Crypto Investigation & Restraint Lawyers

Crypto Seizure Defence & Representation

Have your cryptoassets been frozen? New legislation came into force on 31 January 2024 making the freezing of cryptoassets much more straightforward. The latest legislation has its foundation on the tried and tested processes originally created through the Proceeds of Crime Act 2022 (POCA). Sections 179 and 181 of the Economic Crime and Corporate Transparency Act 2023 introduced a new Chapter 3C into the POCA.

This allows the authorities to deal with cryptoassets in a similar way to cash and other fixed assets. That means cryptoassets can very quickly become subject to an Asset Freezing and Forfeiture Order.

For expert, trusted legal advice from one of our solicitors, please telephone us on 020 7387 2032 or complete our online enquiry form.

How do Asset Freezing and Forfeiture Orders work?

In criminal cases, the police and other accredited financial investigators can seek a court order to freeze assets held in an institution. In the most basic terms, an order could be sought to freeze money held in a bank account of an individual or organisation. Once frozen, the authorities must make a case for the asset to be forfeit.

It is also possible to apply to the courts for an Asset Freezing and Forfeiture Order in civil proceedings.

What are the challenges of applying this legislation to cryptoassets?

The biggest challenge in applying this legislation to cryptoassets is the distributed nature of those assets. Some of the key attractions of cryptoassets are their liquidity and ease of transfer. Cryptoassets are digital assets and are not tied to any physical location. However, the courts have jurisdiction over assets located within the UK and, in POCA cases, outside the UK. This means that if the cryptoassets are located outside the UK, the courts can order their return to the UK.

The most obvious targets for an Asset Freezing and Forfeiture Orders are Cryptoasset Exchanges and Crypto Wallet providers.

How long can the seized cryptoassets be held?

The initial period any seized cryptoassets can be held is 48 hours. However, this period can be extended to a period of 6 months. Further applications then need to be made to extend the period of retention up to a maximum of 3 years. All extensions are subject to the court being satisfied that the retention continues to be warranted.

Can the cryptoassets be released?

It is possible to have cryptoassets released. There are two possible scenarios.

The first is where the person from whom they were seized makes an application to the court seeking their release. The cryptoassets will be released if the court is satisfied that the conditions for the detention are no longer met.

The second scenario is where an authorised official notifies the court that continued detention of the cryptoassets is no longer justified.

Lewis Nedas Law - Crypto Investigation & Restraint Lawyers

Lewis Nedas Law has a proven track record of assisting clients with cryptoasset seizures and related complex legal matters.

We can provide expert legal advice on cryptoasset regulation, including Asset Freezing and Seizure Orders as well as HMRC powers.

We advise and represent both individuals and companies who face crypto asset investigations and restraint by all UK authorities including FCA, HMRC, NCA, the Police etc.

SOME EXAMPLES OF RELEVANT CASES :

1. Advising an online gambling company that has had a substantial amount of crypto assets (£250,000 value) seized by Isle of Man authorities (Siobhain Egan)

2. Advised and represented a crypto asset marketing company which has over a £1.5 million restrained) (Siobhain Egan represented and advised)

3. Advising a specialist crypto asset trading UK company (and associated companies) facing a joint FCA / Met police investigation of money laundering to the value of £1.3 billion and FSMA offences (Siobhain Egan, dealing)

4. Advising and representing two UK cryptoasset marketing companies upon restraint of over circa £2.5 million (the background of which is a large scale US Dept of Justice prosecution of the UBOs of the Hyperverse group of companies)(Siobhain Egan, dealing)

For expert, trusted legal advice from one of our solicitors, please telephone us on 020 7387 2032 or complete our online enquiry form.

Commentary on Schedule 7 of The Economic Crime and Corporate Transparency Bill, which amends the Proceeds of Crime Act 2002 (‘POCA 2002’)the way to stop the use of crypto assets in criminal conduct?

Introduction

• The answer is, it should be. If not it is a good start. Schedule seven of the Bill contains provisions to allow the widest variety of law enforcement agencies possible to search for information which can be used in locating cryptoassets; seize cryptoassets, and items related to cryptoassets; and provide for cryptoassets to be forfeited.

• The applications are to be made in the Magistrates Court, with a direct appeal of a forfeiture order, to the Crown Court. Though there are some grounds for the matter to be heard in the High Court, the majority of cases, regardless of the value of the seizure.

• The Legislation broadly uses the framework Cash Seizure provisions, as set out in sections 294 to 297 of POCA 2002, for the seizure of Cryptoassets and Cryptoasset Related Items. It uses the framework of Account Freezing and Forfeiture Orders (‘AFFO’s’) as set out at section 303Z1 to 303Z20 of POCA 2002, for the seizure of Crypto wallets and the forfeiture of Cryptoassets. The search provisions also mirror the search provisions for Cash searches.

• The legislation also allows for the cryptoassets to be converted to cash, allows for victims and interested parties to release funds, and for living or legal expenses to be excluded from the order. These are standard in the other legislation, or are due to be introduced, and are provisions which have been developed with the experience of the legislation being used in practice for over 20 years.

• That Cash Seizure and AFFO legislation is established. The Case law has been developed not only for the Provisions of POCA 2002, but also form the legislation that came before, the Drug Trafficking Act 1994. As well as from the Civil Recovery This case law has established that the relevant procedure rule are set out in the Magistrates’ Court Act 1930 and the Magistrates Courts Rules 1981 [1] The CPR and the CrimPR do not apply but some of their principles can be applicable.

• The test for when cash or accounts should be forfeiture when the property has come from unlawful conduct, has been clearly established in a line of case law including R (Director of Assets Recovery Agency) v Green [2005] EWHC 3168, Director of the ARA v Szeptietowski [2007] EWCA Criv 766, and Angus v UKBA [2011] EWHC 461 (Admin). This has established that the evidence must show the money came from a type of criminality, which can include money laundering. Fletcher v Chief Constable of Leicestershire Constabulary [2013] EWHC 3357 and in Sandhu v Chief Constable of the West Midlands Police [2019] EWHC 3316, set out he relevant case law for the second limb of forfeiture for assets to be forfeiture because they are to be used in criminal conduct.

• The use of Cash provisions, have been used where an asset is searched for and should then be physically seized. Here the provisions require a seizure on the spot and then a bringing of a fuller application at the Magistrates Court within 48 hours (not counting weekends or holidays). The AFFO provisions have been used as a base where the asset is held by a body or institution. This will be a wallet provider or a bank if the asset has been converted to money. These provisions are much more direct, and require an application to the Court, with or without notice.

• The definitions included in the provisions are taken from the cryptocurrency working group. These definitions are broadly drafted. They cover what is required, but there is also provisions in the rules for the definitions to be changed by way of statutory instrument if it is required. This is a sensible provision as it allows flexibility.

• The application can be made by any accredited financial investigator (‘AFI’) under section 354 of POCA 2002. The AFI can belong to any organisation, be it a Local Authority, a Law Enforcement agency or any other body with a registered AFI.

• This is sensible approach by the drafters of the Bill to use try and tested laws and definitions.. They could have attempted to reinvent the wheel. They have not. They have applied the provisions that are relevant to what the assets are due to

• In this article I will discuss three core issues which will affect the way that the implementation of the bill as currently formed.

• The international Issues, information and jurisdictional issues;
• Practical issues of locating crypto assets;
• The infrastructure to allow the act to be properly implemented.

• These issues will dictate how the Act will operate in practice. What I will not cover is how agencies will get the compliance with Crypto exchanges and wallets. This is a matter for governments, on how they enforcement the orders, which will fit into their wider regulations of Crypto assets by governments. This is also linked to requiring those bodies providing intelligence sharing and enforcement of orders.

International issues

• By their very nature these applications are likely to have an international element to them. Crypto assets were adopted by criminal organisations because of the way the way they were supremely liquid and could be moved swiftly with little trace between borders. That is not strictly true now. Not all crypto assets are the same. Some have not been developed for internal markets, and are highly traceable. By their nature they do not have a home jurisdiction. `they by their nature are part of the blockchain, and as such do not have a physical form or address.

• Whereas banks are tied to locations, even if they have different branches and regulators, while assets and cash is physical, crypto currency do not have these intrinsic links. Its closets similarity is to banks, but without the regulation and obvious infrastructure. Crypto asset exchange providers and wallet providers are similar to banks but without the regulatory relationships or the deep links to a jurisdiction. Though this is something to which is developing.

• This raises two questions. First does the Court have jurisdiction to deal with assets which do not have a fixed jurisdiction. Second, how do authorities get information and assistance from other jurisdiction, to support the investigation.

• The first should be reality straight forward. The Court has a jurisdiction over assets regardless of where they are located. The Court has consistently found that it has the power over assets in the UK and outside it in POCA cases. This was highlighted in Restraint Order Proceedings, where the Court found that they had the power to require asset to be returned to the Jurisdiction in DPP v Scarlett [2000] 1 WLR 515.

• Overall the Courts have consistently found that the restraint or deal with any asset, regardless of the location. The issue is what they can enforce an order against. This means the order will only be made against assets which the Court can enforce it against. In this case that should mean only assets which are controlled by Crypto Wallets or Crypto asset exchanges that can be accessed here and will obey orders here. Effectivity this means bodies that can have action taken against them if they cannot comply.

• This is going to be the real issue in this area. How do you enforce the order with Crypto Asset Exchange Providers and Wallets? This won’t apply to all cases. The use of Cash provisions, have been used where an asset is searched for and should then be physically seized. The AFFO provisions have been used as ab base Some assets will be seized when an access details are recovered, and the asset is then held by the applicant in question. This will normally be after a search or the seizure of crypto asset related material.

• The Second question is how will law enforcement agencies be able to get assistance from abroad. There is going to be a need for assistance from abroad. Unlike in cash cases we have seen that a large proportion of AFFO’s rely on evidence from abroad. This might be evidence of a conviction, or it could be circumstantial evidence of criminality, or tracing evidence.

• This will be in addition to any intelligence which is gathered, but which cannot be used in Court. This is particularly important with case that involve a conviction or court action. In those cases, details of the conviction, and in particular the factual matrix behind the conviction are important.[2]

• To get that information a Letter of Request (LOR) is needed between the UK Central Authority and the other relevant Central Authority. This is a long and technical process, where response times can take many months, rather than weeks. Evidence can be requested within 2 years, indeed exchanges of LOR’s can take place, but time can be tight. The response time will depend on the country in question.

• To deal with this potential delay the legislation allows the seizure of Crypto asset related items and the seizure of crypto assets to be extended to three years if a LOR is being requested. This is a sensible provision as it will give the investigating body time to consider matters. It should not be used as a way to delay investigations, indeed it will be expected that LOR’s are made early and with a clear basis being explained, but if that is done the provision allows investigations to expand. This will also be important if any investigation needs to be expanded into different jurisdictions. Thought this will normally be revealed in the intelligence stage rather than the evidential stage.

• I imagine that there will be a lot of contested hearings on whether a further year is needed. As with an extension now the emphasis will be on how the investigation has progressed and whether the steps so far have been reasonable. This will be especially important as the provisions are on 6 months increments , rather than giving the option of getting an order for the whole time immediately. This allows the Court to scrutinise the increases and provides and extra safeguard for delays.

• Another difficult will be if other countries recognise the law and the principle of dual criminality. This is not a crypto asset related argument, and relates more to the forfeiture provision, though the gloss of Cyrpotassets will not necessarily assist the process. This is because a lot of countries do not have similar asset based asset recovery as part of their legislation, so often other routes have to be purposed. This can be a problem with AFFO’s and will likely be a problem with these types of applications.

• This will require more education and co-operation on the behalf of Law enforcement agencies. The use of the network of liaison magistrates will help, but in LOR cases personal relationships cannot be underestimated.

• This is a good provision. The developments from the Cash and AFFO provisions, are clear and helpful. They will allow for evidence to be gather from other jurisdictions, and for the applications to be in the best position, when a decision on whether to apply for forfeiture is made. What is important is that the provisions are not taken advantage of.

• Though Crypto Assets involve a lot of complications, not all cases will involve these issues, and the provisions should not be taken as a green light for procrastination. Indeed, it is likely that courts and respondents will scrutinise the extension applications event further.

Practical Issues of locating Crypto Assets

• Crypto Assets are not like other assets. Though this seems to be stating the obvious it is worth exploring. Financial investigators and legal professionals are used to dealing with cash and bank accounts. Currency in some form or another has been used since the late Bronze age. In contrast banks are a reality new institution, with banking in the current form tracing its route back to late medieval, and early Renaissance Italy in the 14^th

• This means that Financial Investigators, Courts and Lawyers are used to how these institutions and concepts work. When AFFO’s were brought in, it involved the freezing of Accounts. A concept which was not revolutionary in any way. The banks were used to dealing with Restraint and Production Orders. All stakeholders were aware of how they operated, and there were clear lines of communication already established. Financial Investigators knew how to locate the assets, and had the tools and experience to do so. Though it is true that we have seen a change in what is a bank in the last 5 years, and a move away from traditional financial institutions, fundamentally their role has not changed and this change has been easy to deal with in legislation.[3]

• This is not the case with Cryptoassets and the bodies that hold them. There are no established links between law enforcement and these bodies. These bodies were often formed to avoid scrutiny from governments and other institutions. This is largely changing as the sector seeks to become mainstream, but there is still residual resistance to this.

• This means that implementing any orders might be problematic. The Orders are only as good as the willing ness of the holders of the subjects of the orders to obey them. This is straight forward with established instructions that have a legal department, a base and a public reputation, who know that a breach of an order or non-compliance will lead to Court action, a fine and possibly a term of imprisonment. But if there is no established headquarters and no pater of compliance, then the standard framework is harder to apply.

• The knowledge of what Cryptoassets, Crypto Wallet, and other Crypto related items are is not widely held. This is true for Courts, Investigators and Lawyers. This creates two fundamental issues. First locating the assets. Second, using the correct terminology to implement the aims of the stakeholders.

• In one of the first seizures of crypto currency, which occurred around 2015, and used section 47 of POCA, the wallet was stumbled on by chance. A search had occurred by an experienced investigator with a young trainee. The trainee noticed a string of numbers on a paper. This had been missed for the experienced investigator who was not looking for it. It turned out to be the pass code for a crypto wallet and subsequently millions of crypto assets were seized.

• This highlights the need to know what you are looking for. Investigators are learning this, and the legislation allows they wide powers to search. It should not be a problem with investigators dealing with these applications regularly, but the nature of this legislation, any accredited Financial investigator can use the provisions, therefore they will all need a fundamental working knowledge of this complicated area as part of their accreditation, even if they do not use the provisions often.

• They will also need the correct technology support. Both to trace and seize crypto assets and wallets. This will inevitably be to costly for all bodies. Therefore, a specialist knowledge hub at a law enforcement agency such as the National Crime Agency, that can give support to any accredited financial Investigator would be ideal. If this is possible in terms of logistics or finding is another issue, but such an institution, would both provide assistance with expertise and technology, which would allow his bill to be properly enforced.

• This knowledge will filter down to the Courts and Lawyers. We are already seeing this in the High Court, where Judges have dealt with claims concerning the recovery of Crypto Assets have been regularly heard. But to do this we need all stake holders to be regularly hearing these matters, and to be learning from experts. The first issue is a matter for organisation, and I have dealt with the possibility of specialist POCA courts below. The second issue can be dealt with by relying on a cadre of experts on Crypto Currency. We are seeing a rise in the demand for these and this legislation will inevitably increase the need for experts. This will inevitably lead to the rise of a cadre of experienced experts, but it might in the short term lead to unqualified people trying to take advantage of the newness of the area and pass themselves off as experts. All stakeholders need to be vigilant of this.

• Overall, the answer, as with so many things is training. Both to Financial Investigators, but also to lawyers and Judges. There needs to be an understanding of how these assets work, how they are evolving and how they can be identified. This needs to be at all levels. This expertise needs to be instilled but also regularly tested and updated. This is only way hat an effective understanding can be maintained. Without regular cases, and specialities to work on them (Applicant, Respondent and Judge), the law will not be used correctly, and will not be effective.

Scale of the cases

• In preparation of the Bill passing into law, the focus has been on the law. What does it do and how it will operate. Very little has been discussed about resources for the Courts or for the enforcement agencies that will be using the provisions.

• It is had to be able to quantify how many cases will be brought under the provisions, but the fact that there has not been an attempt to do that is concerning. Under the Account Freezing and Forfeiture Order provisions we have seen a huge rise in the need for non CPS Courts. The amount of cases being brought has risen. This has put a strain on Magistrates Courts which already face a back long. As of the last published statistics 347,820[4] cases outstanding, which is up from 331,596 in the second quarter of 2022.

• Crimes involving crypto currency are rife. This involves not just money laundering, which has been at the centre of the discussion around this part of the bill but also the theft of crypto assets. With the victims provisions included in the bill at ---, this appears to open up a route to victims of crypto asset crime to recover their assets.

• There are limited other options. Police officers do not seem to have other dynamic powers to allow them to recover assets. They could use a standard Restraint Order and wait for the matter to come to Criminal Trial. There is likely to be a very cadre of police officers who are trained or equipped to deal with such matters. The process is likely to be very extended. For the asset to be recovered it would need a criminal conviction. Due to the back long in criminal cases this is likely to take a long time. The burden of proof is also higher so there is more chance that there will not be a conviction and therefore there will be no confiscation process which would allo w for a compensation order and the return of the Asset to the victim.

• Another route would be to apply under the strictly civil route in the County or High Court. This would involve bringing a civil claim and putting in place a freezing order. This is a very costly route, though it can be effective. Though litigation funding can be available, the viability of this for asses under £250,000 is questionable. Even over this figure it is costly operation. As we have seen since the rise of crypto currency tracking and recording time is a difficult operation. Which is one of the factors which makes acquisitive crime in relation to crypto currency so rife.

• Therefore, it is likely that victims will turn in desperation to police, and any other law enforcement agency with a qualified financial investigator under section 354 of POCA to assist them. They can assist them because these provisions. The provisions allow for the easy seizure and recovery of crypto assets.

• In the provisions under POCA related to Accounts, Cash or Assets, the emphasis has been on using the provision to disrupt and interdict the flow of unlawful assets. This can be seen in the lack of victims provisions and the way the provisions have been used in cooperation with DAMAL’s as well as extensive use at the borders. If there is ever a victim crime in relation to one of their three other types of assists either a work around is used, using section 303Z4 of POCA for the accounts, or another route is used.

• With Crypto Currency, the situation will be different. As we have seen in the litigation, crypto assets need specialist knowledge and laws to recover them This is the only legislation offering that tailored approach.

• This will mean that all victims can and might approach the police and ask for their assets to be recovered under the provisions. We are not concerned with the morality of using these provisions over criminal provision but the scale. No prediction or quantifying appears to have been carried out about crypto crime, but anecdotally it is very wide speared.

• This has the potential to overwhelm teams using these new provisions. It could also overwhelm the Courts. What is of note is that no work appears to have been done to look at expanding the capacity of the Courts and the law enforcement agencies who use the provision’s Account Freezing and Forfeitures have put a further strain on the capacity all of these bodies. There is no prospect of this getting better or for more resources to be allocated.

• As demonstrated by the Case of HMRC v Mann, a case where the Courts were unable to hear a matter in time due to COVID, the time lines in these types of cases is strict. If it is not complied with the case could be kicked out of the process This means that the result of a lack of capacity will be cases not being carried on, rather than just further delayed. This could lead to complainants and injustice.

• An issue exacerbating this problem is that the Courts do not receive a share of any assets recovered. The Asset Recovery Incentivisation Scheme (ARIS) for these cases gives a 50% split between the law enforcement agency and the Home Office. This is contrast to the Confiscation Regime which gives the Court 12.5% of any assets recovered under that provision.

• It is not suggested that ARIS is at the forefront of any Courts mind, but it helps the underfunded Courts. It will also could help increase capacity. It could be that ultimately this will be used to establish a separate POCA Court or have the ticketing of judges in POCA work, in the Magistrates Court, but also in the Crown Court and High Court.. There will certainly be the work there, and the need for specialist knowledge, as this area continues to expand, both in terms of law and cases. This would allow judges to receive training in the law and develop a specialist knowledge of the terminology and rapid changes in the area. It could work in the same way as extradition to start, with Judges required to undergo specialist training. The difference in this area would be that Judges in different Courts would all need such a ticket and would also work together to share experiences and approaches to this case.

• Fundamentally the issue is that though the law might work well, the infrastructure is not here. If the infrastructure is not there the laws cannot be enforced, and that might be worse, they could give victims false hope of action.

Conclusions

• This bill is a good start to dealing with Cryptocurrency being made from illegitimate activity or about to be used in illegitimate activity. It uses a tried and tested legislative frame work, with a clear existing framework, and established principles as set out in relevant case law. The legislative framework is known to Courts, Investigators and lawyers. There is no reinventing of the wheel but just applying these frameworks to this new problem, while applying established definitions.

• The issue is how will it work in practice. This might seem an obvious answer, but Crypto currency’s create some particular issues. Not just in volume but in their nature which is different from other assets which stakeholders in this area usually come across.

• By their nature these orders are going to involve international involvement and co-operation. Both from a jurisdictional level and also as part of the investigations. Though with AFFO’s we have seen some of the later, the juristically issues are not at play as the banks being frozen are through banks established in the UK. Crypto assets are a different proposition entirely with the infrastructure and assets by their nature being digital with little or no bricks and mortar address to locate it. This is the first time that a law of this nature has specifically been used to target crypto currency. That in itself a potential issue as other jurisdictions, when being asked for assistance, will not have similar framework or experience, which will allow them to understand and provide assistance in cases of this type.

• With all new legislation, how they will be used in practice is often a factor which is overlooked. Though there is time until implementations, this does appear to be the case here. Both in terms of infrastructure to hear these new cases, and the expertise to bring them. Without these two issues being addressed the legislation will not be effective

• Therefore, though this is a good piece of legislation which develops on well tested foundations, the practicalities are what might let it down. This is by no means inevitable, and ultimately these issues should be overcome. The issue will be how quickly this can be achieved, and if it can be achieved so that the credibility of the legislation can be maintained.

Commentary provided by Barnaby Hone, 5 St Andrew’s Hill, and republished by Lewis Nedas Law with permission.  

For expert, trusted legal advice from one of our solicitors, please telephone us on 020 7387 2032 or complete our online enquiry form. 

[1] Paragraph 57 of R (on the application of MNL) v Westminster Magistrates’ Court [2023] EWHC 587

[2] ARA v Gheson Virtousu and Victoria Virtosu [2008] EWHC 149 (QB)

[3] REG

[4] Official statistics for third Quarter 2022