Modern Slavery and Money Laundering: The Duty Most Companies Don’t Know They Have
Do UK companies have a duty to prevent, or report, forced labour or human trafficking? The answer, for now, is ‘not quite’ – but duties in this area are strengthening in practice, thanks to laws on modern slavery and money laundering.
A risky combination
Corporate counsel, especially those outside industries (such as financial services) that are heavily regulated for anti-money laundering (AML) purposes, may be forgiven for not having encyclopaedic knowledge of UK criminal law. They may, if they are unlucky, have had occasion to consider the Proceeds of Crime Act 2002 (POCA), particularly those sections that create money laundering offences for everyone, whether AML-regulated or not. They may also have encountered the provisions of the Serious Crime Act 2007 (SCA) about encouraging or assisting offences. And they might even have some knowledge of the Modern Slavery Act 2015 (MSA), if only because of the duty (applicable to all large companies) to produce a ‘modern slavery statement’. But should they also be familiar with how these three Acts work together?
POCA: big risks to business
The principal reason why POCA can create big risks for business is that it prohibits a vast range of activity (any dealings, including mere possession, and any related arrangements) in connection with any funds or property that represents, even partly, the proceeds of ‘criminal conduct’ (always assuming, that is, that the person doing the activity knows or suspects that this is the case). So, a product made with raw materials that come from crime, or a bank account that contains even a small amount of the proceeds from selling such products, can engage those prohibitions.
For businesses that operate internationally, it may also be important that ‘criminal conduct’ here can include conduct that takes place overseas and is lawful there, but that would be unlawful if it happened in the UK. This has caused problems for medicinal cannabis companies, for instance, but is also worth bearing in mind in a context like modern slavery, where the ‘local’ laws in jurisdictions in which suppliers operate might be significantly different from our own.
Whose activity, whose suspicions?
Another reason why the risks of POCA can trip up people who own, run, or work for businesses is that requirement for ‘knowledge or suspicion’ – a relatively low bar in the scheme of criminal law, and not one well-suited to a business context. So, any of those involved in procuring, processing, and selling products, and those involved in dealing with the proceeds at any stage, could in principle become ‘money launderers’ if they develop a ‘suspicion’, which in practice could come from adverse press, gossip or rumours.
In theory, of course, a multinational corporate whose directors (and other ‘guiding minds’) may not share, or even learn of, such suspicions may have nothing to fear (or at least, would probably have a good defence if prosecuted). But in practice, even large companies are well-advised to take these risks seriously, both for reputational reasons, and because of the practical risks that banks and others in the regulated sector may report their suspicions first. A pernicious effect of a law that relies on ‘suspicion’ is the tendency, when concerns are relayed to senior management, for discussion itself to create liabilities that had not existed before.
The provisions of POCA that deal with ‘adequate consideration’ can potentially be useful for a business, where it has acquired products or proceeds that may represent the proceeds of criminal conduct. They say that, where the product or proceeds are acquired in return for something else (typically money), then it is not an offence to acquire or possess them. But this does not apply if the consideration is significantly less or more than the value of the product or proceeds, or if the acquirer knows or suspects that he may thereby help someone to commit criminal conduct.
This can have an effect where a product changes hands one or more times, and each recipient ‘knows or suspects’ that the transaction ‘may help’ someone commit criminal conduct. In many cases, it will be possible for a business to say that a product, by the time it reaches it, no longer represents the proceeds of an offence committed higher up the supply chain. But if its supplier bought the product with the requisite knowledge or suspicion, then the product may still represent the proceeds of ‘criminal conduct’ – if not the original offence, then the money laundering offence of the business’ immediate supplier.
Requirement to report
Where a business develops suspicions about products or proceeds in its hands – perhaps long after it made its original purchase – it can mitigate its POCA risks by making a Suspicious Activity Report (SAR) to the National Crime Agency (NCA), setting out its recent and proposed future activities in connection with the property, and requesting consent (also called a Defence Against Money Laundering (DAML)) for the latter.
The process is not necessarily straightforward, and the NCA may respond to the information in the SAR by opening a civil or criminal investigation, and/or by freezing relevant assets. Obtaining a DAML may be necessary for a business to deal with its immediate POCA risks; it may also be helpful in putting it on the front foot in terms of any related investigation, letting the law enforcement agencies involved know its position at the outset and setting the tone for future cooperation.
‘Encouraging or assisting’
The provisions of the SCA about ‘encouraging or assisting’ offences can make things even more complicated. In broad terms, they can be committed either intentionally or where the person ‘encouraging or assisting’ an offence believes that it will be committed. At a basic level, of course, any business should do its best to ensure that its personnel neither commit offences themselves, nor do things that ‘encourage or assist’ offences by others, in the context of their work. But the effect of POCA is that businesses should also think about the proceeds of such activity, including by their personnel.
To take an example, if a business buys its office supplies from a fraudster, who has (say) used deception to obtain those supplies very cheaply, its risk under POCA would have two parts to it. First, did anyone at the business know or suspect that the fraud had taken place? Second, did anyone at the business do something to assist or encourage that fraud, believing that it would take place? The answers affect the analysis of what criminal conduct is suspected, and whether and when any money laundering activity has taken place. They may also interact with questions about whether ‘adequate consideration’ provisions of POCA apply, to mitigate the business’ risks.
Modern slavery problem
How do POCA and the SCA apply in the context of modern slavery? The MSA prohibits slavery, servitude, forced or compulsory labour, and human trafficking. The prohibitions in POCA may be engaged for products and proceeds that represent the fruits of those activities, anywhere in the world, or of any activity that has encouraged or assisted them (with the requisite intention or belief) under the SCA.
The analysis under POCA is made more complicated by the realities of modern supply chains, particularly where those are international in nature. To take a simplified example, where a business buys (say) jeans from a supplier that it (rightly) suspects is using forced labour, then the business is guilty of money laundering. But what if it buys from an intermediary, whom it (rightly) believes was not engaged in the activity itself? Do the jeans still represent the proceeds of forced labour, and does it matter whether the intermediary knew about it?
Questions to ask (about) a supplier
At a minimum, a business whose supply chain may involve the equivalent of MSA offences should consider the position of its immediate supplier. Does the business suspect that the supplier’s personnel have committed such conduct itself, or encouraged or assisted such conduct in the belief that it would take place? When the supplier bought the product, might its personnel have known or suspected that it represented the proceeds of such conduct (or such ‘encouraging or assisting’)? Did it buy it for ‘adequate consideration’, and if so, did it know or suspect that this may help someone to commit criminal conduct (either the equivalent of MSA offences, or something else)?
The problem, of course, is that many of these questions can be hard to answer, both evidentially (the facts about a supplier’s activity, and the state of mind of its personnel, may be hard to ascertain) and because they are open to interpretation. The reality is that a business may be best advised to operate, if not a full-blown due diligence procedure, a set of policies to ensure that is not just compliant with the law, but some appropriate distance away from the often-nebulous risks.
What might ‘best practice’ look like?
Many businesses, prompted in some cases by the need to publish a modern slavery statement, now have procedures in place to tackle the risk of such conduct in their supply chains. To ensure such procedures also tackle their POCA risk, they should provide that, at or before the point of procurement, the business is able to assess whether it has any relevant suspicions about its suppliers, which in turn will mean knowing at least something (and preferably more than just the basics) about their procedures, whom they procure from, and so on.
It would be a mistake either to assume this might purely be a ‘tick box’ exercise, or to focus on the impracticability of having unassailable confidence in a supply chain that might involve multiple companies and countries. What POCA, the SCA and the MSA do together is encourage businesses to seek confidence (absence of suspicion) that they and their suppliers are aiming to discourage and hinder (rather than encourage and assist) the equivalent of MSA offences, anywhere in the world, and to resist the idea that long supply chains inevitably dilute the standard of scrutiny to be applied.
Duties of UK businesses
We do not yet have a law that requires businesses to try to prevent, or to report, modern slavery offences (or their equivalents overseas); nor are they liable (as they are for bribery) when their personnel commit such offences. The effects of POCA and the SCA on businesses where ‘criminal conduct’ occurs in their supply chain are certainly complicated, and it is certainly arguable that they focus too much on immediate suppliers.
It seems clear, however, that it would be helpful, both to businesses that operate in the UK, and to the ongoing efforts to tackle modern slavery in their supply chains, if the effects of these laws were more generally understood. A business whose first experience of these risks is where circumstances force a SAR to the NCA, and with it the potential for criminal investigation, may find some sympathy for the time being that it had not previously had cause to look at them in detail. As these issues gain in prominence and investigators start to toughen their approach, however, that sympathy may not be inexhaustible.
John Binns is a partner at BCL Solicitors LLP and specialises in POCA, including the drafting of SARs and seeking of consent (DAML) from the NCA. His experience in advising corporates on POCA includes considering its impact in the context of modern slavery in international supply chains.