ADEQUATE CONSIDERATION – PROCEEDS OF CRIME IN SUPPLY CHAINS [BE CAREFUL]

The UK Court of Appeal recently held that the National Crime Agency’s decision not to investigate whether cotton goods manufactured in China and imported to the UK were the product of forced labour was unlawful—a decision that could significantly impact organisations.

LANDMARK RULING

The challenges firms face in complying with their AML and reporting obligations will likely increase following a landmark ruling by

• The Court of Appeal in R (on the application of World Uyghur Congress) v National Crime Agency (NCA).

The case arises from a procedural challenge to the NCA's investigation powers, AND the court addressed the scope and application of the exemption to money laundering offences.

• Where the relevant criminal proceeds are acquired for "adequate consideration" (set out in section 329(2)(c) Proceeds of Crime Act (POCA)). 

The appeal court’s clarification of the scope of the ‘adequate consideration’ exemption under POCA has wide-reaching implications for businesses with global supply chains and all professional services firms in the UK.

Professional services

The effect of World Uyghur Congress v National Crime Agency will be felt by professional services firms who have hitherto relied on the adequate consideration exemption when receiving client monies in circumstances where they may represent criminal property.

Following World Uyghur Congress v National Crime Agency,

1. Although those monies may still be received by such firms in reliance on the adequate consideration exemption, they may not be transferred onwards – for example, by being applied against invoices or used to pay disbursements without the commission of a substantive money laundering offence.
2. This interpretation of POCA effectively renders the adequate consideration exemption useless for the purposes of carrying on normal business as the onward movement of monies would require the submission of a defence against money laundering to the National Crime Agency on each occasion.

The position for law firms is slightly improved in so far as the courts have previously considered the application of principal money laundering offences under POCA in Bowman v Fels [2005] 4 All ER 609.

1. The decision in that case was that section 328 of POCA was not intended to cover the ordinary conduct of litigation by legal professionals, but the court’s reasoning extended further at [63] (emphasis added):

‘To our mind, it is as improbable that parliament, being the UK legislator, had the ordinary conduct of legal proceedings to judgment in mind under s328 (or indeed under ss327 and 329) as it is to suppose that the European legislator had them in mind in article 7.

If the European legislator did not intend article 7, and the UK legislator did not intend ss327-9, to cover the ordinary conduct of legal proceedings or the ordinary giving of legal advice in circumstances not making the legal adviser a co-conspirator or accessory to any other offence [emphasis added], it was unnecessary – and would indeed have been inappropriate – to have introduced into either article 7 or into ss327-9 any equivalent exceptions to those provided, respectively, by article 6 and s330(6)(b), (10) and (11).

Support for our conclusions is provided by linguistic and policy considerations.’

2. Law firms are likely to seek to rely on the indications in Bowman v Fels that the ordinary giving of legal advice is not subject to the substantive money laundering offences at sections 327-329 of POCA.

3. The policy arguments relied on in Bowman v Fels include that legal advice is to be regarded as a fundamental right that is not lightly interfered with, such that there is a strong argument that parliament cannot have intended that law firms are unable to take receipt of funds for the provision of such advice.

4. While this approach looks to offer a way forward for law firms, it is of no assistance to other professional services firms which, because of the World Uyghur Congress v National Crime Agency judgment, will have no option other than to wait for updated guidance from the CPS or NCA.

BACKGROUND TO THE DECISION

The case arose from the NCA's decision not to exercise its powers under POCA to investigate money laundering offences and/or commence civil recovery investigations about

• Importing cotton products from the Xinjiang Uyghur Autonomous Region of China (XUAR).

The World Uyghur Congress (WUC), a non-governmental organisation advocating for the Uyghur people, provided substantial evidence suggesting that these cotton products were.

• The result of forced labour and other human rights abuses perpetrated by the People's Republic of China and
• The funds and products arising from those products were, therefore, the proceeds of crime.

The Court of Appeal focused on whether the NCA had misdirected itself on two main points of law.

• The first – whether it was necessary to identify specific criminal property before commencing an investigation under POCA – is particular to the NCA and was addressed briefly by the Court of Appeal (which found it straightforward to conclude.
• "The investigating body does not need to know that recoverable property exists before commencing an investigation, since the specific purpose of that investigation may be to ascertain that fact").
• However, the second –
• Whether the presence of a person in the supply chain who can rely on the exemption under section 329(2)(c) of POCA "cleanses" the criminal property, thereby precluding its recovery – has far broader implications for all AML-supervised firms.

No 'cleansing' of criminal property by s.329(2)(c)

Section 329(2)(c) of POCA provides an exemption from liability for acquiring, using, or possessing criminal property (that is, the specific offences provided for in section 329)

• If the act was done for "adequate consideration".

The NCA's interpretation of this exemption is that.

• If any person receiving the criminal property could rely on this exemption, the property would cease to be criminal property at that point, effectively "cleansing" it.
• This would mean that any future dealings with that property would not be subject to the AML restrictions set out in POCA (nor would any further reporting in relation to that property be required by regulated firms).

This interpretation has been a longstanding and widely held view based on judicial observations going back 15-20 years.

The Court of Appeal rejected that interpretation:-

• The exemption is personal to the individual relying on it and depends on their state of mind:
• It does not alter the status of the property as criminal property in respect of third parties.
• The court specifically distinguished the status of the person relying on the section 329(2)(c) exemption from "bona fide" purchasers for good value.
• If a person is acting bona fides, then they do not know or have reasonable grounds to suspect that the property is the proceeds of crime.
• If they do not have that knowledge or suspicion, the property is "cleansed" and not recoverable (consistent with section 304 POCA).
• However, if they have the knowledge or suspicion, they are not bona fide purchasers and must rely on the section 329(2)(c) exemption.
• The property remains criminal for any other purpose, including onward recipients of the property and/or civil recovery.
• The exemption from liability applies only to the offences set out in section 329 POCA.
• It does not apply to the offences set out in sections 327 or 328.

Consequently:-

1. A party who receives criminal property in cash (for adequate consideration) and thus acquires and possesses the criminal property would be able to rely on the section 329(2) exemption.
2. However, if they were to spend that cash, they would risk committing the section 327 money laundering offence of converting or transferring the criminal property (for which they would need a separate defence against money laundering (DAML) on each occasion).
3. Further, any property acquired with that cash would risk being subject to the same ML restrictions unless the vendor was a bona fide purchaser with no suspicion about the party's source of funds.

Practical implications for financial services and supply chains

1. The threshold for "suspicion" in the context of ML is low—
• Being merely a "more than merely fanciful" one—
• But the penalty for money laundering offences is very high, not merely in the criminal liability under POCA but also in the likely impact on any business's relationship with its regulator/ML supervisor.
2. Firms need to ensure that their AML policies reflect this understanding and are not calibrated to assume that any business activities which rely on the firm itself (or anyone else in the supply chain) being a bona fide purchaser for value such that any suspect criminal property has been "cleansed".
3. Firms should remain vigilant in their due diligence process.
4. Where the flow of funds or supply chain involves several operators, they may need to improve their oversight of any upstream activities and/or update their contractual terms to resolve any uncertainties promptly and take appropriate action.
5. Firms will also need to take much more care over the need to submit DAMLs.
6. Although financial services firms benefit from the exemption in section 327(2D) [SEE NOTE BELOW] to make transfers to close customer accounts where the transfer is below the threshold, it is likely that caution over the scope of section 329(2)(a) exemption will mean an increase in the number of DAML applications to the NCA to deal with situations under which firms might otherwise have assumed the property was "cleansed".
7. The NCA's current approach to DAMLs is likely to exacerbate the caution in this area.
8. Recently, examples of the NCA responding to a DAML to neither expressly confirm nor deny the defence, instead cancelling the DAML and requiring firms to re-submit.
• This leaves firms in an unfortunate lacuna: the DAML is not effective, and the moratorium period does not begin to run.
• This has arisen from a new internal protocol within the NCA to relieve pressure on its stretched resources. This protocol avoids the impression of giving tacit approval to ML activities that firms' AML controls should have otherwise caught.
9. The judgment reminds us that AML compliance is an ongoing process that requires constant vigilance and adaptation to evolving legal standards.

SOURCE

• https://www.osborneclarke.com/insights/english-court-appeal-narrows-scope-exemption-money-laundering-adequate-consideration
• https://www.skadden.com/insights/publications/2024/07/significant-uk-court-of-appeal-decision
• https://www.jdsupra.com/legalnews/significant-uk-court-of-appeal-decision-1394740/
• https://www.lawgazette.co.uk/legal-updates/uyghur-v-nca-and-how-it-could-affect-law-firms/5120413.article

EXEMPTION IN SECTION 327(2D)

Section 327(2D) of the UK’s Proceeds of Crime Act 2002 (POCA) provides an exemption for certain activities carried out by financial services firms.

According to this section, a person (“P”) who carries out an act mentioned in paragraph (C) or (d) of subsection (1) does not commit an offence under that subsection if:

• P is carrying on business in the regulated sector that is not excluded business,
• P does the act, in the course of that business, in transferring or handing over to a customer or client money or other property of, or owing to, the customer or client.

Subsection (2E) defines “excluded business” as a business of a description specified in regulations made by the Secretary of State for the purposes of this paragraph.

This exemption is significant as it allows financial services firms to carry out certain activities without committing an offence under the anti-money laundering provisions of POCA. However, it’s important to note that this exemption applies only under specific conditions and does not provide a blanket immunity from the provisions of POCA.

SOURCES

• https://www.legislation.gov.uk/ukpga/2002/29/section/327
• https://www.cps.gov.uk/legal-guidance/money-laundering-offences
• https://www.gov.uk/government/publications/money-laundering-reporting-obligations/guidance-on-money-laundering-reporting-obligations-in-relation-to-the-daml-exemption-provisions-introduced-by-the-economic-crime-and-corporate-transpa?trk=public_post_comment-text