World Uyghur Congress case ruling: A new challenge for supply chains?

In a landmark ruling, the Court of Appeal in a case brought by the World Uyghur Congress (WUC) has clarified that the provision of “adequate consideration” at some point in the supply chain does not prevent goods imported into the UK from being identified as criminal or recoverable property under the Proceeds of Crime Act 2002 (POCA).

This decision contradicts previous understanding and could have far-reaching implications for businesses.

The appeal was brought by the WUC against the National Crime Agency (NCA), following concerns about the importation of cotton products from the Xinjiang Uyghur Autonomous Region (XUAR) in the People’s Republic of China.

The WUC had provided substantial evidence of forced labor and human rights abuses in the XUAR to the NCA, the body responsible for investigating possible offenses under POCA. The Court of Appeal found that the NCA had made an error in law in deciding not to investigate under POCA.

It found that the NCA was wrong in proceeding on the basis that 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, whether criminal or civil, and that the payment of adequate consideration at some point in the supply chain does not form a defense against any subsequent transfer of that criminal property or the acquisition of it by a third party.

A new tension

This ruling creates a tension between mandatory due diligence requirements and the money laundering offenses under POCA.

Carrying out more thorough due diligence could increase a person’s exposure to the anti-money laundering regime under POCA by increasing that person's knowledge or suspicion that the products in question are criminal property. In addition, following the WUC ruling, the presence of a person in the supply chain who obtained the criminal property for adequate consideration does not have the “cleansing” effect it was once thought to have.

For businesses sourcing goods or services from countries where there is a greater risk of human rights violations and criminal conduct occurring somewhere in the supply chain, exposure to the money laundering regime in POCA is heightened. The following practical steps may serve to assist in limiting such exposure.

1. Risk assessment

Prudent businesses will assess the risk associated with specific suppliers and regions; consider factors such as the prevalence of forced labor, human rights abuses, and money laundering in the territory and market in question; and prioritize suppliers with transparent and ethical practices.

2. Enhance due diligence

Businesses are encouraged to conduct thorough due diligence on their supply chains. This includes investigating suppliers, subcontractors, and other entities involved in the production process.

Verify the origin of goods and services, especially if they come from regions with a higher risk of human rights violations or criminal conduct.

Although this will of course increase the likelihood of a business becoming aware of suspected criminal conduct – and therefore exposure to the UK's money laundering regime – it is favorable to operate from a position of knowledge and take informed sourcing decisions.

3. Supply chain mapping

Businesses may consider creating a detailed map of the entire supply chain by identifying each link, from raw materials to the final product. Understand the flow of goods, services, and funds within the chain.

4. Contractual clauses

Businesses could include clauses in contracts that require suppliers to comply with applicable laws, including anti-money laundering regulations and human rights standards. Specify – and follow through on – consequences for noncompliance.

5. Monitoring and auditing

Businesses can regularly monitor suppliers’ activities; implement surprise audits if necessary; and use technology, such as blockchain, to track transactions and verify authenticity.

6. Collaboration and information sharing

In efforts to limit exposure, businesses can collaborate with industry peers, nongovernmental organizations, and government agencies; share information on best practices and risks; and join initiatives that promote responsible sourcing and transparency.

7. Training and awareness

Businesses may consider educating employees and supply chain partners about the importance of compliance, and training staff on recognizing red flags related to money laundering and human rights violations.

8. Escalation procedures

Establishing clear procedures for reporting and addressing potential issues, such as escalating concerns to senior management or legal teams promptly, is encouraged.

9. Legal advice

Businesses may consider seeking legal advice to ensure compliance with relevant laws and regulations, and are encouraged to understand the implications of the Court of Appeal ruling and adapt policies accordingly.

10. Document efforts

Maintaining comprehensive records of due diligence efforts, risk assessments, and compliance measures is encouraged. Document steps taken to address any identified risks.

In addition, a formal process exists in the UK whereby a person can make a report of known or suspected money laundering to the National Crime Agency and seek a defense against money laundering (DAML), commonly referred to as "consent," from the NCA to deal with the suspected criminal property.

Whilst a DAML provides a complete defense against a charge of money laundering for the reporting party, it does not protect onwards recipients of the criminal property in question. Each person in the chain would need to make such a report and seek such a DAML in order to protect themselves – a burdensome task on any assessment.

In summary, all will recognize that compliance is an ongoing process. Businesses are encouraged to stay informed about legal developments, adapt their practices, and prioritize ethical sourcing to align with the ruling and protect their reputation.