A life after crime: What happens to crypto seized in criminal investigations?

Earlier this year, during during the annual Queen’s Speech in the United Kingdom, Prince Charles informed the Parliament about two bills. One of them — the Economic Crime and Corporate Transparency Bill — would expand the government’s powers to seize and recover crypto assets.

Meanwhile, the United States Internal Revenue Service (IRS) seized more than $3 billion worth of crypto in 2021.

As digital currencies’ monetary stock grows and enforcers’ scrutiny over the maturing industry tightens, the amount of seized funds will inevitably increase.

But where do these funds go, assuming they aren’t returned to the victims of scams and fraud? Are there auctions, like there are for forfeited property? Or are these coins destined to be stored on some kind of special wallet, which might end up as a perfect investment fund for law enforcement agencies? Cointelegraph tried to get some answers.

The dark roots of civil forfeiture

For the newcomers in the room, cryptocurrency is money. In that sense, the destiny of seized crypto shouldn’t differ much from other confiscated money or property. Civil forfeiture, the forceful taking of assets from individuals or companies allegedly involved in illegal activity, is a rather controversial law enforcement practice. In the U.S., it first became common practice in the 1980s as a part of the war on drugs, and it has been the target of vocal critics ever since. 

In the U.S., any seized assets become the permanent property of the government if a prosecutor can prove that the assets are connected with criminal activity or if nobody demands their return. In some cases, the assets are returned to their owner as a part of a plea deal with the prosecution. Some estimate, however, that just 1% of seized assets are ever returned.

How do law enforcement agencies use the money they don’t have to return? They spend it on whatever they want or need, such as exercise equipment, squad cars, jails and military hardware. In 2001, for example, the St. Louis County Police Department used $170,000 to buy a BEAR (Ballistic Engineered Armored Response) tactical vehicle. In 2011, it spent $400,000 on helicopter equipment. The Washington Post analyzed more than 43,000 forfeiture reports and reported that the seized money was spent on things as varying as an armored personnel carrier ($227,000), a Sheriff’s Award Banquet ($4,600) and even hiring a clown ($225) to “improve community relations.”

Some states, like Missouri, legally oblige that seized funds be allocated to schools, but as the Pulitzer Center points out, law enforcement agencies keep almost all of the money using the federal Equitable Sharing Program loophole. In 2015, U.S. Attorney General Eric Holder issued an order prohibiting federal agency forfeiture, but his successor under the administration of President Donald Trump, Jeff Sessions, repealed it, calling it “a key tool that helps law enforcement defund organized crime.”

Seized coins’ destiny in the U.S., U.K. and EU

While none of the experts who spoke to Cointelegraph could speak to the technical aspects of storing seized crypto assets, the rest of the procedure tends to be pretty much the same as with non-crypto assets.

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Don Fort, a former chief of the IRS Criminal Investigation Division who heads the investigations department at law firm Kostelanetz & Fink, told Cointelegraph that the only principal distinction is the necessity to auction the digital assets off:

“At the federal level, seized cryptocurrency goes to either the Department of Justice or Department of Treasury Forfeiture Fund. Once the crypto funds are auctioned off by one of the forfeiture funds, the funds can be used by the respective federal law enforcement agencies.”

Fort explained that as with non-crypto funds, the agency requesting forfeited funds has to submit a specific plan or initiative to acclaim the money and spend it,…