Out-Law News | 15 Feb 2022 | 2:40 pm | 3 min. read
The UK tax authority’s seizure of three non-fungible tokens (NFT) as part of a probe into a suspected £1.4 million VAT fraud is “unlikely to be the last”, an expert has said, as agencies around the world fight back against cryptocurrency-based crime.
NFTs are digital tokens that can be bought and sold using cryptocurrency and represent certificates of ownership for virtual or physical assets. Unlike cryptocurrencies, which are also underpinned by blockchain technology, NFTs are digital ‘uniques’, which cannot be exchanged like coins.
Andrew Sackey, tax fraud and white-collar fraud litigation expert at Pinsent Masons, said “The fact that the Fraud Investigation Service, the criminal directorate of HM Revenue and Customs (HMRC), is the first the first UK agency to seize NFTs is very informative of the strategic direction of travel. The fact that that three people had been arrested on suspicion of attempting to defraud it of £1.4m in a scheme involving 250 allegedly fake companies is an impressive piece of investigative work – but what’s more relevant is the fact that HMRC was agile enough to flag this as a risk and see through the sham and the inherent complexities and anonymity thought to be afforded by crypto assets”.
“The fact that money laundering now turns to investments in digital assets itself brings us to the next level of online crime,” said Nils Rauer, expert for digital transformation at Pinsent Masons. “Lately, NFTs have generated high revenue at online auctions. Sellers as well as bidders often remain anonymous. We must therefore develop new ways of preventing the investing of illicit funds vested in cryptocurrency into valuable digital assets such as NFTs.”
HMRC was agile enough to flag this as a risk and see through the sham and the inherent complexities and anonymity thought to be afforded by crypto assets
Sackey said: “In the UK, authorities’ response to cryptocurrency money laundering has been informed by the Proceeds of Crime Act (POCA). Although its three central offences - the concealing offence, the arranging offence and the acquisition or use offence - are clear, POCA was drafted in in 2002, when cryptocurrency was clearly not at the forefront of lawmakers’ minds. This action shows how HMRC has reimagined how to apply the criminal and confiscation parts of POCA to a modern threat.”
“Regulators and law enforcement agencies are certain to continue to evolve the playbooks they use to identify not just the proceeds of crime, which are subject to seizure, but also any individuals or entities involved in illicit dealings who may have had ‘reasonable cause to suspect’ that funds were tainted,” Sackey said.
He added: “While there will continue to be new and evolving crypto currencies and associated methodologies, the basis of dishonestly transacting with tainted funds involves dealing in the proceeds of criminal conduct, and that definition enables traditional UK money laundering laws to engage.”
“Addressing economic crime and money laundering are stated government priorities, and existing laws provide for custodial sentences of up to 14 years, appropriate confiscation and forfeiture to be ordered.”
Jennifer Craven, a cyber security law expert at Pinsent Masons, said the seizure was “unlikely to be the last one we see,” and pointed to an “astonishing” confiscation by the United States Department of Justice (DOJ) last week. Investigators seized $3.6 billion of digital assets linked to a hack of crypto exchange firm Bitfinex in 2016, and arrested tech entrepreneur Ilya Lichtenstein, 34, and his rapper wife, Heather Morgan, 31.
Given the significant uptick in illicit crypto-fraud activity in the last two years, law enforcement agencies, legal experts and forensics are being driven to work collaboratively and on an international scale to identify the culprits
The DOJ charged the pair with conspiring to launder money after investigators traced 119,754 bitcoin – stolen during the hack - to a digital wallet controlled by Lichtenstein. Bitfinex had previously offered a reward worth hundreds of millions of dollars for information leading to the return of the funds stolen from it – though US officials would not confirm whether the offer played a part in their investigation.
The seizure - the largest in DOJ history – is the latest in a series of actions that US authorities have taken against cryptocurrency-based criminals. Last year, the US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Suex and Chatex, two DeFi ‘gateway services’ that regularly laundered funds from ransomware operators, scammers, and other cybercriminals.
Craven said: “Given the significant uptick in illicit crypto-fraud activity in the last two years, law enforcement agencies, legal experts and forensics are being driven to work collaboratively and on an international scale to identify the culprits. We are likely to see an increase in major cryptocurrency seizures and prosecutions as a result.”
“Many victims are also choosing to ‘follow the money’ by pursuing civil cases,” Craven said, “In the English High Court, for example, judges continue to show a willingness to be flexible in granting draconian orders - including worldwide freezing orders and search and disclosure orders - to assist victims in tracing and recovering stolen crypto assets.”
Sackey said, “This latest US action shows that the law enforcement adage of the need to ‘follow the money’ remains applicable, and in the UK there is no limitation period restricting the authorities ability to bring charges if the evidential and public interest tests are met.”
04 Feb 2022