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Cryptocurrency – Reducing The Risks

Cryptocurrency offers new business possibilities, either through investment in it or by using it in transactions. But it carries risks.

It does not respect borders, the regulation of it is in its infancy and the risks it carries mean that anyone considering involvement with it has to be fully aware of all aspects of it. Advice needs to be taken before engaging with cryptocurrency in any capacity.

Defined by the UK’s Financial Conduct Authority (FCA) as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value”, cryptocurrency can be accessed via the internet and used to make cross-border payments and fund transfers.

Yet it has been linked repeatedly to allegations of fraud. Fake start-ups – known as initial coin offerings - have seen the initial hard sell swiftly followed by the figures behind them disappearing with investors’ money. Cryptocurrency has also been accused of being a vehicle for large-scale money laundering.

Such problems are reason enough to approach your potential involvement in cryptocurrency with caution – and only after having taken the appropriate legal advice. This is particularly true now that the authorities in the UK and worldwide are finally starting to scrutinise cryptocurrency closely.

At Rahman Ravelli, our international experience in serious and business crime means that we are ideally placed to offer the best advice, carry out the necessary checks, deal with the relevant enforcement agencies worldwide and assist whenever assets need to be traced and recovered as the result of cryptocurrency transactions that have not brought the required outcome.

Dealing With The Authorities

Like many emerging business concepts and commercial opportunities, cryptocurrency has its supporters and its detractors. While cryptocurrency is still a relatively new concept, 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, as well as allegations that they are being set up to defraud investors and / or being used to facilitate other offences.

Any company or individual that comes under investigation has to know how to respond – immediately.

Our cryptocurrency teams have represented the creators of cryptocurrencies. As we said 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 a number of nations and investigations in many jurisdictions. This is why it is important that anyone who comes under investigation is represented by those with the expertise in (and experience of) coordinating cases that span many countries and involve various authorities.

Rahman Ravelli regularly represents those who come under investigation by agencies such as the Serious Fraud Office (SFO), National Crime Agency (NCA) and Financial Conduct Authority (FCA) 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.

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.

Our job is to take the pressure off the client and ensure the matter is concluded for them in the swiftest, most favourable way.

Recovering What Is Yours

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 lead to what was lost being automatically returned to those who are out of pocket: which is why asset tracing and recovery can be the most viable option. 

At Rahman Ravelli, our asset tracing and recovery specialists 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, the money (or other assets) may have been moved around a number of countries and through various hands in order to make it difficult for them to be traced. But we work with forensic accountants and other relevant experts around the world – and all

the necessary authorities - to identify the assets in question and use our expertise in civil fraud matters to instigate the correct legal procedures to reclaim them for clients. 

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 in order to maximise the chances of locating and recovering the assets for clients.

The Need For Due Diligence And Prevention

The current situation regarding cryptocurrency means that anyone looking to use it needs to make all possible checks themselves.

It is important to learn all you can about cryptocurrency and have all necessary precautions in place before becoming involved in it. Cryptocurrency is new. But it is yet another reminder of the value of the old saying - look before you leap.

Any individual or company looking to use cryptocurrency, invest in it or do deals with others that want to use it must ensure that they are aware of the risks and can recognise the potential warning signs that may indicate possible wrongdoing. This will involve being aware of all changes and issues relating to cryptocurrency and carrying out due diligence on current or potential trading partners.

If anyone in business believes they do not have the time or the expertise to do this, they must seek advice from those who have. Companies and individuals cannot be expected to have an instant and comprehensive awareness of the plus and minus points of cryptocurrency. But they do have to get up to speed with it.

This means developing a risk-based approach to working with cryptocurrency. Such an approach has to involve taking steps to:

  • Make sure staff have the relevant cryptocurrency knowledge, expertise and awareness of any developments so that they can identify potential risks.
  • Understand all aspects of their clients’ businesses - and the cryptocurrency risks they may pose.
  • Carry out due diligence on key individuals in any business that is a client.
  • Assess the quality of the due diligence that has been carried out by those who are or who may potentially become clients of your business.
  • Analyse the investor base, organisers and functionality of any new currency you are considering investing in.

At Rahman Ravelli, we possess all the experience and expertise to assist you in these tasks.

Internal Investigations

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 help pinpoint who has committed it and how it was possible. This can be useful if the matter is then reported to the authorities as some of the work has already been done for them. But reporting the matter is not the only option. An internal investigation can 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.

The Need For Regulation

Virtual currency certainly has huge potential and will have a notable effect on how trade is conducted in the future. It offers the chance to make most types of commercial activity simpler and quicker. It may also, given time, make transactions safer. But, for now at least, it is the issue of security that brings risk to cryptocurrency.

Cryptocurrency is subject to few meaningful checks or restrictions. Some cryptocurrency exchanges are becoming more cautious, exercising more due diligence and setting their own terms and conditions for using their facilities in an attempt to prevent them being used by criminals. This may well make them safer. But much more needs to be done to ensure cryptocurrency does not remain an attractive facility for those looking to commit crime.

Cryptocurrency is a sector that needs regulating because of the risks posed by volatile markets, price fluctuations and the possibility of it being used for money laundering and fraud.

In order to transfer funds and execute payments, crypto asset platforms rely on complex infrastructures and entities that are spread across numerous countries. Client details will be held by different entities in those different countries and jurisdictions. This offers the potential for wrongdoing and makes it difficult for regulators and any law enforcement agency to access those details.

Without regulation, the dangers posed by cryptocurrency will remain. That will mean many being accused of using it to commit crime and many others being at risk of such crime. In either situation, the value of the right legal representation cannot be over emphasised.

Moves Towards Regulation

While the need for regulation has been voiced by commentators and authorities the world over seem to be increasingly aware of this need, regulation of cryptocurrency is very much in its infancy. But anyone who is involved in cryptocurrency - or is thinking of becoming involved – must ensure they are up to speed with the current legal situation. While this may seem daunting, our cryptocurrency specialists are on hand to advise on all such matters.

The European Union’s (EU’s) 5th Money Laundering Directive (5MLD), which comes into effect across Europe in 2020, introduces measures to regulate both virtual currencies and pre-paid cards to prevent terrorist financing. Virtual currency platforms and wallet providers become regulated entities under the scope of the Directive. As a result, performing customer due diligence checks and submitting suspicious activity reports (SARs) involving such currencies will be legal requirements.

The European Securities and Markets Authority (ESMA) is calling for a measures to be introduced across the EU to give cryptocurrency investors greater protection. Meanwhile, the UK’s NCA and SFO have identified tackling money laundering as a priority, with the NCA having highlighted the appeal of cryptocurrencies to criminals looking to move the proceeds of crime across borders.

In 2018, the Treasury Select Committee report on crypto assets recommended that regulation was needed to cover cryptocurrency. The Committee stated that that if the UK was to devise an appropriate and proportionate regulatory environment for cryptocurrency the UK could be at the forefront of the industry.

Similarly, the joint Treasury, FCA and Bank of England Crypto Assets Taskforce Report detailed a need for a regulatory framework to cover cryptocurrency activity in the UK; warning that cryptocurrency could bring many benefits but also a number of risks to consumers, market integrity and financial stability.

In the US, the Securities and Exchange Commission (SEC) created a new senior advisory position in 2018 to oversee securities regulation of cryptocurrency. The role involves coordinating the SEC’s efforts to ensure that existing securities laws are applied to cryptocurrencies and other emerging digital asset technologies and innovations: an area the SEC recognises as a “dynamic area that has both promise and risk.”

Syedur Rahman C 0920

Syedur Rahman

Legal Director

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Specialist Areas of Practice: Fraud and Business Crime, Compliance and Regulatory, Civil Recovery, Civil Fraud, Corporate Investigations

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Cryptocurrency – Reducing The Risks

Team: Syedur Rahman, Syedur Rahman.

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