Court of Appeal decision shines a spotlight on ESG and money laundering issues in supply chains

The Court of Appeal ("CA") recently handed down a significant judgment giving rise to repercussions for retailers across a range of sectors: World Uyghur Congress, R (on the application of) v National Crime Agency [2024] EWCA Civ 715. The issue on appeal was whether the National Crime Agency ("NCA") erred in law in its decision not to investigate imports of cotton with suspected links to forced labour and human rights abuses overseas.

In considering this, the CA provided guidance on key points in relation to the interpretation of the Proceeds of Crime Act 2002 ("POCA"), particularly on the adequate consideration exemption in relation to money laundering offences. This will have wider implications for businesses with suspected criminality and human rights abuses in their supply chains.

Key Points

• Although investigative authorities are given extremely broad discretion, they must direct themselves correctly in law and the courts will intervene if the natural reading of a decision reveals an error of law.
• A lack of identifiable specific criminal property (or recoverable property) is not necessarily a bar to investigators commencing an investigation into suspected proceeds of crime.
• The provision of "adequate consideration" anywhere in the chain of possession does not prevent the goods from subsequently being identified as criminal property in the hands of another individual with the requisite knowledge or suspicion.
• This emphasises the need for companies to be cognisant of the origins of the goods they are importing as part of their supply chains, in light of the risk of investigation and potential criminal liability if they deal with goods knowing or suspecting they derive from criminal conduct.

Background

At first instance, the judicial review brought by the World Uyghur Congress challenged the decisions by three public bodies, including the NCA, not to investigate the importation of goods suspected to have derived from forced labour and human rights abuses overseas.

The defendants argued, in a pre-action letter to the claimant (the "Letter"), that:

• For POCA offences to be established, even where there was evidence of forced labour / human rights abuses, specific property involved or connected with specific criminal conduct had to be identified. In the absence of identifying a specific consignment of goods said to be the product of criminality, the requirements of s.340 POCA were not met and no money laundering offence could arise;
• Even if there was evidence of identifiable criminal conduct and identifiable criminal property, the payment of adequate consideration was a defence to money laundering. The NCA argued that the purpose of the policy was not to taint the 'bona fide' purchaser for value.

The High Court^[1] broadly agreed, ruling that the claimant was unable to point to any specific instance of criminality, and circumstantial evidence of statistical risks of criminality was not a substitute for proof.

The appeal raised a single, narrow issue, namely whether the NCA had misdirected itself in one or more material respects by not commencing an investigation (criminal or civil) in relation to the cotton consignments. The NCA conceded that the Letter did contain certain errors of law. The focus of the appeal was on whether the NCA's decision not to investigate was based on errors of law, or whether it instead conveyed "the type of polycentric decision-making that cannot be impeached other than on grounds of irrationality".

Judgment

The CA made clear that the issue on appeal did not concern the substance of the decision, but rather was limited to whether the NCA's decision, as reflected in the Letter, had relied on an error of law. It reiterated the long-established position that only in highly exceptional cases will the court disturb the decisions of an independent prosecutor and investigator, but also confirmed that the powers of such decision-makers are not unfettered and must be used correctly.

It was not persuaded by the argument that the first instance judge interpreted the NCA's decision letter as setting out a preliminary description of what would need to be established in the course of the investigation, followed by a separate "unimpeachable value judgment" that an investigation would be unlikely to provide sufficient evidence to meet this threshold. In light of this, the CA recognised the concern that the first instance judgment may be understood as "endorsing the proposition that there is a need to establish criminal conduct or criminal property before an investigation under POCA can begin".

Proceeds of Crime Act 2002: an overview

There are three principal money laundering offences under Part 7 of POCA:

• concealing, disguising, converting or transferring criminal property or removing it from the jurisdiction (section 327 POCA);
• entering into or becoming concerned in an arrangement which facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person (section 328 POCA); or
• acquisition, use or possession of criminal property (section 329 POCA).

In each case, 'criminal property' is required, which is defined at s. 340 POCA as any property which constitutes or represents a person's benefit from 'criminal conduct', where the person dealing with the property knows or suspects that this is the case. It is immaterial who carried out the conduct and who benefitted from it.

It was accepted by the NCA (and other defendants), in the High Court proceedings, that offences of forced labour (contrary to the Modern Slavery Act 2015) and crimes against humanity (contrary to the International Criminal Court Act 2001) were capable of constituting criminal conduct under s.340 of POCA. However, the NCA argued that the failure to identify specific criminal property (i.e. a specific consignment of cotton) meant that the requirements in s.340 were not met and there was no "proper basis" for commencing a POCA investigation.

Furthermore, they claimed the provision of “adequate consideration” anywhere in the supply chain would prevent any goods imported into the UK from being identified as criminal property or recoverable property.

Adequate consideration

A person does not commit an offence under s.329 if they acquired or used or had possession of the property for adequate consideration (s.329(2)(c)). POCA further provides in this regard that:

• a person acquires, uses, or possesses property for inadequate consideration if the value of the consideration is significantly less than the value of the property (or the value of the use or possession);
• 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.  

There was uncertainty, until the CA judgment, as to whether once adequate consideration was given, the property was effectively cleansed of its criminal taint for all future purposes or whether subsequent use, for example transfer, could re-engage liability if done with the requisite suspicion. The Court of Appeal in R v Afolabi^[2] held that once criminal property has been acquired by a bona fide purchaser, it does not remain criminal property as it passes through various hands. 

Civil recovery

Under Part 5 of POCA, UK law enforcement authorities can also bring civil proceedings in the High Court to recover property obtained through unlawful conduct – i.e. conduct that is an offence in the UK (or would be if it occurred here and is unlawful in the place it occurred). As the proceedings under this regime are civil in nature, no criminal conviction is required and the property can be deemed recoverable on a civil standard of proof (i.e. on a balance of probabilities).

If a person disposes of recoverable property, and a person who obtains it in good faith, for value and without notice that it was recoverable property (a "bona fide" purchaser) then the property may not be followed into that person's hands.

Adequate consideration: the Court clarifies

The CA clarified the adequate consideration exemption by stating that:

• Section 329(2) is not about bona fide purchasers, and has no impact on the status of the property.
• Adequate consideration would afford protection to the purchaser while he continued to possess the property even if he knew it to be criminal property, but it would not protect him if, in that knowledge, he transferred it to someone else.
• The provision of adequate consideration by someone who can rely on it does not preclude the property from being 'criminal property' in the hands of someone else with the requisite knowledge or suspicion.
• To the extent that the first instance judge accepted the NCA's submission that the chain of criminal proceeds could be broken merely by the use of adequate consideration in any of the transactions involved, he was wrong to do so.

The CA held that the NCA had misdirected itself and that both propositions in the Letter were wrong as a matter of law.

The result was that the NCA's decision was quashed, and it will be required to reconsider whether to carry out an investigation. 

Implications

The case provides clarity on the impact of the adequate consideration exemption which has not previously been available. That a lack of identifiable specific criminal property is not necessarily a bar to an investigation by the authorities is not surprising, but its confirmation in this case may factor into the analysis that individuals and corporates must conduct when considering reporting and requests for consent under POCA.

The broader implications of this judgment are also significant. Companies would be advised to take responsibility for their supply chains on a holistic level, or else should be prepared for the possibility of an investigation by the NCA (or other analogous bodies) if there is any suggestion that criminal property may have been involved at any stage of the chain. This increased accountability will require retailers to be actively critical of the labour practices in use across the lifecycle of a product and ready to take decisive action when presented with criminal practices. It is clear on the basis of this judgment that the chain cannot be broken, or "cleans[ed]", by the provision of adequate consideration at an earlier stage, thereby reintroducing the potential for liability for each party within the chain and moreover, establishing a clear legal route through which companies who indirectly support human rights abuses in other countries can be investigated and potentially prosecuted in the UK.

It is also interesting to see the UK courts taking a more interventionist approach in an ESG context, even in areas such as investigative decision making where the courts have traditionally been hands off in their consideration of such decisions and the justifications put forward for them. In the context of other recent decisions in the ESG sphere, this may signal a greater willingness from the courts to police issues of significant public concern.