Proceeds of Crime Act 2002 - Adequate consideration and supply chains

On 27 June 2024, the Court of Appeal dealt a blow to the National Crime Agency’s (“NCA”) refusal to investigate cotton goods consignments that had been imported from the Xinjiang Uyghur Autonomous Region of the People's Republic of China (“XUAR”) as products of forced labour.

In overturning a 2023 High Court decision, the Court of Appeal’s judgment may prove to be a pivotal moment for the UK’s anti-money laundering regime; specifically, the ‘adequate consideration’ exemption under the Proceeds of Crime Act 2002 (“POCA”).

Background

In 2020, the World Uyghur Congress (“WUC”) sent substantial evidence to the NCA evidencing serious human rights abuses that were taking place in XUAR, noting that cotton harvested from the region may have come from forced labour.

This led to the WUC urging the NCA to commence a POCA investigation into money laundering offences on grounds that (i) the cotton was criminal property; and therefore, (ii) trading that cotton was criminal conduct.

The NCA refused to commence such an investigation, its reasoning (amongst others) being that:

1. as per the (widely accepted) reading of POCA; if, at any point in the supply chain, adequate consideration (i.e. fair market value) had been paid for the cotton, the very nature of such a transaction meant that the relevant exception in POCA was triggered and the cotton was cleansed of its character as criminal property; and
2. it was necessary to be able to identify specific criminal property and criminal conduct before there can be a proper basis for a POCA investigation.

The WUC sought a Judicial Review of the NCA’s decision but this was rejected by the High Court in 2023.  The WUC appealed, citing that the High Court had “correctly identified the nature of its challenged [but] failed to address the substance of it”.

Money laundering offences under POCA

Money laundering offences under POCA can be distilled into three categories:

1. concealing;
2. arranging; and
3. acquiring, using and possessing criminal property.

Liability under any of these offences requires knowledge or suspicion that the property is criminal property (i.e. the benefit from a crime). Only the third category raises a statutory exemption of adequate consideration, such that if market value is paid for what is criminal property, the chain of criminality is broken and that property is cleansed of its criminal character.

The NCA sought to rely on this exception when it refused to commence an investigation.  It explained that if at any point in the supply chain, fair market value had been paid for the cotton, there was no money laundering offence in the onward trading of that commodity.

Court of Appeal

The Court of Appeal unanimously agreed with the WUC’s interpretation of the money laundering offences under POCA, finding that the NCA had misdirected itself in law when deciding not to investigate the concerns of the WUC.  

The High Court’s decision was quashed, with the NCA being ordered to reconsider investigating whether any money laundering offences had been committed in the trading of cotton from the XUAR.

NCA’s refusal to commence a POCA investigation

In analysing the NCA’s second argument for refusing to commence a POCA investigation, the Court of Appeal found that it was obvious that an “investigating body does not need to know that recoverable property exists before commencing an investigation, since the specific purpose of that investigation may be to ascertain that fact”.

Adequate consideration

On the issue of adequate consideration, the Court of Appeal agreed that the NCA was wrong to assume that the payment of adequate consideration within a supply chain could cleanse the criminal character of the property.

The Court of Appeal noted in its judgment that the concept of criminal property is a “fluid one” which is dependent on:

• the “state of mind of the alleged offender”; and
• crucially, whether the alleged offender knows or suspects that the property has criminal origins.

Simply paying market value does not preclude, the Court of Appeal surmised, the property losing its criminal character, which would be wrong in law. Any onward transfer, where there is knowledge that the property is criminal property would give rise to a different money laundering offence under POCA (e.g. arranging)

What this means for businesses

Although it remains to be seen whether this judgment will result in an uptick in money laundering investigations, it underscores the importance of businesses undertaking thorough due diligence on their supply chains and who they transact with.

Businesses would be wise to consider the following:

1. not to take delivery of goods that are suspected to be tainted by human rights abuses or another criminality.
2. ensuring that reporting channels are sufficiently clear so that where there is such a concern, it can be escalated to the right person/team so that appropriate action is undertaken.
3. reviewing contractual terms to assess whether it allows a business to reject the delivery of any goods that may be tainted with criminality.           

That said, and on analysing the judgment, a slight quirk arises. Although unlikely (not least extremely risky), if knowledge/suspicion is required, there is arguably a risk that some businesses could take an intentionally ignorant approach to supply chains, by turning a blind eye to the source of products.  In other words, if you do not know/suspect untoward activity, then there is no breach of the law.

As noted above, this would be an incredibly risky approach and would go against a trend, set by the Bribery Act 2010, of businesses taking heed of their compliance programmes to ensure that their approach to transacting with third parties is well-defined and transparent.

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