03 Jun 2023

Prosecuting companies for criminality in their supply chains – an impossible prospect

Does English law criminalise multinational companies and their executives if they profit from international crimes committed outside the UK in their supply chains? There is an emerging trend in other jurisdictions to seek to impose criminal liability in these circumstances. For example, in October 2022, the French company Lafarge S.A. pleaded guilty in the United States to conspiring to provide material support and resources in Northern Syria to ISIS during 2013 and 2014; in Sweden there is an ongoing criminal investigation into Lundin for complicity in war crimes in South Sudan; and in France, in October 2022, a criminal complaint was filed in France against TotalEnergies for alleged complicity in Russian war crimes in Ukraine.

However, no such cases have yet been brought in England. In the Autumn 2021 issue of this publication, we wrote that, whilst the “risk of English companies finding themselves exposed to this enforcement risk is slowly increasing”, difficulties in proving accessorial liability, as well as the need to identify a directing mind and will of the corporate accessory with the requisite mens rea meant that, for now, “it is in continental Europe that the risk is most acute”.

It is in response to these difficulties that Non-Governmental Organisations (NGOs) and criminal lawyers have begun to ask whether it would be more effective to seek to prosecute companies and their directors not for their alleged complicity in international crimes, but instead for offences relating to the proceeds of those crimes, i.e. through their supply chains. Specifically, the question is whether a company and/or its directors whose supply chain concerns goods which have been obtained or produced as a result of an international crime could be held liable for money laundering offences under the Proceeds of Crime Act 2002 (POCA).

The most straightforward illustration of the logic of this legal approach is as follows:

  • Under s340(3) POCA, property is “criminal property” if it constitutes or represents a person’s benefit from criminal conduct (conduct which would constitute an offence in the UK if it occurred there), and the alleged offender knows or suspects that it does;
  • Under s329 POCA, a person commits a criminal offence if they acquire, use, or possess criminal property[1];
  • Therefore, if goods are produced in another jurisdiction as a result of, for example, crimes against humanity (contrary to the International Criminal Court Act 2001), and if a company and its directors, knowing or suspecting this to be the case, buy those goods and import them into the UK, then they will be acquiring and using criminal property, and so committing a s329 POCA money laundering offence.

In theory, this presents a more straightforward route to criminal liability than one requiring proof of complicity in committing the international crime.

The fact that, in principle, this logic is sound was confirmed recently in R (on the application of) World Uyghur Congress v SSHD, HMRC and the NCA [2023] EWHC 88 (Admin). In this case, the WUC (an NGO) sought a judicial review of the refusal of three UK government law enforcement agencies (all of whom shared a responsibility for policing the UK’s borders) to launch criminal investigations against companies importing cotton into the UK from Xinjiang (XUAR), where it was alleged the cotton was produced using forced labour.

The defendants did not appear to dispute that, theoretically, a company (and its directors) importing goods into the UK which were the proceeds of criminal conduct abroad could be liable for money laundering offences. This has led many commentators to suggest that the criminal risks faced by such companies and their directors has suddenly increased. This claim is questionable. After all, the court concluded that the defendants had not misdirected themselves in failing to launch criminal investigations. Moreover, each of the court’s three reasons for reaching this conclusion illustrate the practical difficulty in bringing a prosecution of a company or its directors in these or similar circumstances.

Firstly, in relation to the actus reus of money laundering, Mr Justice Dove found that “specific proof in relation to particular consignments” was required. The extensive but generalised evidence in relation to forced labour in XUAR was insufficient. Given the complexity of multinational supply chains, proving that a particular consignment was the product of an international crime is an evidential hurdle which will often be insurmountable.

Secondly, in relation to the mens rea, the court applied the same logic, i.e. there must be specific evidence that the company or an individual responsible for the importation knew or suspected that a particular consignment of cotton from XUAR was produced by forced labour. Evidence of knowledge of a generalised risk was insufficient.

Thirdly, and most significantly, the judge recognised that no offence under s329 POCA is committed where the suspect “acquired or used or had possession of the property for adequate consideration” (s329(2)(c) POCA). The judgment states: “It would not only be necessary to show that a consignment was criminal property, but also that, considering the question objectively, the consignment had been purchased for significantly less than its value or by some other measure for consideration which was not adequate. This requirement presents difficulties in the context of the international trading of the goods which are in question in this case.” To describe this requirement as “presenting difficulties” is an understatement.

The analysis proceeds on the basis that the market value of the goods being traded is a correct measure of adequate consideration (the judgement specifically endorsing that adequacy is an objective measure). That, as amply demonstrated by this case, is an analysis which fails to account for the economic realities of the market, where market value is itself influenced by the conditions under which goods are produced.

If there is widespread production taking place under forced labour conditions (or under any other conditions of widespread criminality), then these practices will themselves inform (and likely lower) the market value. Purchasers would only find themselves committing money laundering offences if they bought the goods for even cheaper than the market value (a value which has forced labour already baked in). The practicality is such that the adequate consideration exemption, as presently applied, makes it very difficult to prosecute for money laundering unscrupulous capitalists who knew that the commodity they traded had been produced by forced labour (or other serious international criminality).

In the context of international supply chains, the defence of adequate consideration could therefore pose a barrier to any future prosecution. Whether it will be an insurmountable barrier in practice depends on one of two possible interpretations of s329(2)I POCA:

  • In the first interpretation, the payment of adequate consideration means that no offence of money laundering is committed by the payer, i.e. payment of inadequate consideration becomes, in effect, an element of the offence, which can be committed by anyone in the supply chain;
  • In the second interpretation, not only is adequate consideration an exemption to liability for the payer, but once adequate consideration has been paid by a bona fide purchaser, the property itself ceases to be criminal in all future hands in the supply chain.

This distinction is of huge significance in an international supply chain, where adequate consideration may be paid at one but not every stage. If property ceases to be criminal property on the payment of adequate consideration, then the logical conclusion is that, thereafter, no future purchaser commits the s329 offence, even if they pay inadequate consideration. Thus, if the second interpretation is correct, it creates a barrier to criminal prosecution which is likely to be insurmountable – that not only must the final purchaser have paid inadequate consideration, but so must every intermediate purchaser in the supply chain.

There is some support in case law for the second interpretation. For example, in the case of R v Afolabi [2009] EWCA Crim 2879, which related to a house bought with the proceeds of crime which was then sold on, the Court of Appeal concluded that “once the house is sold to a bona fide purchaser then it does not remain criminal property. Although the purchase money is then criminal property, we think the judge was wrong to say as he did that it remains criminal property as it passes through various hands.”  The court acknowledged that it had not heard any direct argument on the point of s329(2)(c) POCA, but suggested that the application of this section would mean that subsequent transfers (after the payment of adequate consideration) would have to be prosecuted under s327 or s328 POCA instead.

This rationale is logical in considering the purchase of a house with criminal funds: the house cannot stay as criminal property forever, regardless of future bona fide purchasers. However, it is an imperfect analogy with an international supply chain. Goods produced by forced labour are very different in nature from a property purchased with tainted funds in that their very existence is criminal: the goods exist only because of criminality and have no former life untainted by criminality. It cannot have been intended as a consequence of POCA that the designation of forced labour produced goods as criminal property could be cleansed through a single purchase for adequate consideration.

Whether or not the WUC judgment adequately clarifies this ambiguity is open for debate, as the judgment can be read in two possible ways. The defendants specifically argued that “at any point in such a market supply chain stretching many thousands of miles the chain could be broken by the use of adequate consideration in any of the transactions involved”. What is unclear is whether Mr Justice Dove fully endorsed this position. He made some general statements in support of the defendants’ overall approach, such as “Having reflected on the respective position of the parties I am not satisfied that there is any legal error or misdirection in the approach taken by the Defendant to the provisions of the 2002 Act.

In addressing adequate consideration specifically, the judge relied on the case of Hogan v DPP [2007] EWHC 978 (Admin), saying that it provides “a definitive interpretation which supports the concerns of the Defendant”. However, Hogan was a case about a man acquiring stolen scaffolding. It confirmed that the question of adequate consideration is an objective one, and that inadequate consideration is an element of the offence, needing to be proved by the prosecution to the normal criminal standard. The effect of this on a supply chain, and the circumstances in which the goods being supplied might cease to be criminal property, was not considered. Therefore, Mr Justice Dove’s reliance on this case does not equate to a whole-hearted endorsement of the defendants’ position on this particular point.

Ultimately, it seems that the court was reluctant to make a definitive finding on the question as to whether the defendants were correct to assert that the chain could be broken by the payment of adequate consideration at any point. This is understandable but the uncertainty it creates is highly undesirable. The practical reality is that if criminal investigators need to evidence that every purchaser in the prior supply chain has paid inadequate consideration, the chances of prosecutions being brought for s329 POCA offences in these circumstances are extremely slim.

There are other routes to liability for the offence of money laundering which remain open (the adequate consideration exemption not applying to the offences under s327 (concealing / transferring criminal property) or s328 (becoming concerned in an arrangement which facilitates the acquisition of criminal property)), and these remain untested by the courts in the context of international supply chains. But the WUC case is a reminder that, at least until the law on adequate consideration is clarified, the risk of a company (or its directors) being prosecuted for an s329 offence in the context of an international supply chain remains a distant prospect. The commentary suggesting that the case heralds a new dawn of money laundering prosecutions is misplaced. There is no doubt that many NGOs and civil society organisations wish to see criminal enforcement against companies for international crimes, but it may take an overhaul of the existing criminal law, rather than merely a more ambitious prosecutorial strategy, to enable us to catch up with the high-profile examples in continental Europe.

[1] In relation to criminal conduct outside the UK, even if it was not a criminal offence in the country where it occurred, some offences (as prescribed by the Secretary of State) can still qualify as the underlying offence for a money laundering offence, if certain conditions are met.

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