Anti-Money Laundering Regulations – Trustees need to take steps

Mark Bondi, 15 December 2017

As we mentioned in our last blog, there is an immediate pressure on scheme trustees to ensure that their records are up to date because of the new anti-money laundering (AML) rules. These rules are in The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which were made on 22 June 2017 and came into effect only four days later. 

Which scheme trustees will be within the scope of these new AML rules?
Well, the new rules apply to any person “acting in the course of business carried on by them in the United Kingdom” who fit into one of several categories, one of which is “trust or company service providers”. Such a ‘provider’ includes any firm or sole practitioner who ‘by way of business’ provides a service of acting as a trustee of “an express trust or similar legal arrangement”.

Pension schemes are almost always set by an express trust (although a few are set up by legislation) and so many pension scheme trustees will be within scope.

Accordingly, we think that it will be prudent for trustees to take legal advice to confirm whether or not they, and their scheme, are within the scope of the new AML rules. Professional trustees would appear to be clearly within scope. 

What may be required of those trustees who fall within scope of the new rules?
Well, there are a number of obligations imposed on affected trustees.  These include duties such as:

  • Keeping accurate and up-to-date records of all ‘beneficial owners’ of the trust;
  • Retaining certain appropriate records until five years after a scheme has wound up;
  • Providing law enforcement bodies with certain information on request; and
  • In cases where the scheme pays certain taxes, to provide detailed and accurate information to HM Revenue & Customs (HMRC) by 31 January 2018.
Failure to comply with key requirements is a criminal offence and civil penalties can also be imposed as well.

Who are ‘beneficial owners’, what records must be kept and is there any guidance from HMRC?
Taking the last point first, we understand that HMRC is still working on some guidance about how to interpret the source legislation for the new AML rules which ultimately derive from European legislation.  However, this has yet to be finalised and formally published at the date of writing (14 December 2017). So, to determine what records must be kept, it is necessary to check against the Regulations.

A beneficial owner will include the body that set up the trust scheme in the first place (known legally as the ‘settlor’), the trustees, all beneficiaries and any individual who has control over the trust (e.g. the power of amendment, the power to appoint and remove trustees, the power to add beneficiaries and the power to trigger winding up). Lastly, a beneficial owner will also include any ‘class of persons in whose main interest the trust is set up or operates’. 

This is a very broad group of persons and there is some discussion as to when members become full beneficiaries rather than just a ‘class of persons’ and whether those whose benefits have not come into payment may belong to a ‘class of persons’ instead. This latter point is important as the records of actual beneficial owners need to include specific identifying details (e.g. company registration number, individual’s date of birth) whereas the only records that need to be kept for a class of persons is a description of that class.

So, what records do I need about members and others who qualify as beneficiaries?
Enough records to uniquely identify them. In fact, this is basic common data and it is arguably an essential part of running a trust that basic accurate records are kept.

The actual data required for the AML rules is short; it is the individual’s full name, date of birth, National Insurance (NI) number and status in relation to the trust (e.g. pensioner receiving a pension). While this list is small the information needs to be present, complete and accurate. Of course, many schemes do not hold NI numbers and some that are held may be wrong. A unique taxpayer reference may substitute for the NI number.  If neither of items of data is available then the individual’s current UK residential address should suffice (if they live in the UK). 

For those who live abroad matters are more complicated. As well as the individual’s overseas address it will be necessary to further ID information such as passport number, ID card number or equivalent form of ID, along with linked supporting information about that passport/ID such as the country of issue and the passport’s / ID’s expiry date.

This is where it gets more difficult as much legacy data will not be complete and may have become inaccurate (e.g. if a person has changed their name or moved). Ideally for UK residents trustees would have several items of information (NI number, unique taxpayer reference and current UK address). 

What needs to be done? Is there a defence if I cannot get the necessary data?
Therefore we think that trustees have to take action (if they have not already done so). First they should evaluate if the data they hold is complete in these essentials, second they should obtain the necessary outstanding data and, third they should check what they hold is (still) accurate.

Where trustees do not hold the necessary data then the law allows them a defence to the criminal offences and any civil penalty in this area. This defence is that the trustee had taken ‘all reasonable steps and exercised all due diligence’ to ensure that the requirements would be complied with. If trustees have employed specialists to review their records and then made efforts to get them fully up to date then those trustees may be protected by this defence. However, trustees must actually have taken steps and have exercised due diligence in order to benefit from this defence.

What about reporting to HMRC by 31 January 2018?
This duty only applies if the scheme is a ‘taxable relevant trust’. 

Where it does apply then the trustees will need to register with HMRC’s new Trust Registration Service (TRS) if they have not already done so and this is explained at https://www.gov.uk/government/publications/trusts-and-estates-trust-details-41g-trust. The TRS is a new HMRC online service that applies generally to trusts paying their taxes and is not just applicable to those trusts subject to the new AML rules.

If a scheme is registering for the first time then this needs to be done by the extended deadline of 5 January 2018. Thereafter, the required beneficiary and tax information needs to be provided to HMRC annually about each tax year’s tax by the following 31 January (so 31 January 2018 for the 2016/17 tax year).

But is my scheme a ‘taxable relevant trust’?
Only if the trust scheme pays certain taxes as its own taxation obligations and not because it only collects and pay taxes that members and others are liable for. The relevant taxes are   

  • Income tax
  • Capital gains tax
  • Inheritance tax
  • Stamp duty land tax
  • Scottish land and buildings transaction tax
  • Stamp duty reserve tax

Various tax charges (lifetime allowance, annual allowance, income tax deducted from pensioners’ payments, etc.) do not count for this purpose.

Given tax exemptions for pensions, it is quite possible that some schemes may not be liable to pay such taxes (e.g. if the investments are all in pooled funds), but attention should be paid to stamp duty and other taxes imposed on investments that the scheme may hold (e.g. if the scheme undertakes direct property investment).

We understand that HMRC’s draft guidance indicates that “We expect that most registered pension schemes will be express trusts but will not be taxable relevant trusts” so this may provide some reassurance.

However, trustees should check with their scheme accountants and fund managers to establish the facts in their particular case and take legal advice if unsure of their position.

About the author

Mark Bondi Senior Technical Consultant Technical

Mark Bondi

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