Politics, law and money laundering
English Civil Court makes money laundering KYC much more complicated.
The recent case of The WORLD UYGHUR CONGRESS v The NATIONAL CRIME AGENCY was heard in The Court of Appeal in the Administrative Court. It’s about as far away from the criminal courts as it’s possible to get within the English legal system and is only one of many cases over the years where civil courts have made determinations on matters we would normally expect to be within the purview of the criminal courts, particularly in relation to proceeds of criminal conduct.
The plaintiffs, the World Uyghur Congress, sued The National Crime Agency, Secretary of State for the Home Department (acting through Border Force) and Commissioners for His Majesty’s Revenue and Customs (“HMRC”). Border Force describes its functions as “Border Force is a law enforcement command within the Home Office. We secure the UK border by carrying out immigration and customs controls for people and goods entering the UK”. HMRC says its many functions include “facilitate legitimate international trade, protect the UK’s fiscal, economic, social and physical security before and at the border”. It also has a function in relation to illegal financial flows.
The claims against Border Force and HMRC were dismissed at first instance and did not form part of this appeal which the judgment says is limited to a narrow aspect of the case.
In broad terms, the case was brought because the plaintiffs (known in English courts as “claimants) said that the supply chain for textiles imported into the UK from Xinjiang Uyghur Autonomous Region of China were not properly scrutinised to ensure that the products did not include elements of forced labour (the dismissed claims) and that the NCA acted in breach of its duties when deciding not to investigate when it was notified that products may include such elements.
There is a complication that seems to have been either overlooked or ignored: the NCA is a national investigation agency but that is one part of its function: it is also the UK’s FInancial Intelligence Unit for the reporting of financial crimes. So, I think it’s important to note that this does not, it seems, relate to the FIU but instead to the general criminal investigation sections of the NCA.
How your KYC just became a much more complicated
Given that, the nature of the claim and of the judgment is all the more worthy of question as to application. Yes, the court is the correct place for judicial review of administrative decisions by government departments and agencies. For this reason, jurisdiction is not in question. But the effect of the judgment goes far beyond that administrative decision. It goes to financial crime investigations regardless of where in the enforcement system them originate and it expands the question over suspicious activity decisions in financial institutions and other regulated businesses from lawyers to money transmitters and trade finance companies to banks and cargo insurers.
The Court will always be reluctant to intefere with the decisions of operational officers. This was set out in a 2008 cases cited in the present case. Lord Bingham said, in the earlier case, “the powers in question are entrusted to the officers identified, and to no one else. No other authority may exercise these powers or make the judgments on which such exercise must depend. “ What his Lordship did not say, but which I would imply, is that that is contingent upon the officer making the decision in good faith. And he did go on to say that the officer must “direct himself correctly in law.”
Joining all of that into a simple statement, in the absence of an error of law, there is no proper basis for interfering with the officer’s exercise of his discretion.
The plaintiff argued that at first instance, the judge had misdirected himself and instead of treating the claim as looking at an error of law but instead, as it was described, “a rationality challenge.”
The claim argues that the Judge asked the correct question: did the NCA, when giving its reasons for not investigating the allegations of the use of forced labour amount to a misdirection of law. But then, it is claimed, the Judge failed to answer that question.
The technical arguments are fascinating and the case was argued by legal teams including two people I worked with in the mid 1990s, both now KCs. But most of it is the reason I am writing this article.
This is what interests me:
“The Appellant contends that it is clear on the face of the decision letter that the NCA was labouring under two fundamental misapprehensions, namely:
i) That it is necessary to identify a specific product as criminal property before commencing an investigation into whether a money-laundering offence has
been committed;
ii) That the presence within a supply chain of a person who can rely on the exemption under section 329(2)© of POCA has the effect of “cleansing” criminal property so as to preclude its recovery from anyone who subsequently acquires it, or the recovery of the proceeds of its onward sale.”
In the judgment, there is this:
“The NCA contends that on a proper reading of the decision letter, it did not make the first mistake alleged, and that the second error (which it now accepts) was an immaterial one which did not affect the substance or validity of its reasoning. The Judge rightly understood that its position, as set out in the letter, was that, on an orthodox reading of the requirements of POCA, there was insufficient evidence from which to develop an investigation which had any realistic prospect of bearing fruit.”
The story began several years ago and there have been many articles and even tv documentaries about it. And while there are no court procedings that can be regarded as evidential, there is an enormous body of information that the court and the parties accept as, for want of a better word, evidence. But from a lawyer’s perspective, everything referred to in the judgment as “evidence” is actually hearsay.
It was accepted that there is a diverse, substantial, and growing body of evidence that serious human rights abuses are occurring in the XUAR cotton industry on a large scale. The Judge referred to a “striking consensus” as to the clear and widespread exploitation and abuses in that industry involving forced labour, and that forced labour accounts for a significant proportion of all cotton originating from China. The unchallenged evidence was that 85% of cotton grown in China comes from the XUAR.
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It is here that I must take issue with the court.
There is an increasing tendency amongst, in particular regulators, to place what I consider is undue weight on “negative press.” The media, however we define it, is never impartial: the need for eyeballs depends on two things — saying what half of the audience wants to hear while saying what half of the audience wants to take issue with. So if they are looking for only one side of the story, as activists are wont to do, they only find one side of the story and then that’s what much of the media reports. So I have to question the validity of “a striking consensus” as a basis for a determination of, when one reads what comes next, appears to mean that all KYC must assume that negative media reports are true.
“It was also not in dispute that products derived from forced labour occurring anywhere in the world can amount to “criminal property” for the purposes of a money-laundering offence in Part 7 of POCA, or “recoverable property” for the purposes of civil recovery in Part 5 of that Act. It was agreed that funds from the sale of such products, and any property into which such funds were put, could also be criminal property or recoverable property.”
Yes. Absolutely. That is exactly correct.
The point at issue, so far as I am concerned, is to ask at what point does hearsay achieve sufficient weight as to create what the plaintiffs say is a presumption of culpability?
Why does this matter? If the NCA is to investigate “ potential contraventions of the Foreign Prison Made Goods Act 1897 and/or the Proceeds of Crime Act 2002” then how much greater will the pressure be on businesses to take action.
Source of information — credibility
There are no sanctions to look up. The only source of information is material produced by activists which feed adverse media (so it’s the same stuff in multiple sources and, as we know, self-corroberation has no value in a court so why should it in an MLRO’s office.
There is much else in the judgment to exercise our minds but it is this that concerns me the most.
The second point of major concern to me relates to the question of whether when “adequate consideration” is paid, it does not, perforce, remove the taint from the proceeds.
“ If, and to the extent that, the Judge accepted the NCA’s submission recorded in the final sentence of [75] that, at any point in a market supply chain stretching many thousands of miles, the chain could be broken merely by the use of adequate consideration in any of the transactions involved, he was wrong to do so.”
This is a basic tenet of counter-money laundering laws and it is one that has long caused considerable difficulty. In Australia’s Act, it is phrased in such a way that creates a near certainty that any purchase will remove the taint but that is unusually strong.
In the instant case, the end result is this: the decision in favour of the NCA at first instance was quashed as was the NCA’s decision not to investigate. Because of the nature of the proceedings, the question of whether to carry out an investigation is remitted to the NCA for reconsideration.
The NCA has now made several serious admissions as to the quality of “evidence” is is prepared to admit and it seems to me that it is not now open to it to say “thanks for your report but it does not reach the standard of evidence we would need to mount a prosecution.”
But that’s not the primary point: it’s whether an investigation should be mounted and that, it seems the NCA has burned its bridges on.
And in doing so, it’s done the same for the entirety of the regulated sector.
Just how far are regulated businesses supposed to go in making decisions based on the politics of pressure groups?
Footnote: you will have noticed above the reference to items produced by prison labour. In the USA, this is a very widespread practice and textile products are heavily represented. It follows, then, that if this principle is established American textile products must be treated with a similar suspicion to those originating in China.
The judgment is here: https://assets.caselaw.nationalarchives.gov.uk/ewca/civ/2024/715/ewca_civ_2024_715.pdf
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Nigel Morris-Cotterill is a pioneer in the field of financial crime risk and compliance and author of several books and many papers and articles. He is available for consultation and to present lectures, seminars and workshops.
