In the UK Law Commission's words, there is "strong consensus" that the UK's regime for recovering the proceeds of crime is "inefficient, complex and ineffective".
The Law Commission has published the Final Report in its project for reform which includes policy and related recommendations regarding the preservation of the value of assets in confiscation proceedings, including digital and crypto assets. The recommendations, particularly on restraint and effective asset management, would be a welcome strengthening of the regime if implemented.
The purpose of restraint orders is to prevent "realisable property" from being dissipated or put beyond the reach of a Court before a confiscation order can be made or enforced. It works by prohibiting any person from dealing with any realisable property specified in the order. "Realisable property" is defined within the Proceeds of Crime Act 2002 ("POCA") and means any "free property held" by a defendant or the recipient of a "tainted gift".
In order for the Crown Court to exercise its powers to make a restraint order it must be satisfied that one of five statutory conditions set out in s.40 of POCA is met. In practice, the two most used conditions are:
- A criminal investigation has been started for an offence and there are reasonable grounds to suspect that the defendant has benefited from their criminal conduct.
- Criminal proceedings for an offence have been started and there is reasonable cause to believe that the defendant has benefited from their criminal conduct.
"The Dissipation Test"
The Courts have introduced an additional test to the exercise of restraint orders, namely that the prosecution must "establish that there is a real risk that assets will be dissipated which might otherwise meet a confiscation order" (the "Dissipation Test"). The purpose of the test is to balance the defendant's right to liberty and enjoyment of property with the need to preserve the value of assets which may be subject to a confiscation order.
The National Crime Agency and Serious Fraud Office have both raised cryptoassets and the criminal law as a potential project for the Law Commission's 14th programme of law reform. The restraint of cryptoassets is challenging for various reasons. They can be dissipated quickly and held anonymously or pseudonymously, making them difficult to trace. Where there are regulatory gaps, they can also be traded on platforms without the need to present proof of identification.
It was generally agreed by those consulted in the reform project that the existing powers in Part 2 of POCA 2002 (Confiscation: England and Wales) are broad enough to encompass intangible property such as digital or other hidden assets. However, POCA pre-dates the emergence of cryptoassets, which remain largely unregulated and, as a result, the relevant statutory powers are inconsistently applied across law enforcement agencies.
In its Final Report, the Law Commission recommends placing the Dissipation Test on a statutory footing to provide clarity to Part 2 of POCA. In doing so, the Law Commission recommends that a number of factors be taken into consideration when applying the Dissipation Test, including:
"The person's capability (whether gained through membership of a profession, through connections with an organised crime group or otherwise):
(a) to transfer assets overseas;
(b) to use trust arrangements, corporate structures and cryptocurrencies or otherwise to distance themselves from assets."
Whilst the factors are non-exhaustive, the Law Commission's intention is to provide clarity to both prosecutors and Courts as to whether:
- the defendant's right to enjoyment of property ought to be restrained; and
- whether the prosecutor's arguments (particularly in the context of an ex parte application) were reasonable having regard to its obligation to provide full and frank disclosure.
Such clarity could remove the disincentive effect that current rules have on bringing restraint proceedings, particularly in terms of adverse costs awards against prosecutors.
Risk of adverse costs awards
The general rule in restraint proceedings is that the unsuccessful party will be ordered to pay the costs of the successful party. In its Final Report the Law Commission expressly "acknowledge[s] that this inhibits applications for restraint orders, since the "losing" prosecution incurs defence costs regardless of its good faith and the reasonableness of the application."
There is a risk of prosecutors having to compensate acquitted defendants at the costs stage for additional loss arising from cryptoassets being restrained and converted into sterling. The Courts have recognised that "Cryptocurrencies are characterised by extreme high and persistent volatility that exceeds the volatility of other assets like equities and gold" (AA v Persons Unknown  EWHC 3556 (Comm),  4 WLR 35). This could make them particularly unattractive to restrain (if identifiable). That said, cryptocurrencies are not the only form of volatile assets and the Law Commission's view is that they should not be singled out for special treatment.
The Law Commission recommended that a power to award costs should be included in POCA and the Criminal Procedure Rule Committee should consider outlining the procedure for an assessment of costs in the CPR in the following (non-exhaustive) terms:
- Costs should be limited to each application.
- Costs orders should not be made against the defendant.
- If the prosecution brings a successful application, each party should bear their own costs.
- If the prosecution brings an unsuccessful application, there is a presumption that costs follow the event (that is, that the prosecuting authority pays the defence costs) unless the prosecution can demonstrate that the application was reasonably brought.
- In deciding whether the application was reasonably brought, the fact that the application was previously successful does not necessarily mean it was reasonably brought.
As to (5), this decision will have specific regard to the factors to be taken into consideration for the Dissipation Test. This should provide the Court with a baseline to assess reasonableness and much needed clarity for both prosecutors and the judiciary to avoid stifling applications.
Effective asset management
Whilst the Law Commission's view is that cryptocurrencies do not warrant special treatment, their volatility presents an ongoing challenge. The Bank of England has noted that:
"From 2014 to the beginning of 2018, oil prices didn't change by more than 10% in one day unlike the value of Bitcoin which changed significantly – rising by 65% in one day and falling by 25% on another."
The cryptoasset market differs significantly to other markets, such as the stock exchange, which are heavily regulated. In addition to general external factors that may affect volatility (including social media influence), the values of cryptocurrencies are vulnerable to manipulation due to the unregulated nature of the trades which can take place. The impact of this is that the valuation of a crytoasset at the start of a lengthy confiscation hearing may differ significantly to its valuation at the end of the same proceedings.
In addressing this issue, the Law Commission, along with consultees, acknowledge that the primary concern articulated by several consultees was that cryptoassets are an emerging technology and therefore law enforcement agencies struggle to adapt their traditional powers and processes to manage such assets.
It recommended the Government consider establishing a Criminal Asset Recovery Board ("CARB") in order to facilitate the development of a national asset management strategy, and that any such strategy should cover issues in connection with the storage and conversion of cryptoassets. This recommendation may be subject to further consideration if the clauses of the Economic Crime and Transparency Bill (Bill 154 2022-23) are enacted, and we continue to follow this development with interest.
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.
Clear, decisive (and non-exhaustive) factors will guide prosecutors and the Courts as to whether crypto-related assets are restrained reasonably, without being stifled by the risk of adverse cost awards. The recommendations put forward by the Law Commission would, if taken up, could allow cryptoassets to be seized more quickly in more cases.
A national asset management strategy including cryptoasset-specific guidance would be welcome to harmonise and co-ordinate the approach to prosecution. Enforcement authorities need considerable guidance in relation to issues such as tracing of cryptoassets and optimal conversion of cryptoassets into sterling. The private sector offers excellent expertise in such areas, and it is positive that the Law Commission has recognised this when raising the possibility of private sector membership for its recommended CARB.
The Final Report can be viewed here. See Chapters 17, 18 and 19 respectively for analysis of restraint orders generally, national asset management strategy and cryptoassets.
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