Is forced labour your financial crime?

Banks, corporates, financial compliance, ethical compliance and individuals in corporate treasury teams may face real criminal liabilities — personal as well as corporate — if they authorise or make payments connected to supply chains that involve forced labour or where at least local legal minimum wages are not paid to workers.

This post is triggered by an original post by Matthew Friedman (you can read that here). Matthew told the story of a presentation that he made to a finance group at a bank, and how that presentation, in turn, led to a discussion about the role of bankers in helping to mitigate labour rights abuses.

Who is this post for?

All businesses and their bankers - and specifically:

• Ethical compliance teams: Corporate teams that manage or conduct labour rights due diligence on supply chains; their work is then relied upon by themselves, and then by others who are involved in making payments to suppliers, to mitigate their risks of criminal liabilities;

• Corporates and corporate treasury teams who authorise payments to suppliers;

• Banks and bank compliance teams who handle those payments; and

• Legal counsel who may be asked to advise on the matters mentioned here.

Why are payments a source of risk?

Al Capone ended up going to prison in the US for wire fraud based on income tax evasion, not directly for his mafia activities.

• Making payments related to criminal activities can be a crime in most jurisdictions around the world for the people and organisations involved.

• Employing forced labour can be, and usually is, a crime.

This post has three sections:

• A walk-through of a typical supplier payment process, looking at who is involved and what they may know or should suspect.

  
  

• A summary of the English law implications, specifically two laws ("POCA" and "ECCTA").

  
  

• What needs to be done - how might individuals, corporates and banks protect themselves from criminal liabilty, is the position different in other countries?

Part 1: payments to a supplier

Consider the following sequence of events — unremarkable in every operational detail but legally significant in almost every one.

The Supplier 

A garment manufacturer in a South-East Asian export processing zone wins a contract to supply a UK retail group.

Its prices are competitive partly because its workforce — many of them foreign migrant workers whose passports have been retained — receives less than the local legal minimum wage.

The manufacturer invoices the UK buyer and is paid.

In the language of the UK legislation - the Proceeds of Crime Act 2002 ("POCA 2002"):

• the saving on labour costs is a financial benefit to the supplier derived from criminal conduct (paying less than the legal minimum wage);

• the entire payment in respect of the goods could even be a financial benefit to the supplier derived from criminal conduct (forced labour).

  
  

Some or all of the payment to the supplier is criminal property.

The Corporate team 

The supplier has been onboarded by the ethical sourcing team and has provided the usual range of ethical compliance certifications, warranties and confirmations, including a comprehensive "self-assessment questionnaire".

A social audit was conducted ten months ago in line with policy — though, as is standard across many companies, the audit was arranged by the supplier, paid for by the supplier, and the small number of workers interviewed in the audit were questioned under the supervision of the supplier.

The supplier's ethical representations and the social audit confirmations have been taken at face value.

The treasury team processes the payment to the supplier without incident.

Payment is authorised, runs through the payment system, and settles.

No one in treasury has asked whether the supplier's pricing is consistent with legal labour costs or checked this particular shipment. A junior colleague has forwarded a link to an NGO report flagging local labour practices where the supplier is located; it was not escalated.

The Bank and the MLRO 

The bank's client is a large UK retailer; the beneficiary is a supplier who is regularly paid by the client for goods. The supplier is in a jurisdiction that the bank's own country risk framework considers to be elevated for labour exploitation.

The Money Laundering Reporting Officer (MLRO) is responsible for ensuring the bank's compliance policies are implemented in practice, including that the bank's systems are not used to move or disguise the proceeds of crime.

No transaction monitoring scenario has been configured to flag payments to apparel suppliers in this geography. There has been no review of customer due diligence in relation to this supplier and the particular shipment to which this payment relates.

The bank processes the payment on its corporate client's instruction. The payment clears.

The MLRO has not filed a Suspicious Activity Report ("SAR"); that was not because they considered the position and found no suspicion, but because the question was never asked.

Part 2: Analysis

The above story has not been constructed simply to make a point.

Variations of these transactions are happening now, across payment systems in the financial sector, at treasury desks in large corporates, and in the compliance functions of banks that have not yet connected their financial crime frameworks to the forced labour risks that may be sitting inside their clients' supply chains.

2018: FATF says forced labour generates $150bn per year and human trafficking is one of the fastest growing and most profitable forms of international crime

The legal exposure is real, it is already present, and it is growing.

ECCTA and the corporate buyer

The Group Treasurer is a senior manager for the purposes of the Economic Crime and Corporate Transparency Act 2023 ("ECCTA 2023"). Their knowledge is the company's knowledge. The team's decision to pay in reliance on the compliance department's standing approval without further enquiry is the company's decision as well as their own.

On top, ECCTA adds a further dimension for corporate treasury teams which is the "failure to prevent fraud offence" (s199). Where payments are shown to have been made on the basis of materially misleading supply chain representations (eg: from the supplier), the question arises whether a fraud was committed by an associated person for the organisation's benefit - and the only defence available for the corporate receiving that advantage is that reasonable prevention procedures were in place.

POCA: both the bank and the corporate buyer

The legal mechanism in the UK is straightforward via the Proceeds of Crime Act, POCA.

POCA directly connects

• forced labour or a failure to pay minimum wages in a supply chain to

• a potential financial crime liability at a bank, for the corporate buyer, and even for the individuals involved.

Payments to a supplier that employs coerced or under-paid workers are a financial benefit derived from that criminal conduct.

Under s.340 POCA 2002, that benefit is criminal property — provided the underlying conduct would be criminal in the UK, or constitutes an offence in the country where it occurred.

In the UK, the position relating to forced labour and minimum wage levels is clear:

• forced labour is a criminal offence in the UK under the Modern Slavery Act 2015 section 1 ;

• paying workers less than the minimum wage is a criminal offence under the National Minimum Wage Act 1998.

In the UK, there would not be a need to consider whether such conduct might be a criminal offence in the country of the supplier.

Given near-universal ratification of the ILO Convention on forced labour, the criminality test would likely be satisfied almost everywhere, which means this would likely also be an offence in the supplier's own jurisdiction.

Getting involved with payments relating to criminal activity can also be criminal activity (ie: "money laundering"):

"A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person." Proceeds of Crime Act 2002, s.328

When a corporate buyer pays a supplier that uses forced labour or pays less than the local minimum wage, some or all of that payment may constitute becoming concerned in an arrangement that facilitates the use of criminal property under s.328.

The bank processing that payment on its client's instruction is one step further along the same chain. It risks committing an offence under ss.327–329 POCA if it knows or suspects (or should suspect) the relevant facts.

There are cases already confirming these links and the potential liabililities - for example, see this Court of Appeal decision in the UK: World Ujghur Congress v National Crime Agency. This case held that "trading in goods that are known or suspected to have been produced with forced labour, or any other criminality, (and products containing those goods) can be a money laundering criminal offence, even if fair value has been paid."

The offence can arise merely as a result of suspicion.

The key word in this analysis is "suspects".

In a sector or geography with elevated forced labour risk or low wages, an absence of inquiry is not a neutral fact. It is something a prosecutor or regulator will need to hear explained.

What do we mean by "suspects"?

The treasurer is operating on a business-as-usual basis — this is a regular supplier, used for many years, with paperwork in order.

The bank has actioned many of these payments before, and no red flags have been triggered to enquire further.

But the defence of ignorance is narrower than many compliance professionals might assume.

For a number of years, in English law "knowledge" has included refraining from making enquiries whose results one might not care to have.

If the due diligence procedures used by the corporate compliance team are insufficiently effective, and if the professionals involved have not raised questions themselves - they may have "wilful blindness", which the courts will typically consider to be equivalent to actual knowledge.

The key points that arise

The supplier, if it pays less than the local minimum wage or uses forced labour, would be committing a criminal offence were this to have happened in the UK.

Payments relating to goods supplied in this circumstance:

• Trigger potential criminal liabilities under POCA for people and organisations involved in making those payments to that supplier, and may trigger criminal liabilities for the corporate under ECCTA;

• The defence (for the bank, the corporate and the individuals involved in making the payments) under POCA, ECCTA and related regulations is to show that:

  
  

  • suspicion has reasonably not arisen; or

  • if suspicion has arisen, it has been alleviated by effective, and ideally documented, due diligence; or

  • an appropriate Suspicious Activity Report has been filed and a confirmation received that the payment can go ahead.

Part 3: What should be happening?

For both MLROs at banks and corporate treasury teams, the starting point is integrating forced labour as an explicit typology within the firm's financial crime risk framework — not leaving it to ESG or procurement functions with standing instructions to proceed.

For a bank, that means:

• sector risk assessments that identify high-risk supply chain profiles (in respect of wage-levels, and in respect of forced labour);

• customer due diligence questionnaires for corporate clients in relevant sectors that explore supplier sourcing practices;

• transaction monitoring scenarios configured to flag payment patterns to suppliers in high-risk jurisdictions for labour rights abuses;

• making Suspicious Activity Reports where needed and potentially waiting for NCA consent before proceeding to make payments; and

• developing an understanding of what "reasonable due diligence" actually means so that the bank is in a position to make judgements about suppliers with elevated forced labour risks or suppliers paying less than the minimum wage - when they are asked to make payments to such suppliers.

The FCA's Financial Crime Guide requires firms to understand the nature of their clients' business. A client whose supply chain carries elevated forced labour risks or risks with respect to minimum wages is a client whose payments carry elevated financial crime risk — and the MLRO's framework and expertise should reflect that explicitly.

For corporate treasury teams, reasonable procedures require that:

• supplier onboarding in payment systems is integrated with ethical sourcing clearance from procurement;

• payment authorisations for high-risk supplier categories involve compliance sign-off rather than straight-through processing; and

• a clear escalation path exists directly to corporate legal counsel when supply chain concerns arise.

For corporate compliance teams, achieving a "reasonable due diligence" standard becomes ever more important given the potential criminal consequences for all concerned:

• they have to be ready for their procedures and records to be reviewed by the banking partners on whom their business relies;

• they have to move beyond an assumption that suppliers can broadly be trusted, and go beyond processes where suppliers may be able to control the due diligence narrative (such as relying on announced or self-funded audits with supervised worker interviews and supplier self-assessment questionnaires);

• the warranties and confirmations a supplier provides at onboarding are a starting point, not a conclusion — those confirmations need to be grounded in due diligence that would withstand scrutiny;

• some aspects of the due diligence process may need to be operating on a "per-payment basis" not just on a "per-supplier basis"; and

• the new regulations emerging provide guidance on what that due diligence should include - explicitly reinforcing audits with "effective engagement with stakeholders" - which means asking the workers themselves.

It is important also to note that the legal logic set out here could extend risks for corporates and banks receiving goods at the top of a supply chain beyond their immediate suppliers all the way down to the lowest tiers of suppliers involved.

Forced labour and financial crime: other countries?

This analysis has focused on UK law, specifically POCA and ECCTA and the implications for UK banks and UK corporates processing payments to suppliers that may be using forced labour or under-paying workers.

What about other countries?

The Analytical Framework

The chain of reasoning for the UK has three links:

1. Using forced labour or paying illegally low wages, where-ever it takes place, is considered to be a criminal offence in the jurisdiction from where the payment is being made.

2. The payment received by the supplier therefore represents, in whole or in part, the proceeds of that crime — making it "criminal property".

3. A person or institution that processes a payment to that supplier is engaging with that criminal property either knowing, or where they should have suspected that, a crime was happening — triggering money laundering reporting obligations and potentially criminal liability.

Each link must hold for the analysis to apply. Making payments that are connected to crimes becomes itself a crime of "money laundering".

Picking six countries, what about France, Germany, Spain, US, Canada, and Australia?

In the UK, all three links hold clearly and have been articulated in the POCA framework. The question is whether they hold elsewhere.

The FATF Foundation: forced labour

The starting point is that all six jurisdictions (alongside the UK) are members of the Financial Action Task Force, an international group established by the G7 countries in 1989 to combat money laundering amongst other things which has 37 members internationally.

The FATF standards require countries to apply the crime of money laundering to all serious offences, with a view to including the widest range of universally potential offences.

Human trafficking and forced labour are explicitly listed in FATF's designated categories of offences - see the FATF recommendations document, and the interpretative note on recommendation 3 (see page 38). It means that financial flows from human trafficking are recognised as generating criminal proceeds that are subject to money laundering obligations.

In 2018, FATF published a 74 page report specifically on the crime of forced labour and human trafficking and setting out how payments relating to these activities would themselves be criminal - see it here: FATF GAFI.

This means the links hold in all six jurisdictions as a matter of international legal obligation for forced labour.

Making payments relating to forced labour is a money laundering offence in all six jurisdictions.

What about mininum wage violations?

The more nuanced question is whether minimum wage violations — a distinct category from outright forced labour — constitute a "predicate offence" for money laundering purposes. In the UK, the answer is yes, because the National Minimum Wage Act 1998 creates a criminal offence and POCA picks up all-crimes.

A preliminary analysis for the six jurisdictions suggests that the UK may be an outlier here - as in other countries, a failure to pay legal minimum wages may be considered to be a civil or administrative offence rather than a criminal one.

Preliminary conclusions, the six selected countries

• Forced labour violations by suppliers or in their supply chains trigger potential criminal liabilities for those making payments to those suppliers in all these countries.

• Minimum wage violations by suppliers or in their supply chains may be an issue only for UK-based corporates and banks.

What next - forced labour and financial crimes?

Those who build their frameworks now — treating forced labour or illegally low-wages as the financial crime risk it already is — will be better placed when the legislative perimeter tightens further.

The question is not whether this risk applies. It is whether current frameworks and practices would survive scrutiny if a regulator, prosecutor, or court examined them tomorrow.

A significant mitigant to the risks involved here is to ensure supplier due diligence includes a direct and continuous engagement with the workers involved.

If worker rights are not being respected, workers will say provided they are anonymous and confident there are no reprisals.

Scalable and low cost technologies now exist, including Ask The Workers, that enable workers to be incorporated directly into supply chain due diligence processes - on the basis that workers tell us (via an app on their phone), and then we can tell you. See how this post fits into the story of Worker Voice - click here for our guide to worker voice.

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