Court of Appeal rules on money laundering risks in supply chains

The Court of Appeal in R (World Uyghur Congress) v NCA has found that the NCA’s decision not to open a money laundering investigation into the trade of cotton in the UK from the Xinjiang Uyghur Autonomous Region of China (XUAR), was unlawful.

Implications for companies

Importantly, the judgment disagreed with a widely held interpretation of the money laundering offences in the Proceeds of Crime Act 2002 (POCA). If the Court of Appeal’s interpretation is correct, any business (or person) that becomes suspicious that the property they are acquiring or have acquired is tainted by criminality, even where they have paid market value for that property, now faces greater risk of committing an offence under POCA in any onward dealing with the property (eg. selling, transferring, or moving it). This is because it cannot rely on the adequate considerate exemption to cover these steps. Businesses will need to consider how to protect themselves when doing anything with such property, for example, seeking a Defence Against Money Laundering (DAML) from the NCA.

It remains to be seen whether the judgment will lead to an increase in money laundering investigations, but there is no doubt that it has significant implications for business in terms of how they manage the risk of human rights abuses, environmental crimes and other criminality in their international supply chains.

Businesses should reflect on the processes that they have in place to monitor their supply chains for wrongdoing and what steps are taken if concerns about wrongdoing in their supply chains comes to light.

Background facts of the case

The World Uyghur Congress (WUC) is an NGO that aims to promote the interests of the Uyghurs, an ethnically and culturally Turkic people living in the XUAR. The WUC provided evidence to the UK National Crime Agency (NCA), to demonstrate the widespread use of forced labour in the cotton industry in the XUAR, and the trade in this cotton in the UK. The WUC alleged that such cotton was ‘criminal property’ under POCA and sought to persuade the NCA to investigate businesses who were trading the cotton in the UK for potential money laundering offences.

Money laundering offences in POCA

There are three principal sections in POCA that contain the money laundering offences. These are:

• Section 329 – which makes it an offence to acquire, use or possess criminal property.
• Section 328 – makes it an offence to facilitate the acquisition, retention, use or control of criminal property by or on behalf of another person.
• Section 327 – makes it an offence to deal with criminal property in various ways, including concealing it, disguising it, converting it, transferring it, or removing it from the UK. 

In order to be liable under any of these sections, a person must know or suspect that the property is a benefit of someone’s crime (ie. that it is “criminal property”). The apposite offence in the context of a supply chain case is section 329. This section contains an exception whereby if ‘adequate consideration’ (ie. market value) is paid for the criminal property, then there is no offence. There is no similar exception in sections 327 or 328.

The NCA’s decision

The NCA decided not to open an investigation stating that:

•  It was not required to investigate unless a specific shipment of cotton had been identified as the proceeds of crime; and
• Once someone in the supply chain had paid ‘adequate consideration’ for the product, the product could no longer be criminal property. Given the likelihood that, at some point in the supply chain for the XUAR cotton, adequate consideration would have been paid, the chances of there being any money laundering offence was low. 

The WUC launched a judicial review of the NCA’s decision.

During the Court of Appeal process, the NCA accepted that it can commence an investigation into the proceeds of crime before specific criminal property (or recoverable property) is identified.

The Court of Appeal’s decision

The Court of Appeal found that the NCA had misdirected itself in law when deciding not to investigate. Critically, the Court of Appeal found that the adequate consideration exception operates only in relation to the acquiring, using, or possessing of criminal property (under s.329), and that it does not operate to ‘cleanse’ the property of its criminal character. Therefore:

• the payment of adequate consideration by one party somewhere in a supply chain does not ‘break the chain’; and
• a purchaser of criminal property for adequate consideration can still commit a different money laundering offence (under section 327) if they deal in that property, for example by using it to manufacture another product, and/or selling it to someone else. 

The NCA must now re-consider its decision. However, the judgment does not compel the NCA to open an investigation. It is possible that the NCA will again refuse to investigate, but for other legitimate reasons (from a public law point of view). As such, this may be a hollow victory for the WUC.

For more detail on this case and its implications for businesses, see our client briefing Money Laundering: Now a Never-Ending Chain?