Blockchain technology and cryptocurrencies like Bitcoin, Ethereum, Litecoin and so on, are confidently taking over the wallets of investors.
Some believe that the usual financial ecosystem may change as a result of this modern development and that traditional money will one day disappear. Others predict another financial collapse owing to cryptocurrency fever, which may ultimately drag the world economy into another crisis in a similar manner to the dot-com bubble at the turn of the 21st Century.
Because of cryptocurrency’s somewhat unique origins, not all countries have developed a unified approach to its legislative regulation yet. There are nations that recognize cryptocurrency and all connected activity as illegal, while others allow it to be legally implemented throughout its territory.
With many years of experience in dealing with complex criminal cases, AVER LEX lawyers note that Ukraine largely distrusts cryptocurrencies due to its evidence of existing in a financial bubble, and its significant links to corruption, drug trafficking, acts of terrorism and other serious activities.
Legalization Of Cryptocurrencies In Ukraine
The vast majority of European countries, including Ukraine, have chosen a slow way of introducing cryptocurrencies, accepting transactions with digital coins and recognizing them as a valid means of payment—or at least as a commodity. For this, the Financial Action Task Force on Money Laundering (FATF) has developed special recommendations.
FATF states that each country must adopt legislation that requires all cryptocurrency share markets and exchanges to register with the relevant government agencies. They are to adhere to the Anti-Money Laundering (AML) and Know Your Customer (KYC) policies, exchange information about the participants of joint transactions where necessary, and provide information about customers and their transactions to state regulatory and law enforcement agencies, as well as confirm the identity of customers.
Artem Drozdov, a criminal defense attorney and partner at AVER LEX, notes that the AML rules are virtually the only ones that relate to the regulation of the circulation of digital assets like cryptocurrency to some extent. Taking into account these norms and recommendations of the FATF, the relevant law was adopted in Ukraine a year ago, in April 2020.
Artem also points out that although there is no explicit permission to conduct business in the field of cryptocurrency and income in many countries, this is certainly not prohibited by their respective legislation. Therefore, it’s quite legal for cryptocurrencies, cryptocurrency exchanges and mining farms to conduct initial coin placements (ICO) and to withdraw cryptocurrency into fiat (traditional) funds to operate quite legally.
However, in conditions of legal uncertainty, and close attention from law enforcement agencies to cryptocurrency transactions, the investor and stakeholders should be aware of the possible risks and the consequences of such transactions.
Criminal Risks Of Cryptocurrency Transactions
For cryptocurrency-related partners, there have been cases where an exchange has seized its clients’ accounts without a detailed investigation by police.
Artem Drozdov emphasizes that in Ukraine, the most common reasons for opening criminal cases may be attempts to carry out charges related to:
- Carrying out illegal actions with documents for transfer and with electric money (fine of 170,000 hryvnias ≈ 5,030 euros)
- Money laundering (imprisonment for up to 12 years with confiscation of property)
- Terrorist financing (imprisonment for up to 12 years with confiscation of property)
Opening a criminal case allows law enforcement agencies to conduct procedural and investigative actions that could significantly harm the business or its representatives. The details of which are laid out below:
1. Carrying out searches in offices and premises of the cryptocurrency business and its partners, as well as at the home of the owners and top management of the business
Searches are carried out in all places where, according to the investigation, there may be ‘black’ accounting that’s intended for money laundering, obtained through criminal means, or intended for terrorist financing. The tools for this, such as computer equipment, servers, mining farms, smartphones and other relevant assets, may be seized for an indefinite period which could impact working life, timing and the retention of investment.
In their practice, AVER LEX attorneys stated that they handle frequent cases of illegal seizure of documents and property that have nothing to do with investigations. There are also cases of intentional failure to indicate the seized items in a special description or search report—which is mandatory in preventing a subsequent disappearance.
Without sufficient business response and qualified legal support, such searches often have many negative material and physical consequences.
2. Seizure of property and bank accounts
The next step for law enforcement agencies is to seize or arrest:
- Property seized during the search
- Property of persons suspected of committing a crime (houses, apartments, land plots, cars, etc.)
- Cash in bank accounts;
- Cryptocurrency, which is stored on the accounts of cryptocurrency exchanges.
This means that a ban on using, selling, renting or exchanging property could be put in place. In the event of a court conviction in the case, the property may be further confiscated as part of the punishment for the crime or as compensation for damage caused.
3. Interrogation for employees, top management, business owners and partners
No criminal investigation is complete without questioning witnesses and suspects. Law enforcement agencies can interrogate every cryptocurrency business, employee and their partners.
The investigator or prosecutor will use everything that the person said in the investigation—especially if mistakes or inaccuracies emerge. Naturally, these investigations will use psychological methods which can be used to obtain distorted information that could negatively impact the cryptocurrency business.
4. Delaying the investigation of a criminal case and disseminating in the media classified and distorted information regarding participants
Cases of an intentional delay by law enforcement agencies in investigating a criminal case are not uncommon. If the investigation doesn’t have enough evidence, often the case is not closed, but artificially suspended or stretched while seizures of property are also not cancelled.
In this way, the attempts of the participants in the case—including illegal ones—to provoke this process as soon as possible are invoked, which can also be used underhandedly against the business. In this way, false information can be disseminated in the media by law enforcement agencies.
All of the above, from the opening of a criminal case to the interrogation of cryptocurrency business employees and publications in the media, inevitably entails significant reputational, financial and personal losses:
- Clients terminate contracts or other formats of relations with a company involved in criminal prosecution, and employees may be laid off en masse
- Partners refuse to cooperate with the company itself, as well as with its top management and owners, as they also run the risk of being suspected
- Banks and stock exchanges refuse to open accounts due to the high level of business risk
Summarizing the circumstances of incomplete legal regulation of cryptocurrency activities and the high interest of law enforcement officers in it, it’s important to pay special attention to the legal support of such businesses to comply with full legality and transparency to government agencies, partners and clients.