Cryptocurrency – Reducing The Risks
Dealing with the Authorities: Financial Crime / Cybercrime Defence
Like many emerging business concepts and commercial opportunities, cryptocurrency has its supporters and its detractors. While cryptocurrency is still a relatively new concept from a regulation perspective, it has attracted the attention of enforcement agencies around the world. Such agencies have been quick to assess the potential dangers associated with such currencies and the allegations that they have been set up to defraud investors and / or are being used to facilitate other offences.
From email scams to ransomware, cybercrime can take many forms. In recent years, cryptocurrency has become the preferred detergent for criminals to launder money.
A lack of regulation may mean that many people become unknowingly involved in such crime, due to them being unaware of the risks and / or not having taken proper precautions before engaging in cryptocurrency transactions.
Any company or individual that comes under investigation has to know how to respond – immediately. We at Rahman Ravelli have put ourselves at the forefront of representing those who believe they have - or are accused of having - used cryptocurrency as a vehicle for wrongdoing.
Our cryptocurrency teams have represented the creators of cryptocurrencies. As noted earlier, cryptocurrency is not restricted by physical borders. An investigation into either the creation or use of cryptocurrency could quite easily involve enforcement agencies from several nations and investigations in many jurisdictions. Therefore, anyone who comes under investigation must be represented by those with the expertise to coordinate cases that span many countries and involve various authorities.
We are continually dealing with enforcement agencies all over the world. Rahman Ravelli regularly represents those who come under investigation by agencies such as the Serious Fraud Office (SFO), National Crime Agency (NCA), Financial Conduct Authority (FCA) and HM Revenue & Customs (HMRC) in the UK. We also defend those who are questioned by agencies in the United States - such as the Department of Justice or the Securities and Exchange Commission - or by any of the hundreds of national and international law enforcement agencies that investigate financial crime. As a result, we have the necessary experience to either challenge assumptions made by these authorities or, where necessary, negotiate during an investigation to seek the best resolution for our clients.
Any such investigation needs to be responded to in an intelligent and carefully-coordinated manner. That response requires specialist skills – and the ability to assemble a team with those skills at a moment’s notice. It can involve challenging the assumptions and allegations that are being made by an enforcement agency anywhere in the world at any time. We are adept at challenging allegations, from wherever they originate. We are also known for our tact and ability to negotiate with the authorities to gain the best outcome.
Currently, the legal landscape for cryptocurrency is a labyrinth, with conflicting barriers and ambiguous oversight. Rahman Ravelli provides the essential protection and representation for those who do business in this area. Our job is to take the pressure off the client and ensure the matter is concluded for them in the swiftest, most favourable way.
The Proceeds of Crime Act 2002 (“POCA”)
Cryptoassets fall under the definition of “property” (section 74 of POCA) and “realisable property” (section 83 of POCA). This was reaffirmed in the landmark High Court ruling in AA v Persons Unknown  EWHC 3556 (Comm). As a result, prosecuting authorities and investigative bodies can pursue all cryptoassets deemed to be illegal (i.e. cryptoassets obtained through crime or used for the means of concealing criminal funds).
Recovering What Is Yours: Asset Tracing and Recovery
The increasing use of virtual and digital currency, together with the inconsistent approach to regulation and the opaque, virtual nature of many online currencies, such as Bitcoin, Ethereum and Litecoin, mean that there are dangers associated with the use of cryptocurrency. This puts many at risk of cryptocurrency-related crime such as fraud.
We have seen many recent, high-profile cases where cryptocurrency or other assets held on decentralised ledgers have been used or misappropriated, including instances of hacking, “double-dipping” and online scams. While cryptocurrency is still in its relative infancy, there is already no shortage of cases where money has been lost by those who have invested in it.
In such situations, those who believe their losses are due to the illegal conduct of others can go down the criminal route, reporting the matter to the authorities and relying on them to resolve the matter. But while this may lead to prosecutions being brought, it will not necessarily lead to what was lost being automatically returned to those who are out of pocket: which is why asset tracing and recovery can be a valuable option.
Rahman Ravelli’s asset tracing and recovery department offers our full range of skills and expertise to those who have suffered losses as a result of their investment in cryptocurrency. Our asset tracing and recovery specialists will devise the most appropriate strategy to locate the assets in question and initiate the legal procedures, wherever necessary, to have them restored to their rightful owner. In such situations, funds (or other assets) belonging to victims may have been moved around a number of countries and through various hands in order to make it difficult for them to be traced.
We have vast experience of working with blockchain investigative firms and forensic accountants to identify the assets in question and we use our expertise in civil fraud matters to instigate the correct legal procedures to reclaim them for our clients. We can also provide access to relevant experts worldwide who can assist in regaining what has been fraudulently taken from those who have used cryptocurrency.
While such situations are relatively new in relation to cryptocurrency, the practice of asset recovery is something that we have been conducting for clients for decades. Whether it is cryptocurrency or some other means by which fraud is alleged, asset tracing can be a vital component of any civil fraud case. We work with speed and intelligence and use all the legal tools available around the world to maximise the chances of locating and recovering the assets for our clients.
As with any type of business crime, a company needs to respond whenever wrongdoing is identified - or even when it is merely suspected. While the obvious response is to report the matter to the police or another enforcement agency, there can be value in conducting an internal investigation before deciding on the next course of action.
A well thought-out, carefully-conducted internal investigation carried out at the earliest opportunity can not only identify what, if any, wrongdoing has been committed. It can also help pinpoint who has committed it and how it was possible. This can be useful in a number of ways: it enables a company to make informed commercial decisions to allow for continued business operations; and if the decision is then made to report to the authorities, much of the work has already been done for them.
Reporting the matter to the authorities is not the only option. An internal investigation can also provide the basis for bringing a private prosecution against those believed to be responsible. Its findings can also be useful if the decision is made to start asset tracing and recovery.
Of more long-term benefit, anything that is learnt from an internal investigation about a company’s vulnerability to wrongdoing can lead to workplace practices being changed and procedures tightened to prevent any repeat of the problems.
Such an approach is certainly not unique to cryptocurrency. But with cryptocurrency being such a relatively recent arrival in the worlds of business and finance, internal investigations have to be seen as a means of reducing the fraud and money laundering risks that have already been associated with it.
Defending Cryptoasset Claims
When defending claims of this type, any response has to be strong, intelligent, diligent and proactive.
Defendants in these types of proceedings must first assess whether the correct legal procedures have been applied. Defendants may well be subject to a disclosure order or proprietary injunctions (or both) and it is imperative that you respond in a timely manner and comply with any such orders. Failure to comply will inevitably lead to contempt of court proceedings, which may well attract a custodial sentence.
We will investigate whether the claim the claim has been property particularised, whether the correct procedures have been followed and whether there is any legal basis for the claim or the orders sought by the claimants. If not, we will make robust applications to the court to have them set them aside.
Traders or recipients of crypto assets must have a good understanding of the history of their trades. Defendants will be expected to provide an explanation of the circumstances for various transfers and be able to provide corroborating evidence. This will include (but not be limited to) the amounts paid and transferred, the payment method used, the circumstances in which the payment was made, identification details and the wallet in which the crypto assets were transferred and any electronic addresses (including IP and email addresses).
Depending on the nature of the claim, consideration must be given to the communication between the sender and any brokers, whether on a platform or when an over the counter (OTC) transaction is performed.
Challenging the use of OTC transactions
More often than not, OTC transactions are criticised as a method of transferring crypto assets because of the negative connotations associated with them. OTC transactions are commonly viewed as a means of enabling money laundering. However, claimants who seek to take this approach must be able to prove the specific money laundering that is alleged. We will seek all the evidence from the claimants to determine exactly what the allegations are against any defendant and assess their strength.
The fact that a defendant undertakes an OTC transaction is not in itself an indication of wrongdoing. There are a number of valid reasons why an OTC transaction may be carried out.
- It prevents trades from being executed at a different price to the expected price
- It avoids difficulties resulting from a lack of liquidity associated with traditional currencies e.g. when trying to exchange local currency for BTC.
- OTC transactions are not hindered by banking restrictions on those in various jurisdictions.OTC transactions are a common place where the buyer and seller do not need to know each other’s identity
- BTC and other crypto assets often trade at discounts relative to the official market place
- Challenging the use of VPN services and IP addresses
Claimants in these types of cases may rely on the use of VPN services, alleging there are no legitimate reasons why obfuscated VPN servers are required prior to transfers of crypto assets. The inference would be that the sender or defendant may well be hiding their true identity, their IP address and location. Using VPN services or certain IP addresses can appear to be associated with fraud.
But while it is well known that VPN services allow users to connect to the internet privately and securely, free from oversight by third parties, this alone cannot be the basis for an assumption of wrongdoing. And users accessing different IP addresses cannot be taken as a clear indicator of any illegal activity. There is always scope, therefore, for a variety of challenges to such allegations.
Challenging due diligence
Claimants may often suggest that not enough due diligence was carried out during certain transactions. The inference will be that this is an indication of any purported wrongdoing. However at the time of writing, these can be challenged given there is no guidance as to what due diligence should be taken when purchasing or selling crypto assets.
Cryptoassets have the ability to cross borders and jurisdictions with ease. It is, therefore, imperative to assess whether any claim has been brought in the correct jurisdiction.
In such cases, we look at legal arguments for a declaration that the court has no jurisdiction to try the claimant’s case pursuant to CPR Rule 11(1). English Courts are generally cautious in allowing a process to be served on foreigners outside of England. As such, claimants must be able to establish that they have “much the better argument” when proving jurisdiction. It will also be up to the claimant to satisfy the court that the claim falls within one of the jurisdictional gateways under CPR Practice Direction 6B.
As a matter of legal submission, we would challenge the grounds upon which the claimant states he is entitled to serve the claim. If this is wrongly asserted by the claimants, the defendants can make an application to strike out the case and seek costs. Robust legal submissions can be made if the claimant has not properly established there is a serious issue to be tried.
Defence of good faith purchaser
Depending on the nature of the claim, it can be argued that the defendant was a good faith purchaser of the cryptoassets in question. Certain measures can be taken to demonstrate what steps were undertaken when purchasing or selling the cryptoassets. These will include assessing matters such as how the cryptoassets were purchased, the reliance on third parties, any steps that may have been taken post-purchase or sale and may involve the use of third-party experts producing blockchain analysis reports.
For more information see: Defending civil fraud claims section of our website.
Taxation Issues and Disputes
Just as the world of cryptocurrency and the use of blockchain are developing quickly, so too is the tax treatment of them by HM Revenue and Customs (HMRC). It is, therefore, important that companies and individuals involved in cryptoassets have a full understanding of how they are to be taxed. They must keep on top of any developments to prevent any threat of investigation by the tax authorities.
Cryptoassets constitute ‘assets’ and so can be within the scope of some taxes. How cryptoassets are taxed depends on their nature and use. Subject to how one’s cryptoassets are held, you may be liable to pay tax; for example, capital gains tax, income tax, inheritance tax or tax on any other taxable income. So, it is advisable to retain records for each crypto transaction, whether selling or receiving, so that you can stand up to any scrutiny of your finances.
Getting it right at the beginning is clearly the safest option. However, we understand that despite the best of intentions it doesn’t always end up that way. So, if you or your company find yourself in difficulties with HMRC concerning your tax status, our team at Rahman Ravelli is well placed to advise as to the potential tax implications of your involvement in cryptoasset transactions; as well as providing valuable support and assistance through any investigations and prosecutions you may face as a consequence.
Cryptocurrency and the Regulatory Perimeter
The increased popularity of cryptocurrency and blockchain in recent years has led to national and international enforcement agencies taking an interest in the use of cryptoassets. This has slowly led to formal regulation, with regulators now taking a more rigorous approach in the oversight of digital currencies and their custodians.
An investor who trades in cryptocurrency or who uses blockchain is unlikely to be able to seek relief from the Financial Ombudsman Service or the Financial Services Compensation Scheme should something go wrong. As such, any person or organisation thinking of using it or investing in it must carry out thorough research on the currency they are considering becoming involved in.
Those dealing with cryptoassets in the UK must have particular regard to the following:
The Fifth Money Laundering Directive (5MLD)
The European Union’s (EU) 5MLD introduced measures to regulate both virtual currencies and pre-paid cards to prevent terrorist financing. As a result of the 5MLD, both cryptocurrency exchanges and custodian wallet providers now face formal regulation by EU member states under the scope of the Directive. In England and Wales, cryptocurrency exchanges and custodian wallet providers are now classed as ‘obliged entities’, which means they will have to adhere to the same anti-money laundering regulations as traditional financial and professional service providers. As a result, performing customer due diligence checks and submitting Suspicious Activity Reports (SARs) involving such currencies are legal requirements. This has put a much greater onus on the providers and brings with it a labyrinth of policies and procedures which need to be implemented.
The Sixth Money Laundering Directive (6MLD) will be implemented into law by June 2021. It is yet to be seen how or whether this will take effect in the UK.
The Amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs)
In January 2020, under the MLRs, the FCA became the anti-money laundering and counter-terrorist financing regulatory supervisor for businesses carrying out certain cryptoasset activities. The consequence is that if your company is carrying out cryptoasset activities falling under the scope of the MLRs, you must comply with the UK’s MLR requirements. These include: registering with the FCA before conducting business, obligations relating to customer due diligence, the requirement to submit Suspicious Activity Reports (SARs) and the responsibility to hand over information when demanded by the authorities.
Financial Services and Markets Act 2000 (FSMA)
Carrying on a regulated activity without authorisation is a criminal offence under section 19 of FSMA. Firms carrying on regulated activities in relation to cryptoassets must make sure they have the correct authorisation from the FCA. Such activities may include involvement with:
- Security tokens
- E-money tokens
- Investment products such as derivatives contracts and exchange traded notes that reference cryptoassets
It is, therefore, important that anyone who is involved in cryptocurrency or assets held on the blockchain – or anyone who is thinking of becoming involved – ensures that they are up to speed with the current legal situation and fully understands how it applies to them.
While this may seem daunting, our cryptocurrency specialists are on hand to advise on all such matters. At Rahman Ravelli, our worldwide regulatory expertise makes us an obvious choice for individuals or corporates seeking advice or representation on all matters relating to the regulation of cryptocurrency and blockchain technology.
Meet the team
The rise of cryptocurrency was something that was noted at an early stage and followed closely by a number of our senior solicitors. This has meant that our cryptocurrency team has an in-depth knowledge and unrivalled experience of all the issues relating to what is one of the most dynamic, swiftly-evolving areas of business.
Our team was assembled to ensure that any client with a cryptoasset-related problem is guaranteed an immediate response wherever and whenever it arises. The team is headed by:
Syed has come to be recognised in the legal profession and by the media as an astute operator and commentator when it comes to cryptocurrency matters. His knowledge of this area, coupled with his experience and expertise in international fraud and business crime cases and top-level commercial and financial investigations and litigation have made him the first choice for companies, senior business figures and high net worth individuals looking to resolve crypto-related problems.
With a caseload that includes some of the largest, most notable cryptocurrency cases around the world and a strong track record in financial services cases, he is the logical choice to manage any virtual currency investigation.
With an impressive track record in defending white-collar crime cases, a reputation for strong and shrewd representation of individuals and companies in the most challenging multinational investigations and litigation and an enviable knowledge of cryptocurrency, Josie has become an expert in this field.
Her shrewd analysis of investigations in this rapidly-developing area coupled with her eye for detail and awareness of all ongoing crypto-related issues have led to clients specifically requesting that she works on their case.