Judgment on the World Uyghur Congress: A new challenge for supply chains? | DLA Piper

In a landmark ruling, the Court of Appeal in a case brought by the World Uyghur Congress (WUC) has made clear that the provision of ‘reasonable consideration’ at a particular point in the supply chain does not prevent goods imported into the UK from being classified as criminal or recoverable property under the Proceeds of Crime Act 2002 (POCA).

This decision contradicts previous findings and could have far-reaching consequences for companies.

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

The WUC had provided extensive evidence of forced labour and human rights abuses in the XUAR to the NCA, the body responsible for investigating possible breaches of POCA. The Court of Appeal found that the NCA had erred in law in deciding not to investigate under POCA.

The Court concluded that the NCA had wrongly assumed that specific criminal property and criminal conduct had to be identified before there could be an appropriate basis for a POCA investigation, whether criminal or civil, and that the payment of reasonable consideration at one point in the supply chain was not a defence to a subsequent transfer of that criminal property or its acquisition by a third party.

A new tension

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

A more thorough due diligence exercise could increase a person's exposure to the anti-money laundering provisions of POCA because it would increase that person's knowledge or suspicion that the products in question are criminal property. Moreover, following the WUC ruling, the presence in the supply chain of a person who has acquired the criminal property for reasonable consideration no longer has the 'cleansing' effect that was once attributed to it.

Businesses sourcing goods or services from countries where there is a higher risk of human rights abuses and criminal activity somewhere in the supply chain are at greater risk of the money laundering provisions of POCA. The following practical steps can help to limit this risk.

1. Risk assessment

Prudent companies assess the risks associated with specific suppliers and regions, taking into account factors such as forced labor, human rights violations and money laundering in the area and market in question, and give preference to suppliers with transparent and ethical practices.

2. Improve due diligence

Companies are encouraged to conduct a thorough audit of their supply chains, including examining suppliers, subcontractors and other companies involved in the production process.

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

While this obviously increases the likelihood that a company will become aware of suspected criminal behaviour – and therefore exposed to UK money laundering law – it is still beneficial to act on knowledge and make informed sourcing decisions.

3. Mapping the supply chain

Companies can create a detailed map of the entire supply chain by identifying each link from raw materials to finished products. Understand the flow of goods, services and funds within the chain.

4. Contractual clauses

Companies could include clauses in their contracts requiring their suppliers to comply with applicable laws, including anti-money laundering regulations and human rights standards. Define and enforce the consequences for non-compliance.

5. Monitoring and auditing

Companies can regularly monitor their suppliers' activities, conduct unannounced audits when necessary, and use technologies such as blockchain to track transactions and verify authenticity.

6. Cooperation and exchange of information

To limit risk, companies can collaborate with industry peers, non-governmental organizations and authorities, share information on best practices and risks, and join initiatives that promote responsible sourcing and transparency.

7. Training and awareness raising

Companies could consider educating their employees and supply chain partners about the importance of compliance and teaching them to recognize warning signs related to money laundering and human rights violations.

8. Escalation procedure

It is recommended to establish clear procedures for reporting and addressing potential problems, such as promptly escalating concerns to senior management or the Legal Department.

9. Legal advice

Companies may consider seeking legal advice to ensure compliance with relevant laws and regulations and are advised to be aware of the implications of the Court of Appeal's ruling and adapt their strategies accordingly.

10. Document efforts

It is recommended to maintain comprehensive records of due diligence efforts, risk assessments and compliance actions. Document the steps taken to address any identified risks.

In addition, there is a formal process in the UK whereby an individual can make a report of known or suspected money laundering to the National Crime Agency and apply to the NCA for a defence against money laundering (DAML), commonly referred to as a 'consent', to deal with the suspected criminal assets.

While a DAML provides the reporter with a complete defense against a money laundering allegation, it does not protect the recipients of the illicit assets in question. Each person in the chain would have to make such a report and request such a DAML to protect themselves – a burdensome task in any assessment.

In summary, everyone will recognise that compliance is an ongoing process and companies are encouraged to keep abreast of legal developments, adapt their practices and prioritise ethical sourcing to comply with the ruling and protect their reputation.

[View source.]