29 August 2024

With the rapidly evolving cryptocurrency market comes evidential hurdles in relation to consequences arising from the new era. There is growing concern regarding the use of cryptocurrency in illegal activities. In Scotland, law enforcement agencies have had difficulties in tracking, freezing and seizing crypto assets that are related to criminal activities.

The UK government have recognised that existing regulatory frameworks require to be updated in the area to reflect the changing nature and scale of the sector.

Here, we assess the changes in relation to the criminal aspect, by the introduction of the Economic Crime and Corporate Transparency Act 2023.

Economic Crime and Corporate Transparency Act 2023 (ECCTA)

Due to cryptocurrency being decentralised and frequently pseudonymous in nature, this new digital era has become a breeding ground for money launderers, finance terrorism and fraudulent activity which utilise the platform for illegal activities. The legislation is aimed at preventing organised criminals from laundering the profits of criminal activity through crypto currency and ransomware payments.

The ECCTA makes changes to Chapter 5 of the Proceeds of Crime Act 2002, to enable law enforcement agencies to investigate, seize and recover proceeds of crime and illicit crypto assets. Prior to ECCTA, the Proceeds of Crime Act 2002 was not fully equipped to deal with the complexities of crypto assets.

Civil Recovery

The introduction of the legislation extends the civil recovery regime for assets that are connected to crypto currency. It provides more powers to quickly seize and recover crypto assets. Forfeiture of assets through the civil courts is aimed at mitigating the risk posed by those who cannot be criminally prosecuted but use the funds to further their criminality or for terrorist purposes.

Searches

The ECCTA provides powers for police officers, where there are reasonable grounds to suspect that the assets are from the proceeds of unlawful conduct or intended for use in such conduct, to search and seize any “crypto asset-related item” that contains or provides assistance in the seizure of crypto property. This provides powers to seize electronic devices, diaries, notebooks that may have information stored for the purposes of gaining access to a crypto wallet.

Freezing Orders

If there are grounds to suspect that the relevant crypto wallet contains criminal property or that the property is intended to be used for unlawful conduct, there are powers for police officers to seek a crypto wallet freezing order.

This allows law enforcement to act upon reasonable suspicion, without the requirement of the individual to have been criminally convicted.

An application must be made ex parte and once granted, can be in place for a period of two years. This order prohibits the relevant person by or for whom the wallet is operated from making withdrawals or payments using the wallet, unless permitted under exclusions by the court.

This power only extends to a “UK-connected crypto asset service provider”. Where there is ambiguity over whether the service provider is connected to the UK, the UK does not have jurisdiction to enforce the order. The Act allows law enforcement to act pre-emptively to avoid assets being transferred across borders instantaneously.

Forfeiture of the Assets

The court must be satisfied, in granting an order for forfeiture of some, or all of the crypto assets, that the assets are recoverable property or that its intended use was for unlawful conduct.

The Act allows Scottish Courts to confiscate digital assets where there has been a conviction for economic crime. Where there is no conviction, but the assets are deemed to be proceeds of crime, the act provides a mechanism to forfeit these crypto assets.

Conversion of Crypto Assets

There are provisions to allow the conversion of detained crypto assets and frozen wallets into a flat currency on application to the court. The court must have regard to whether the crypto assets are likely to suffer significant loss in value during the period before they are released or forfeited. Should the converted currency not be subsequently forfeited, the affected party may make representations for compensation.

There is a relatively low bar for authorities to have greater powers to freeze and forfeit the assets. We have seen a rise in clients, with assets that are not related to criminal activity, have their assets frozen or seized, pending both criminal and civil investigations. This consequently results in individuals who have devoted their time within the new era of online and crypto assets becoming scrutinised and investigated.

Stacey Fox is a Solicitor in BTO’s Corporate Crime and Health and Safety and Regulatory team. If you would like to have an informal discussion, please get in touch.

Stacey Fox, Solicitor: sfo@bto.co.uk / 0141 221 8012