How crypto-assets are handled in criminal investigations

Evan Wright
Crypto coins

Crypto-assets have exploded in popularity in the past few years. But how many holders of Bitcoin, Ada, and other tokens such as NFTs understand the legal status of these assets, and how they are treated by the law? Some even believe they can evade the eye of the law or HMRC by owing crypto currency or NFTs. This is the reality.

Under what circumstances can crypto-assets be seized or frozen?

Crypto-assets are considered property under UK law and can be seized, confiscated, ring-fenced or frozen. This means they can be reclaimed and used to pay a confiscation order in the event that someone has to pay back the proceeds of a crime and they can be frozen if a person is suspected of a crime.

Seizing and freezing

Police, HMRC or other investigators become aware of potential criminal activity from three main sources:

1. From a complainant who has lost assets through fraud.

2. Suspicious activity reports from banks, when their internal processes detect unusual transactional patterns.

3. HMRC in particular is alerted to suspicious activity through its own data collection. It either deals with the investigation itself, or passes it to another relevant authority.

A person or company will usually become aware of an investigation for the first time when they find they are unable to use their account(s). This will happen because the bank has stopped the account by reference to its terms of business with the account holder, or the investigators have obtained an order from the court (usually an Account Freezing Order from the Magistrates Court, or a Restraint Order from the Crown Court).

Dealing with the first scenario is tricky because the bank is not permitted to discuss the circumstances with the account holder pending the outcome of an initial assessment, whether it is conducted by the bank itself, the police, HMRC or another authority. Internal investigations often lead to an ‘un-freezing’ of the account once the bank is satisfied that the relevant account does not contain the proceeds of crime or is not being used for criminal activity. An account holder can unilaterally assist the bank with this process, even though communication from the bank’s perspective is restricted. However, any remaining suspicions following the conclusion of an internal investigation are often escalated to law enforcement investigators.

The second scenario is easier to deal with because investigators must disclose their suspicions to the court when applying for an order and the subject of the order (whether an individual or company) is entitled to see the grounds upon which the order was obtained. Subject to good grounds, this enables lawyers to apply for a variation or discharge of the order.

Difficulties in securing crypto-assets

From a practical standpoint, difficulties can arise when it comes to seizing crypto-assets. Depending upon how they are held, it can be almost impossible even for governmental agencies to seize the assets. Many users, however, do not possess the know-how to do this and so leave themselves open to having their assets seized by investigators. In such cases, the crypto exchange where the transaction took place may be obligated to help recover the funds, or to divulge identifying information about the user accounts associated with any fraudulent activity.

Specialist crypto-asset recovery experts can trace the movement of funds through the blockchain in order to find and reclaim stolen property. Although it is easy for criminals to quickly transfer stolen assets between multiple accounts in such a way as to make them difficult to trace, the blockchain gives investigators a solid path to follow.

If crypto-assets are converted to fiat currency or other more traditional assets, banks will sometimes detect the conversion. If not, investigators can use a principle most familiar in confiscation proceedings – the repatriation direction. Where investigators have evidence that assets have been hidden, a court can direct a suspect to reverse transactions or otherwise re-convert assets they control into a form capable of being frozen and recovered. A failure to do so without good reason can result in a contempt of court, punishable by imprisonment.

What happens if I am the victim or I become the subject of an investigation?

If your crypto assets are stolen, you should call the police, who may be able to investigate, try to retrieve your assets and convict the responsible parties. You should also speak to an expert lawyer who can support this effort. However, given the issues of the peer-to-peer system, this is often a difficult and expensive process, especially if the criminal has the know-how to cover their tracks.

Professional asset recovery services have developed tools to be able to forensically track down stolen crypto assets. In suitable cases, you can even bypass the police entirely and utilise solicitors to privately prosecute fraudsters who have stolen your money. Often, solicitors will act in this capacity for a range of clients, from private individuals to businesses who have had business critical assets stolen and even public authorities who want to maximise the use of taxpayers’ money.

If individuals or companies suddenly become the subject of an investigation, largely the same processes are used to demonstrate lawful activity. Investigators often cast a wide net over the asset recovery process and innocent parties can be caught in that net, pending the outcome of an investigation or a successful application to vary or discharge a court order.

Crypto-assets by their definition are fluid and intangible. Specialist knowledge is key to navigating the ever changing world of digital assets and currencies. If you have been exposed to fraud, it is vital that you have access to specialist expertise and knowledge that can help you to achieve justice.  

Written by
August 11, 2022