Money Laundering Bulletin
Money laundering and supply chains (redux): the 'wrecking ball' of the World Uyghur Congress appeal
The recent UK judgment of the Court of Appeal in R (World Uyghur Congress) v National Crime Agency (NCA) has important effects on the law of money laundering in supply chains and for law firms. John Binns of BCL, a specialist in the Proceeds of Crime Act 2002 (POCA), digs into the detail.
John Binns (+44 (0)20 7430 2277, jbinns@bcl.com) is a partner at BCL Solicitors LLP (www.bcl.com).
The recent UK judgment of the Court of Appeal in R (World Uyghur Congress) v National Crime Agency (NCA) has important effects on the law of money laundering in supply chains and for law firms. John Binns of BCL, a specialist in the Proceeds of Crime Act 2002 (POCA), digs into the detail.
Unintended consequences?
In what seems a stark example of unintended consequences, the Court of Appeal of England and Wales, in seeking to address an injustice raised by the World Uygur Congress (WUC) in a judicial review against the National Crime Agency (NCA), appears to have taken a wrecking ball to the UK's money laundering laws under the Proceeds of Crime Act 2002 (POCA). [1] More specifically, it purports to have removed part of the protection for those who acquire criminal property for value (purchasers), opening them up to liability for further acts involving that property. But what exactly has it done, and how (if at all) can it be fixed?
The case arose because the WUC brought compelling evidence to the NCA that cotton goods produced with forced labour in China were being bought and sold by wholesalers and retailers in the UK. Seeking perhaps to justify its prioritisation of resources, the NCA cited various reasons for not pursuing either civil recovery of the products (or the proceeds of UK sales) nor a criminal investigation into the UK traders for 'money laundering' (more precisely, for acquiring 'criminal property').
One of the NCA's points was that neither investigation could proceed without identifying the specific property and conduct involved. The other (and the more important) was that, in the context of a supply chain, the purchase of products for 'adequate consideration' acted as a 'circuit breaker', so that the products after that point were 'cleansed', and so neither recoverable nor capable of being 'laundered'.
The Court of Appeal has now rejected both of these propositions. The rejection of the latter proposition, in particular, has the potential to cause problems, for UK traders and consumers and for certain businesses (notably including professional services firms), and so requires some close analysis.
Background
What does POCA say?
POCA does indeed require some specificity from law enforcement authorities, and offers some protections for purchasers, but these rules differ significantly between its provisions on civil recovery (in Part 5 of the statute) and money laundering (in Part 7). To a significant degree, the problems of the WUC appeal judgment arise because of a failure to distinguish between the two.
Civil recovery
In Part 5, for instance, section 242(2)(b) specifically says that authorities seeking civil recovery need not specify the conduct involved, but instead can suggest that it was one of a number of kinds of conduct. [2]
Bespoke tracing provisions then say (in section 304) that recoverable property may be 'followed into the hands of a person obtaining it on a disposal' (not just once, but any number of times). [3] This in turn makes it necessary to include a specific protection (under section 308) where a person obtains it 'in good faith, for value, and without notice' that it was recoverable (a concept law students through the ages may recognise by the antiquated phrase, 'equity's darling'). [4]
Money laundering
Under Part 7, meanwhile, it is an offence to (among other things) disguise, convert, or transfer 'criminal property', or to remove it from the UK (under section 327) [5], or to acquire, use, or possess it (under section 329). [6] In each case there is an exception where consent is obtained, in practice by making a suspicious activity report (SAR) to the NCA, incorporating a request for consent (also called a Defence against Money Laundering, or DAML) (the 'consent regime').
Acquiring, using or possessing for 'adequate consideration' (under section 329(2)) is not an offence, but with caveats (under section 329(3)), including that purchasing (or using or possessing) property where the price is 'significantly less' than the value of the property (or its use or possession), or providing goods or services the acquirer knows or suspects 'may help' someone to commit criminal conduct, would not be adequate consideration.
Importantly, this exception is specific to the 'acquiring' offence, and does not apply (for example) to 'converting' or 'transferring'. Just as importantly, 'criminal property' is then defined (in section 340(3)(a)) as property that 'constitutes [or] represents' a person's benefit from criminal conduct, but only (section 340(3)(b)) where the person involved knows or suspects that this is so.
Finally, as the court noted, banks and other regulated firms are obliged to report suspicions of money laundering (as well as complying with the general law). Under anti-money laundering (AML) regulations, they are also bound to screen and monitor their customers for money laundering risks.
Three previous cases
Hogan v DPP [7]
Three previous judgments add some colour to the statutory money laundering provisions. First, in Hogan v DPP, the High Court reaffirmed that 'adequate consideration' applied where a defendant knowingly acquired stolen goods, so that they would not be guilty of money laundering (although, notably, the alternative offence of handling stolen goods could have applied).
R v Afolabi [8]
Second, in R v Afolabi, the Court of Appeal struck down two money laundering convictions on the basis that when a house bought with the proceeds of crime is sold, it is then the sale proceeds, and not the house (nor, in a further count, the buyer's proceeds, when it was sold again), that 'represent' a person's benefit from criminal conduct.
Were it otherwise, the court in R v Afolabi reasoned, two undesirable consequences would follow. First, 'criminal property' would duplicate itself exponentially with every transaction. Second, the 'adequate consideration' exception would be useless (as it would not protect a purchaser from liability for converting, transferring etc property after they had acquired it).
R v Afolabi has attracted controversy, in part because of its particular facts. While the court noted that there was evidence from which the jury could have drawn conclusions about the knowledge or suspicion of the buyers, that was not how the case was put and it therefore felt unable to uphold the convictions on that basis. Conceivably, if the buyers knew or suspected their role in a layering exercise (disguising criminal property), this may have been a case where the caveat in section 329(3)(c) (where the acquirer knows or suspects they are helping to commit criminal conduct) applied.
R v Anwoir [9]
The third relevant case is R v Anwoir, which said that a prosecutor can prove that 'criminal conduct' has occurred either by reference to a specific crime or crimes, or by inviting the court to infer that property is the proceeds of unspecified crimes, based on the way that the property was handled (for instance, copious banknotes bagged up and handed over at a service station).
The NCA's position
Applying these laws to the scenario the WUC brought to the NCA, it was common ground that the products, having been made in conditions that would have breached the UK's modern slavery laws, started life as both recoverable and criminal property. The questions were whether this could be traced through to the products (or the proceeds of their sale) in the hands of UK wholesalers and manufacturers, and whether these traders could be pursued for 'money laundering' offences (specifically, for acquiring, using, and possessing criminal property under section 329) in connection with them.
Explaining its decision to commence neither a civil recovery nor a money laundering investigation, the NCA said that there was 'no proper basis' for either, and put forward two key propositions about POCA. The first was that it required both the property and the conduct to be specifically identified at the outset (which, by implication, was impracticable in this case).
The NCA's second, more interesting, proposition was that, 'in the context of a supply chain... if the product has been the subject of a transaction for adequate consideration, the relevant... property' would then be the sale proceeds, and not the purchased product (nor the purchaser's proceeds of any onward sales). Though this initially referred only to money laundering provisions, the NCA later said that it applied to civil recovery as well.
At first instance, Dove J declined to interfere with the NCA's decision, and appeared to endorse both of its propositions about POCA. [10] On appeal, however, the NCA shifted its ground. On the first proposition, it conceded that neither the property nor the conduct had to be specified at the outset of an investigation. On the second, it said that 'the possibility that payment was made in return for the acquisition of the property (even if it constituted adequate consideration) is never a bar to investigation under POCA'.
The Judgment
The question on appeal
Importantly, therefore, the question for the Court of Appeal, in this case, was whether the NCA's decision was based on its two original propositions (which it admitted were wrong) or on a broader basis, making it an example of 'polycentric decision-making that cannot be impeached other than on grounds of irrationality'. The NCA argued that it was the latter, but the court disagreed, and quashed the decision accordingly.
Why, then, were the NCA's propositions wrong? With respect to the first proposition (that both the property and the conduct had to be specifically identified), this question can be answered fairly easily. For civil recovery purposes, both the property and the type of conduct (though not the specific offence) would need to be identified before freezing or forfeiture. In a money laundering case, the property would need to be specified at the point of charge, while the specific conduct may never be identified (applying R v Anwoir). Importantly, though, none of that would need to be done before an investigation started: indeed, part of the point of investigating would be to see what property and conduct was relevant, if any.
With respect to the second proposition (about the impact of supply-chain transactions), the question is harder, because the NCA's concession on appeal was ambiguous in two ways. First, the reference to acquiring property for payment, 'even if' for adequate consideration, conflates the various parts of the relevant tests (in sections 308, 329, and 340(3)) into something of a blur. Second, to say that 'the possibility' that this occurred 'is never a bar to investigation' is to beg a further question: if it (whatever 'it' is) did occur, would it be fatal to the case?
Civil recovery: 'equity's darling'
In civil recovery at least, the answer is reasonably clear. If the buyer of the products can show that they (or someone before them in the chain) bought them in good faith, for value and without notice, then those products (which could otherwise be recoverable in their hands) would be safe from recovery, applying section 308.
Importantly, the NCA's second proposition ('if the product has been the subject of a transaction for adequate consideration, the relevant... property' would then be the sale proceeds, and not the purchased product) must import a 'without notice' requirement in the civil recovery context. If the trader knew or suspected, then they would not be 'without notice' and the property would be recoverable.
This is so even though the acquisition of the property would not be 'money laundering', thanks to the provision in section 329(2)(c). In a confusing passage, the court seemed keen to stress that R v Afolabi (a criminal case) did not remove the 'without notice' requirement in civil recovery. It is not clear whether the NCA ever argued the contrary.
The NCA was right of course to say that 'the possibility' of this (that the trader could deploy section 308) would not be 'a bar to investigation'. But if that is what occurred, it would be fatal to its prospects (part of the point of investigating would be to see if it had). Nothing the Court of Appeal has said in this case places any of that in doubt.
Money laundering: a recap
The issue then is in the court's approach to the money laundering provisions of POCA. To recap:
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it is an offence to (among other things) convert or transfer 'criminal property' (under section 327) or to acquire, use, or possess it (under section 329). The WUC and the NCA agreed that the latter was the relevant offence in this case;
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acquiring for 'adequate consideration' (under section 329(2)) is not an offence, but with caveats (under section 329(3)); and
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criminal property' is defined (in section 340(3)(a)) as property that 'constitutes [or] represents' a person's benefit from criminal conduct.
Seemingly following R v Afolabi, the NCA initially told the WUC in this case that 'if the product has been the subject of a transaction for adequate consideration, the relevant criminal property' would then be the sale proceeds, and not the purchased product (nor the purchaser's proceeds of any onward sales). Later, it argued that its decision not to investigate did not depend on that proposition, and added that 'the possibility that payment was made in return for the acquisition of the property (even if it constituted adequate consideration) is never a bar to investigation under POCA'.
The narrow question: a bar to investigation
One way to interpret the question for the court is whether the NCA's decision not to open a criminal investigation was materially based on an error of law. Insofar as its original proposition seemed to rule out investigating UK traders, based on an assumption that any purchase of goods would have satisfied section 329(2)(c), this was certainly wrong: setting aside questions of prioritising resources, any UK trader could in theory be investigated in these scenarios, if only to see whether the caveats in section 329(3)(c) applied.
A slightly more sophisticated version of that point emerges if we consider the impact of a UK trader acquiring criminal property for significantly less than its full value, and/or where they know or suspect they may thereby help someone to commit criminal conduct (which may apply where, for instance, the continued business relationship effectively encourages forced labour practices to continue).
In that scenario, the product in the hands of that UK trader may no longer represent the benefit of the original modern slavery offence, but nor is it 'clean': rather, at that point it represents the benefit of the trader's own offence under section 327 (and/or of encouraging and assisting the modern slavery offence), just as the house in R v Afolabi, after its first sale, may have come to represent the proceeds of money laundering in the subsequent buyers' hands if the parties had intended to launder the proceeds of the original criminality.
The NCA's original proposition, by referring to 'the' relevant criminal property (inferentially the benefit of the modern slavery offence) therefore made a material error, insofar as it seemed to rule out any criminal investigation on that basis (without acknowledging the prospect that further criminal conduct could give rise to further criminal property). Its later correction did not remove that error, but nor did the court consider the point.
Departing from R v Afolabi
The key question
Instead, the question the court focused on was whether a UK trader would be guilty under section 329 if it acquired property that had previously been acquired for 'adequate consideration' under section 329(2)(c). This was squarely the same question addressed in R v Afolabi, where the court had answered in the negative.
The court spent surprisingly little time addressing this key question in the case. In paragraph 34, it noted (correctly) that section 329(2)(c) provides protection for the person acquiring, using, or possessing the property, and that for it to be relevant, that person must know or suspect the property is or represents someone's benefit from criminal conduct.
'Criminal property' and 'equity's darling'
The court went on to say, at the end of that paragraph, that 'if the individual meets all the requirements of section 308, the property... will cease to be recoverable property for all purposes'. Appearing in the context of a discussion about money laundering offences, 'for all purposes' would appear to imply that section 308 applies to money laundering, which would conflate the tracing provisions in POCA's civil recovery scheme with its money laundering provisions, which have (or had) none.
It is regrettably unclear whether the court is saying here that 'equity's darling' would have the effect of 'cleansing' criminal property. A later passage (in paragraph 57) suggests that it does, by saying that 'if a purchaser has bought... goods from China bona fide and at a market value, any taint passes to the purchase price and the criminal property [sic] remains in China... because of the operation of section 308, not section 329(2)(c)'. Such a 'reading across' of provisions in different parts of POCA has no respectable precedent, and has been deprecated in previous cases.
The court's conclusion
In paragraph 35, the court appeared to reach its conclusion on the key question: that 'therefore, section 329(2)(c) is not about bona fide purchasers, and it has no impact on the status of the property'. The first conclusion is correct, assuming that 'bona fide' here includes 'without notice' or 'lacking knowledge or suspicion'. But the second requires some untangling. It is unclear from this paragraph how the court concluded that there was no impact from the purchase itself (specifically, on whether the property, as opposed to the sale proceeds, now 'represents' a person's benefit from criminal conduct under section 340(3), a provision to which the court gave scant attention at best).
In paragraph 36, the court then disapproved a passage in Hogan v DPP that said where property was acquired for adequate consideration, no offence under POCA was committed (on the basis that, on the contrary, the acquirer may then go on to breach section 327). Rather than explaining its conclusion, however, this merely restates its purported effect.
Is section 327(2D) relevant?
The closest the court came to explaining its conclusion was in paragraph 37, where it said that otherwise, 'there would be no need for the specific exemption from liability under section 327(2D)'. But this exemption (added less than a year ago) applies to financial institutions returning small amounts of money to customers, a scenario where funds are acquired by such firms to hold on the customers' behalf, not as payment for their services. The fact that the court cited this provision as the (apparently sole) explanation for departing from R v Afolabi gives little grounds for confidence that its conclusion is right.
Impacts
The impact of the court's decision
The new law: tracing of criminal property?
While it does not say so explicitly, the court's decision effectively reads section 304 across to section 340(3), providing that property can 'represent' the benefit of a person's criminal conduct in the 'hands of a person obtaining it on a disposal' (not just once, but any number of times). It would also seem to have applied section 308, so that the property would cease to represent such benefit if and when acquired by 'equity's darling' (but not otherwise). So a set of provisions designed to give courts the power to order recovery of property can now spread criminal liability (with a maximum sentence of 14 years' imprisonment) exponentially with each transaction.
The immediate impact on the WUC's case is that the NCA must make a fresh decision about whether to investigate, based on the law as the court has stated it. But what broader impact does the judgment have on supply chains?
The impact on supply chains
A UK trader acquiring 'criminal property' in circumstances where section 329(2)(c) applies (who, by definition, knows or suspects that the property is tainted) still has some protection, but it would appear to be dangerously pyrrhic in nature, insofar as any onward sale (without consent/DAML) would breach section 327. So the property would, again if the judgment is taken literally, be effectively 'frozen' in the trader's hands.
This presents a dilemma for UK businesses that operate in industries where the risk of criminal conduct in the supply chain is high. The consequences of buying goods where such conduct is suspected are now extreme, but it is sadly not obvious whether the answer for such traders is to enhance their due diligence functions (increasing the risk that they develop suspicions, preferably before deciding whether to buy) or, cynically, to wind them up (so they can seek to rely on 'without notice'). A comparison with other jurisdictions, where legislatures have imposed clear due diligence obligations on such businesses, is instructive.
Nor is the problem confined to scenarios where 'criminal conduct' (or the purchase of its proceeds) has yet to occur. In theory, at least, the judgment covers property now in someone's possession that could (thanks to its conclusion) be traced back to criminal conduct many years ago. Any future dealings with that property (by someone who knows or suspects the same) could now breach POCA.
The problem extends not just to wholesalers but to retailers, and even to consumers (insofar as they suspect criminality in the supply chain, and want to sell the product on, give it away, or take it abroad). It also affects professional services providers (potentially including solicitors' firms and barristers) whose business may involve payment from sources that may be suspect.
A spike in SARs?
Taken literally, the impact of this decision should be a spike in SARs to the NCA requesting consent/DAML in such scenarios. We do not yet know whether this has transpired, and if it does, we are unlikely to find out what such requests involve and whether they are granted.
Should, to choose a pertinent example, a UK trader expect to obtain indefinite consent from the NCA (for itself and its personnel) to deal with products (and the proceeds of their sale) where they suspect criminality in their supply chain? Would a law firm (specialising in criminal defence, or otherwise) need to seek a general consent to deal with money received in payment for reasonable fees and disbursements?
The NCA has set its face against broad-brush consent/DAML requests, preferring to deal with specific transactions within timeframes of up to 12 months. But if firms conducting higher-risk business start to respond to the judgment with such requests, it may push this policy to breaking point. But if the consent regime cannot cope with the new law, are there practicable alternatives - or is the court's intention that such business should simply stop, or that firms engaged in it should be prosecuted?
The search for solutions
Questions of interpretation
Against this background, defence lawyers and others have been combing through the judgment and the law in search of ways to interpret it more pragmatically. There is certainly scope to say that it was badly argued, and/or that the court's pronouncements (insofar as they affect, for instance, offences under section 327, and the interpretation of section 340(3)) go further than they needed to (in not ruling out the investigation of offences under section 329). Some may cling to the hope that the court's key conclusion may be considered obiter or 'confined to its own facts', but neither seems likely. Certainly, there can be no doubt that the court intended to depart from R v Afolabi, even if it failed to appreciate the consequences nor explain why or how.
Among other things, the judgment will prompt greater attention to perennial questions about how POCA works in practice, including precisely what is required to amount to suspicion, and whether acts that could fairly be described as (for instance) both 'transferring' and 'using' would breach section 327, 329, or both.
Further guidance
Further guidance may in due course be helpful (depending, of course, on what it says). But as the WUC case itself seems unlikely to be appealed, judicial guidance will have to wait until another test case comes along. The NCA itself, or a suitable regulator may be able to put a gloss on what the court has said, but will not be able to overrule it, and will hesitate to say that it was wrong (even if it was).
Noting the interest of the legal sector, the Legal Services Affinity Group (which issues guidance on behalf of the legal sector's AML supervisors) is expected to provide its take on the judgment and its impacts in the near future. This may include an assessment of the extent to which the judgment in Bowman v Fels [11] protects legal services providers. The Financial Conduct Authority may also take an interest, given the questions the judgment undoubtedly poses for banks and other financial service providers. Among these are how such firms are to identify and apply AML obligations to their customers in higher-risk supply chains, and when it would be necessary to place a block on their accounts (pending consent/DAML).
A new extreme
This is, regrettably, not the first time the courts have had cause to consider the ambiguities of POCA, which was introduced (by a government keen to be seen as 'tough on crime') with the explicit aims of having draconian effects on criminal defendants, suspects, and their families, of generating maximum intelligence (via SARs) to law enforcement, and of giving maximum discretion to law enforcement to choose what property to pursue and whom to prosecute. While the WUC itself has achieved a victory in prompting the NCA to look again at its powers, the full impact of the judgment seems to take these principles to a new extreme.