Trustees don't usually think about financial sanctions. But Edward Brown says they should be aware of the issue and take steps to minimise risks.
Pension scheme trustees don't usually think about financial sanction checking. But they should. All trustees should be aware of the issue, and take some simple steps to minimise the risk. The UK/EU and US regimes differ, and while most trustees will be UK-based, if there are individuals or corporates who are classed as ‘US persons', trustees should think about the US regime as well.
The UK/EU sanctions regime maintains a publically available register of sanctioned people, entities and organisations, and it is a criminal offence for someone to make a payment to or on behalf of someone on the sanctions list. Perhaps curiously, there isn't any positive legal obligation to check the sanctions list, but the Office of Financial Sanctions Implementation (OFSI) understandably does not consider that failing to have proper systems in place to monitor payments amounts to a defence. OFSI says it seeks to ensure compliance through "engagement and guidance", and no pension scheme trustee has ever been prosecuted. But with fines of up to £1m (or up to 50% of the value of any breach if higher), and a maximum seven-year prison sentence, it's as well to be cautious.
For trustees, the safest approach would be to instruct the administrator to check - every month before the pensioner payroll is run - that none of the pensioners are on the list. However, that could be disproportionately costly and time-consuming. Additionally, as the sanctions regime also applies to all UK banks, the scheme's bank should be doing a check themselves anyway.
A fair balance it seems to me is for the trustee:
- To ask the bank for formal confirmation in writing that it does indeed check the list every month before paying pensioners
- Consider asking the administrator to do some more limited checks themselves - perhaps an annual check of all members, or just those pensioners in high-risk jurisdictions
Whatever decisions are made should be minuted/recorded and justified, perhaps in a short policy.
Relying on the bank wouldn't of itself discharge the trustee from liability. Mistakes could happen - banks will use automated screening systems which search fields in the payment message and the screening is only ever as good as the information in the payment message. However, if a mistake occurs, the trustees would at least be able to explain to OFSI what approach they had taken and why, which may help to mitigate the risk of a significant penalty being imposed.
The US sanctions regime is more complex. Like the UK/EU, the US has a list of sanctioned individuals (albeit a longer list). However, this regime imposes an outright prohibition only on actions by any US person (corporate or individual). If the trustee, administrator and bank are all UK-based, and no US persons are actually involved in making any of the payments, this part of the US regime would not be breached. Even if the UK employer is ultimately owned by a US parent, that should not bring the US regime into play (unless the sanctioned person is Cuban or Iranian). It would be sensible, however, for trustee to check whether anyone involved in the process is a US person or is owned by a US corporate or individual.
Finally, the US has a more controversial second part of the regime that is extra-territorial in nature. If a non-US person is providing "material assistance" or "material support" to an individual on the sanctions list (or engaging in a significant transaction with such person), the US has the ability to designate that non-US person as themselves being subject to the sanctions regime. This is discretionary only and obviously controversial as it imposes US obligations on a person who is not a US corporate or individual, but the power has been exercised in the past.
I suspect the risk of a UK-based trustee finding themselves making payments to US-sanctioned individuals, such that the trustee itself will be designated by the US as being subject to the sanctions regime, is highly remote. So, while ultimately it will depend on a trustee's attitude to risk (including reputational harm), this part of the regime is probably one where no additional action is needed.
So it's important for trustees to think about sanctions and not regard it as someone else's problem. While low-risk, trustees don't want to find themselves facing a regulator and having to admit they hadn't given the matter any thought at all.
Edward Brown is a partner at Hogan Lovells
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