This decision is significant for a number of reasons:

• There is now an increased risk that UK law enforcement will be able to recover assets from companies that fail to carry out adequate due diligence on their supply chain (even where adequate consideration was paid for goods) and therefore may be viewed as having constructive notice of the issues in their supply chain.
• There is now an increased risk that businesses will face prosecution for criminality in their supply chain and related money laundering offences. In particular, the new senior manager offence under the Economic Crime and Corporate Transparency Act 2023 (ECCTA) makes companies criminally liable for a number of economic crimes if these were committed by senior managers (including money laundering).
• These increased risks have significant repercussions for many companies, particularly those in the clothing and retail sectors, as they may impact business operations.

In this article we look at the significant implications of this decision for companies and what they should do to minimise these risks.

Liability for money laundering

The existing law on civil and criminal liability for money laundering offences is set out in POCA.

Criminal regime

Part 7 of POCA sets out three substantive criminal money laundering offences:

1. Concealing, disguising, transferring, converting or removing criminal property from the UK (section 327)
2. Arranging the acquisition, retention, use or control of criminal property (section 328)
3. Acquiring, using or possessing criminal property (section 329)

These offences require knowledge or suspicion that the property is criminal property. Property is criminal property if:

1. It constitutes a person’s benefit from criminal conduct or represents such a benefit (in whole or part and whether directly or indirectly); and
2. The alleged offender knows or suspects that it constitutes or represents such a benefit.¹

There is an exemption from liability under section 329 if this property is acquired, used or possessed for adequate consideration. While “inadequate consideration” is defined in POCA,² the courts are yet to clarify how “adequate consideration” will be calculated. The payment of adequate consideration does not provide an exemption from criminal liability under the two other money laundering offences specified in sections 327 and 328 of POCA.

Civil regime

Part 5 of POCA sets out a scheme by which the proceeds of crime can be recovered through civil proceedings even where there has been no conviction. It provides for the making of a civil recovery order by the High Court for property which is, or which represents, property obtained through unlawful conduct, or which is intended to be used in unlawful conduct (“recoverable property”). Conduct that occurs abroad and constitutes, or is connected with, the commission of a gross human rights abuse or violation may also be unlawful.

However, if an individual obtains criminal property in good faith, for market value and without notice, the exemption from liability under section 308 of POCA means that it can no longer be treated as recoverable property; i.e., it cannot be taken away from them. Other case law has gone on to clarify that a purchase may not be deemed to have been made in good faith if an individual has actual or constructive notice that the property in question is criminal or recoverable property. For example, a purchaser who suspects goods to be the product of forced labour or human rights abuses, or fails to carry out adequate due diligence, may not be able to rely on section 308, on the basis that they had such actual or constructive notice – in which case the goods may be recoverable from them.

Regulatory regime

For those in a UK regulated sector, there are also a number of regulatory offences applicable to individuals and businesses, including failure to report suspicions and knowledge of money laundering under sections 330 to 332 of POCA, and failing to meet AML obligations under Regulation 86 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "Regulations")).

The new senior manager offence

Since December 2023, corporate criminal liability for a substantive money laundering offence or an offence under Regulation 86 can be established under the senior managers test set out in ECCTA.

Under ECCTA, an organisation will be guilty of an offence if a senior manager, acting within the actual or apparent scope of their authority, commits the money laundering offence (or other economic crime).³ A senior manager means an individual who plays a significant role in the making of decisions about how the whole or a substantial part of the activities of the organisation are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities. Prior to December 2023, corporate criminal liability for money laundering needed to be established under the “identification principle”. This required the identification of persons representing the “controlling mind and will” of the company, which, in practice, represented a small number of directors and senior managers. Because of this law, prior to December 2023, it had been difficult to successfully prosecute corporates for economic crimes in the UK. The impact of the senior manager offence is that it is now easier for corporates to be prosecuted for money laundering offences (as well as other economic crimes).

For a legal entity, the maximum penalty is an unlimited fine for offences under POCA and the Regulations.

The World Uyghur Congress case

The claim was brought by the World Uyghur Congress to challenge the UK National Crime Agency’s ("NCA") decision not to investigate alleged money laundering offences in relation to consignments of cotton products imported into the UK that originated from the Xinjiang Uyghur Region and were alleged to have been the product of forced labour and other human rights abuses. The Court of Appeal held that the NCA had misapplied the law in making its decision not to prosecute.

The NCA argued that:

1. It is necessary to identify a specific product as criminal property before commencing an investigation into whether a money laundering offence has been committed; and
2. Once adequate consideration has been paid for property in a supply chain, this has the effect of “cleansing” criminal property so as to preclude its recovery from anyone who subsequently acquires it, or the recovery of the proceeds of its onward sale. This would therefore leave nothing to be investigated.

The Court of Appeal disagreed. Instead, it confirmed that:

i. 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. The point of an investigation is to answer this precise question.

ii. If a purchaser had bought goods in good faith and at market value, the general exemption under section 308 (not section 329(2)(c)) of POCA would mean that it is not recoverable.

iii. However, the adequate consideration exemption from liability (under section 329) is personal to the individual concerned and only applies whilst they have the property in their possession. It was agreed that the adequate consideration defence applies to transactions “at market value”. This defence does not clean the chain of transactions related to the property, and is only a defence under section 329(1), and not to the money laundering offences set out within sections 327 and 328.

iv. If a company has actual or constructive notice that goods might be the proceeds of criminality, then the exemption under section 308 does not apply and the goods are recoverable.

The impact of the decision

The Court of Appeal clarified the operation of certain parts of POCA. Before this decision, it was widely thought that purchasing goods in a supply chain at market value (“adequate consideration”) allowed the purchaser then to deal freely in those goods and provided a complete defence should it later be claimed that those goods were recoverable or criminal property. The Court of Appeal has now confirmed that recoverable or criminal property – even if it was bought at market value – remains so in the hands of its purchaser. The fact that goods have changed hands many times before they reach the UK and end customer is not a defence and does not change the criminal or recoverable nature of the property.

This decision may seem at odds with the earlier ruling in the Afolabi case,⁴ which stated that when property (a house in that case) is sold to a good faith purchaser, the property does not remain criminal property. The rationale behind that decision is that when criminal money is used to buy a house, the property becomes criminal, yet when the house is sold on, the sale proceeds will become criminal, but the property, now in the hands of a good faith purchaser, no longer represents or contains any proceeds of the original crime. The Uyghur case, on the other hand, suggests that in certain cases, property, although not criminal proceeds, may nevertheless be recoverable via the civil recovery route from purchasers in the supply chain who had suspicions or constructive notice of potential criminality in the supply chain.

Irrespective of which decision is correct, or if there is in fact any conflict between them, the effect of this decision is that UK law enforcement may now bring more investigations and prosecutions relating to allegations of forced labour, human rights abuses and other criminality in supply chains, where previously they considered themselves unable to act due to misinterpreting the law.

There is now also an increased risk that UK law enforcement will be able to recover assets from companies that fail to carry out adequate due diligence on their supply chain (even where adequate consideration was paid for goods) and therefore may be viewed as having constructive notice of the issues in their supply chain (under Part 5 of POCA).

There is also an increased risk that businesses may face prosecution for criminality within their supply chain and related money laundering offences (under Part 7 of POCA). This risk has increased because of the introduction of the senior manager offence, which has made it easier to prosecute companies for economic crimes such as money laundering. Even if adequate consideration has been paid, there remains a risk of criminal investigations under sections 327 and 328 of POCA. Whether this is a realistic risk is hard to tell at this stage. In most cases where adequate consideration has been paid, the payor is factually less likely to have knowledge or suspect that the goods are the proceeds of crime. As such, there may not be credible alternative grounds for law enforcement to suspect that the individual or company suspected or had knowledge that they were dealing with criminal property, sufficient for them to investigate under these alternative offences.

Practical takeaways and next steps

So, what should companies do to mitigate these risks of criminal investigation or civil recovery?

1. Due diligence

• Conduct or require your customers to conduct due diligence and undertake reasonable checks on all parties involved in the chain.
• Consider filing a Suspicious Activity Report ("SAR"), coupled with a request for a Defence Against Money Laundering/Defence Against Terrorist Financing ("DAML/DATF"), where you suspect or have knowledge that the property you hold may be the proceeds of crime or terrorism. Implementing reasonable due diligence processes will not prevent claims being made. However, the additional safeguard of submitting a SAR, and obtaining a DAML/DATF, will reduce the likelihood of such claims succeeding.

2. Risk assessments

• 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.

3. Representations and warranties from 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 within these policies guidance on the types of representations and warranties that you require from your suppliers.
• Ensure that such representations and warranties appear in your contracts or terms and conditions.

4. Internal training on how to spot risks

• Identify who your senior managers are throughout the business and supply chain.
• Identify who your most at-risk employees, subsidiaries and associated persons are and introduce comprehensive training that ensures that individuals are aware of the risks and know how to spot them.
• Monitor and incentivise compliance throughout the entire supply chain.

5. Auditing the supply chain

• Include audit or other clauses in contracts with all those in the supply chain, including requirements to maintain accurate books and records and producing records of compliance.
• Conduct regular audits – every 6 to 12 months.

6. On-site visits

• Carry out on-site visits and in-person meetings with those throughout the supply chain to identify risks and demonstrate a commitment to maintaining compliance.
• Seek regular feedback from those on the ground to tailor your approach.

If you have any concerns about the above and how money laundering, bribery, fraud, modern slavery or corruption may impact you or your business, please do not hesitate to contact us.

1. Section 340(3) of POCA.
2. Section 329(3) of POCA.
3. section 196 of ECCTA
4. R v. Afolabi [2009] EWCA Crim 2879.

In-depth 2024-158