Crypto Assets Freezing Order - Narita Bahra KC, Chris Sykes & Rachel Ferrari (33 Chancery Lane)
Provisions to freeze crypto wallets and forfeit cryptoassets came into force in 2024. It is anticipated that the authorities will aggressively deploy the new provisions, with high profile and high net worth individuals at risk of being targeted.
That risk has been aggravated by the reputation of crypto investment itself being in flux. These provisions are of real concern to businesses and investors who have invested in cryptoassets to store and transfer their wealth. The civil recovery regime for cryptoassets under Part 5 of the Proceeds of Crime Act 2002 (widely known as ‘POCA’) largely mirrors the Account Freezing Order (‘AFO’) regime.
What is an AFO?
The power to apply for an AFO is available under POCA. Law enforcement authorities use AFOs to disrupt money laundering and organised crime. They may apply to a Magistrates’ Court for an AFO over a bank account. They must prove ‘reasonable grounds for suspecting’ its funds come from, or are
intended for, unlawful conduct. They may apply without notifying the accountholder until after the order is granted.
The court will usually grant the initial application and ‘freeze’ the funds for a set period. Neither the accountholder nor anyone else may subsequently deal with the funds without court authorisation. The accountholder may apply to the court for some of the funds to be released for legal and living expenses.
The authority will then investigate the funds. It will apply to the court for a forfeiture order if it concludes that the funds are recoverable property. The court will arrange a hearing at which it will decide whether to grant forfeiture. The accountholder (and any other interested party) may make submissions to the court opposing the forfeiture application. If the authority succeeds, the funds will be ‘forfeited’ barring a successful appeal to the Crown Court. Forfeited money goes to the Home Office.
What you need to know?
Authorities frequently make use of AFOs, with almost £165m being forfeited in this way over 2022 and 2023. 1 Recent years have seen high net worth individuals targeted. As one example, an Azerbaijani politician and his family lost £5.63m when a court ordered forfeiture of their account in 2022. 2
Despite such grave implications, AFO proceedings are civil rather than criminal. They are heard by a judge or magistrates, and never a jury. They are brought against the account itself rather than the accountholder.
The civil nature of proceedings offers advantages to individual litigants. The most important is that the accountholder does not risk criminal conviction (let alone imprisonment). The disadvantage is that the authority need only prove its case to the ‘civil standard’ of proof. In other words, it need only prove that the funds are more likely than not to be from, or intended for use in, unlawful conduct. The authority does not need to make the court ‘sure’ of its case as it would in a criminal trial.
Another disadvantage is that the strict criminal rules of evidence, disclosure, and procedure do not apply. Procedure is governed by ‘The Magistrates’ Courts (Freezing and Forfeiture of Money in Bank and Building Society Accounts) Rules 2017’. Accountholders consequently lack the protections available to criminal defendants. They also face costs being ordered against them if they unsuccessfully oppose the application.
What are the differences between an AFO and a Crypto Wallet Freezing Order?
As stated above, the AFO and Crypto Wallet Freezing Order (‘CWFO’) provisions largely mirror each other. There are, however, key differences. For example, authorities can apply to convert detained cryptoassets into fiat currency, held in an interest-bearing account. This can be devastating for the
owner of the cryptoassets, given their fluctuating value. Even if the forfeiture application ultimately fails, the owner may miss out on substantial gains that they would have otherwise accrued, had the frozen property been held as cryptoassets instead of fiat currency.
Another key difference is that cryptoassets may be frozen for up to three years in complex cases involving international enquiries. Owners of cryptoassets may therefore be left in legal uncertainty for a year longer than those in AFO proceedings, where the time-limit before which an AFO must expire is two years.
Risks
Individual litigants who must answer CWFO proceedings face serious risks. A major concern will be their reputation. AFO and CWFO proceedings alike go ahead in public, barring exceptional circumstances. Observers could draw incorrect conclusions about the nature of the proceedings and the actions of the individual respondent.
A more practical concern will be the inaccessibility of the cryptoassets while the CWFO is in place. It can take months for a freezing order to be resolved either in a contested hearing or by settlement with the authorities. Litigants will hope the matter can avoid a contested hearing but, if proceedings do reach that stage, there is a risk that a court will decide to order forfeiture of the entirety of the cryptoassets. There is no monetary limit to a forfeiture order.
Crypto wallet holders going to a contested hearing are not required to give evidence but will be under pressure to do so in order to challenge the application effectively. This is stressful enough in itself. To make matters worse, however, their evidence can potentially be used in other proceedings (including
future criminal prosecutions).
With effective representation, you may be able to persuade the authorities to discontinue the CWFO. Even in this ‘best case scenario’, your success could be blunted by the difficulty of obtaining compensation for the hardship and inconvenience caused by your assets having been frozen. Compensation (including for the impact on any business interests) is only granted in
exceptional circumstances.
What should you do if you need to oppose a CWFO?
The above overview has explained just how high the stakes are for those facing a CWFO. Your reputation, investments, and finances are all at risk. It is imperative that you protect your position by seeking specialist advice as soon as you know your assets have been frozen. Your solicitors should arrange for a bespoke team of litigators and advocates to act for you and advise on the strengths and risks of your case.
Your legal team should advise you on the following:
Reputation management, including whether to apply to hold proceedings in private.
Procedural milestones, including the process of requesting disclosure of helpful material from the authorities.
Applying to set aside or vary the order at the earliest opportunity or, alternatively, waiting for the authorities to make the next move.
Pursuing a fair out-of-court settlement, if that is the course in your best interests.
How best to approach any contested hearing to maximise your chances of success.
Challenging any application for costs, or applying for compensation if the application fails or is abandoned.
With expert advice, you will maximise your chances of protecting your investments and minimise (or even avoid) the reputational and financial harm that these proceedings inflict.
Require Legal Representation?
We advise you to seek legal advice from a member of Garrick Law’s Criminal Defence and/ or Financial Crime Team.
Our team of top rated criminal, regulatory and family law solicitors and barristers have decades of experience in all types of cases. We maintain close professional relationships with many of the top barristers, experts and public relations firms nationally and internationally.
We are experts, here to provide advice, support and legal aid. Contact a member of our team today at +44 (0)203 196 7822 or email us at enquiries@garricklaw.com.
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