By Jamas Hodivala KC, Matrix Chambers
LONDON – When you think of money laundering, you possibly think of Jason Bateman in “Ozark” or Bryan Cranston in “Breaking Bad” running around desperately trying to hide suitcases full of ill-gotten cash from the authorities. You probably associate money laundering with drugs, guns, people-trafficking, fraud, bribery and other criminal conduct.
And you would be right: money laundering is a global problem predominantly covered in the UK by legislation called the Proceeds of Crime Act 2002.
But judges in a recent Court of Appeal case have shone a spotlight on other conduct caught by this legislation – and it is directly relevant to the apparel industry.
Forced labour can amount to a criminal offence under the Modern Slavery Act 2015. While allegations of overseas forced labour in the apparel industry are not new, the UK’s Lady Chief Justice (the Head of the Judiciary in England and Wales) recently fired a significant warning shot in the case of R (World Uyghur Congress) v National Crime Agency.
In certain circumstances, apparel and retail companies, their directors and employees can be guilty of money-laundering if they are in possession of, or otherwise use in the course of their business, garments made using forced labour.
What was the case about?
There are three important aspects to the Proceeds of Crime Act 2002. First, the legislation applies to conduct that takes place anywhere in the world provided it would amount to a criminal offence if it occurred in the UK. Secondly, the legislation applies to any direct or indirect benefit from that criminal conduct and includes all property obtained as a result of, or in connection with, the criminal conduct. Thirdly, and most importantly, property is only “criminal property” for the purpose of money laundering offences if the person knows or suspects that it represents someone’s benefit from criminal conduct.
The World Uyghur Congress is an NGO that stands up for the rights of persecuted Uyghur Muslims. It provided evidence to the National Crime Agency that 30 per cent of the world’s production of cotton originates in the People’s Republic of China, of which 85 per cent originates in the Xinjiang Uyghur Autonomous Region (XUAR). This is an area of China in which internment and “re-education” of a vast number of citizens by the Government is associated with forced labour, birth prevention and forced separation of families.
The NGO previously tried to persuade the NCA to open a money-laundering investigation into companies associated with the domestic importation and sale of garments manufactured using cotton possibly derived from the XUAR.
Whilst the NCA agreed, in principle, that garments manufactured using forced labour would represent benefit from criminal conduct it declined to open any investigation because it believed no offence was committed once someone upstream in the garment’s supply chain had paid “adequate consideration” for the goods.
In addition, there was no proof of a specific consignment of garments being manufactured using forced labour.
The NGO disagreed with the NCA’s interpretation of the law and decided to seek clarification from the courts by issuing a claim for judicial review of the NCA’s decision not to open an investigation.
What did the court decide?
The courts agreed that garments manufactured using forced labour would amount to “criminal property” for the purpose of money laundering offences if the person in possession of those garments correctly knew or suspected they had been manufactured using forced labour.
The courts held that a person in possession of such garments who has given “adequate consideration” has a limited defence if prosecuted, but the fact that someone else upstream in the supply chain has paid “adequate consideration” does not cleanse the garments of their criminal status.
The NCA was also wrong to require proof that a specific consignment of goods had been manufactured using forced labour before it opened an investigation; the purpose of an investigation may be to establish whether a consignment of goods had been manufactured using forced labour. The Court of Appeal ordered the NCA to reconsider its decision not to open an investigation.
What is “adequate consideration”?
There are three main money laundering offences. One of those offences has a specific defence where the person who acquires, uses or has possession of the criminal property has given “adequate consideration” for it. Normally that is understood to mean “market value”. But there has been a lot of debate in the legal community about how “adequate consideration” should be calculated for garments that have been made using forced labour, as there is by definition no market value for such goods. Unfortunately, the Court of Appeal left this question unanswered.
Why is this case significant?
Money laundering is a serious offence. For the first time anywhere in the world, a court has decided that ordinary commercial trade could amount to a money laundering offence if there is criminality in the supply chain. In the worst cases, this could result in directors and employees of apparel companies and retailers being convicted of money laundering. Also, under new legislation that came into force on 26 December 2023, the company could be convicted of that offence.
The maximum sentence for an individual is 14 years’ imprisonment and for a company it is an unlimited fine. In addition, the court has power to confiscate personal or corporate assets.
Separately, the police can apply to a magistrates’ court to freeze individual or company bank accounts if they suspect those bank accounts contain the proceeds of crime, and subsequently forfeit those sums in a summary procedure. Finally, certain prosecutors can obtain Civil Recovery Orders of these sums in the High Court.
What could this mean for brands with criminality in their supply chains?
This is a new and complex area for brands and retailers. The legal principles don’t just apply to forced labour in supply chains, but in theory extend to any criminality from which garments are derived (e.g. overseas environmental crimes, such as garments that are manufactured in connection with serious water pollution).
As money laundering offences can only committed where the person correctly knows or suspects the garments were made as a result of, or in connection with, criminal conduct it may be tempting for apparel companies and retailers to positively decide they won’t investigate their supply chains. That would be unwise. Quite apart from the raft of EU legislation that requires the conduct of due diligence into supply chains, older cases from the Court of Appeal have decided that a person may be fixed with the knowledge they would have obtained had they conducted such inquiries.
Shareholders, investors, prosecutors, regulators and the courts would probably view dimly any company that deliberately failed to conduct due diligence into its supply chains.
Should brands and retailers be worried by this case?
The case applies not only to the physical manufacture of apparel, but also to criminality in the entirety of the supply chain. While the Court of Appeal has clarified the law, the NCA appears to have little appetite to open a criminal investigation in this case. That would involve gathering evidence from China, which is notoriously difficult to obtain.
However, the US Department of Labor has identified forced labour risks regarding garments produced in China, India, Malaysia, Thailand, Vietnam, North Korea, Nepal, Malaysia and Taiwan. Child labour may also equate to forced labour contrary to the Modern Slavery Act 2015.
Apart from the adverse PR associated with a brand having child or forced labour in its supply chains, there is also the possibility of companies or individuals bringing a private prosecution in the UK; that could be an NGO aiming to hold a brand accountable for forced labour in its supply chains, or a brand competitor tired of being persistently undercut by criminally low costs of manufacture.
Nobody wants to be the first in the apparel industry to be prosecuted for money laundering.
Article by Jamas Hodivala KC, Matrix Chambers, London (www.matrixlaw.co.uk)
