Introduction
In this article, we examine the potential impact on organisations managing global supply chains of the recent Court of Appeal judgement in the case against the National Crime Agency (NCA) brought by the World Uyghur Congress (WUC)1. The appeal was based on the NCA’s decision not to initiate a money laundering investigation under the Proceeds of Crime Act 2002 (POCA), on the basis that the importation of certain cotton goods originating from the Xinjiang Uyghur Autonomous Region (XUAR) may be categorised as criminal property.
Original Proceedings
In the original case, evidence was presented by the WUC to the NCA that 85% of cotton grown in China comes from the XUAR2, and there is significant evidence that its production involves conditions of forced labour and exploitation of workers3. The WUC considered the cotton product, which is traded with the UK, to be categorised as criminal property under POCA, based on allegations that its production involved violations of human rights impacting the Uyghur community. The NCA argued, and the court agreed, that it is insufficient for the purposes of POCA to deal in hypothetical scenarios or presumptions. Therefore, due to the absence of identifying a specific consignment of goods originating from criminal activity, the requirements of s340 POCA were not met and no POCA offence can arise.
The NCA also advanced the defence, as previously commented in Hogan V DDP 20074, that if criminal property is acquired for “adequate consideration” then no offence is committed under POCA. Under this argument, the adequate consideration defence contained within s329(2)(c) would apply, as the purchaser (UK imports) had paid fair market price for the cotton.
Court of Appeal Decision
The Court of Appeal ruled that the NCA’s adequate consideration argument was true to the wording of section 329(2)(c). However, the court went on to set out that section 329(2)(c) would only afford protection to the purchaser while it remained in their possession. It would not protect the purchaser or importer if, while having knowledge or suspicion of criminal conduct, they transferred the criminal property to someone else (e.g. trade) even if the goods were purchased at fair market value, as this act could potentially attract liability under s327 POCA.
To the argument that it is insufficient (for POCA purposes) to deal in hypothetical scenarios, the court ruled that it did not make sense for an investigation not to be initiated based on the absence of evidence when the purpose of the investigation would then be to establish whether suspected criminal conduct had occurred.
What Does This Mean for Organisations?
The Court of Appeals' determination that adequate consideration does not preclude liability to human rights violations within the supply chain poses significant implications for UK businesses operating globally and those importing goods and/or services from other regions. There is now a potential money laundering liability placed on those who purchase goods and/or services from a supplier who conducts activity that is unlawful or would be unlawful in the UK if they subsequently transfer or otherwise utilise the (criminal) property they have acquired.
This means that human rights issues identified within a supply chain could have a direct link to money laundering offences, based on violations in how that product or service has been produced. Understanding the intersectionality of these risks within the supply chain and ensuring your business is taking an integrated approach to its due diligence means the appropriate response can be deployed where acute issues are identified.
Beyond the immediate legal risk, businesses must also manage any potential reputation fallout, where the public’s standards for ethical conduct are often higher and more fluid. Non-governmental organizations (NGOs) and other activists, particularly those operating in hostile jurisdictions where human rights abuses are more prominent, may identify acute human rights issues and exert greater pressure on the NCA and other enforcement agencies to open money laundering investigations, using this recent ruling as a benchmark. If publicised, this could create additional reputational risk for organisations. Businesses should adopt a proactive approach, ensuring regular assessment of enterprise and localised risk metrics within the supply chain is undertaken and that thorough due diligence is conducted to continuously monitor these risks.
Quantifying the Scale of Forced Labour
Given the complexity and often hidden nature of human rights violations and modern-day slavery, accurately quantifying their impact can be challenging. The International Labour Organization estimates that 28 million people are currently in conditions of forced labour, underscoring the scale of this issue across global industries. The U.S. Department of Labor annually publishes a 'list of goods produced by child labour or forced labour,' which in 2022 identified 159 goods produced under those conditions.5 These goods encompass a broad spectrum, from livestock and fruits to precious minerals such as gold and cobalt, highlighting the widespread risk of modern slavery infiltrating the supply chains of major commercial businesses across many sectors.
Take for example cobalt, a mineral critical to technologies that symbolize modern life, such as electric vehicles and smartphones. An estimated 70% of the world's cobalt supply originates from the Democratic Republic of Congo (DRC), a region notorious for child labour and human rights abuses within its cobalt mining operations.6 With the International Energy Agency projecting a surge in global demand for cobalt by as much as 60%7, the issues of forced labour in its production are not going away.
Other sectors where this new ruling could have a significant impact include construction (18% of forced labour victims), manufacturing (15%), and agriculture & fishing (11%).8 Companies operating in these sectors without full visibility of their supply chain activity could now risk attracting liability under s327(1) of POCA 2002 following the WUC vs NCA judgement. Due to the exploitative nature of human rights abuses, local and in-depth reviews, including engagement with inherently vulnerable stakeholders are often required as part of the organisation’s overall risk assessment and due diligence process.
An Integrated Approach to Risk Management
Traditionally, integrity and governance risks including money laundering and corruption are managed separately within the business compared to social and environmental risks. The WUC vs. NCA judgement will require businesses to take an integrated approach to how various risk metrics are managed. Your money laundering reporting officer may become a key stakeholder in social and environmental governance matters when considering the onward use of goods acquired with “adequate consideration” but where suspicions of human rights violations have been raised.
Corporate Social Responsibility Due Diligence and Disclosure (CSRDDD) and the International Sustainability Standards Board (ISSB) represent useful frameworks that target human rights issues and ethics in global supply chains. Compliance with these frameworks, as well as integration with financial crime and anti-bribery and corruption risk frameworks, may be particularly relevant for businesses considering the implications of the recent ruling.
The CSRDDD is a proactive approach by the EU that requires certain companies to identify, prevent, and account for how they address their actual and potential adverse societal impacts. Specifically, the EU anticipates that the directive will directly affect around 50,000 companies domiciled within the EU.9
The ISSB aims to provide a comprehensive global baseline of sustainability disclosure standards and to provide consistent, comparable, and reliable information on companies’ societal impact for shareholders. Through the lens of ISSB standards, companies would be expected to disclose their sustainability practices, including how they address the risk of slave labour in their supply chains. Such disclosures could help investors, consumers, and other stakeholders make informed decisions, potentially steering the market away from entities that fail to uphold ethical standards.
By aligning your business’ operations and sustainability efforts with the guidelines set out by the CSRDDD and ISSB, you can establish a robust mechanism to help you identify and mitigate your supply chain risk. Compliance with these regimes serves as a benchmark, ensuring that responsible and ethical business practices are not just aspirational but are grounded in internationally recognized standards. This strategic approach will not only mitigate the risk of legal challenges such as POCA but will also enhance your reputation, investor confidence, and long-term sustainability.
Ankura provides an unparalleled suite of services to support businesses managing their supply chains and third-party risk. If you would like to discuss how we can support you, please reach out to one of our experts.
1. The World Uyghur Congress (WUC) is a non-governmental organization that advocates for the human rights and freedoms of the Uyghur people in Xinjiang, China, and globally, focusing on raising awareness and support to address the political, social, and economic challenges faced by this community.
2. Xinjiang accounts for 87% of China's cotton production - Chinadaily.com.cn
3. UK judge rejects Uyghur bid to halt Xinjiang cotton imports | Courthouse News Service
4. Hogan v The Director of Public Prosecutions | [2007] WLR 2944 | England and Wales High Court (Administrative Court) | Judgment | Law | CaseMine
5. Forced labour, modern slavery and trafficking in persons | International Labour Organization (ilo.org)
6. Baumann-Pauly, D., “Making Mining Safe and Fair: Artisanal Cobalt Extraction in the Democratic Republic of the Congo”, World Economic Forum (Geneva, Switzerland; September 2020).
8. Figures from Business' duty to break the chains of modern slavery (cgi.org.uk)
9. Sustainable economy: Parliament adopts new reporting rules for multinationals | News | European Parliament (europa.eu)
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
