Supply chains and UK money laundering considerations
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Publications: 15 November 2023
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Blog Post: 26 October 2023
A recent English court ruling has shed light on the approach of UK enforcement authorities to the question of money laundering risks where there is potential forced labour / modern slavery in a supply chain. The ruling will be of interest to companies that have identified these risks in their supply chains, when determining the potential regulatory consequences that flow from them.
A non-governmental organisation (the NGO) applied for judicial review of decisions by UK law enforcement agencies (including the Border Force, HMRC and the UK National Crime Agency, the NCA) (the Authorities). The NGO alleged that the Authorities should be actively investigating (i) whether the import of cotton into the UK value chain from particular regions where modern slavery was alleged to be a risk breached the Foreign Prison-Made Goods Act 1897 (FPMGA); and (ii) whether cotton goods with their origin in those regions could be criminal property under the UK Proceeds of Crime Act 2002 (POCA) and whether trading in them amounted to criminal conduct.
The NGO’s challenge failed on both grounds.
The case provides a unique insight into the Authorities’ current thinking (with which the court agreed) on the applicability of POCA to goods moving through a global supply chain, and is the first case to look at the defence of ‘adequate consideration’ in the context of modern slavery and how it might be assessed.
Application of POCA in the context of global supply chains
Importantly, the Authorities accepted that offences of forced labour contrary to s1 Modern Slavery Act 2015 (MSA) and crimes against humanity contrary to s51(1) International Criminal Court Act 2001 (ICCA) were capable of constituting criminal conduct under POCA, which means that handling the proceeds of such conduct is capable of leading to money laundering offences, and potential confiscation of the benefit.
However, in pre-action correspondence with the NGO, the NCA stated that it had not identified any evidence in respect of the imports in question that provided a “concrete allegation” of modern slavery upon which it could commence an investigation, and that, at that time, there were insufficient grounds to suspect that any identifiable criminal offence had been committed by identifiable individuals.
The Authorities submitted to the court that it was a requirement under POCA that:
- any criminal conduct is clearly and specifically identified;
- the resultant property is specifically identified; and
- in any event, the application of the ‘adequate consideration’ defence would apply to the purchase of the goods, even in circumstances where the purchaser knew or suspected that the consignments constitute or represent a person’s benefit from criminal conduct.
Challenge of identifying ‘criminal property’
A prerequisite for a money laundering offence under POCA is that there is ‘criminal property’, which is precisely defined under s340(3) as constituting ‘a person’s benefit from criminal conduct’ and also that ‘the alleged offender knows or suspects that it constitutes or represents such a benefit’.
The court agreed with the Authorities that the definition of criminal property under s340 POCA requires the criminal property to be established as a prerequisite of the money laundering offence, and separate from the money laundering offence itself. Specifically, there is a need to identify (i) the relevant criminal conduct (the court noted that although "the specific offence would not be required", at least the kind of criminal activity would need to be known), and (ii) the resultant property. They would then need to prove that the alleged offender knows or suspects that the criminal property constitutes or represents such a benefit. The court also noted that these elements would need to be proved to the criminal standard, ie that there is proof beyond reasonable doubt.
The Authorities argued that to prove the existence of criminal property it was insufficient to deal in hypothetical scenarios or presumptions, relying on statistical and circumstantial evidence, and that the requirement under s340 POCA is not met where there are practical difficulties in identifying a specific consignment of goods (in this case, imported cotton) which is the product of the relevant criminality.
The NGO had contended that the definition of criminal property is wide, and that the provision under s340 POCA is “well suited to an investigation of value chains where the goods involved are produced by criminal activity”.
However, the court ultimately agreed with the Authorities that they needed specific proof rather than suspicion for each particular consignment of goods, with at least knowledge of the kind of criminal activity (and that it would be helpful to have details of when and by whom the conduct was committed). As set out above, the NCA said that it did not have this knowledge, but it did however remark that it remained open to “the possibility that the intelligence picture may change at any time”.
‘Adequate consideration’ defence applies in a supply chain
The Authorities argued that the most appropriate offence relating to supply chains is s329 POCA (namely the acquisition, use and possession of criminal property). But, they said, even if a s329 POCA offence was triggered, the ‘adequate consideration’ defence would apply to the imported cotton and therefore, once in the purchaser’s possession in return for adequate consideration, it was no longer criminal property. The relevant criminal property would then instead be the proceeds paid to the seller of the cotton (in other words, the money or other consideration provided in exchange for the cotton).
The NGO contended that the adequate consideration defence phrase was not clear and unambiguous in this way, and suggested that a “sweeping construction” could endorse “a market in goods produced by modern slavery”.
Nevertheless, the court agreed with the Authorities that the adequate consideration defence applies to transactions ‘at market value’ in goods which may in themselves be criminal property (in this case, the cotton imported into the UK). The court stated that the adequacy of consideration is an objective question and that the Authorities had “legitimate and understandable concerns” in relation to establishing criminal liability in light of this defence.
Following Hogan v DPP, the court found that the prosecution would therefore be required to prove not only that the consignment was criminal property, but also, considering the question objectively, that the consignment had been purchased for significantly less than its value or by some other measure for consideration which was not adequate. The court noted that this requirement presents “difficulties in the context of the international trading of the goods in question”.
The court did not consider questions about how the market value of goods may be impacted by forced labour, such as to keep the value low for international trade, or indeed the applicability or otherwise of s329(3) POCA, which states that ‘the provision by a person of goods or services which he knows or suspects may help another to carry out criminal conduct is not consideration.’
This case confirms that the defence of adequate consideration is capable of applying even where there is knowledge by the purchaser of actual modern slavery issues in particular consignments that have been acquired. There will be concerns from many quarters that this, and the perceived lack of scrutiny around 'adequate consideration' means that, in the words of the NGO "this provision could lead to the enforcement of a market in goods produced by modern slavery". However, on the other hand, the decision could potentially lead to responsible companies being more confident about properly investigating these risks in their supply chains in order to address them, given that, so long as they have been providing adequate consideration, and are not committing other money laundering offences, they will not be opening themselves up to money laundering concerns.
Entering into an arrangement
The court agreed with the Authorities that, in addition to the requirements for showing criminal property as set out above, the Authorities would need to prove for a s328 (entering into an ‘arrangement’) POCA offence that the accused person knew or suspected that the arrangement into which the person was entering facilitated the acquisition, retention, use or control of criminal property. Given that the defence of adequate consideration does not apply to the arrangement offence under s328, this can throw up some difficult questions, although the case of R v GH confirmed that the criminal property needs to have that quality or status at the time of the arrangement offence. In other words, criminal property means property obtained as a result of criminal activity which is separate from the arrangement offence itself – and that the property needs to be criminal at the time when the arrangement operates upon it.
Examples of where these more difficult questions may arise, bringing the s328 POCA arrangement offence potentially into play even in spite of the purchaser giving adequate consideration for the goods, are where, for example:
- the purchaser obtains a financial interest in the overseas factory in which they know or suspect that the specific goods are produced in violation of the MSA; or
- where the purchaser enters into a purchase agreement where it is the only customer of consignments that have been produced in violation of the MSA, and the purchaser knows or suspects that they are creating a market in the criminal property given that, for example, no other purchasers are prepared to do business with that producer.
Pressure to disclose the reason for the lack of investigation
This case forced the Authorities to take a public position on the reason that they have decided not to investigate. In addition to the POCA points above, the Authorities emphasised that:
- there was little point in commencing either criminal or civil investigations with no realistic prospect of any successful conclusion, for example prosecutions or seizures.
- there is an inevitable need for co-operation from the authorities of the relevant overseas jurisdictions, which in this case they considered would not be forthcoming.
- they see the "danger" in embarking on investigations which, in addition to “being incapable of effective resolution” would also “carry the risk of allegations of high-handed conduct and abuse of power”.
The court considered that the Authorities had not been “inert or unresponsive” in their consideration of the NGO’s concerns, and instead had actively examined the NGO’s information when deciding whether to commence an investigation. The Authorities clearly did not exclude the possibility of reopening the issue in the event that they received further intelligence.
Growing trend of supply chain due diligence
It is clear from the case that the Authorities are continuing to carefully consider whether to bring POCA proceedings following offences being committed under the MSA and ICCA. The ruling provides a roadmap to interested NGOs as to what information is required to successfully bring a criminal prosecution, and of course, any party can bring a private prosecution within England and Wales. There have also been civil proceedings brought against companies in relation to allegations of modern slavery in their supply chain seeking, amongst other remedies, declarations that the company is in breach of POCA.
The ruling is important for a company considering whether to make a disclosure (a Defence Against Money Laundering) to the NCA if it discovers supply chain issues of this nature, either in its own operations or those of a soon-to-be acquired target. Large companies with an annual turnover of over GBP36m are already required to prepare slavery and human trafficking statements with a view to ensuring that slavery and human trafficking are not taking part in their supply chains. Companies should already be considering supply chain issues, and taking steps to address issues such as the risk of modern slavery.
Finally, corporates face increasing pressures and obligations globally in respect of supply chain due diligence and modern slavery disclosures, which result from new and proposed legislation in jurisdictions such as Belgium, France, Germany, the U.S. and the Netherlands as well as proposed EU-wide legislation, so corporates cannot afford to consider the enforcement risks in only one jurisdiction. Many of these developments were summarised in the Allen & Overy Business and Human Rights Review
Supply chain misconduct and increased accountability for human rights issues are two themes explored in the 2023 edition of the Allen & Overy Cross-border White Collar Crime and Investigations Review.
Case: R (on the application of World Uyghur Congress) v Secretary of State for the Home Department  EWHC 88 (Admin)