored programmes, aligned with the unique needs of the insurance sector, expand knowledge while boosting operational effectiveness.
Collaboration with authorities is equally important. Practical, user-friendly tools that facilitate communication and information sharing can significantly enhance efforts to combat terrorism financing, enabling organisations to remain proactive and well-prepared.
Given the intricacies of tracking smaller, fraudulent transactions—often tied to activities like insurance fraud—it’s vital to integrate advanced real-time monitoring and analytics tools. Technologies such as Artificial Intelligence (AI) and generative AI enable compliance teams to process vast data sets efficiently, uncover hidden patterns, and detect suspicious transactions, including low-value ones linked to terrorism financing.
The insurance sector, as an essential pillar of Luxembourg’s financial ecosystem, has a critical role in enhancing scrutiny over financial flows. A coordinated approach involving regulatory bodies like the Commission de Surveillance du Secteur Financier (CSSF) and CAA is important, particularly in supporting smaller entities to implement effective counter-terrorism measures.
In line with this, the CAA is actively working on strengthening Luxembourg’s insurance framework on terrorism financing matters, with a new regulatory measure expected in 2025. This initiative, which was highlighted during the CAA AML Day on 10 October 2024, underscores the ongoing efforts to bolster the sector’s resilience in this area. While this regulatory update has been anticipated for some time, its implementation could be still pending. It is important for insurance companies to stay prepared as these developments unfold.
In conclusion, by fostering a culture of continuous learning, investing in technology, and reinforcing collaboration, Luxembourg can fortify its defences against terrorism financing, while also strengthening its reputation as a secure and trustworthy global financial centre.
*TFAR: Specific type of terrorism financing declaration with no transactions
**TFTR: Specific type of terrorism financing declaration with transactions
What we think
While money laundering uses the dirt to clean the money, terrorism financing cleans the money to fund the dirt. In Luxembourg’s financial ecosystem, especially within the insurance sector, this distinction is critical. The challenge lies not just in tracking illicit funds, but in preventing them from being sanitised and redirected to fuel global instability.
Just as a small crack can weaken a dam, even minor, seemingly innocent financial transactions can be exploited for terrorism financing. Luxembourg’s insurance sector, at the heart of the financial world, needs to remain vigilant, ensuring that its transactions never become a pathway to violence.
