English Court of Appeal narrows scope of exemption to money laundering for 'adequate consideration'

Tackling financial crime and anti-money laundering (AML) continues to be high on the list of priorities for the government and the regulatory oversight bodies. Over the past year, there has been a significant volume of guidance, consultations and supervision activity as AML remains an area of focus (see our Insight in relation to the financial service sector).

The challenges faced by firms seeking to comply with their AML and reporting obligations are likely to be increased 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, but the court also addressed the question of 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 court's comments could have far-reaching implications for all firms under AML supervisions and compliance officers and money laundering reporting officers (MLROs) should ensure the impact of this decision is taken into account in their internal processes. There are also practical implications for supply-chain risk. 

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 the importation of 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 specific to the NCA, and was addressed briefly by the Court of Appeal (which found it straightforward to conclude that "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 wider 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 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, and meaning that any future dealing 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 some 15-20 years.

The Court of Appeal rejected that interpretation in a short but clear analysis.

• The exemption is personal to the individual relying on it and depends on their specific 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 person relying on the section 329(2)(c) exemption from "bona fide" purchasers for good value. If a person is acing bona fides then they do not know or have reasonably grounds to suspect that the property is the proceeds of crime. If they do not have that knowledge or suspicion then the property is "cleansed" and is not recoverable (consistent with section 304 POCA).
• However, if they do have the knowledge or suspicion then they are not bona fide purchasers and must rely on the section 329(2)(c) exemption. The property remains criminal property for any other purpose, include any onward recipients of the property and/or civil recovery.
• The exemption from liability is only an exemption for the offences set out in section 329 POCA. It is not an exemption from the offences set out in sections 327 or 328.

Consequently, a party who receives criminal property in the form of cash (for adequate consideration) thus acquiring and possession the criminal property would be able to rely on the section 329(2) exemption. 

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 (and for which, they would need a separate defence against money laundering (DAML) on each occasion). Further, any property acquired with that cash would risk being subject to the same ML restrictions, unless the vendor was a bone fide purchaser with no suspicion about the parties source of funds.

Practical implications for financial services and supply chains

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 the likely impact on any business's relationship with its regulator/ML supervisor.

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".

Firms should remain vigilant in their due diligence process. Where the flow of funds, or supply chain, involves a number of operators, they may well need to take steps to improve their oversight of any upstream activities, and/or update their contractual terms, so that they can resolve any uncertainties promptly and take appropriate action. 

Firms will also need to take much more care over the need to submit DAMLs. Although financial services firms benefit from the exemption in section 327(2D) to make transfers to close customer accounts, where the transfer is below the threshold it is likely that caution over the scope of the 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".

The caution around this area is likely to be exacerbated by the NCA's current approach to DAMLs. We have seen examples, recently, 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 where the DAML is not effective, but nor does the moratorium period begin to run. This appears to have arisen from a new internal protocol within the NCA to relieve pressure on its stretched resources, which avoiding the impression of giving tacit approval to ML activities which should otherwise have been caught by firms' AML controls.

The judgment serves as a reminder that AML compliance is an ongoing process that requires constant vigilance and adaptation to evolving legal standards.