Professional Trustees, Money Laundering And “Failure To Prevent”

The passing into law last October of the Economic Crime and Corporate Transparency Act 2023 reinforced the position that economic crime is a key battleground for UK government and law enforcement. The Act followed on from the earlier Economic Crime (Transparency and Enforcement) Act 2022 which was rushed through Parliament in response to Russia’s attack on Ukraine.

While support for the international sanctions regime and maintaining financial pressure on Russia remain key objectives of the recent legislation, there are wider considerations at play. Financial crime has grown exponentially over the past two decades, much of it either perpetrated or enabled by email and online activity. The National Crime Agency states that fraud represents over 40% of reported crime in the UK, despite the fact that only 13% of fraud is reported, and the UK Economic Crime Plan 2023-26 estimates that £12bn in cash is generated each year in the UK by criminal activity.

Although the financial crime regulatory burden falls heavily on banks, financial institutions and legal services firms, there are arguably few sectors more complex than that of Professional Trustees. Rapid growth in the pensions market and the impact of pension liberation have led to a scattergun picture in which high-risk or even apparently fraudulent pension schemes appear to fall through regulatory gaps.

A key principle governing the conduct of Professional Trustees, set out in the case of Bartlett v Barclays Bank [1980] Ch515, is that a Professional Trustee owes a high duty of care to beneficiaries of the trust in question. The use of “anti-Bartlett clauses”, designed to limit the liability of Trustees of pension funds instructed to invest in what may turn out to be a fraudulent or dishonest scheme, raises important questions about the extent of professional liability, the responsibility of Trustees to conduct due diligence and how such clauses potentially interact with the financial crime statutory framework.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) establish the current regulatory framework for anti-money laundering and counter-terrorist financing (AML/CTF) measures. Professional Trustees are brought within the regulated sector by virtue of section 12(2) as those who provide trust or company service “by way of business”. In addition to the requirement to prepare a formal risk assessment of their business (section 18 and 18A), establish policies, controls and procedures to manage the risk of money laundering and terrorist financing (section 19) and conduct due diligence on its customers and transactions, the Professional Trustee has additional specific duties under section 44 to maintain record of the beneficial owners and beneficiaries of the trust; to advise any “relevant person” with whom they carry out a transaction that they are acting as a Trustee; and to provide that relevant person on request with information about those owners and beneficiaries. The requirements reflect international concern that the proceeds of crime and corruption are frequently hidden behind complex corporate structures and trust arrangements.

The dangers of failures in due diligence are frequently underestimated. The phrase “money laundering”, broadly interpreted as meaning direct involvement in moving or hiding dirty money, is in fact defined in UK law by sections 327, 328 and 329 of the Proceeds of Crime Act 2002. Whilst these sections do criminalise the acquisition, use, possession, concealing, disguising, converting, transferring or removing of criminal property, they also cover under s328 the act of “becom[ing] concerned in an arrangement which [you] know or suspect facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person”. This effectively criminalises any professional arrangement, including establishing a trust, company, foundation or other legal structure, for the purposes of money laundering, whether or not any criminal property passes through the hands (or accounts) of the Professional Trustee concerned.

Section 328 of POCA is known in law enforcement circles as the “professional enabler offence” and the only statutory defence for enabling money laundering is the submission of a Suspicious Activity Report to the National Crime Agency and the subsequent receipt of a formal consent to carry out the transaction or activity in question. Failure to report suspicion is punishable by up to 5 years in prison; proceeding with a transaction which a Trustee knows or suspects amounts to a money laundering scheme can ultimately lead to a sentence of 14 years imprisonment.

The regulatory burden is not limited to the requirements imposed by the Money Laundering Regulations. In 2010, the UK introduced the Bribery Act in response to growing public concerns about the impact of corporate corruption on the developing world. As well as updating existing bribery offences, the new Act also introduced a new concept of “Failure To Prevent” or “FTP”, meaning that corporations could be held directly responsible for bribery engaged in by “associated persons”, with or without the knowledge of the corporation, unless they have in place adequate policies, controls and procedures to prevent the payment of bribes across the business. The FTP concept closed a legal loophole by which companies could turn a blind eye to bribery by employees and contractors and escape prosecution for conduct from which they directly benefited. This innovative approach was used again following a string of highly publicised tax scandals when further FTP offences were introduced through the Criminal Finances Act 2017 in respect of corporate facilitation of tax fraud.

Which brings us back to the Economic Crime and Corporate Transparency Act 2023. Section 199 of the Act introduces a new FTP offence extending to corporate failure to prevent any fraud offence benefiting the company, directly or indirectly. Fraud is widely defined as being any offence under the Fraud Act, false accounting, making false company statements, fraudulent trading or any common law offence of “cheating the public revenue” which covers a wide range of tax offences. Concerns about the scope of the offence and the cost of compliance to small businesses led to the new offence being restricted to large companies, meaning those meeting any two of three of the criteria: over 250 staff, £36m turnover or £18m of balance sheet assets. The tax and bribery FTP offences apply to all businesses of any size. As with the Money Laundering Regulations, the “adequate procedures” defence requires businesses to prepare a risk assessment, conduct effective due diligence, train staff and maintain procedures to deliver compliance. Failure to do so could ultimately result in – amongst other things – criminal prosecution, unlimited fines, regulatory action and significant reputational damage.

It is difficult to determine how the FTP concept will affect the application of Bartlett v Barclays Bank and the value of “anti-Bartlett clauses”. The inclusion of a clause limiting civil liability in the event of misconduct by a company into which Trust assets are invested is likely to be insufficient to escape criminal liability in the event that the actions of the Trustees have “facilitated” fraud or bribery having failed to conduct adequate due diligence prior to engaging in a transaction. Trustees will be exposed further in the event that inadequate checks lead to them facilitating the transfer of criminal property or funding terrorism.

The landscape of economic crime is ever-changing and legislation is constantly developing as government and enforcement agencies struggle to keep pace with modern threats. Financial services firms must either employ senior staff with the skills and expertise to deliver financial crime compliance, source that expertise from a suitable service provider, or run the risk of criminal liability and significant financial damage. Just as there is no room for amateurs in the world of Professional Trustees, there is no room for complacency in the world of financial crime compliance.