Consider yourself warned: the state has wide powers of confiscation and they’ll use it!

by Edmund Yong


So many bitcoins have been confiscated by law enforcement over the years, that the “Swiss bank account in your pocket” line is becoming fan fiction.

Confiscation can be rather rewarding for the state:

After the Silk Road bust, the US Marshals Service became the largest known owner of bitcoins in the world at one point, even more than the Winklevoss twins. Tim Draper bought a chunk in one of their early auctions for a steal. In Australia, Big Four auditor Ernst & Young was brought in to oversee the auction in a publicized 48-hour sealed bidding period. The Belgian government engaged Wilsons which one-upped EY with a 24-hour online auction and interest from 110 countries. Deloitte was reportedly brought in for a secret auction held by the Bulgarian treasury for several Asian sovereign funds, along with the US FBI to help secure the transactions.

All in some 600,000 bitcoins have been seized globally by our raw estimate, so you can do the math.

In case you were wondering, these darknet perpetrators and drug dealers had their computers raided and seized with bitcoin wallets inside; their private keys searched or pried out during interrogations; and their assets in flow-through exchange accounts traced and forfeited. Depending on the jurisdiction, refusal to provide login information may be considered tampering with evidence attracting separate criminal charges. There’s no need for truth serum, apparently.

Just curious, where does the law stand in all this?

Sometime last year, at an Industries 4.0 conference inaugurated by the Prime Minister of Malaysia, I was invited to moderate a session on AML for cryptocurrencies. Having done some breezy research on this the day before, I threw a curveball to the panel:

In Thailand, the successful arrest of kingpins like Sergey Medvedev and Alexandre Cazes had hauled in well over a 100,000 bitcoins. But due to a legal loophole, the police cannot confiscate them because they are not recognized under Thai law as regular currency or assets. Storage and custody are also an issue – who’s responsible to hold and keep watch during the freeze? As is the consent of third parties: Cazes committed suicide while under arrest, leaving his crypto as part of his estate.

The deputy chief of the Legal Execution Department remarked: “Now it’s up in the air. There is no legal recognition whatsoever”. Speaking to The Nation last year, the Thailand AML Office said there is “no law allowing the agency to freeze or seize digital currency, nor anywhere to keep it… As a result, Thai authorities can jail or extradite cybercriminals and confiscate their physical assets – but they cannot touch their digital assets”!

Question to the panel: Is this the case for Malaysia?

For context, this was preceded by a spirited discussion on why predicate criminals would prefer to use cash rather than crypto due to the former’s lack of traceability. (The next question would’ve been whether they should move to Thailand!)

For clarity, confiscation covers seizure which refers to the state taking control of the property. This may then lead to forfeiture (by court order within 12 months from date of seizure) i.e. the state sells or disposes the property as compensation for the offence. The physical location of where the property is found will be likely considered the rightful jurisdiction for the purpose of confiscation.

In Malaysia, confiscation powers are well-grounded:

  • First off, Malaysia is a ratified member of the legally binding UN Convention Against Corruption. Its secretariat the UN Office on Drugs & Crime (UNODC) has issued a self-described “basic manual” that’s 234-pages long on how to seize bitcoins since 2014. The seizure covers both the wallet and its contents i.e. the “instrumentalities” used for crime and illegal “proceeds” flowing from it. The same words are reflected in Section 56 of the local AMLA Act.
  • In addition to AMLA, action can be taken under DDFOPA and MACCA legislations, and on both criminal and civil basis.1 The Financial Action Task Force (FATF) pointed this out as a key strength in its 2015 evaluation report of Malaysia: the country’s “broad legal regime” which allows it to use different options on case-to-case basis like non-conviction or civil-based forfeiture is “producing better results”. This is due to a view that the “standard of proof is lower for property recovery especially where the evidence for prosecution is weak”, and that confiscation has a higher deterrent effect than prosecution (para 3.61).
  • To explain further, civil confiscation shifts the burden of proof from the state to the owner. In a criminal proceeding, the prosecutor has to prove “beyond reasonable doubt”. But in the civil case, the property itself is presumed “guilty” of illegal activity and its owners must prove why they should not be deprived of it, even if they are bona fide third parties. “If owners do not fight civil confiscation and the state wins by default judgment, then law enforcement agencies are more likely to engage in it,” quoting UITM law professor Zaiton Hamid who published several thought-provoking papers on this.
  • Confiscation powers could turn law enforcement agencies against you like bounty hunters. The system can create a powerful incentive to seize, forfeit and profit. For instance, courts in the UK have let the police keep 18.8% of bitcoin auction proceeds to fund its operational budget. In the US, this can be up to 80% as part of the Department of Justice’s “equitable sharing program”. Since 2008, seizures have contributed to 20% or more of total annual budgets (WaPo).

The first path of enlightenment is in asking questions.

Thinking out loud here: For those who are likely “guilty” or feign ignorance, is it better to let civil forfeiture happen if it can stave off criminal prosecution?

Has bitcoin possession become the prima facie element in confiscation? It is hard to prove legal ownership of bitcoins, even though the private key is found inside your jean pocket with your glutes sitting on it. There is no identity or direct linkage to you. But if it’s found on you, it’s presumably yours. Authorities don’t have to gather evidence to prove mental state or “specific intent” in concealing the true nature of how you got those bitcoins. Their job is pretty much done at unlawful possession.

(Oh if you’re using a centralized exchange to store your bitcoins, this is a non-issue – confiscation is a cakewalk. The wallet is custodial and doesn’t really belong to you.)

So far, it seems that confiscation is the go-to approach for small-timers and low-level predicate offences. But as FATF observed, it is less effective in targeting the higher-up “profit taking” levels, the really big fish, which have a much more elaborate bleaching machinery. Meanwhile, bitcoins should be the least of your worries – judging from foreign precedents, courts won’t hesitate to freeze any of your fiat bank accounts that have touched bitcoin transactions.2 That’s that.

You have been warned. Stay safe by staying legal.

Disclaimer: This is not a legal opinion. You read this at your own risk and hold me harmless.

Footnotes:

  • Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA), Dangerous Drugs (Forfeiture of Property) Act 1988 (DDFOPA), Malaysian Anti-Corruption Commission Act 2009 (MACCA).
  • UK case: Vorotyntseva v Money-4 Ltd [2018] EWHC 2596 (Ch); and HK case: Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718.

Cover Image (free to use) by BROTE Studio.