Clifford Chance

On 27 June 2024, the English Court of Appeal overturned a 2023 High Court decision, which concerned the NCA's refusal to investigate potential money laundering in certain supply chains.

The Court of Appeal¹ re-confirmed the very broad scope of the term "criminal property" for the purposes of the money laundering offences in the Proceeds of Crime Act 2002 ("PoCA"), which has important implications for financial institutions and business.

Overview

The Court of Appeal confirmed that:

• the concept of "criminal property" is not only very broadly expressed, but it is a fluid one which depends on the state of mind of the alleged offender. This means that the same property can be criminal property in the hands of A but not criminal property in the hands of B, depending on their respective states of mind;
• payment of adequate consideration for criminal property may be a defence to an offence under section 329(1) of PoCA (relating to the acquisition, use or possession of criminal property); but
• payment of adequate consideration does not of itself protect the purchaser from committing another money laundering offence (such as transferring the property to a third party) nor does it mean that the property ceases to be "criminal property": another person may know or suspect the property to be the product of criminal activity, and thus "criminal property" (and therefore, if they are a regulated financial institution, for example, they would need to file a SAR); and
• property only ceases to be criminal property by reference to the test set out in section 308 of PoCA, which addresses whether property is "recoverable" for the purposes of the civil recovery rules in PoCA. Essentially, this requires more than adequate consideration, including that the purchaser acquired the property in good faith, and without notice of the underlying criminality.

Money Laundering under PoCA

The law on money laundering is set out in Part 7 of PoCA, which provides that:

• "Criminal property" is property which constitutes a person's benefit from criminal conduct (being conduct which would constitute a criminal offence in the UK) and the alleged offender knows or suspects the property to be the product of criminal activity (section 340(3) PoCA);
• A person commits a money laundering offence if they acquire, use or possess criminal property (section 329(1) PoCA); and
• A person does not commit an offence under section 329(1) PoCA, if they acquired, used or had possession of the property for adequate consideration (section 329(2)(c)).

A person also commits a money laundering offence:

• Under section 328(1) if they enter into or become involved in an arrangement which they know or suspect facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person; or
• Under section 327 if they transfer (section 327(1)(d)) or remove criminal property from England and Wales, Scotland or Northern Ireland (section 327(1)(e)). Concealing, disguising and converting criminal property is also an offence under section 327.

The Court of Appeal Judgment

The Court of Appeal has confirmed that "criminal property" cannot be cleansed through the payment of adequate consideration alone. In this case, the Respondent had argued (relying on earlier High Court authority) that payment of adequate consideration means that the property acquired can no longer be the subject of money laundering for purposes of PoCA. The Court of Appeal rejected this argument, confirming that payment of adequate consideration of itself does not cleanse property which is known or suspected to represent a benefit a conduct that would be criminal in the UK.

The Court of Appeal held that whereas payment of adequate consideration is a defence to the money laundering offence in section 328 of PoCA (re acquiring, using or possessing criminal property) it does not impact the status of the property as "criminal property" and it does not act as a defence to the commission of other money laundering offences, for example, where a person who acquired it for adequate consideration subsequently transfers it to someone else (which may infringe section 327 of PoCA).

On the other hand, if a person acquires property for adequate consideration and in good faith, and without notice that it was obtained through unlawful conduct, it ceases to be "recoverable property" for purposes of the rules on civil recovery set out in Part 5 of PoCA. Importantly, the Court of Appeal found that in those circumstances, the property also ceases to be "criminal property" in the hands of the purchaser for purpose of the money laundering offences in Part 7.

The key passage of the judgment is in paragraph 57:

"Whilst the Judge was right in general terms when he went on to state in [75] that, if a purchaser has bought [goods] a market value, any taint passes to the purchase price and the criminal property remains [with the seller] that is only because of the operation of section 308, not section 329(2)(c). A purchaser or importer who suspects the goods to be the product of [unlawful conduct] would not be able to rely on section 308. 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."

The implication is that criminal property can cease to be criminal property but only if there is, not only adequate consideration, but also good faith on the part of a purchaser who was not on notice of the underlying criminality.

In this respect the judgment appears to have conflated the concept of "recoverable property" (as defined in Part 5 of PoCA for purposes of civil recovery) with "criminal property" (as defined in Part 7 of PoCA for purposes of the money laundering provisions). Those concepts are similar, but not identical. Unlike criminal property which is (broadly) property where a person knows or suspects that it represents a person's benefit from conduct that would be criminal if it took place within the UK, property is only "recoverable property" if it is unlawful in both the UK and the place where it occurs (unless it relates to the commission of a gross human rights abuse or violation, in which case it only needs to have been unlawful in the UK).

A potential difficulty with the underlined text in the judgment extract quoted above, is that it does not expressly address the position where, after there has been a bona fide purchase which meets the test in section 308, a subsequent purchaser acquires the property knowing or suspecting that it was (originally) a person's benefit from criminal conduct. Can the property, in such a situation, become criminal property again in the hands of that subsequent purchaser?

The Court of Appeal's judgment implies that the answer is "no": where someone has purchased property for value in good faith and without notice that it is recoverable, then it ceases also to be criminal property. This is, presumably, because it no longer represents a person's benefit from criminal conduct (the benefit being the proceeds of the original sale in the hands of the original seller). But if that is the case, then the concern expressed at the end of the paragraph from the judgment quoted above does not appear to be resolved: a very long chain could be broken where an innocent person purchases the property. Perhaps the Court of Appeal was satisfied that, on the facts of that case, there could never be an intervening bona fide purchase without notice of the underlying criminality. But that was not a matter determined on the facts and seems far-fetched.

The judgment therefore leaves open the possibility that a purchaser of property knowing it is the product of some criminality may have a defence to money laundering if they can establish that, somewhere in the chain before them, there was an innocent purchaser for adequate consideration who acquired the goods in good faith and without notice. Does that mean a buyer later in the chain that may have done more due diligence than an earlier purchaser can avoid a money laundering offence? The Court of Appeal judgment as it stands would suggest that this is the case.

For financial institutions and others who suspect that property may be criminal property, the reality is that knowing or establishing that there was an innocent bona fide purchase earlier in a chain of ownership is not likely to be possible. Absent some specific information to the contrary, the safest course would likely be to treat property that they know, or suspect was at some point the product of criminality, as "criminal property" even if adequate consideration may have been paid. The Court of Appeal confirmed that that would not of itself, be enough to break the chain.

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¹In The King (on the application of World Uyghur Congress) v National Crime Agency, [2024] EWCA Civ 715