Clifford Chance

The High Court has clarified that, where adequate consideration is paid for goods, the risk of criminal liability is low, even if criminal conduct exists in the supply chain.

Over the course of 18 months, the claimant had corresponded with the UK Home Office, HM Revenue & Customs (HMRC) and the National Crime Agency (the NCA) (together, the Defendants), raising concerns about the importation into the UK of goods which it suspected had links to forced labour and other human rights abuses overseas.

The Defendants decided not to investigate the claimant's concerns. In an application for judicial review of their decisions, the High Court considered whether the Defendants had misdirected themselves in law by deciding not to exercise powers of civil recovery under the Proceeds of Crime Act (PoCA) or to use its powers to investigate potential breaches of the Proceeds of Crime Act 2002 (PoCA), and/or the Foreign Prison-Made Goods Act 1897 (FPMGA)¹.

PoCA

Under PoCA:

• The acquisition, use and possession of criminal property is a criminal offence, unless it can be shown that such acquisition, use or possession was for adequate consideration (s. 329, PoCA).
• This offence is one of the 3 money laundering offences in PoCA for which it is necessary to identify "criminal property".
• "Criminal property" is property that constitutes or represents a person's benefit from criminal conduct (as defined in s.340(2), PoCA) and the alleged offender knows or suspects that the property constitutes or represents such a benefit (s.340(3), PoCA).
• Part 5 of PoCA includes powers to enable the civil recovery of property obtained through unlawful conduct, and provisions that allow property obtained by unlawful conduct to be 'followed' or 'traced' into the hands of a person obtaining the property.

The Defendants explained to the claimant that their decision not to investigate was based on their interpretation of the relevant provisions of PoCA which can be summarised as follows:

• Offences of forced labour contrary to s.1 of the Modern Slavery Act 2015 and crimes against humanity contrary to s. 51(1) of the International Criminal Court Act 2001 are capable of constituting criminal conduct within s. 340 of PoCA.
• However, for PoCA offences to be established, specific property involved or connected with specific criminal conduct has to be identified.
• Even if there is evidence of identifiable criminal property and identifiable criminal conduct, the payment of adequate consideration is a defence to money laundering. In this case, the 'criminal property' for the purposes of PoCA would be the proceeds of the transaction in the hands of the seller, not the product/goods in the hands of the buyer.

The Court broadly agreed with the Defendants' interpretation: (i) in a supply chain situation, evidence of criminality related to a specific consignment of goods must be established; and (ii) even where criminality is shown to be connected with goods in the supply chain, a company which pays adequate consideration for those goods (i.e. not significantly less than their value) has a defence to money laundering offences under PoCA.

The claimant also attempted to argue that the Defendants had failed to deploy civil powers under Part 5 of PoCA. However, the Court held that even though the lower burden of proof applies to civil rather than criminal breaches, it is still necessary to prove that specific property was the product of unlawful conduct.

Applying those principles to the case, since no specific consignment of goods connected to criminality or unlawful conduct had been identified, the Court found that Defendants had not misdirected themselves by declining to investigate the claimant's concerns either on a criminal or a civil basis.

The Court considered it relevant that the NCA had actively examined information provided by the claimant before deciding that there were no grounds to investigate further. The Court also noted the NCA's acknowledgement that its conclusion could change if further information came to light.

The FPMAG
The FPMAG prohibits the importation of goods produced "wholly or in part in any foreign prison" (s. 1, FPMAG). The Defendants argued that there must be proof of an unbroken chain between a specific consignment of goods, and their origin in a foreign prison, for a company to be liable under s. 1, FPMAG. They further argued that the evidence provided did not meet the required standard of proof to establish, on a balance of probabilities that the product was made in a foreign prison.

In the present scenario, the Defendants had determined that the evidence was insufficient to enable conclusions to be drawn as to the particular or specific circumstances of an individual consignment of goods. The Court held the Defendants' interpretation of s.1 FPMAG was correct – a link between a specific consignment of goods and their manufacture in a foreign prison needs to be proven. Therefore, the Court considered that the Defendants' analysis of the law and approach to the evidence was sound and not subject to any misdirection of law.

Importance of continued supply chain due diligence

This case confirms that the risk of a buyer of goods incurring criminal liability for money laundering under PoCA is low, so long as it pays "adequate" compensation for goods it acquires. Paying fair, market value for goods should provide a defence.

Despite the low risks of liability under PoCA, due diligence designed to identify and address human rights risks in the supply chain remains important:

• The UK Modern Slavery Act 2015 (MSA) currently requires certain companies to provide statements on the steps taken to address modern slavery in their business and their supply chains. Last year, the UK Government announced its intention, in the Queen's Speech, to make the six areas of reporting currently recommended in statutory guidance, mandatory. These 6 areas include reporting on due diligence processes in relation to modern slavery and human trafficking. This demonstrates an intention to strengthen the provisions of the MSA in the future to focus on due diligence.
• There is growing momentum in the EU to introduce mandatory corporate human rights due diligence obligations.
• Some countries use import/customs bans to incentivise corporates to carry out due diligence on forced labour risks in their supply chains. The US and Canada are examples of jurisdiction where such legislation is already in place. The EU is considering proposed legislation with similar features. See our briefing explaining these developments here.

Such measures are likely to increase the pressure on corporates to identify and address human rights risks in their supply chains. Companies should be vigilant to identify any evidence of criminal conduct.

¹World Uyghur Congress, R (On the Application Of) v Secretary of State for the Home Department & Ors [2023] WLR(D) 42, [2023] EWHC 88 (Admin), [2023] 2 WLR 121