Decrypting the new powers in the Economic Crime and Corporate Transparency Act 2023

The UK government has not been shy about its desire to make the UK a hub for cryptocurrency business and trading. Tentative plans from the Bank of England to launch a digital pound, for instance, can be seen trumpeted on the Bank’s website; perhaps not that surprising when the PM has a reputation as a “tech bro”. Hand in hand with these plans the government has sought to address the regulatory, investigatory and, therefore, criminal side of the (bit)coin.

On 26 April 2024, the Economic Crime and Coroporate Transparency Act 2003 ("ECCTA"), Schedule 9, Para 1, added Chapters 3C - 3F to the Proceeeds of Crime Act 2022[1] (“POCA”). Based on the existing forfeiture schemes relating to cash and listed assets, government ministers have heralded a new era in the power to seize, freeze, detain, forfeit, realise and destroy cryptoassets by introducing new measures aimed at strengthening the UK’s fight against economic crime. Further provisions amend the confiscation regime of POCA[2]. Practitioners will find the new powers referred to in Part 4 of ECCTA but the detail is contained in Schedule 8 of the Act (in respect of confiscation proceedings, Schedule 9 (in respect of civil recovery) and Schedule 10 (in respect of terrorism related investigations). This article concentrates on Schedules 8 and 9 : the new regime in force with regard to confiscation and the new powers in relation to civil recovery,identifying and commenting on each of the elements listed above.

The claims for the new powers are large. James Cleverly, the Home Secretary, suggested that “these updated powers” will help “more easily strip” the likes of Daesh of their assets. The UK government would of course first have to locate Daesh cryptocurrency assets and on that subject the Home Secretary has had nothing to say, perhaps because those efforts are secret or perhaps because Daesh’s cryptocurrency assets are not easy to locate. Tom Tugendhat, Security Minister, told us: “These reforms are bad news for criminals, they send a clear message we will never let crime pay. Our agencies have already shown they have the expertise to target sophisticated criminals and deprive them of their ill-gotten gains. These new measures will help them take the fight to the next level.”

The features of the new powers coming into force claimed by the government press-release on the www.gov.uk website are these:

• Police will no longer be required to make an arrest before seizing crypto from a suspect. This will make 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 will be able to transfer illicit cryptoassets into an electronic wallet which is controlled by law enforcement, meaning criminals can no longer access it.
• UK law enforcement will be 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 will also be able to apply for money belonging to them in a cryptoassets account to be released to them.

ECCTA introduces 4 major changes to the ways in which cryptoassets may be dealt with by investigators, prosecutors and the courts.

1. The seizure and detention of cryptoassets and cryptoasset-related items discovered when executing a search warrant[3]

ECCTA grants powers to seize cryptoassets or any “cryptoasset-related item” that can be used to assist in the seizure of crypto property. The term is a wide-ranging one and includes physical items in which recovery seeds or private keys are stored, whether scrawled on a paper notebook or contained in electronic devices such as wallets or mobile phones. Items may initially be retained for a period of 48 hours, but this period may be extended by the court for up to 6 months at a time, up to a maximum of two years or three years where mutual legal assistance has been engaged.

An enforcement officer may seize cryptoassets or cryptoasset-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. An officer may require a person to provide information which is stored in an electronic form and accessible from the premises to be produced in a form in which it can be taken away, save where the information is subject to legal professional privilege. This information may further be used to identify or gain access to unhosted cryptoassets or to facilitate the seizure of cryptoassets.

The legislation provides for the transfer of cyrptoassets to a wallet controlled by an enforcement officer. This scenario appears to envisage a disposal of assets not by realisation into fiat currency or by destruction (see below) but into a kind of digital exhibits store cupboard. The police wallet envisaged has already been christened a “burn wallet” in cryptocurrency internet chat rooms. Those same discussions have inevitably turned to the question of how secure any such police wallet might prove to be. How many different currencies will be capable of transfer and the extent to which the police will be alive to the wild fluctuations in the valuation of some of these currencies is anyone’s bet. Whether or not and to what extent the authorities avail themselves of this power and, if so, whether it can be made safe from hackers, remains to be seen.

2. The freezing of cryptoassets held in crypto wallets administered by cryptoasset exchanges and custodian wallet providers[4]

One of the most far reaching of the provisions that have come into force is the power of enforcement officers to seek a “crypto wallet freezing order” (“CWFO”). Such an order will be granted, upon authorisation by a senior officer, if there are grounds to suspect that the relevant crypto wallet, administered by a “UK-connected cryptoasset service provider,” contains recoverable property, or property that is intended for use in unlawful conduct. These applications can be made ex parte with no minimum threshold for a CWFO unless it is combined with an application for an account freezing order, in which case the minimum threshold remains.

A CWFO prohibits the relevant person by or for whom the wallet is operated making withdrawals or payments using the wallet, unless permitted under exclusions authorised by the court. A CWFO may be authorised for up to a maximum of two years from the date of the order, or three years under the mutual legal assistance provisions.

The threshold to obtain a CWFO is a low one and the first an affected person is likely to know about this is after the order has been made. Therefore, timely engagement with the process thereafter will be essential to defend the inevitable forfeiture order application that will follow.

3. The forfeiture of cryptoassets following seizure or the application of a freezing order[5]

This section makes provision for the Magistrates’ court to order forfeiture of some or all of the cryptoassets that are detained or frozen in a wallet pursuant to this legislation. In order to make a forfeiture order, the court must be satisfied, to a higher threshold that the cryptoassets 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 to joint owners where there is no such agreement.

Provision is made for the realisation or destruction of forfeited cryptoassets with specific provisions in place to address potential ownership issues of released or frozen cryptoassets to release them to their true owners in limited situations.

The power to destroy a cryptocurrency asset only crystallises in very specific circumstances: (i) the asset has been released pursuant to section 47R of the Proceeds of Crime Act 2002 and a year has elapsed without it being re-claimed and only then when the person from whom it was originally seized has been notified and given the opportunity to oppose its’ destruction; and (ii) as part of the powers of an appointed enforcement receiver where a confiscation order has been made and remains unrealised. The enforcement receiver may only destroy the asset if it is not practicable to realise it or if the receiver has reasonable grounds to believe it would be contrary to the public interest to do so, having particular regard to whether the asset would facilitate further criminal conduct if put back into circulation. In that scenario, the asset may be destroyed only up to the value of the unrealised portion of the confiscation order and will be used to satisfy that order. One can readily imagine that a person subject to confiscation proceedings would be content to meet the confiscation order in this way rather than by the realisation of other free property, fiat currency or public cryptocurrency.

4. Provide for the conversion of detained or frozen cryptoassets to cash before an application for forfeiture is heard by the court[6]

In an effort to mitigate risks regarding the volatility of the values of detained or frozen assets, provision is now made for the conversion of detained cryptoassets and frozen crypto wallets into fiat currency on application to the relevant court. This applies to cryptoassets that are detained or subject to a CWFO. The court must consider whether the cryptoassets are likely to suffer a significant loss in value during the period before they are released or forfeited.

These provisions allow for the parties to the proceedings or parties who might be affected by its decision to make representations. Upon conversion the money must be paid into an interest-bearing account and held there.

This is likely to be one of the most contentious provisions with conflicting positions resulting as to whether a detained or frozen cryptoasset should be converted and the timing of this conversion.

N.B. As to the announcement that “victims will also be able to apply for money belonging to them in a cryptoassets account to be released to them” there is nothing new here. This does not reflect any new operation of the Proceeds of Crime Act 2002, which has always worked in this way, permitting compensation to be made out of the available amount in the confiscation order.

Key takeaways for practitioners

The consequences of these new provisions are extensive, and it will be interesting to see how they are applied in practice. There are some significant changes of practical importance to practitioners and defendants and some of the key issues are:

• The provisions remove the requirements for a person to have been arrested before the seizure powers can be used.
• The reasonable grounds test where criminality is suspected represents a low bar which will likely cause similar difficulties for the defence as arise in challenging Asset Freezing Orders.
• A person whose crypto property is detained may apply for the release of that item on the basis that the conditions for the detention of the property are no longer met.
• If the cryptoasset related item is released and not reclaimed within a year, an officer may retain it or deal with it as they see fit, including disposing or destroying the item.
• Much like freezing orders more generally, provisions can be made for the provision of sufficient currency to meet reasonable expenses: to carry on a business, trade, or occupation and to meet legal expenses.
• An individual affected by the conversions of detained cryptoassets can make representations and affected people must be notified but there is no appeal against an order for this conversion therefore any representations would need to be carefully made at first instance. Rushing into such a hearing is a bad idea.
• There will be, in some cases, a clear need to identify the issues very early on and instruct experts in cryptoassets who can give evidence of value or forecast to challenge the basis of any proposed order under these provisions.