UK Pensions. Trustees and Money Laundering Systems and reporting requirements. Summary of requirements

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1 UK Pensions. Trustees and Money Laundering Systems and reporting requirements The Money Laundering Regulations 2007 introduce new requirements for anyone who acts by way of business carried on in the UK as a trustee (including a corporate trustee) or as a director of a trustee company. The meaning of by way of business was considered in our previous newsletter, which also considered the need for many such trustees to register with HMRC before 1 April (You can find this at This newsletter assumes that all your trusteeships relate to occupational pension schemes. Otherwise, the statutory requirements will be a little more onerous than those described here. If you are unsure of whether these requirements apply to you, then we would be happy to discuss that with you further. Summary of requirements Broadly speaking, the requirements described here fall into three main categories: checking the identity of fellow trustees; scrutinising transactions (which trustees need to do anyway as part of the process of avoiding fraud); and reporting suspicious transactions. 18 February

2 What is money laundering? Money laundering is the process by which criminal property is exchanged for clean money or other assets with no obvious link to their criminal origins. Criminal property is a very wide term but essentially it means any money, securities, tangible property or intangible property that has been criminally obtained. Money that is used to fund terrorism is criminal property, even if obtained legally. The range of activities that count as money laundering is therefore extremely wide. In the context of a pension scheme: Payments into a scheme of sums acquired through criminal activity will amount to money laundering. Payments out of a scheme with some criminal purpose in mind may or may not involve some element of money laundering, but either way it is clearly a misuse of scheme funds which any responsible trustee will need to take seriously. If the payments are being used to finance terrorism, then the requirements set out in this newsletter apply whether it technically falls into the money laundering definition or not. Assessing the risk You must first assess the risk of money laundering and terrorist financing in relation to each of your schemes. It may well be that you are comfortable that the scheme is sponsored by a legitimate business and genuinely exists for the sole purpose of providing benefits for current and former employees of that business. Typically in schemes like this there is no particular reason to suspect the possibility of money laundering or terrorist financing. If this is the case, then you can reasonably regard it as low risk trustee business so far as the legislation is concerned February 2008

3 In some cases however you may consider the risk to be higher, perhaps because: the employer is based in (or conducts business in or through) a jurisdiction linked to corruption, organised crime or drugs; or the employer has complex business ownership structures which could be used to conceal activities. This risk assessment is inevitably one of judgement. What really matters is that you can demonstrate that you have actively considered the risk level and, where necessary, that you have taken appropriate steps to manage it. Where the risk level is material You should verify the identity of each of your individual co-trustees (or co-trustee directors), on the basis of documents, data or information obtained from a reliable and independent source. For some trustees, you could do this by asking for a copy of their passports. For more prominent members of the trustee board you may prefer to rely on other sources (such as printed material published by the sponsoring employer identifying its senior executives). The important point is that the information is commensurate with level of risk. You will need to keep this information up to date as and when new trustees are appointed. If for any reason you are unable to obtain the verification that you need, you will normally have to terminate your services. Where the risk is low This verification process is not an automatic requirement in low risk cases. However, there is a practical argument for going through this verification process regardless of the risk level (for the reason explained in If you suspect money laundering or terrorist financing below). UK Pensions. 3

4 This may mean that it starts to become best practice for trustee boards to set up procedures for all trustees, including new trustees as and when they are appointed, to prove their identity formally. If you suspect money laundering or terrorist financing In these circumstances, there is a specific obligation for you to obtain the verification of identity mentioned above. This could prove awkward, as it may be hard at such a time for you to ask for that verification without revealing your suspicions (which could later prove to be unfounded). Your position may be easier if you already have sufficient proof of identity, which you obtained from your fellow trustees as a routine step before your suspicions arose. Whether this justifies you in not seeking fresh verification when you do become suspicious will depend on the circumstances, and the law, at that time. It is obviously important to keep track of news reports concerning your schemes employers, as you do not want to be criticised for not having acted if suspicions of money laundering or terrorist activity have come into the public domain. Also, see Reporting suspicious transactions below. Scrutinising transactions Whatever the risk level, you need to scrutinise transactions to ensure that they are consistent with the scheme, its liabilities and its risk profile. The level of scrutiny should be commensurate with the risk level, so what you really need to watch out for are: payments by employers that exceed the levels you would normally expect for this particular scheme; AVC payments by members over a set threshold; 4 18 February 2008

5 individual transfer payments into the scheme over a set threshold; any payments made to the scheme from third parties; benefit payments over a set threshold; payments from the scheme to third parties (other than advisers or agents); unusual patterns of transactions that have no apparent explanation (such as contributions or pension payments that vary from month to month for no obvious reason). In any of these cases, you should seek further information about the receipt or payment. Setting these thresholds is again a matter of judgement, having regard for example to the size and nature of the scheme and its benefits. You should set tighter thresholds, however, in those schemes where the risk is material. Reporting suspicious transactions If you suspect or have reasonable grounds to suspect money laundering or terrorist financing, then you are under an obligation to disclose it as soon as practicable to the Serious Organised Crime Agency ( SOCA ) or, if you are part of an organisation, to your nominated officer (see Your organisation below). There is more information on reporting to SOCA at Keeping records Where you have verified the identity of your co-trustees as outlined above, you must keep your copies or notes of that evidence until at least 5 years after your relationship with the scheme has ended. You should keep your copies of the documents relating to your trustee role until your relationship with the scheme ends (although you would probably do this anyway). UK Pensions. 5

6 Policies and procedures You are required to establish and maintain appropriate and risksensitive policies and procedures for: carrying out of each of your obligations as outlined above; and ensuring compliance with those policies and procedures (which includes the internal communication of those procedures where relevant). Nominated officer (The remainder of this newsletter does not apply if you act as an individual trustee and do not employ, or act in association with, anyone else.) The policies and procedures mentioned above need to ensure that: an individual within your organisation is a nominated officer. In practical terms, this means somebody to whom other members of the organisation are to report any suspicions that they have and who must then consider the issue further. There are one-day training courses available for individuals who perform this role; anyone in the organisation who receives information or other material in the course of the business as a result of which he or she knows or suspects (or has reasonable grounds to know or suspect) money laundering or terrorist financing must as soon as practicable disclose it to the nominated officer or to SOCA (see Reporting suspicious transactions above); and where the nominated officer receives a disclosure, he or she must consider it in the light of the available information and decide whether it gives rise to knowledge or suspicion (or reasonable grounds for knowledge or suspicion) of money laundering or terrorist financing. If so, the nominated officer must as soon as practicable disclose it to SOCA (see Reporting suspicious transactions above) February 2008

7 Training Finally, you need to take steps to ensure that those of your employees who work on these matters are: made aware of these requirements; and given regular training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing. We shall be happy to discuss with you any questions or concerns that you may have arising from this newsletter. UK Pensions. 7

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