What happens to cryptos seized as part of criminal investigations?

Earlier this year, during the Queen’s annual speech to the UK, Prince Charles briefed Parliament on two bills. One of them – the Economic Crime and Corporate Transparency Bill – would expand the powers of the government to seize and recover crypto assets.

Meanwhile, the U.S. Internal Revenue Service (IRS) grasped more than $3 billion worth of crypto in 2021.

As the monetary stock of digital currencies grows and supervisory oversight of the maturing industry tightens, the amount of seized funds will inevitably increase.

But where do these funds go, assuming they are not returned to victims of scams and fraud? Are there auctions, as there are for confiscated property? Or are these coins meant to be stored on some kind of special wallet, which could become a perfect investment fund for law enforcement? Cointelegraph tried to get answers.

The Dark Roots of Civil Forfeiture

For newcomers to the room, cryptocurrency is money. In this sense, the fate of the seized crypto should not differ much from that of other confiscated funds or assets. Civil forfeiture, ie the forcible seizure of assets of individuals or companies allegedly involved in illegal activities, is a rather controversial law enforcement practice. In the United States, it became common practice in the 1980s as part of the war on drugs, and it has been the target of fierce criticism ever since.

In the United States, all seized assets become the permanent property of the government if a prosecutor can prove that the assets are linked to criminal activity or if no one demands their return. In some cases, assets are returned to their owner as part of a plea bargain with the Crown. Some estimatehowever, that only 1% of seized assets are returned.

How do law enforcement agencies use the money they don’t have to return? They spend it on everything they want or need, like exercise equipment, squad cars, prisons, and military hardware. In 2001, for example, the St. Louis County Police Department used $170,000 to purchase a BEAR (Ballistic Engineered Armored Response) tactical vehicle. In 2011, he spent $400,000 on helicopter equipment. The Washington Post analyzed more than 43,000 forfeiture reports and reported that the money seized was spent on things as varied as an armored personnel carrier ($227,000), a sheriff’s reward banquet ($4,600) and even hiring a clown ($225 $) to “improve community relations”.

Some states, like Missouri, legally require seized funds to be allocated to schools, but like the Pulitzer Center pointed out, law enforcement agencies keep almost all of the money by using the federal fair share program loophole. In 2015, US Attorney General Eric Holder issued an order barring forfeiture by a federal agency, but his successor under President Donald Trump’s administration, Jeff Sessions, repealed calling it “a key tool that helps law enforcement fund organized crime.”

The Fate of Coins Seized in the US, UK and EU

Although none of the experts who spoke to Cointelegraph could speak to the technical aspects of storing seized crypto assets, the rest of the procedure tends to be much the same as for non-crypto assets.

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Don Fort, former head of the IRS Criminal Investigations Division who heads the investigations department at law firm Kostelanetz & Fink, told Cointelegraph that the only main distinction is the need to auction digital assets:

“At the federal level, seized cryptocurrency goes either to the Department of Justice or to the Department of Treasury’s forfeiture fund. Once the crypto funds are auctioned off by one of the confiscation funds, the funds can be used by the respective federal law enforcement agencies.

Fort explained that, as with non-crypto funds, the agency requesting the confiscated funds must submit a specific plan or initiative to claim the money and spend it, and the plan must be approved by the Department of Justice before that the funds can be allocated to the agency.

A similar procedure regulates the allocation of cryptos seized in the UK. The Proceeds of Crime Act 2002 outlines how cryptocurrency proceeds of crime should be handled once seized. Tony Dhanjal, tax manager at Koinly, explained to Cointelegraph:

“In terms of generally confiscated assets – as opposed to cash – the Home Office gets 50%, and the remaining 50% is split between the police, crown prosecution services and the courts. There is also wiggle room for some of the confiscated assets to be returned to victims of crypto crime.

However, Dhanjal believes the legislation needs to be updated to deal specifically with crypto assets, as they pose a “unique challenge for criminal agencies like anything that has come before it.” The aforementioned announcement of the Economic Crime and Corporate Transparency Bill did not include any details other than the intention to “create powers to more quickly and easily seize and recover crypto assets,” but an update. update on the procedure for allocating seized cryptos is surely something to be desired.

As is often the case with regulatory policies, the European Union is more complicated. Although there are systems of mutual assistance in criminal matters within the EU, criminal legislation falls within the competence of the Member States and there is no single agency to coordinate execution or seizure.

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Therefore, there are different ways to handle the entered cryptography. Thibault Verbiest, a Parisian partner at law firm Metalaw, cited several cases to Cointelegraph. In France, for example, the Agency for the Recovery and Management of Seized and Confiscated Property (AGRASC) is responsible for the management of seized property. Verbiest said:

“When, following a judicial inquiry, property has been seized, it is, by decision of the public prosecutor, transferred to the AGRASC which decides, in accordance with articles 41-5 and 99-2 of the Code of Criminal Procedure, the fate of these assets; they will be sold at public auction or destroyed.

But it is not always possible to seize crypto assets. In 2021, 611 Bitcoin (BTC) were sold at a public auction by AGRASC after seizing the cold storage devices used by the prosecuted, who had stored their encryption keys on a USB key. As Verbiest explained:

“This was made possible by the fact that the aforementioned articles allow seizures of movable property, so that the USB key (and its contents) could be seized. The case would have been different if the crypto funds had been stored on a third-party server via a delegated storage service, the aforementioned texts not authorizing seizures of intangible assets.

The practice of asset confiscation remains highly controversial – with some even preferring to call “highway theft” – cryptocurrencies offer their owners at least a relative degree of protection. Yet technology aside, it is in the realm of politics that coiners and non-coiners alike will have to wrestle with the long tradition of over-enforcement of the law.

Mark M. Gagnon