Last month, the FCA announced the arrest of two people suspected of running an illegal cryptoasset exchange business. The suspects were interviewed under caution, and their digital devices seized, before being released on bail pending an investigation.
The FCA, working with the Metropolitan Police Service, is investigating the business for allegedly buying and selling cryptoassets, which are believed to be worth more than £1 billion, without having registered for anti-money laundering (AML) regulations purposes.
This announcement should act as a reminder to investors and investment managers using crypto exchanges in the UK to carry out appropriate due diligence on who they are doing business with, as failure to do so could not only result in the loss of assets to bad actors but also, as this development shows, the FCA and other enforcement agencies potentially seizing their cryptoassets.
Here, we explore the application of the AML regulations, the potential for seizure, forfeiture, and recovery of cryptoassets and what investors can do to ensure UK authorities do not seize their cryptoassets.
AML registration requirements
The UK government has long identified cryptocurrencies as being high risk in facilitating the flow of illicit finance, including money laundering. HM Treasury's 2022-23 anti-money laundering supervision report conveyed the FCA's view that cryptoasset firms were "particularly vulnerable to financial crime and posed the greatest risk of being exploited for money laundering".
In an effort to frustrate potential criminal activities, and in line with the fifth EU Anti-Money Laundering Directive, the UK government introduced new legislation through amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs). Under the amended MLRs, since January 2020, the FCA became the AML supervisor for cryptoasset businesses active in the UK.
Implementation of this requirement has, however, been vexed. Of the 349 applications for registration submitted to the FCA since 2020, only 47 businesses have been approved.
The MLRs give the FCA broad powers to assess the suitability of businesses wishing to enter the AML regime. This includes an assessment of their fitness and propriety, such as assessing their money laundering and terrorism financing risk.
Notably, the FCA's approach to rejecting applications has been robust, both in its administrative determination and in litigation.
For example, in Moneybrain Limited v FCA [2022] UKUT 00257 (TCC), Moneybrain Limited argued that the FCA's assessment regarding its probity was beyond its powers under the MLRs.
However, Deputy Upper Tribunal Judge Anne Redston rejected this argument on the ground that the FCA had acted within its remit when considering misleading financial promotions on Moneybrain's website as reckless and intentional and therefore failing to meet the fitness and propriety test referred to in the MLRs.
Seizure and recovery
Seizure of cryptoassets has, traditionally, been somewhat complicated. However, amendments introduced to the Proceeds of Crime Act 2002 (POCA) via the Economic Crime and Corporate Transparency Act 2023 (ECCTA), and a recent decision of the High Court have made this prospect more likely.
The ECCTA amendments to POCA aimed to support the recovery of cryptoassets by bringing reform to the criminal and civil recovery regimes. These amendments specifically provide for the seizure of cryptoassets. Accordingly, cryptoassets may now be subject to civil recovery as the proceeds of crime. This includes where, on a balance of probability, it is found that such property was obtained by or in return for unlawful conduct.
Significantly, the recent case of Fresh View Swift Properties Limited v Westminster Magistrates' Court [2023] EWHC 605 (Admin) endorsed a District Judge's determination that client funds received into a firm in criminal breach of registration requirements, in this case a money service bureau (MSB) remitting money between the UK and Nigeria, were recoverable by law enforcement for the purposes of Part 5 of POCA.
In considering proportionality in Fresh View Swift Properties, Justice Mostyn accepted the District Judge's conclusion that had the client made basic enquiries they would have established that the MSB was not registered, but they either knew this or chose not to check. Therefore, he determined that the seizure of £67,372 was not manifestly disproportionate. The same principles would seem to apply to cryptoassets held with an unregistered crypto exchange on behalf of its customers.
To date, the FCA has taken a robust view of the crypto sector and the financial crime risk it can pose. This is seen, firstly, in its approach to registrations under the MLRs and, more recently, in its decision to issue a significant fine to a subsidiary of the cryptoasset trading platform Coinbase, for failings in its anti-money laundering systems and control. It is, therefore, likely that the regulator will want to consider all available powers when dealing with unregistered crypto exchange providers which, alongside their customers, present a very high financial crime risk to the financial sector.
Remedies for victims of illegal crypto exchanges
Anyone looking to invest in crypto should conduct appropriate due diligence, including checking the FCA's webpage listing registered cryptoasset firms. The outcome of not doing so could be devastating.
If one finds oneself deprived of cryptoassets as a result of forfeiture proceedings in respect of unregistered crypto exchanges, the ECCTA amendments have also implemented remedies that replicate provisions for the release of detained or frozen cash at section 303Z17A, mirroring applications made under sections 297 and 301 of POCA. However, for such applications to succeed, applicants must consider carefully how they can show that their position is different from the applicants in Fresh Swift View Properties and, in particular, how it was that their assets came to be held by an unregistered crypto exchange before they were deprived of them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.