New powers to search, freeze and forfeit crypto assets

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) has updated the existing proceeds of crime legislation in relation to searches, freezing and forfeiture of crypto assets.

Crypto assets are increasingly used by organised criminals, drug dealers and fraudsters to move and launder the profits of criminal activity. Up to now, these assets could not be recovered as easily as other criminal property, in part due to their unique technological qualities. To tackle this increasing threat, the ECCTA makes it easier for UK law enforcement to effectively investigate, seize and recover illicit crypto assets.

The changes include:

• police are no longer required to make an arrest before seizing crypto from a suspect - this makes it easier to take assets which are known to have been criminally obtained, even if sophisticated criminals are able to protect their anonymity or are based overseas
• items that could be used to give information to help an investigation, such as written passwords or memory sticks, can be seized
• officers are able to transfer illicit crypto assets into an electronic wallet which is controlled by law enforcement, meaning criminals can no longer access it
• UK law enforcement is able to destroy a crypto asset if returning it to circulation is not conducive to the public good - privacy coins, for example, are a form of cryptocurrency that grant an extremely high degree of anonymity and are often used for money laundering
• victims are able to apply for money belonging to them in a crypto assets account to be released to them.

Legislation

The ECCTA has amended Part 5 of Proceeds of Crime Act 2002, setting out the crypto asset specific forfeiture powers.

Chapter 3C Searches seizure and detention

The ECCTA grants powers to search for and seize any “crypto asset-related item” that contains or gives access to information that is likely to assist in the seizure of crypto property. This could include notebooks or electronic devices where private keys are written or stored. An officer may use any information obtained from the item for the purpose of identifying or gaining access to a crypto wallet, enabling the seizure under this chapter of any crypto assets.

Items may initially be retained for a period of 48 hours, but this period may be extended by the court up to a maximum of two years (or three years where mutual legal assistance has been engaged). This brings it into line with existing powers available for cash and monies held in bank accounts.

An officer may seize crypto assets or related items where there are reasonable grounds for suspecting that those assets are the proceeds of unlawful conduct or intended for use in such conduct.

The legislation provides for the transfer of such assets to a wallet controlled by an enforcement officer.

Chapter 3D Freezing orders

These provisions give power to an officer to seek a “crypto wallet freezing order” (CWFO) in relation to a crypto wallet if there are grounds to suspect that the relevant crypto wallet, administered by a “UK-connected crypto asset service provider”, contains suspected criminal  property, or property that is intended for use in unlawful conduct.

These applications can be made ex parte with no minimum threshold and, once granted, prohibit the relevant person by or for whom the wallet is operated from making withdrawals or payments using the wallet, unless permitted under exclusions authorised by the court. Freezing orders can be made for up to a maximum of two years.

Issues may arise with regard to identifying whether a service provider is “connected” to the UK. If not, UK law enforcement will have no jurisdiction over them. Many service providers are cloud-based or hosted overseas and so will not be obliged to co-operate with UK law enforcement.

Chapter 3E Forfeiture

This chapter makes provision for the magistrates court to order forfeiture of some or all of the crypto assets that are detained or frozen in a wallet pursuant to this legislation. In order to make an order for forfeiture, the court must be satisfied that the crypto assets are recoverable property or intended for use in unlawful conduct.

Forfeiture can be challenged in relation to joint and associated property if no agreement is reached, but there are financial and practical consequences for joint owners where there is no such agreement.

Chapter 3F Conversion of crypto assets

In an effort to mitigate risks regarding the volatility of the values of detained or frozen assets, provision is made for the conversion of detained crypto assets and frozen crypto wallets into fiat currency on application to the relevant court. Upon conversion the money must be paid into an interest-bearing account and held there. This applies to crypto assets that are detained or subject to a CWFO. In deciding whether to make an order under this section, the court must have regard to whether the crypto assets (as a whole) are likely to suffer a significant loss in value during the period before they are released or forfeited.

These provisions allow for parties who might be affected by its decision to make representations. Applications for compensation can be made where the converted currency was not forfeited. Due to the volatility of crypto currencies, these could be significant.

Conclusion

The Act reflects the changing ways in which criminals operate by giving relevant powers to law enforcement agencies to freeze and/or seize crypto assets.

The new provisions reflect the current economic landscape and increasing popularity in online and crypto assets being used by criminal organisations as alternatives to more traditional assets and investments. However, the low burden of proof required to freeze and ultimately forfeit these assets will mean that many legitimate crypto asset holders may find their funds are subject to unnecessary scrutiny.

CyXcel lawyers are experts in the fields of cybercrime and forfeiture, regularly representing both applicants and respondents in contested proceedings nationwide. This expertise makes us uniquely placed to advise and challenge freezing and forfeiture orders in court. Our lawyers have secured the release of millions of pounds of frozen and forfeited funds for our clients.