Policy paper

Economic Crime and Corporate Transparency Act: cryptoassets - legislation

Updated 1 March 2024

Context

The Economic Crime and Corporate Transparency Bill (“the Bill”) aims to strengthen the UK’s fight against economic crime. It will also support efforts to tackle terrorist financing.

This includes amendments to the Proceeds of Crime Act 2002 (POCA) to support the recovery of cryptoassets.

We must ensure that law enforcement agencies have the right legislative framework in place to recover criminals’ cryptoassets to ensure crime does not pay and prevent those assets being used to fund further criminality and terrorist activities.

These amendments will enable law enforcement to more effectively investigate, seize, and recover the proceeds of crime within the cryptoasset ecosystem.

Policy background

Cryptoassets are a store of value which can be transferred or exchanged digitally and are secured cryptographically. They exist electronically and use a peer-to-peer system. There is no central bank, government or centralised structure that manages the system.

Cryptoassets are now increasingly being used by criminals to move and launder the profits of various crimes including drugs, fraud, and money laundering. There is also an increased risk that cryptoassets are being exploited to raise and move funds for terrorist activities. Intervention is required to facilitate faster and more efficient processes for the seizure of cryptoassets, and to ensure that these assets can be recovered (that is, seizing and confiscating assets acquired by individuals as a result of crime).

In order to effectively address these threats, future reform must take account of the unique technological qualities of cryptoassets and, where possible, likely advances of that technology which may be susceptible to criminal exploitation or for use in terrorist activities.

Using the powers provided in POCA 2002, law enforcement agencies in the UK can enforce a confiscation order against an individual who has benefitted from crime or. These powers can be used to seize and recover cryptoassets. Following recovery, a proportion of the assets are reinvested to tackle economic crime.

The UK’s first post-conviction confiscation of cryptoassets took place in July 2018, to a value of £1.2 million.

We want to modernise our proceeds of crime legislation, to introduce new powers to recover cryptoassets in more circumstances than at present. Existing forfeiture powers are currently limited to cash and listed assets. The creation of a cryptoasset specific civil forfeiture power will mitigate the risk posed by those that cannot be prosecuted but use their funds to further criminality or for terrorist purposes.

Legislative reforms

Broadly speaking there are two distinct category of asset recovery powers, which sit within our criminal (Parts 2, 3 and 4 of POCA) regime and civil (Part 5 of POCA) regime:

Criminal powers, or ‘in personam’ powers: which are used to impose a debt against any person convicted of a crime, who is found to have benefited from their crime(s) — these powers are contained in the criminal regime in Parts 2, 3 and 4 of POCA (for England and Wales, Scotland and Northern Ireland respectively). Changes to the criminal powers in POCA will also apply to those Parts which cover Scotland and Northern Ireland.

Civil powers, or ‘in rem’ powers: which order the direct possession of identifiable assets deemed to have been obtained through unlawful conduct or are intended for use in unlawful conduct. These are contained in Part 5 of POCA.

The reforms in the Bill will be to both the criminal and civil regimes.

The Bill includes measures to amend the supplementary investigatory powers in Part 8 of POCA, which may be used to gather information in support of a criminal or civil asset recovery investigation.

Criminal regime

There are 4 key proposals:

In certain circumstances, to remove the requirement for a person to have been arrested before seizure powers can be used earlier in the process, so that those assets can be more easily confiscated at a later date. These powers will apply to all assets but will be particularly useful in the context of cryptoassets.

Specific provision for officers to recover cryptoassets (intangible items) in a broadly similar way provided for tangible property. This involves tweaking the search, seize and detention powers to make it explicitly clear that officers have the authority to ‘recreate’ cryptoasset wallets and transfer assets into a law enforcement-controlled wallet.

Provide the magistrates’ court (as the authority responsible for enforcement of confiscation orders) the powers to authorise the sale of any cryptoassets, in the same way magistrates can already with cash, funds in bank accounts and other types of personal seized property.

Provide for the destruction of cryptoassets in exceptional circumstances—where the financial gain for the sale of those assets would be outweighed by the loss to the public of allowing that circulation of funds to continue to be used in potentially criminal ways.

Civil regime

The overarching aim is to introduce a new subset of ‘forfeiture powers’ so that cryptoassets (and related items, such as physical wallets) can be recovered swiftly in the magistrates’ court by more agencies. Currently only five agencies can recover cryptoassets using civil powers in the High Court. These powers are modelled on account freezing and forfeiture powers (introduced under the Criminal Finances Act 2017) which are a hugely impactful tool and have proved their worth in a wide range of cases.

There are 5 key proposals:

Enable law enforcement agencies to take control of and recover cryptoassets discovered when executing a search warrant. These powers will be used in circumstances where cryptoassets are “unhosted” and not in the custody of a third-party, akin to a bank. Assets may be recovered where the magistrates court is satisfied—on the balance of probabilities—that they are recoverable property or are intended for unlawful conduct. In the case of a terrorist investigation, property that has been earmarked as terrorist property.

Enable law enforcement to recover cryptoassets direct from cryptoasset exchange providers and custodian wallet providers. Assets may be recovered where the magistrates court is satisfied the above test applies.

Enable detained cryptoassets, or those which have been frozen in a wallet, to be converted to cash pending the outcome of a final forfeiture hearing. This is to safeguard against significant fluctuations in market value.

Provide for the destruction of cryptoassets (for example privacy coins more often than not to launder funds) in exceptional circumstances – where the financial gain for the sale of those assets would be outweighed by the loss to the public of allowing the circulation of funds to continue to be used in potentially criminal ways.

Replicate provision for detained or frozen cryptoassets and related items to be released to victims at any stage of proceedings, ameliorating the negative impacts of fraud.

As far as possible, to futureproof both the criminal and civil regimes, the Bill will introduce a series of delegated powers to ensure that any defined terms such as “cryptoasset”; “crypto wallet”; or “cryptoasset service providers” can be amended by affirmative order as required.

Counter terrorist financing provisions

It is not only in relation to economic and serious organised crime that we are seeing an increasing use of cryptoassets – they are featuring in a small but increasing number of terrorist investigations. This includes fundraising through the use of social media platforms using cryptocurrency as a method of payment.

It is important that we intervene now and ensure our legislation is future-proofed to mitigate the risk of new and emerging threats by taking into account the unique technical features of cryptoassets. Current counter-terrorism legislation includes forfeiture powers, but these are currently limited to terrorist cash, terrorist listed assets and terrorist money in bank accounts.

The amendments to the Economic Crime and Corporate Transparency Bill tabled by the government mirror those amendments introduced by clause 142 of the Bill, and which amend the Proceeds of Crime Act (POCA) 2002, in key pieces of counter-terrorism legislation. Specifically, they will update the Anti-Terrorism, Crime and Security Act 2001 and the Terrorism Act 2000 to ensure that they keep pace with the modern terrorist financing threat by ensuring that civil forfeiture and seizure powers are available in relation to cryptoassets. The Home Office has consulted with the Independent Reviewer of Terrorism Legislation, Jonathan Hall KC, and Counter-Terrorism Policing during the drafting of these amendments.

Why are you applying these changes to counter-terrorism legislation?

• It is not only in relation to economic and serious organised crime that we are seeing an increasing use of cryptoassets. Cryptoassets are also featuring in terrorist investigations. The UK has a robust counter-terrorism legislative framework, which criminalises the financing of terrorism in all its forms, but we need to ensure this keeps pace with emerging threats and trends so that law enforcement has the tools and capabilities to manage these.

• These changes will ensure that law enforcement have the necessary powers to be able to effectively seize, freeze and forfeit cryptoassets that could either be used, or have been used, for terrorist purposes.

• The Bill includes measures to amend the Anti-Terrorism, Crime and Security Act (ATCSA) 2001 and the Terrorism Act 2000 to mirror the new powers under POCA 2002 that are already in the Bill. The government has consulted with the Independent Reviewer of Terrorism Legislation in relation to the changes to terrorism legislation.

Q&A

Cryptoassets are not a new phenomenon so why introduce these changes now?

Reform of current legislation is necessary as the proceeds of crime are increasingly held in the form of cryptoassets. For example, cryptoassets are one of only a few accepted payment mechanisms used by cyber criminals demanding payment following a ransomware attack, which poses a significant threat to the UK public and businesses. There is also a risk that cryptoassets become increasingly exploited to raise and move funds for terrorist activities in the future.

POCA was last updated substantially in 2017 (by the Criminal Finances Act), and there have been few opportunities to make meaningful changes since then, as primary legislation is required.

Why are cryptoassets so volatile and how will you manage this volatility?

Like most commodities, assets and investments, cryptoasset price depends heavily on supply and demand. Cryptoassets in particular can be adopted quickly by investors and traders so speculation about the price plays a significant part in cryptoassets value.

The media, social media influencers, opinionated individuals in the industry and well known cryptoasset advocates can create investor concerns or hype which can lead to price fluctuations causing volatility in the market.

We are ensuring there are legislative mechanisms put in place in Part 5 of POCA to alleviate potential fallout from the volatility of the cryptoasset market and the effect it could have on the seized assets.

Cryptoasset technology is evolving quickly, is there a possibility these powers could become outdated sooner than anticipated?

Cryptoasset technology is evolving rapidly. To mitigate this, we have futureproofed the legislation by introducing delegated powers to amend the definition of key terms such as “cryptoassets” and “cryptoasset providers” to ensure innovations in the technology, which cannot currently be anticipated, are not left vulnerable to criminals’ exploitation.

How will the provisions help law enforcement seize cryptoassets?

The provisions will broaden the circumstances in which seizure powers can be used for cryptoassets, allowing cryptoassets to be seized more quickly and in more cases. This will prevent those assets being dissipated. It will provide law enforcement with the lawful authority to secure the cryptoassets and the relevant search and seizure powers to cater for their digital nature.

The introduction of these powers will enable law enforcement agencies to take control of and recover cryptoassets through the issuance of freezing and forfeiture orders for cryptoassets stored with cryptoasset providers.

What will happen to the seized cryptoassets?

In the context of asset recovery “seizure” has a very specific legal meaning. Seizure powers offer a means to preserve the value of assets pending the outcome of investigations or asset recovery proceedings.

Seizure is a temporary mechanism which interferes with a person’s property rights. Property (that is cryptoassets and cryptoasset related items) can only be frozen or seized if there is a likelihood of a final court order for the confiscation or civil forfeiture of the property being made.

An order for the seizure of property does not permanently deprive the asset holder of any interest they may say they have.

What will happen to recovered cryptoassets

Where a court is satisfied that cryptoassets are the proceeds of crime, the asset holder will be permanently deprived of those assets. The cryptoassets will be sold and the proceeds used to compensate any victims or retained by the state and reinvested into tackling economic crime.

It is of upmost importance that crime does not pay and that individuals who commit crimes are deprived of the profits made from criminality. This disrupts crime and deters future criminality.

What will happen to cryptoassets deemed “recoverable” by the court?

Under the civil regime, the provisions work in the same way as those existing for cash, listed assets and funds in accounts under Part 5 of POCA. If the court orders the forfeiture of seized cryptoassets, those assets must be realised and remitted back to the public purse (i.e. paid into the Consolidated Fund. Decisions on the use of the ‘Fund’ money are managed by HM Treasury).

Under the criminal regime, a confiscation order will be imposed, which will require the person who committed crimes to pay back their benefit from crime as a “debt”. If the individual does not have other means to satisfy that debt, any seized cryptoassets can be realised to satisfy that order and be paid into the Consolidated Fund.

In both instances, a proportion of the assets are redistributed to the agencies who investigate and bring asset recovery cases to further tackle economic crime.

Will victims of crime be able to get their cryptoassets back?

We are introducing a provision similar to existing provisions for cash and listed assets in POCA to enable a person who claims that any cryptoassets detained belongs to them (the true owner) to apply to a court for the cryptoassets or part of them to be released.

This will help negate the negative impacts of fraud and ensure public confidence in the regime.

You’ve said that the ECCT Bill’s amendments to Parts 5 and 8 (investigations) of POCA 2002 will be mirrored in CT legislation – why is Part 2 of POCA not being mirrored in this way?

POCA’s Part 2 powers are already available to officers involved in terrorist financing investigations and so there is no need to replicate these in ATCSA. The changes being made to Part 2 of POCA by the Bill will therefore be available in counter terrorism investigations going forward without any further amendment required. We have worked closely with Counter-Terrorism Policing to ensure that the changes to terrorism legislation meet their operational requirements.

The amendments to Part 2 of POCA will ensure that the relevant post-conviction powers relating to search, seizure, and detention of property take account of the digital nature of certain assets, including cryptoassets. Otherwise, Part 2 is considered effective by law enforcement for the purpose of dealing with cryptoassets and has already been used in terrorism cases involving such assets.

What types of cryptoasset activity are you seeing in relation to terrorist financing?

We have identified a growing threat from terrorists using social media platforms to fundraise, with pseudo-anonymous cryptocurrency having been chosen as a method of payment. The changes to terrorism legislation in this Bill have been introduced after close consultation with Counter-Terrorism Policing to ensure that they meet their operational requirements and will support them to tackle the types of terrorist financing which they are encountering in their investigations.