What happens to crypto seized in criminal investigations?
Earlier this year, during the annual Queen’s Speech in the United Kingdom, Prince Charles informed the Parliament about two bills. One of them — the Economic Crime and Corporate Transparency Bill — would expand the government’s powers to seize and recover crypto assets.
Meanwhile, the United States Internal Revenue Service (IRS) seized more than $3 billion worth of crypto in 2021.
As digital currencies’ monetary stock grows and enforcers’ scrutiny over the maturing industry tightens, the amount of seized funds will inevitably increase.
But where do these funds go, assuming they aren’t returned to the victims of scams and fraud? Are there auctions, like there are for forfeited property? Or are these coins destined to be stored on some kind of special wallet, which might end up as a perfect investment fund for law enforcement agencies? Cointelegraph tried to get some answers.
The dark roots of civil forfeiture
For the newcomers in the room, cryptocurrency is money. In that sense, the destiny of seized crypto shouldn’t differ much from other confiscated money or property. Civil forfeiture, the forceful taking of assets from individuals or companies allegedly involved in illegal activity, is a rather controversial law enforcement practice. In the U.S., it first became common practice in the 1980s as a part of the war on drugs, and it has been the target of vocal critics ever since.
In the U.S., any seized assets become the permanent property of the government if a prosecutor can prove that the assets are connected with criminal activity or if nobody demands their return. In some cases, the assets are returned to their owner as a part of a plea deal with the prosecution. Some estimate, however, that just 1% of seized assets are ever returned.
How do law enforcement agencies use the money they don’t have to return? They spend it on whatever they want or need, such as exercise equipment, squad cars, jails and military hardware. In 2001, for example, the St. Louis County Police Department used $170,000 to buy a BEAR (Ballistic Engineered Armored Response) tactical vehicle. In 2011, it spent $400,000 on helicopter equipment. The Washington Post analyzed more than 43,000 forfeiture reports and reported that the seized money was spent on things as varying as an armored personnel carrier ($227,000), a Sheriff’s Award Banquet ($4,600) and even hiring a clown ($225) to “improve community relations.”
Some states, like Missouri, legally oblige that seized funds be allocated to schools, but as the Pulitzer Center points out, law enforcement agencies keep almost all of the money using the federal Equitable Sharing Program loophole. In 2015, U.S. Attorney General Eric Holder issued an order prohibiting federal agency forfeiture, but his successor under the administration of President Donald Trump, Jeff Sessions, repealed it, calling it “a key tool that helps law enforcement defund organized crime.”
Seized coins’ destiny in the U.S., U.K. and EU
While 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 pretty much the same as with non-crypto assets.
Don Fort, a former chief of the IRS Criminal Investigation Division who heads the investigations department at law firm Kostelanetz & Fink, told Cointelegraph that the only principal distinction is the necessity to auction the digital assets off:
“At the federal level, seized cryptocurrency goes to either the Department of Justice or Department of Treasury Forfeiture Fund. Once the crypto funds are auctioned off by one of the forfeiture funds, the funds can be used by the respective federal law enforcement agencies.”
Fort explained that as with non-crypto funds, the agency requesting forfeited funds has to submit a specific plan or initiative to acclaim the money and spend it, and the plan must be approved by the Department of Justice before the funds can be allocated to the agency.
A similar procedure regulates the allocation of seized crypto in the United Kingdom. The Proceeds of Crime Act 2002 outlines how cryptocurrency proceeds of crime should be dealt with once seized. Tony Dhanjal, head of tax at Koinly, explained to Cointelegraph:
“When it generally comes to confiscated assets — as opposed to cash — the Home Office gets 50%, and the other 50% is split between the Police, Crown Prosecution Services and the Courts. There is also leeway for some of the confiscated assets to be returned to the victims of crypto crime.”
However, Dhanjal believes the legislation needs to be updated to deal specifically with crypto assets, as they are a “unique challenge for crime agencies as anything that has ever come before it.” The aforementioned announcement of the Economic Crime and Corporate Transparency Bill didn’t include any specifics aside from the intention to “create powers to more quickly and easily seize and recover crypto assets,” but an update on the procedure of seized crypto allocation is surely something to be desired.
As it often goes for regulatory policies, the European Union is more complicated. While there are systems of mutual assistance in criminal matters within the EU, criminal legislation falls within the authority of the member states, and there is no single agency to coordinate enforcement or seizure.
Hence, there are various ways seized crypto is handled. Thibault Verbiest, a Paris-based 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 Assets (AGRASC) is responsible for managing seized property. Verbiest stated:
“When, as a result of a judicial investigation, assets have been seized, they are, by decision of the public prosecutor, transferred to the AGRASC, which will decide, 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) was sold at a public auction by the AGRASC after it seized the cold storage devices used by prosecuted people, who had stored their encryption keys on a USB stick. As Verbiest explained:
“This was made possible by the fact that the aforementioned articles allow seizures on the movable property, so the USB stick (and its content) 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, as the aforementioned texts do not allow seizures of intangible property.”
With the practice of property forfeiture remaining highly controversial — with some even preferring to call it “highway robbery” — cryptocurrencies provide their owners at least a relative degree of protection. Still, technology aside, it’s in the area of policy where both coiners and no-coiners will have to fight against the long tradition of law enforcement overreach.