The money laundering regime requires certain service providers, including some paid pension scheme trustees, to have in place systems to prevent money laundering as well as to report any suspicious transactions to the Serious Organised Crime Agency. Civil and criminal sanctions may be imposed for compliance failures.
New regulations provide that a "firm or sole practitioner who by way of business" acts as a pension scheme trustee must comply with the new requirements and must register with HM Revenue and Customs (HMRC) by 1 April 2008. It is not clear from the HMRC draft guidance exactly how they decide whether a person is acting by way of business as a pension scheme trustee. Therefore, whether or not a trustee needs to register is going to depend on the facts of each case.
Find out more about the implications for paid pension scheme trustees from Wragge & Co's Pensions team.
New money laundering regulations provide that a "firm or sole practitioner who by way of business" acts as a pension scheme trustee must comply with the new requirements and register with HM Revenue and Customs (HMRC) by 1 April 2008. However, it is not clear from HMRC draft guidance exactly how they decide whether a person is acting by way of business as a pension scheme trustee.
What is money laundering?
Money laundering is the process by which criminally obtained money or other assets (criminal property) are exchanged for "clean" money or other assets with no obvious link to their criminal origins. Criminal property may take any form, including money. It also includes money, however come by, which is used to fund terrorism.
Who does the anti-money laundering regime apply to?
Most financial businesses in the UK are covered by the anti-money laundering regime, including banks and building societies. In addition, the regime covers various professionals, including accountants and lawyers, as well as trust or company service providers (TCSPs).
Can pension scheme trustees be TCSPs?
Yes. A person or a firm acting "by way of business" as the trustee/trustee director of an occupational pension scheme can be a TCSP.
TCSP: meaning of "by way of business"
Not all paid pension scheme trustees are professional trustees. While there certainly are businesses/individuals which charge for their services as professional trustees, there are others who are trustees of one scheme and in receipt of only a modest fee.
It is not clear from HMRC's guidance whether or not both ends of this spectrum are caught by the anti-money laundering regime. While we understand that HMRC has refused to provide specific guidance on paid pension scheme trustees, they have indicated that if a trustee is:
- A trustee of only one pension scheme,
- The fee paid is determined by the scheme sponsor or the trustee board (not the individual trustee), and
- Is not providing services based on sound and recognised business principles,
He or she will not be caught by the new money laundering requirements.
HMRC has confirmed that any trustee unsure of his or her status should write for a ruling as to whether or not he or she is acting as a TCSP and so required to register.
What does the anti-money laundering regime require?
The anti-money laundering regime requires that certain businesses/service providers put systems in place to prevent money laundering and to report any suspicious transactions to the Serious Organised Crime Agency (SOCA). The key parts of the anti-money laundering system are:
- Registration with HMRC: in addition to registration, businesses are required to pay an annual fee to HMRC. Certain businesses, including TCSPs, must also complete the "fit and proper" requirements.
By 1 April 2008, a TCSP must pay the relevant fee to:
- Register with HMRC; and
- Apply to pass a "fit and proper test" which will check individuals against a number of objective criteria.
- Customer due diligence: businesses must identify and verify the identity of their customers as well as obtaining information on the purpose and intended nature of the business relationship. Due diligence must be applied at the start of the relationship, where the business suspects the customer of money laundering and at various other times. It is possible for businesses to rely on other due diligence checks, for example, an auditor or independent legal adviser. Most pension schemes (other than life assurance only schemes) will need to comply with the simplified due diligence process. This means that the TCSP would only need to carry out customer due diligence where he or she suspects money laundering or terrorist financing. Simplified due diligence is likely to be limited to identifying his or her fellow trustees and the existence of the trust.
- Ongoing monitoring: a risk-based approach should be taken to the extent to which transactions should be scrutinised. The idea is for the business to be able to identify unusual events which cannot be rationally explained. Suspicious events should be reported to SOCA.
Ongoing monitoring for a TCSP is to ensure that the scheme is not being used for money laundering purposes. This is likely to dovetail with the schemes internal controls and governance risk management systems.
- Record keeping: businesses must keep records to demonstrate compliance with the anti-money laundering regime as well as ensure that appropriate internal management controls are in place.
What are the penalties for failure to comply with the anti-money laundering regime?
Civil and criminal penalties may be imposed for failure to comply with the anti-money laundering regime.
HMRC can impose civil penalties for various failures, including customer due diligence measures, ongoing monitoring and record keeping. The penalty will be for an amount which is considered appropriate for the purposes of being effective, proportionate and dissuasive. There is no upper amount on the penalty.
Compliance failures may also lead to criminal proceedings. A conviction may result in up to two years' imprisonment and/or an unlimited fine.
The penalties for failure to comply with the anti-money laundering regime are draconian. It is unfortunate that HMRC has not seen fit to provide more specific guidance for paid pension scheme trustees. Whilst each case will turn on its own facts, HMRC could have at least provided some examples to indicate when a paid trustee might be considered acting by way of business.
Paid trustees need to determine whether or not the anti-money laundering regime applies to them as soon as possible so that they can complete the necessary HMRC formalities by 1 April 2008. Where they are unsure of their position, we suggest that they contact HMRC as soon as possible for a view.
Example factors which we think might influence HMRC in their deliberations are:
- The amount that a trustee is paid and the proportion that may be out of their overall income.
- Whether or not an individual is a trustee or more than one scheme where all schemes have the same employer.
This analysis is based on HMRC draft guidance MLR8 and MLR9 and Joint Money Laundering Steering Group guidance for the UK financial sector: part I (December 2007). Key Contact Ruth Bamforth, associate, +44 (0)20 7664 0381, [email protected] This analysis may contain information of general interest about current legal issues, but does not give legal advice.