18 March 2022

Crypto: What trustees need to know about the proposed new civil seizure powers - Caroline Harbord and Joe May write for ePrivateClient

Dispute Resolution Senior Associate, Caroline Harbord, and Trainee Solicitor, Joe May, have written for ePrivateClient on the proposed Economic Crime Bill and new civil seizure powers relating to cryptoassets.

The article was first published on ePrivateClient on 17 March 2022, and is available to read in full behind the paywall.

The UK government has announced that it will introduce a further Economic Crime Bill, in addition to the one currently working its way through parliament, to bring in new powers to seize cryptoassets and to extend existing civil forfeiture powers to them.

UK enforcement authorities can currently seize cryptoassets using powers derived from criminal law. For example, HMRC did so when it recently seized three non-fungible tokens as part of a VAT fraud investigation. However, the ability to seize cryptoassets under the civil regime –via the High Court rather than criminal court – is potentially very attractive, at least from the perspective of enforcement authorities.

One of the key benefits of seizing assets through the civil regime is the lower burden of proof required by the civil court. When applying to make use of civil seizure and forfeiture powers, enforcement authorities need to persuade the judge that, “on the balance of probabilities”, the property in question is the proceeds of crime. When applying for equivalent relief from the criminal court, the judge needs to be satisfied of this “beyond all reasonable doubt”. The latter is a much higher evidential threshold for the relevant authority to clear.

In addition, civil recovery proceedings focus on whether the asset in question represents the proceeds of crime, rather than establishing criminality on that part of a specific individual (which is the focus of criminal proceedings). Provided the civil court is satisfied on the balance of probabilities that the asset is the proceeds of crime, it is not necessary for the authority to establish who committed the relevant crime or for there to be simultaneous criminal proceeds on foot.

This is a particularly useful feature of the civil regime when it comes to seizing cryptoassets, given that it is harder to establish who might own a cryptoasset or who might have committed a ransomware attack. The public traceability of blockchain transactions makes this potentially a very powerful tool; in many cases it will be easier to identify proceeds of crime than with non-cryptographic assets. That said, there are techniques which can be used to evade the public traceability of blockchains.

The existing civil seizure and forfeiture tools are widely regarded as having been underutilised. This is largely a product of how expensive the relevant orders are to obtain, and the additional costs incurred if an application fails. The government has, however, taken concurrent steps to mitigate these costs in the extant Economic Crime Bill currently passing through Parliament. This may mean that these powers are used more frequently in the future.

It will be interesting to see how the second Economic Crime Bill (in which the civil seizure powers will be set out) grapples with crypto-specific issues and how enforcement authorities intend to hold (and potentially liquidate) seized cryptoassets. This question is far less straightforward than for tangible assets such as cash and gold, and begs the question as to whether authorities will have their own cryptowallets.

So what are the implication of the new powers for those operating in the private client world? Pending the publication of the draft bill, the fundamental takeaway is how important it is for trustees to be alive to the anti-money laundering risks associated with holding cryptoassets, and to seek advice before dealing with such assets or agreeing to hold them on trust.

The government has expressly stated that there is an increased risk that these assets could constitute the proceeds of crime, such that little sympathy is likely to be afforded if robust source of wealth checks are not undertaken, particularly for clients or assets with links to Russia.

In addition, once the bill is published, trustees would do well to start considering how they would respond to a civil seizure order. This includes details of how they might isolate, secure, and potentially liquidate cryptoassets in compliance with such an order.

Finally, only when the Bill is published will we know if it is to impact trustees further afield than just England. The current civil seizure powers include criminal conduct that occurred outside of England, so it is foreseeable that the new powers will have some extra-territorial effect as well.

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