At the end of June, the Court of Appeal handed down judgment in the case of R (oao World Uyghur Congress) v NCA [2024] EWCA Civ 715.
The Court of Appeal has clarified the operation of certain parts of the UK's Proceeds of Crime Act 2002 (POCA) and the approach the UK authorities should take to money laundering investigations. The judgment is important for a number of reasons.
- Many businesses may face a new or heightened risk of prosecution for criminality in their supply chain and related money laundering offences. This could arise in unexpected ways. Companies such as clothing manufacturers, furniture makers or food suppliers may be impacted, as could investment firms, banks and commodity traders that are exposed, directly or indirectly, to the proceeds of crime.
- Arguably, a swathe of laws intended to protect the environment and working conditions around the world have just been given new teeth in the UK. The UK authorities may bring more investigations and prosecutions in this area, where previously they considered themselves unable to act.
- It could impact how businesses carry out their day-to-day operations, even if they are never investigated or prosecuted by the authorities. Businesses may have to carefully rethink their compliance arrangements in order to make sure they do not commit money laundering offences, even inadvertently.
The full impact of the judgment is yet to be seen and it is still being processed in legal and business circles. However, there are some immediate impacts that firms may wish to consider.
What do I need to know?
The case was brought by the World Uyghur Congress against the National Crime Agency (NCA) to challenge the NCA's decision not to investigate whether cotton imports from China were the product of forced labour or other human rights abuses. The claim was initially unsuccessful, but succeeded on appeal – with the Court holding that the NCA had misapplied the law in making its decision not to investigate.
As the judgment confirms – if a company has goods in its supply chain that are the product of criminality then the company itself could be liable for money laundering offences if it handles them. This could apply in a wide range of circumstances. For example, a company dealing in raw materials generated in breach of environmental laws or goods produced in breach of labour laws (which underpinned the Uyghur case) may commit money laundering offences by doing so.
A key point is that a company only has to suspect, rather than know, that there is criminality in its supply chain to place it at risk of committing money laundering offences.
While it may have been thought previously that purchasing goods in a supply chain for market value allowed the purchaser then to deal freely with those goods (on account of the "adequate consideration" exemption, considered below), the Court of Appeal has now clarified that is not the case. Criminal property – even if it was bought at market value – remains criminal property in the hands of its purchaser. The fact that criminal conduct took place overseas and the products in question have changed hands many times before they reach the UK (and businesses here) is not a defence and does not change the nature of the criminal property.
If, for any reason, a company has reason to suspect that its supply chain involves criminality then it is advised to consider investigating this and either seek to remove those suspicions or otherwise protect itself from potentially committing money laundering offences. This could include, for example, submitting "defence against money laundering" suspicious activity reports (DAML SARs) in order to lawfully dispose of the property in question or changing its supply chain arrangements to avoid the exposure to underlying criminality.
The judgment also clarified that the UK authorities, such as the NCA, do not need to know for sure that criminal property exists before they launch an investigation into possible criminality.
The bars for both committing a money laundering offence and for the authorities to investigate possible criminality have therefore been confirmed to be low.
The legal bit
The substantive money laundering offences under POCA are contained within sections 327, 328 and 329.
This case focused in particular on section 329, which is the offence of acquiring, using or possessing criminal property.
Section 329 is unique in POCA because it contains the "adequate consideration" exemption at section 329(2)(c). This states that if a person purchases criminal property for an amount that is not significantly less than its value, even if they know the property in question is criminal property, then they do not commit a money laundering offence when making the purchase.
In the first instance judgment, from January 2023, it appeared that this "adequate consideration" exception had been endorsed as a "circuit breaker" that had the effect of cleansing criminal property. However, the Court of Appeal has explicitly rejected this and clarified that section 329(2)(c) "has no impact on the status of the property".
This is significant, because property therefore remains criminal in the purchaser's hands, albeit no offence is committed on the acquisition of the property. If that purchaser wished to subsequently transfer the property or convert it (both of which are offences under section 327 POCA) then they would commit an offence by doing so. The utility of the "adequate consideration" exception is accordingly narrow and a host of problems can arise once a person or company has obtained criminal property. Even if obtaining the property was not itself a money laundering offence, any further dealing with it may well be.
The judgment makes clear that the state of mind of a person handling criminal property is critical. The same property could be criminal in the hands of one person, but not another, depending on their knowledge or suspicion. However, the threshold for suspicion is low. It has long been established (since the 2006 case of Da Silva) that a person must only think there is a possibility, which is more than fanciful, that property constitutes a person's benefit from criminal conduct, or that it represents such a benefit.
In the present case, it was common ground that there is evidence of apparent widespread abuse in the cotton industry in the Uyghur region of China, including forced labour, and that products derived from forced labour can amount to criminal property or recoverable property. However, the low bar for suspicion suggests that these legal issues could arise in situations where there is a lot less evidence and analysis than in this case.
Are there other implications?
In early 2019, we considered the legal issues that POCA could cause for firms trading in the overseas legal cannabis industry. Specifically, that shares in a legal cannabis-related business overseas constitute "criminal property" for the purposes of POCA. It was therefore possible to acquire them legally under the "adequate consideration" exemption, but other dealing with those shares could constitute offences under sections 327 or 328 POCA.
This legal position had not, until last month, been tested in the Courts and the risk could largely be managed by submitting DAML SARs to lawfully deal with any such property, as required from time to time. Inevitably, however, given the apparent confusion around the interpretation of the law, there will have been numerous examples in multiple industries of individuals or firms that misapplied the "adequate consideration" defence and that may have committed money laundering offences by handling goods they knew or suspected were criminal property.
This judgment will likely bring renewed attention to this area of law, which was already difficult to navigate, but now appears to have become even knottier and potentially riskier for those who come within its scope.
What happens next?
The immediate result of the case is that the question of whether to carry out an investigation into cotton goods from China has been remitted back to the NCA to reconsider. How the NCA chooses to proceed will be an interesting indication of the future direction law enforcement agencies may take in light of this ruling.
Irrespective of the NCA's decision, the applications of POCA are arguably becoming so widespread that compliance is becoming near impossible. This judgment will exacerbate that. For example, if a firm (legally) accepts payment from a source suspected to include the proceeds of crime in exchange for services – which is permitted under the "adequate consideration" exemption – it has now been confirmed that it would risk committing a money laundering offence every time it wanted to spend or transfer any portion of that money. That risk would then be passed to any recipient of those funds, as long as they also knew or suspected that the original source was criminal.
Therefore, an immediate, likely consequence of this judgment is that there will be a rise in the number of DAML SARs as firms take a cautious approach to try to ensure they are legally compliant in their normal business activities. There may also be a stifling of economic activity, at least in relation to some higher risk industries, as firms work out how best to navigate the legal issues thrown up by the judgment.
Given the wide-reaching impacts of this judgment and the likely costs of compliance that it will cause, as well as uncertainty it may lead to in many areas of business, we may also see calls for reform of the law or for Government guidance to clarify its scope and application.
It also seems likely that other non-governmental organisations and pressure groups will use this judgment to identify and pursue new ways of bringing actions against the Government or businesses. Environmental crimes in supply chains appears to be a key area in which this could occur.
In any event, firms are advised to consider whether – in light of this judgment – their business operations bring them within scope of POCA and what steps they can take to ensure they remain legally compliant and protect themselves from the risk of investigation or prosecution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.