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This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.
Written by Guest Contributors:
Mathew Green, IP, Tech, Media and Commercial Lawyer at Brandsmiths
Carmel King, Assets Recovery Manager at Grant Thornton
Recovering misappropriated crypto assets can take different approaches, determined by whether the wrongdoer is known, or at least identifiable to the victim, or not. It is a misconception that in the latter event, where the victim doesn’t know who has their crypto, that funds are irretrievable as there is no individual or body to chase, and victims are unaware of where any investigation can begin.
From payments to falling for seemingly legitimate advisory investment platforms to ransoms paid by insurers, and even where victims hand over to fraudsters their unlocked mobile phone in a bar (it has happened), the individuals which receive the funds are not always known.
Both lawyers and asset recovery practitioners are able to assist using particular strategies to target the funds and individuals who hold them as they have moved along specific blockchains.
Here we look at specific high level strategies used by professionals to ensure that victims of fraud are able to make enquiries and pursue their funds where no clear fraudster is identifiable.
A LAWYER’S PERSPECTIVE
Once funds have been paid to an account, the victim will either know who the funds have been transferred to or not, and in many cases it is the latter, even where the assets have initially been paid to a seemingly legitimate person.
For a lawyer, the first step is to instruct an investigator who can trace the funds from their original withdrawal address to various addresses across the blockchain, until they hit an account at a crypto service, like an exchange.
From here, the victim can write to the exchange via their lawyers, requesting a freeze on the account housing the funds, the funds themselves, and the identity of the individual who is the account holder with that exchange. In most cases, the exchanges will look to cooperate given the reputational need to assist a victim and to ensure they appear compliant where there is a regulator, but do not always cooperate substantively.
The next step is therefore to injunct the exchange, to ensure (i) the interim freezing of the funds, known as a proprietary claim, (ii) a lock on the account so no funds can be withdrawn, and (iii) a disclosure order. This is the only legally guaranteed way for these three reliefs to be obtained and in many cases, including where exchanges are unhelpful, is a necessary step.
As most exchanges are now required to conduct some KYC and AML checks on their clients, the victim should then be able to obtain key information on the account holder whose account holds the misappropriated funds.
The legal tracing route as above is able to assist in identifying the person who ended up with the funds when they hit the exchange. Importantly, the person who demanded the funds is, to some degree, irrelevant, as the lawyer’s job is to reobtain the funds- the police are there to locate and pursue the criminals by their own means.
From there, the victim can seek to negotiate with the holder of their funds or seek to litigate, but in either event, those funds are frozen, and any withdrawal from the account which houses those funds will be frozen until a resolution is obtained, or until the Courts order for the removal of that restriction.
In this way, victims are able to follow the money rather than the person and can reclaim their crypto assets using the above methodology.
AN ASSET RECOVERY PRACTITIONER’S PERSPECTIVE
The above methodology can be coupled with corporate intelligence solutions which provide multiple lines of attack and a wider contextual background for an effective recovery process.
Importantly, whilst the identity of the fraudster may be unknown at the outset of an investigation, the victim will have some key information that can kick-start the process in identifying them.
Utilising open source intelligence, known as OSINT, can yield significant results in an investigation, providing a holistic picture of the fraud, like the identities of the bad actors involved, those who may have dishonestly assisted them, and any potential assets for recovery.
The given identities of the fraudsters will often be fake, but OSINT techniques enable investigators to trace and analyse the use of those aliases, link them with other illicit activity and identify patterns.
Domain name investigations can also provide perspective on activities from specific IP addresses and websites, and provide links to other criminality and individuals involved. Social media capture can map out entire networks of people and corporations, their locations and activities, as well as potential assets.
Importantly, investigators can also identify other victims and coordinate asset recovery approaches. By layering OSINT with DNS and social media capture, practitioners can understand the broader picture which will inform the overall approach and may provide a range of recovery strategies.
Having gathered sufficient information to identify a bad actor, a corporate vehicle used or an accomplice, practitioners can then rely on insolvency and similar processes, which are powerful tools in the asset recovery process. They are ubiquitous from jurisdiction to jurisdiction, and though they can vary in nature, they offer the practitioner significant powers of investigation and recovery, like compelling disclosures and interviews with certain targets.
MOVING FORWARD
Historical blockchain investigations have started without a discernible target and have ended in the recovery of crypto funds. In November 2020 the US filed a civil action to forfeit cryptocurrency valued at over $1 billion in connection with the Silk Road investigation. Eight years after the BTC was stolen. A combination of blockchain analysis and social media capture identified fifty-four previously unidentified transactions that stemmed from unlawful activity.
It must be stressed that so long as a victim either has their own address from which funds were withdrawn, or the address to which the funds were deposited, legal professionals are likely able to start the Court process to seek to recover funds. Similarly, with some basic information from the victim, asset recovery practitioners can broaden the scope of an investigation, identify real-world routes to recovery, and work with legal professionals to achieve the best outcomes.
Meet Matthew Green
Matt specialises in intellectual property, crypto asset recovery, and regulatory advice, as well as media and commercial law, advising the tech and blockchain, FMCG, fashion, entertainment, and music sectors.
Matt is also a business mentor at Virgin StartUp, helping entrepreneurs navigate the early stages of growth and development.
Contact Brandsmiths and Matt
P: 07545068499
E: matt@brandsmiths.co.uk
Meet Carmel King
Carmel specialises in asset tracing and recovering funds for clients who have suffered a financial loss as a result of fraud. She has 15 years experience of in using insolvency proceedings, court-appointed receiverships, other civil procedures, and litigation funding to conduct investigations, formulate legal claims and enforce judgments.
She has a particular interest in crypto-asset fraud and can assist victims and representatives in investigations and asset recovery strategies.
Carmel also has experience working in the public and private sectors, having taken instruction from government departments and local authorities in the UK, non-UK governments, and international companies.
Contact Grant Thornton and Carmel