In a significant ruling from the UK’s Court of Appeal, the application of the Proceeds of Crime Act 2002 (POCA) has been expanded, putting companies at increased risk for asset recovery, fines and even criminal prosecution for failing to conduct adequate due diligence on their supply chains.
Furthermore, the recently passed Economic Crime and Corporate Transparency Act (ECCTA) could see more companies and even senior managers found criminally liable for economic crimes within their supply chains, and failing to conduct adequate due diligence. Paying market value for goods linked to criminality is no longer a defence.
The Xinjiang cotton case and Uyghur slavery
In the case of R (World Uyghur Congress) v NCA, the court found it unlawful that the National Crime Agency decided not to open a money laundering investigation into the trade of cotton to the UK from the Xinjiang Uyghur Autonomous Region (XUAR) of China. The cotton trade in Xinjiang has been subject to serious allegations of forced labour, slavery and human rights abuses perpetrated against the Uyghur ethnic group by Chinese authorities. The World Uyghur Congress (WUC) alleged that the product of such abuses – the cotton transported to the UK – is therefore criminal property. But the NCA refused to investigate businesses trading in this cotton, so the WUC brought a judicial review.
The current law as set out in POCA lays out the money laundering offences, and explains what is criminal property and when it becomes such. POCA also sets out civil recovery schemes where criminal property can be seized, even without a criminal conviction. This includes conduct that occurred abroad and constitutes or is connected with the commission of gross human rights abuses, which is what the WUC alleged.
In this case, the court agreed that 85% of cotton grown in China comes from the Xinjiang region and that it is accepted that there is “a diverse, substantial, and growing body of evidence that serious human rights abuses are occurring in the XUAR cotton industry on a large scale.”
“Adequate consideration” of criminal property under POCA
It is a money laundering offence to “acquire, use or possess criminal property” (section 329 POCA), but there is an exemption if this property is acquired, used or possessed for “adequate consideration.” Although the “adequate consideration” exemption does not provide an exemption from criminal liability under S. 327 and S. 328 of POCA.
Prior to the R (World Uyghur Congress) v NCA decision, the “adequate consideration” exemption under POCA allowed the purchaser or criminal property to freely deal in that property if they paid market value. For instance, purchasing a tonne of slave-produced cotton at market value would therefore ‘cleanse’ the cotton of illegality once it was sold to a buyer further down the supply chain. This would therefore prevent the cotton becoming “recoverable property” under POCA.
Other precedent, in particular R v Afolabi, held that a house cannot be criminal property forever once it has been purchased in good faith by a bona fide buyer. The proceeds of the sale would remain criminal property, and therefore liable to be recovered or prosecuted as money laundering. The Uyghur case, on the other hand, states that property even if it is not the result of criminal proceeds, could be recoverable via the civil recovery route from purchasers in the supply chain who had suspicions of potential criminality in the supply chain. This also includes buyers who fail to properly assess their supply chain for the risks of criminality, i.e. not undertaking adequate due diligence.
Impact of criminal property on the supply chain
The Court of Appeal decision in the Uyghur case has also given the NCA more power to investigate potential cases of criminality in the supply chain. It held that the definition of “investigations” within POCA makes clear that an investigating body does not need to know that recoverable property exists before commencing an investigation.
Importantly, the “adequate consideration” exemption from liability is personal to an individual and only applies whilst they have the property in their possession, i.e. a house. But this exemption does not clean the chain of transactions related to the property, regardless of having paid market value. This expands the scope to the supply chain, where specific goods and raw materials are being bought and sold.
The Court of Appeal held that if a company has actual or constructive notice that goods might be the proceeds of criminality, then the “adequate consideration” exemption does not apply and the goods are recoverable. Companies need to just do more than take their suppliers’ word for it. They must conduct adequate due diligence.
This means that businesses are at an increased risk of being investigated by UK law enforcement, or having assets recovered if they fail to carry out adequate due diligence on their supply chain, even when “adequate consideration” was paid for goods. Failing to conduct due diligence or ignoring red flags or warning signs could be considered “constructive notice” of the criminality issues in their supply chain in light of the Court of Appeal ruling.
ECCTA and criminality in the supply chain
ECCTA has also increased the risk of criminal prosecution in light of the Uyghur case. ECCTA introduced the senior manager offence, a significant change in corporate criminal liability. Prosecutors no longer have to prove that “the directing mind and will” of a company was behind wrongdoing. After ECCTA, any “senior manager” who has engaged in criminality around fraud, tax evasion, sanctions breaches, money laundering, false accounting and bribery can find their actions result in corporate prosecution.
Therefore, it is increasingly incumbent on senior managers to ensure that due diligence is conducted across the supply chain on a risk-based and ongoing basis, to ensure there is no criminality in any of the goods or services purchased in the supply chain. If not, the proceeds of these goods can become criminal property, and dealing in criminal property is a money laundering offence. Even if a senior manager signs a market value deal for clothes made from cotton, and doesn’t conduct adequate due diligence to ensure the cotton wasn’t produced by criminal forced labour, both the company and the senior manager could find themselves facing prosecution.
How companies can audit their supply chain for compliance risks
First and foremost, due diligence must be taken seriously across the supply chain. This applies at all levels and tiers, at home and abroad, so you are assured your own suppliers and further tiers are also conducting reasonable checks and you are satisfied with such. Onboarding new suppliers is a significant part of the process and expanding your capabilities through compliance technology in this area is vital.
Carry out risk assessments of the geographies and sectors your business operates in, alongside those of your clients and suppliers, to identify all potential risks. Document these risk assessments and ensure they are kept up to date.
Train all staff involved in the process in understanding the risks of issues like modern slavery, forced labour, money laundering, fraud and other compliance risks. Ignorance is no excuse. Also ensure senior managers are subjected to training throughout the business.
Following a risk assessment process, identify the most at-risk subsidiaries and associated persons and require comprehensive training. You can and should require training, including logs and even mandating certain courses, to your subsidiaries and suppliers.
Ensure that you have proportionate policies and procedures in place to cover key risks that stem from different parts of your supply chain. Include warranties and clauses in your supply chain contracts protect your business, and are fully communicated up and down the supply chain. Suppliers should also be required to introduce policies such as those against forced labour, and you should ask for copies of these regularly.
Conduct regular audits, at least every 6 to 12 months depending on the risks of a supplier, and include audit clauses in contracts within the supply chain, and the right to access books and records, along with records of compliance.
Join VinciWorks webinar on supply chain risk management – Wednesday 4 September 2024 at midday UK time
Join VinciWorks free webinar on understanding the hidden compliance risks in your supply chain, from modern slavery to bribery. Assess your procedures and get best practice advice from our compliance experts on auditing and protecting your supply chain in light of ECCTA and the Uyghur case.
