On June 28th the UK Court of Appeal confirmed that payment of genuine value for goods received within a supply chain does not prevent companies from committing money laundering offences if the source of these goods is tainted by criminal activity like forced labor. This principle will apply to any goods produced in breach of UK criminal labor or environmental laws.
This finding arose from a successful judicial review claim brought by an NGO against the UK money laundering authorities for refusing to investigate whether cotton produced through forced labor in the Xinjiang Uyghur Autonomous Region of China (XUAR) was present in the supply chain of retailors and other companies in the UK. Ignorance in these circumstances might be seen as bliss but with new ESG reporting standards and positive diligence obligations imposed by CS3D on EU facing firms to conduct supply chain due diligence to prevent and mitigate human rights and environmental abuses throughout their supply chain, companies cannot afford to not make inquiry. This is one trap companies need to navigate carefully. Getting it wrong will not only produce negative publicity but could result in corporate criminal penalties, prosecution of individuals, the seizure and forfeiture of the product or revenues and the payment of large confiscation orders. Equally, companies may wish to inform authorities or bring their own private prosecution against competitors using "dirty" supply chains. If there is a risk UK supply chains have been tainted, careful assessment is needed to determine whether statutory defenses against money laundering are available.
Away from the UK there is already trade legislation in force in the United States, Mexico, and Canada banning the importation of goods produced either in the XUAR or from forced labor. Recently the US government has added aluminum to its priority list of XUAR sectors. The same type of trade legislation will soon be in force in the EU. It remains to be seen if these jurisdictions will adopt the same principles as the UK court to the application of their own money laundering laws but with the EU and UK money laundering regime closely aligned, it is only political will stopping the EU from adopting a similar interpretation.
This matter brings into sharp focus the inter-connectivity between supply chain (ESG) risks and the application of the criminal law. Companies can no longer seek comfort in simply adopting a best efforts approach to applying international standards propounded by the UNGPs for Business and Human Rights or OECD. Companies that adopt a holistic approach to monitoring supply chain risk will be in a much stronger position to comply with the upcoming EU CS3D law, as well as mitigating themselves from potential criminal exposure and reputational damage.
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