The Court of Appeal in London has delivered a landmark ruling that has removed certain legal barriers to investigations into businesses suspected of profiting from alleged forced labour in China.

A panel of three appeal judges concluded that the UK’s National Crime Agency (NCA) had acted unlawfully when declining to investigate companies accused of importing cotton into the UK from the Xinjiang region in China where Uyghur Muslims and other Turkic minorities are allegedly forced to work and subjected to abuse, torture and other human rights violations.

The World Uyghur Congress and Global Action Legal Network (GLAN), which brought the case, had asked the Court to order the NCA to reconsider whether companies importing cotton produced by Uyghurs in Xinjiang could be committing a money laundering offence under the UK’s Proceeds of Crime Act.

Diana Czugler, Young Lawyers’ Committee Liaison Officer for the IBA Criminal Law Committee and a senior associate at Peters & Peters in London, says that while the ruling is in line with what the legislation intended – to prevent the laundering of criminal property – it has created more questions than answers about the practical consequences for businesses. 

‘It will be interesting to see how the ruling will affect businesses’ ability to use money suspected of stemming from human rights violations or other crimes going forward,’ she says. ‘It will hugely restrict the extent to which reliance can be placed on the adequate consideration defence once the funds have been received, and where the recipient has knowledge or suspicion of the funds being or representing the proceeds of criminal conduct’. 

Czugler predicts an uptick in companies requesting compliance advice from lawyers and seeking a defence against money laundering (DAML) from the NCA – a process whereby the agency has seven days to decide whether to grant consent and absolve a business of potential criminal liability for a specific transaction – because of the increased uncertainty they face.

Sarah Ellington, Newsletter Officer for the IBA Business Human Rights Committee and a partner at Watson Farley & Williams in London, believes the increased exposure to legal risk, paired with the low threshold for suspicion – which existed in case law before the ruling – will encourage companies to ramp up their due diligence efforts. ‘With the test for suspicion a low bar, due diligence can be used as a tool to understand mitigating actions put in place by supply chain partners which would allow companies to allay concerns highlighted by initial risk mapping exercises,’ she says.

While the theoretical risk of prosecution has undoubtedly grown, it’s unclear whether the ruling will lead to the NCA opening money laundering investigations into companies for allegedly importing cotton produced by Uyghurs in Xinjiang. The NCA told Global Insight that it doesn’t plan to appeal against the ruling and ‘is taking all relevant information, along with the judgment of the Court of Appeal, into account in its decision making process’.

The GLAN and the World Uyghur Congress expect the judgment to ‘lead to full investigation into imports from the Uyghur region, and a commitment from the NCA to stopping tainted goods entering UK markets’. They add that ‘evidence suggests’ that Uyghur cotton ends up in well-known high street fashion stores.

Ellington says she doubts there will be a big increase in money laundering investigations linked to Uyghur cotton imports being opened by the NCA because the appeal judges only overturned two narrow legal points, and the agency can rely on other reasons for not opening an investigation. Czugler says potential prosecutions might be slowed by the challenges inherent to investigating human rights abuses abroad, including regarding the collection of evidence. 

She says the likely increase in DAML requests following the judgment might also slow investigations down. ‘If there is a significant uptick of businesses filing SARs [suspicious activity reports] and seeking DAMLs, that will be a big task for the regulator to process,’ says Czugler.

Lucy Blake, an investigations partner at Jenner & Block in London, says the appeal ruling may give other human rights groups more confidence to pressure law enforcement agencies to act on environmental, social and governance (ESG) issues, for example the climate crisis. 

In 2021, a UK government response to a parliamentary committee report said that introducing more detailed reporting requirements and fines for non-compliance into the country’s Modern Slavery Act – which requires businesses with a turnover of £36m or more to publish an annual statement on their efforts to prevent modern slavery in their supply chains – was a ‘priority’ to deter businesses from importing Uyghur-made cotton. These reforms, however, haven’t yet been implemented and the new Labour government hasn’t so far announced plans to introduce them. 

Outside the UK, pressure on companies to do more to root out human rights harms and environmental misconduct in their supply chains has risen. The EU recently introduced a raft of new legislation requiring companies to be more transparent and implement substantive measures to tackle slave labour and climate issues in their business operations. In 2021, the US passed the Uyghur Forced Labor Prevention Act, prohibiting the import of goods from Xinjiang. ‘[The UK appeal ruling] is not happening within a vacuum,’ Blake says. ‘Companies need to take steps to analyse, vet and prevent abuses’.

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