A recent ruling by the UK’s Court of Appeal is set to make supply chain compliance even more challenging, with significant implications for all companies and their supply chains.
The case in question, R (on the application of World Uyghur Congress) v National Crime Agency (NCA), involved a landmark decision with far-reaching consequences for due diligence policies and processes. Here’s what you need to know.
What happened in this case?
The World Uyghur Congress (WUC), a human rights organisation advocating for the Uyghur people, challenged the NCA’s decision not to investigate suspected money laundering related to cotton products imported from China’s Xinjiang Uyghur Autonomous Region (XUAR). The WUC provided evidence suggesting the cotton was produced using forced labour, meaning the profits derived could constitute criminal property under the Proceeds of Crime Act 2002 (POCA).
The Court of Appeal examined two key legal questions:
- Can the NCA launch an investigation without clear evidence of criminal property?
The court clarified that investigators don’t need absolute proof of criminal property before starting an investigation. The purpose of an investigation is to determine if such property exists. - Does the “adequate consideration” exemption in POCA cleanse criminal property?
The answer from the Court of Appeal is no, it does not.
What is the “adequate consideration” exemption?
Under POCA, section 329(2)(c) provides an exemption for acquiring, using, or possessing criminal property if the person paid “adequate consideration” for it. For example, someone purchasing goods at fair market value might argue that they did so without knowledge of the goods’ criminal origins.
The NCA had previously interpreted this exemption broadly, assuming that if one person in the supply chain relied on the exemption, the property ceased to be classified as criminal. This effectively “cleansed” the property, removing AML reporting obligations or the element of criminality for subsequent transactions.
The Court of Appeal rejected this interpretation. The exemption is personal to the individual claiming it and does not change the property’s status as “criminal” for others in the supply chain. Any onward dealing with criminal property, even if acquired for adequate consideration, remains subject to seizure.
The case involved cotton products from China’s Xinjiang region, linked to forced labour. The World Uyghur Congress provided evidence suggesting these products were proceeds of crime. The ruling clarifies that criminal property retains its status unless acquired by a bona fide purchaser without suspicion of its origin.
Forced labour in supermarket supply chains
A recent BBC investigation highlights the risks posed by inadequate supply chain oversight. The investigation found tomato puree sold in UK supermarkets – including Asda, Morrisons, Tesco, and Waitrose – was linked to forced labour in China’s Xinjiang region. Despite being marketed as “Italian,” the tomatoes were likely sourced from Xinjiang, where Uyghur and other minority groups face coercive labour conditions.
Labour MP Sarah Champion described the UK’s product labelling as “weak and confusing” and criticised supermarkets for prioritising profits over human rights. She urged stronger legislation to ban the import of goods made with forced labour and called for clearer ingredient sourcing information.
Former Conservative Party leader Sir Iain Duncan Smith echoed Champion’s calls for tougher laws backed by criminal sanctions. Meanwhile, Business and Trade Minister Douglas Alexander acknowledged the concerns and emphasised the government’s commitment to reviewing the Modern Slavery Act and improving supply chain transparency.
Adequate consideration and modern slavery compliance
Under the UK Modern Slavery Act 2015, businesses with an annual turnover of £36 million or more are required to publish annual statements detailing the steps taken to prevent modern slavery and human trafficking in their operations and supply chains. While the Act was hailed as a global leader upon its introduction, its effectiveness has been called into question due to limited enforcement mechanisms and the absence of financial penalties for non-compliance. A 2021 UK government report highlighted plans to strengthen the Act by introducing detailed reporting requirements and fines. While these reforms remain unimplemented, the UK government elected in July 2024 under Sir Keir Starmer plans to revisit modern slavery compliance.
The Court of Appeal ruling reinforces the importance of thorough supply chain due diligence, particularly in light of international scrutiny. Globally, regulations such as the EU’s Corporate Sustainability Due Diligence Directive and the US Uyghur Forced Labor Prevention Act place additional pressures on companies to identify and eliminate forced labour from their supply chains. With 85% of Chinese cotton produced in Xinjiang, the region remains a focal point for supply chain risks, and goods from there may taint global supply chains, including those of prominent high-street brands.
As human rights organisations push for stricter enforcement of modern slavery laws and the UK government considers enhancing modern slavery reporting, businesses must ensure their statements address key areas, including organisational structure, due diligence processes, risk assessment, training, and efforts to evaluate supplier compliance.
What does the Court of Appeal ruling mean for supply chain compliance?
This ruling changes how firms need to approach supply chain due diligence compliance, particularly in supply chains where there is a risk that criminal property might circulate. Here’s what it means in practice:
- The exemption is limited
The “adequate consideration” exemption only applies to specific offences under section 329 of POCA. It doesn’t protect against other offences like transferring or converting criminal property (section 327) or facilitating its use (section 328). - Criminal property remains criminal
Even if someone in the supply chain relies on the exemption, the property still retains its criminal status for others. For example, if you receive payments that originated as criminal property, you could still face liability. - Increased reporting requirements
Firms can no longer assume that property is “cleansed” after passing through someone claiming the exemption. This means more Suspicious Activity Reports (SARs) and applications for Defence Against Money Laundering (DAML) will likely be needed to avoid liability.
How does this affect supply chains?
The ruling has significant implications for supply chains, especially those involving multiple parties.
Greater due diligence
Companies must strengthen their oversight of supply chains to identify potential risks early. This could involve tracing funds or products upstream and ensuring suppliers meet stricter compliance standards.
Contract updates
Businesses may need to revise contracts to address AML concerns and establish clear procedures for handling suspected criminal property.
Increased regulatory scrutiny
Regulators will expect firms to adapt their AML policies to reflect this ruling. Failing to do so could damage relationships with supervisors and lead to enforcement action.
The Court of Appeal’s decision also highlights growing issues with the NCA’s handling of DAML applications. Firms report delays and instances where the NCA neither approves nor rejects a DAML, leaving businesses in limbo. This approach appears to be part of an internal protocol aimed at managing resource constraints but creates uncertainty for firms trying to comply with the law.
What should you do now?
To ensure your business remains compliant in light of the World Uyghur Congress v NCA ruling, take the following steps:
Update policies and procedures
- Revise due diligence policies to reflect the limits of the “adequate consideration” exemption.
- Incorporate enhanced due diligence requirements for higher-risk transactions and supply chains.
Strengthen supply chain oversight
- Conduct thorough supplier audits to trace the origins of goods and identify potential risks.
- Use tools like blockchain or third-party verification platforms to improve transparency in supply chain tracking.
Review contracts
- Include clauses in supplier agreements that address compliance and require disclosures about the origin of goods or materials.
- Establish procedures for managing suspected criminal property in supply chain transactions.
Increase suspicious activity reporting
- Train staff to recognise red flags and escalate concerns promptly.
- Have channels for staff to raise suspicions and procedures to investigate possible criminal origins
Enhance training and awareness
- Deliver regular training tailored to staff roles, focusing on the implications of the ruling and the low threshold for suspicion.
- Educate procurement teams about the risks of forced labour and criminal property in supply chains.
Document compliance efforts
- Keep detailed records of due diligence activities, supplier checks, and compliance measures as evidence for regulators.
- Regularly review and update documentation to reflect any changes in regulatory expectations.
Engage with legal and compliance experts
- Consult with legal advisors to assess the ruling’s specific impact on your business.
- Stay updated on changes to legislation and due diligence best practices by engaging with industry bodies.
Monitor regulatory developments
- Keep track of updates to the Modern Slavery Act, supply chain transparency requirements, and AML regulations.
- Adapt compliance strategies proactively to meet new standards.
Join our free webinar on managing supply chain compliance. Register now.
Join us on 19 February 2024 at midday UK time where VinciWorks compliance experts will discuss how to audit your supply chain effectively, using straightforward techniques and tools to identify potential risks in supplier onboarding and ongoing monitoring. We will dive into the practical steps for conducting audits that go beyond surface-level checks to uncover critical risks, and explore risk mitigation strategies that ensure your supply chain is resilient and compliant.
