New UK Legislation allows for law enforcement to seize, freeze, recover and/or destroy illicitly obtained Digital Assets
21 November 2023
Taken from the published LinkedIn pulse article.
Continuing the trend of institutional engagement with the digital assets ecosystem, on the 26th of October 2023, the UK government’s Economic Crime and Corporate Transparency Act (ECCTA) received Royal Assent and became law. While the passage of the ECCTA into law was overshadowed by the more controversial Online Safety Act, the ECCTA is a significant piece of legislation, seeing for the first time UK law enforcement powers for economic crime extended to digital assets.
With economic crime coming at a cost to the UK of £8.4 billion per year, the government has made a focused legislative effort to curb illicit activity, with the ECCTA following the Economic Crime (Transparency and Enforcement) Act 2022 as the next step in this approach. Notably, the inclusion of digital assets within the ECCTA is a strong display of increasing institutional recognition of the industry's evolution and growth.
The ECCTA delivers several new and unprecedented measures aimed at combatting economic crime. In addition to significant reforms to Companies House (the UK government’s executive agency responsible for maintaining the register of UK companies), the ECCTA strengthens limited partnership rules to prevent abuses, boosts business information sharing against money laundering, enhances law enforcement intelligence gathering powers and reduces unnecessary burdens on business. The most headline-grabbing of the new rules is the creation of a ‘failure to prevent fraud’ offence, making large organisations (as defined by the Companies Act 2006) liable in cases where a specified fraud offence is committed by employees, for the organisation’s benefit.
However, most relevant to the digital assets space is Part 4 of the ECCTA, which makes amendments to Parts 2, 3, 4, 5 and 8 of the Proceeds of Crime Act 2002 (POCA). As initially set out, POCA introduced many measures designed to make the confiscation of unlawfully held or illicitly gained cash and listed assets easier and swifter for authorities designated with financial investigation powers (such as the National Crime Agency (NCA), or police forces)). In effect, the ECCTA’s Part 4 amends - and extends - the existing powers of authorities as proscribed in POCA, to now scrutinise the digital assets space. Before the ECCTA, authorities were often forced to leave digital assets with suspects whilst investigations took place, allowing suspects to move assets out of law enforcement’s reach.
The extension of POCA to digital assets now gives authorised law enforcement agencies enhanced powers to search for and seize, freeze, recover or in certain circumstances destroy digital assets suspected of being used for illicit activity (such as money laundering, fraud and ransomware attacks). In a move designed to allow a swift response by authorities, POCA’s amendment to make provisions for confiscation orders (covered by POCA’s Parts 2, 3, 4), and the amendment of POCA to make provision for civil recovery (covered in POCA’s Part 5) concerning digital assets allows for the seizure of digital assets before arrest or conviction. The extension of POCA powers also places third-party holders of digital assets, such as exchanges and wallets, within the scope of search and seizure powers. Further, the ECCTA also amends the Anti-terrorism, Crime and Security Act 2001 to make similar provisions for digital assets suspected of links to terrorism.
The ECCTA (and the extension of POCA powers to digital assets) undoubtedly legislates extensive new powers to UK law enforcement agencies, which authorities hope will allow for rapid action on criminal activity whilst navigating the complexities and nuances of the digital assets ecosystem. However, with the ECCTA in its infancy, it is not yet clear what the practical implementation of POCA powers in the digital space will look like, what the scope of their use by law enforcement will be, or indeed, the efficacy of these measures in tackling economic crime in the digital assets space. It is important to note for instance, that financial investigation powers as defined in POCA are currently granted to several government agencies, including personnel of the NCA, police officers, investigators of His Majesty’s Revenue & Customs, immigration officers and Accredited Financial Investigators. Further, the government is currently considering giving POCA powers to five further bodies, the Security Industry Authority, the Food Standards Agency, the Environment Agency, the Public Sector Fraud Authority and the Department for Work and Pensions. It will no doubt take all the personnel of all these organisations time to familiarise themselves with and understand the complexity of the extension of powers given to them by Part 4 of the ECCTA, and how to use POCA measures effectively and correctly in the digital assets ecosystem.
As the trial and subsequent guilty verdict of Sam Bankman-Fried in the US for fraud and money laundering has shown, any perceived association between industry and criminality damages reputation and hampers investments - to the detriment of most law-abiding, honest businesses operating in the space. It is therefore welcome that the UK government is taking ambitious steps to tackle economic crime - and including the digital assets industry in such steps - to ensure a secure space for consumers and foster the fair and innovative environment that is essential for growth and sustainable business. With that said, as with the passage of any legislation, the industry must be adequately prepared and familiarised to ensure compliance and smooth operations. At Appold, we are working hard to understand how UK and international legislation, such as the passage of the ECCTA and the extension of POCA, will impact both institutions and industry so that we can provide advice and guidance to our clients in a fully supported manner.
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