What happens to crypto seized in criminal investigations?

The United States Marshals Service auctioned off more than 31,000 bitcoins seized in criminal investigations.
How much of the cryptocurrency will be used by law enforcement and how likely is it that criminals can get access to their assets?

Cryptocurrency is a digital asset that uses cryptography to secure its transactions, control the creation of additional units, and verify the transfer of assets. Read more in detail here: is cryptocurrency legal.

What happens to crypto seized in criminal investigations?

 

Prince Charles notified Parliament about two legislation earlier this year during the annual Queen’s Speech in the United Kingdom. The Economic Crime and Corporate Transparency Bill, for example, would provide the government the authority to confiscate and reclaim crypto assets.

Meanwhile, the Internal Revenue Service (IRS) of the United States confiscated more than $3 billion in cryptocurrency in 2021.

As the monetary stock of digital currencies expands and regulators’ supervision of the developing sector intensifies, the quantity of seized cash will certainly rise.

But, if the cash aren’t returned to the victims of scams and fraud, where do they go? Are there auctions for forfeited property, as there are for forfeited property? Or are these coins going to be housed in a special wallet that may serve as an ideal investment fund for law enforcement agencies? Cointelegraph attempted to get some information.

Civil forfeiture’s shady origins

Cryptocurrency is money for the newbies in the room. As a result, the fate of seized cryptocurrency should be similar to that of any confiscated money or property. Civil forfeiture, or the forcible seizure of assets from people or organizations accused of illicit behavior, is a contentious law enforcement tactic. It became regular practice in the United States in the 1980s as part of the drug war, and it has been the subject of outspoken detractors ever since. 

If a prosecutor can establish that the assets are linked to criminal conduct or if no one seeks their return in the United States, any confiscated assets become the government’s permanent possession. As part of a plea agreement with the prosecution, the assets are sometimes restored to their owners. However, other estimates suggest that just 1% of confiscated assets are ever restored.

What do police departments do with the money they don’t have to return? They may spend money on everything they want or need, including workout equipment, police vehicles, prisons, and military weapons. The St. Louis County Police Department, for example, spent $170,000 in 2001 on a BEAR (Ballistic Engineered Armored Response) tactical vehicle. It spent $400,000 on helicopter equipment in 2011. The Washington Post examined more than 43,000 forfeiture files and found that the money was spent on a variety of items, including an armored personnel vehicle ($227,000), a Sheriff’s Award Banquet ($4,600), and even employing a clown ($225) to “enhance community relations.”

Some states, such as Missouri, require that confiscated monies be distributed to schools, but as the Pulitzer Center points out, law enforcement agencies pocket almost all of the money by exploiting a loophole in the federal Equitable Sharing Program. U.S. Attorney General Eric Holder issued an order forbidding federal agency forfeiture in 2015, but it was revoked by his successor, Jeff Sessions, under President Donald Trump’s administration, who called it “a crucial tool that helps law enforcement punish organized crime.”

The fate of seized coins in the United States, the United Kingdom, and the European Union

While none of the specialists who talked with Cointelegraph could comment on the technical issues of storing seized crypto assets, the rest of the process is very similar to that of non-crypto assets.

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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, confiscated cryptocurrency is sent to the Department of Justice Forfeiture Fund or the Department of Treasury Forfeiture Fund.” The proceeds may be utilized by the various federal law enforcement agency after the crypto funds are auctioned off by one of the forfeiture funds.”

The agency seeking forfeited assets, like non-crypto funds, must present a particular strategy or initiative to reclaim and spend the cash, and the plan must be authorized by the Department of Justice before the funds can be handed to the agency, according to Fort.

In the United Kingdom, a similar system governs the distribution of confiscated cryptocurrency. The Profits of Crime Act of 2002 specifies how seized cryptocurrency proceeds of crime should be handled. Tony Dhanjal, Koinly’s head of tax, told Cointelegraph:

“In general, the Home Office receives 50% of seized assets — as opposed to cash — and the other 50% is distributed between the Police, Crown Prosecution Services, and the Courts.” There is also the possibility that some of the seized assets may be restored to crypto crime victims.”

Dhanjal, on the other hand, feels that the law should be modified to address crypto assets explicitly, since they provide a “unique challenge for criminal agency as anything that has ever gone 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 for seized crypto asset allocation would be welcome.

The European Union, as is typically the case with regulatory systems, is more convoluted. While the EU has mutual aid procedures in place for criminal concerns, criminal law is the responsibility of the individual member states, and there is no central body to coordinate enforcement or seizures.

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As a result, seized crypto may be handled in a variety of ways. Thibault Verbiest, a partner at the legal firm Metalaw in Paris, gave Cointelegraph many examples. The Agency for the Recovery and Management of Seized and Confiscated Assets (AGRASC) in France, for example, is in charge of handling seized property. Most eloquently stated:

“When assets are seized as a result of a judicial investigation, they are transferred to the AGRASC by decision of the public prosecutor, who will decide the fate of these assets in accordance with Articles 41-5 and 99-2 of the Code of Criminal Procedure; they will be sold at public auction or destroyed.”

However, seizing crypto assets is not always feasible. After seizing the cold storage devices used by convicted persons who had saved their encryption keys on a USB stick, the AGRASC auctioned 611 Bitcoin (BTC) at a public auction in 2021. As Verbiest put it:

“Because the aforementioned provisions permit seizures of moveable property, the USB stick (and its contents) might be confiscated.” Because the aforementioned laws do not authorize seizures of intangible property, the situation would have been different if the crypto money had been held on a third-party server through a delegated storage service.”

Property forfeiture is still a contentious issue, with some even preferring the term “highway robbery” to describe it. However, cryptocurrencies provide at least some security to their owners. Regardless of technology, both coiners and non-coiners will have to resist the historical heritage of law enforcement overreach in the field of policy.

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