Due Diligence in Luxembourg AIFs: Strengthening Compliance and Governance

Luxembourg’s position as a leading hub for alternative investment funds (AIFs) hinges on its rigorous regulatory framework, particularly in anti-money laundering (AML) and countering the financing of terrorism (CFT). For compliance officers (Responsable du Contrôle or RC) and senior management (Responsable du Respect or RR), understanding the nuances of simplified due diligence (SDD), enhanced due diligence (EDD), and risk-based approaches is critical to maintaining compliance while optimising operational efficiency.

1. Legal Foundations: A Hierarchical Framework

At the core of Luxembourg’s due diligence obligations lies the Law of 12 November 2004 on AML/CFT¹, transposing EU directives such as the Fourth and Fifth AML Directives (AMLD4/AMLD5)². Professionals are required to consider various risk factors related to customers, countries or geographic areas, products, services, transactions, or delivery channels. Professionals are also expected to evaluate all relevant risk factors to determine the overall risk level and apply appropriate measures to manage and mitigate these risks.

The Commission de Surveillance du Secteur Financier (CSSF) reinforces these obligations through regulations like CSSF Regulation 12-02³, which outlines due diligence requirements for fund entities, and CSSF Circular 18/698, detailing governance expectations for RCs and RRs. Non-compliance risks high administrative fines⁵.

2. Implementing Due Diligence

Simplified Due Diligence (SDD)

SDD applies to low-risk scenarios, such as regulated entities or investors from jurisdictions with equivalent AML/CFT standards. For example, a Luxembourg AIF onboarding a EU-based pension fund may rely on SDD, requiring only basic identity verification and periodic reviews.

Enhanced Due Diligence (EDD)

EDD is mandatory for high-risk categories: politically exposed persons (PEPs), investors from high-risk third countries (e.g., those listed by the FATF or EU), or complex ownership structures. This involves:

• Source of wealth verification: Corroborating documentation for funds’ origins.
• Ongoing monitoring: Real-time transaction screening against sanctions lists (e.g., EU Consolidated List)⁶.
• Board oversight: The RR must approve high-risk relationships.

The CSSF regularly highlights weaknesses in EDD for cross-border intermediaries, underscoring the need for robust oversight of delegated functions.

3. Roles and Responsibilities: The RC/RR Dynamic

The RC oversees day-to-day AML/CFT controls, including due diligence processes, while the RR— typically a board member (or the board collegially) — ensures strategic alignment with the fund’s risk appetite. Key duties include:

• Risk assessments: Integrating supranational (EU Commission) and national (Luxembourg Ministry of Finance) risk reports into internal frameworks.
• Training: Annual AML/CFT programmes tailored to roles, from frontline staff to board members.
• Reporting: Submitting regular AML/CFT reports to the CSSF, detailing investor risk categorisations and mitigation measures.

Luxembourg’s AIF sector thrives on trust and regulatory clarity. By anchoring due diligence in legal hierarchies, adopting dynamic risk assessments, and empowering RCs/RRs with actionable insights, funds can navigate compliance complexities while fostering investor confidence. As regulatory scrutiny intensifies, proactive adaptation remains the hallmark of resilient governance.

References

1. Law of 12 November 2004 on AML/CFT, CSSF host page re latest consolidated version.
2. Directive (EU) 2015/849 (AMLD4); and Directive (EU) 2018/843 (AMLD5), EUR-Lex.
3. CSSF Regulation No. 12-02, 14 December 2012 (amended in 2020).
4. CSSF, Circular 18/698, specific provisions on AML/CFT Obligations for Investment Fund Managers, 23 August 2018 (amended 2023). 
5. CSSF Press Release, Administrative Sanctions.
6. EU Consolidated Sanctions List (2025).