Third Party Confiscation in Criminal Proceedings at Crypto Exchanges

• Germany

• Crypto assets

10-09-2021

First Judgement in Germany (Regional Court of Dresden): No Third Party Confiscation in Criminal Proceedings at Crypto Exchanges

On 18 May 2021 the Regional Court of Dresden in a very recently published decision declined the regular attempts of German investigation authorities of freezing cryptocurrency holdings in digital asset exchanges. The court affirmed that confiscation measures could not be applied if the prosecution fails to prove that the crypto exchange is linked to criminal activities and the proceeds to be confiscated ground in “a paid transaction (…) that precludes confiscation of the proceeds of the offence from others than the perpetrators or participants in the offence“. As far as evident, this is the first decision by a German criminal court on this increasingly relevant issue for crypto exchanges.

Powers of the Authorities to Confiscate Assets

In 2017 the German legislator strengthened the legal possibility of asset freezing and confiscation of proceeds of criminal activities. According to the German Criminal Code, public prosecutors and criminal courts may now confiscate assets obtained from criminal offences not only if the perpetrator has obtained something directly from the offence or for the offence. Rather, any third party may be subject to confiscation measures should the acquired assets have been transferred to the party free of charge or without legal reason, or that if the third party recognised, or should have recognised, that the assets are directly linked to an unlawful act. Such measures may already be ordered by public prosecutors at the beginning of investigations in order to preliminarily secure the assets for subsequent confiscation at a later stage.

Given the rise of crypto currencies, also numbers of criminal investigations involving crypto currency and crypto exchanges are on the rise. Given that authorities often may not get hold of individual wallets it became a more regular habit to try to confiscate assets at crypto exchanges instead.

With its decision of 18 May 2021 the Regional Court of Dresden clarified that the prerequisites for third party confiscation are regularly not met in case of crypto exchanges, particularly in case of a remunerative business model in which the exchange charges fees to the customers and therefore acts on a remunerative basis. The court stated confiscation is unlawful should the prosecutor not succeed in proving that the very crypto exchange is involved in the (alleged) criminal offences of their users or must have known about them.

Outlook and Best Practice of Risk Mitigation

The landmark decision of the Regional Court of Dresden sends a strong signal to investigation authorities to overthink their current practices. Nevertheless crypto exchanges will still be considered a potential target by prosecutors as it might still be deemed relatively easy for them to argue that the crypto exchange has recognised, or at least should have recognised, that the donated cryptos or fiats originate from an illegal act and can therefore be confiscated (or simply by ignoring the Dresden ruling).

Crypto exchanges shall therefore continuously pay attention to:

• Preventive AML and Business Partner Compliance Measures:
  Crypto exchanges may mitigate risks of being subjected to third party confiscation measures if they can demonstrate proper AML and business partner compliance countering any potential suspicion of involvement in criminal offences quickly and consistently.
• Fast Reactivity in case of (Pre-Trial) Measures Imposed:
  Should confiscation measures have been imposed on a crypto exchange, immediate action is required in order to have the imposition of the confiscation revoked.

Regulatory and Criminal Law from one hand: We can support you!

Our partners Dr. Carola Rathke (Head of the Practice Group Company Commercial and Lead Expert for Crypto Regulation) and Dr. David Rieks (Head of the Corporate Crime & Investigations Practice) are here for your support to:

• Discuss with you whether your crypto exchange might be exposed to confiscation risks and in which way your crypto exchange might be structured best to mitigate them.
• Assist you with regard to AML and business partner compliance in order to counter any suspicion of an involvement in criminal offences and thereby limiting risk to potentially have confiscation measures imposed.
• Lead and structure your defence in case of any (pre-trial) third party confiscation will be imposed on your exchange.