A new approach to an old issue? Modern slavery in supply chains may be investigated under anti-money laundering provisions

When the UK’s Modern Slavery Act came into force in 2015, it was heralded as one of the first pieces of legislation in the world to specifically tackle modern slavery. Today, the UK’s regulatory regime is at risk of falling behind as other jurisdictions contemplate ambitious new measures to enhance corporate accountability: we continue to await the Modern Slavery Bill promised in the Queen’s Speech last year and the post of anti-slavery commissioner, mandated by the Modern Slavery Act 2015, has been vacant for 10 months and counting. In the meantime, however, a High Court judgment has turned attention to other legislative mechanisms UK enforcement agencies might use to hold businesses to account for criminal activity in their supply chains, namely the anti-money laundering provisions of the Proceeds of Crime Act.

International developments

The regulation of human rights risk is increasing. Early regimes tended to be topic-specific (e.g., modern slavery), focussed on reporting, and reliant on public censure for enforcement. Newer regimes have substantive diligence requirements backed by financial penalties and other sanctions and are increasingly starting to look beyond supply chain, to value chains. The most ambitious new regime is the EU Corporate Sustainability Due Diligence Regulation proposal (the “CSDDD”). If adopted as proposed, the CSDDD would introduce mandatory human rights and environmental diligence obligations for a wide range of EU and non-EU companies meeting certain size and financial thresholds or operating in certain sectors. This would include obligations to prevent, cease or minimise actual and potential adverse human rights and environmental impacts, supported by the threat of financial penalties and civil liability.

A full summary of the Commission’s proposal can be found here, with key changes in the EU Council’s counterproposal here. The EU Parliament is still debating its own position, with its plenary vote recently pushed back to 30 May.

Outside the CSDDD, similar regimes already exist or are being developed in some EU member states (e.g. France, where a number of claims are currently being brought under the Devoir de Vigilance, Germany, and the Netherlands). Human rights risks are also being indirectly managed through wider legislation like the EU Sustainable Finance Disclosure Regulation and Taxonomy. In Asia, Japan has published human rights due diligence guidelines, while in the U.S. the approach has been slightly different, using withholding release orders and import bans (something the EU is also now considering), but which nonetheless show the broader trend of regulating to tackle human rights risks.

The developing landscape in the UK

The regulatory regime

The UK, once considered a frontrunner by virtue of the early introduction of the Modern Slavery Act 2015, has more recently been criticised for its ‘toothless’ regime. The Government has said it will not replicate the CSDDD, and although the 2022 Queen’s Speech did announce plans to introduce a Modern Slavery Bill that would aim to increase accountability of companies on modern slavery, no progress has been made on this to date.

The UK’s Modern Slavery Act contains a reporting requirement for certain commercial organisations to publish an annual “slavery and human trafficking statement”. There is suggested, but not mandatory, content for statements and applicable guidance, but the regime relies on public censure for enforcement. This approach was augmented through the launch of the Government registry.

The Modern Slavery Bill would, among other measures: (i) mandate the reporting areas for statements; and (ii) introduce civil penalties for non-compliance. It is unclear when and whether the Bill will be progressed but with its focus on only a single topic and reporting, UK regulation of human rights risks is at danger of being left behind.

An alternative mechanism to hold businesses to account for criminal activity in their supply chains

A recent High Court judgment has, however, turned attention to other legislative mechanisms UK enforcement agencies might use to hold businesses to account for criminal activity in their supply chains. The World Uyghur Congress (the “WUC”), an international organisation which claims to “represent the collective interest of the Uyghur people”, sought to challenge the decision of the National Crime Agency (the “NCA”) to refrain from launching an investigation into companies sourcing cotton from the Xinjiang Uyghur Autonomous Region (the “XUAR”) in China. The WUC argued the NCA should have launched an investigation under Parts 5 and/or 7 of the Proceeds of Crime Act 2002 (“POCA”), which concern civil recovery of the proceeds of unlawful conduct and money laundering.

In a decision handed down on 20 January 2023, the High Court upheld the NCA’s decision not to launch an investigation on the evidence then available to it. The High Court agreed that the NCA would face various challenges in seeking to bring a prosecution, including that on the information then available, it was not possible to identify a specific consignment of goods which could be said to constitute criminal property, as required by s.340 of POCA. It would also be necessary to prove that the alleged offender knew or suspected that the allegedly criminal property constituted or represented a benefit from criminal conduct. A defence to a charge of criminal money laundering (at s.329(2)(c) POCA) can also be raised where the importer has paid adequate consideration for the goods (consideration would be inadequate where it is “significantly less than the value of the property”).

Although this challenge was ultimately unsuccessful, the decision has indicated a potential willingness on the part of the NCA, where there is sufficient evidence, to investigate and prosecute companies whose supply chains involve forced labour. In his judgment, Mr Justice Dove referred to a letter to the WUC whereby the NCA acknowledged that, for the purposes of POCA, forced labour offences under section 1 of the Modern Slavery Act 2015 are capable of constituting criminal conduct within the meaning of s.340 of POCA. In the present case, although the NCA had not identified “a concrete allegation of modern slavery upon which the NCA could commence an investigation”, the NCA said that it “remains at the stage of initial intelligence gathering” and “open to the possibility that the intelligence picture may change at any time”.

What this case highlights is that, where sufficient evidence of the use of forced labour or other human rights abuses exists in the supply chain of a business or organisation, that business or organisation could be at risk of prosecution under POCA, provided that: (i) the knowledge/suspicion requirement is met; and (ii) the payment of adequate consideration for the goods at any point has not broken the chain of criminal property.

How can companies mitigate risk amid the increased scrutiny of human rights impacts?

The direction of travel is clear: companies are already facing increased regulatory and investor expectations as regards social risks and impacts, including those arising through business relationships with suppliers and customers. The first step towards mitigating these increasing risks would be to identify your human rights landscape by developing an understanding of what human rights-related requirements apply to you (including regulatory regimes, soft law standards, your own commitments, market practice and stakeholder expectations) and where your human rights impact might lie.

Once this landscape has been established, companies can take more substantive steps to update and enhance policies and establish and embed supply chain due diligence systems and processes. Where possible it can be helpful to develop these by expanding existing compliance and risk programmes (like those for anti-bribery and corruption). This is no small task for any company, so a risk-based approach is recommended, prioritising those areas where the business has identified the highest potential for exposure.

For further information on how companies can manage supply chain risks, see our client briefing here.