What You Need to Know
- Cryptocurrencies made up 93% of assets confiscated by the Criminal Investigation Division of the IRS in the last fiscal year.
- Once seized, it can take years for authorities to secure a forfeiture order letting them sell crypto and return the proceeds to crime victims or governments.
- As regulators and law enforcement agencies become savvier about seizing and disposing of crypto, so do the criminals trying to evade detection.
One spring day in a village just west of London, residents saw a man being muscled into a car in front of a nearby house. He reappeared with cuts and bruises 13 hours later, but the cops had already discovered the house was a cannabis-growing operation.
A separate search of the man’s home in a nearby town turned up something more intriguing—some of the first cryptocurrency that would ever be seized by U.K. police.
That era-defining 2017 case yielded a safety-deposit box containing jewelry, gold bars, £263,000 ($345,000) in cash, and an item that flummoxed the lead investigator, Matthew Durkin, a 19-year veteran of the Surrey police. It was a USB device found in the suspect’s study.
The gadget was wrapped in a small notebook, which contained two strings of 12 random words. A young probationary officer recognized the device, a KeepKey, as a virtual currency holder and the words as seed phrases to access crypto wallets. Eventually, police discovered it held 295 Bitcoin.
“It meant nothing to me until someone said it was worth £900,000,” recalls Durkin, 51.
In recent years, police departments such as Durkin’s and law enforcement agencies around the world have had to learn quickly about how to deal with cryptocurrencies, often in amounts that eclipse traditional assets such as cash, gold, jewelry, cars, and real estate. In London, for instance, police seized almost £300 million of crypto linked to crime last year.
Big Seizures on the Rise
The U.S. Marshals Service held 22 cryptocurrencies valued at about $919 million last December, according to spokeswoman Shaunteh Kelly. In February the U.S. made its largest financial seizure ever: about $3.6 billion in Bitcoin stolen during a 2016 hack of the Bitfinex currency exchange.
And cryptocurrencies made up almost all — 93% — of the assets confiscated by the Internal Revenue Service’s Criminal Investigation Division in the fiscal year that ended Sept. 30.
“It’s exploded since 2017,” says Ryan Korner, head of the division in Los Angeles. “We’re at a point where it touches almost every investigation that we work in one way or another. We’re trying to make sure that all of our agents have the knowledge to work these cases.”
The qualities that make cryptocurrencies attractive to criminals — some think they’re easier to hide and transfer than many valuable assets — are challenging law enforcement.
Cracking the Code
To start, investigators have to learn to recognize a crypto wallet and then how to obtain the private key, or seed phrase, to unlock it. Months after the $10 million hack of the GateHub platform in 2019, French investigative judge Pascal Latournald and his colleagues held and interrogated a suspect for the better part of 48 hours before he gave up the code that unlocked $2 million in Bitcoin.
The exhausted suspect, hoping for leniency, revealed he’d written it on a slip of paper inside a cookbook in his parents’ living room in southern France, according to an officer involved in the investigation who spoke on the condition he wasn’t named.
U.S. agents have discovered seed phrases hidden on a gum wrapper, inside a TV instruction manual, and on tiny pieces of paper stuffed in a suitcase in a closet, says Tigran Gambaryan, who was a special agent for the IRS’s criminal investigation arm for a decade before joining crypto exchange Binance in September.
In 2018, U.K. police chiefs lobbied the government for funding to equip about 250 officers—dubbed crypto tactical advisers—and train them in how to investigate, seize, and realize the value of digital currencies.
The U. S. Federal Bureau of Investigation in February formed a crypto unit to provide equipment, training, and blockchain analysis to agents. The Department of Justice appointed Eun Young Choi as the director of a team dedicated to crypto crimes.
Choi says her focus will include virtual currency exchanges and services, known as mixers or tumblers, that obscure funds. Speaking at a Munich conference, Deputy Attorney General Lisa Monaco said her prosecutors will work more with European partners on crypto enforcement.
Laurel Loomis Rimon, who worked on many money laundering cases during her 17 years as a federal prosecutor, says the value of the recent seizures is “staggering” and will have a big impact on prosecutors. “There’s a facility with this type of analysis that has been growing,” says Rimon, now at the law firm Paul Hastings. “You’ve got prosecutors getting more and more comfortable with it.”
Security, Liquidation Matters
As law enforcement becomes more sophisticated in identifying and accessing a suspect’s cryptocurrency, they’ve also had to navigate the challenges of securing it and, eventually, liquidating it.
In the Surrey case, police quickly bought their own KeepKey and transferred the Bitcoin to it. They put the device and seed phrase in a safe, and only two officers knew the combination. Durkin had heard about two U.S. agents who went to prison for stealing Bitcoin while investigating the now-shuttered Silk Road underground virtual drug bazaar.
“I was very conscious of security—people’s heads can be turned with a million quid,” Durkin says. “But most of all, I was worried about losing it—I didn’t want to stand in front of my chief constable and say £900,000 in Bitcoin had gone.”
Durkin’s team got a court order, the first of its kind in the U.K., that enabled them to convert the crypto into sterling. They sold it directly to a trusted international exchange for £1.25 million, the market rate at the time.
Once seized, it can take years for authorities to secure a forfeiture order letting them sell crypto and return the proceeds to crime victims or governments. In the U.S., seized property is subject to claims by people who say they have a right to it.
In 2018, authorities in Monmouth County, N.J., raided two locations used by a suspected drug dealer, Giddel Gonzalez-Estrada. They seized cocaine, cash, and a handgun, as well as Bitcoin, Litecoin, and Ether valued at $57,000. Gonzalez-Estrada held the crypto in an account at Coinbase Global Inc. Monmouth authorities got a judge’s approval to seize the crypto from Coinbase, which transferred it to a wallet set up by detectives.
They held it on a device in the evidence vault, says Michael Costanzo, a special deputy attorney general. Gonzalez-Estrada pleaded guilty in 2019 and was sentenced to 10 years in prison. When a judge finally approved the forfeiture in 2021, detectives transferred the crypto back to Coinbase, netting $198,237 for the county’s law enforcement trust account.
Seizing and selling crypto is becoming less daunting for prosecutors and detectives, Costanzo says. Monmouth prosecutors are preparing for trial against a former tennis teacher accused of identity theft and other crimes. In 2017 they seized crypto valued at $200,000.