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The UK’s tax authority, Her Majesty’s Revenue and Customs (“HMRC”) is currently investigating a suspected VAT fraud of £1.4 million involving 250 alleged fake companies. In February 2022 HMRC disclosed that, as part of its investigation, it had secured a court order to seize crypto assets worth £5,000 and three digital artwork non-fungible tokens (“NFTs”). HMRC has also said that the alleged fraudsters were using "sophisticated" methods to hide themselves, including using stolen identities and pre-paid mobiles, providing false addresses and invoices, and pretending to be a legitimate business. Three people have been arrested in connection with the investigation, which is continuing.
This is the first time a UK authority has seized NFTs in this way. An NFT is a unique digital token stored on an online ledger that can represent real objects, including works of art, music and videos. They are typically paid for using digital currencies such as Bitcoin and Ethereum. The ease with which NFTs can be transferred has led to warnings that they are ideal vehicles for money laundering and tax evasion. The art market, which is considered a risk sector for money laundering, is a particular concern. Art dealers and auction houses are already obliged to verify their customers’ identities and take other steps to prevent the use of the art sector for criminal purposes. However, sales in digital art are rising rapidly. NFT art sales are reported to have accounted for one third of the global art market in 2021, valued at around $25bn (£18.4bn). The U.S. Treasury warned in a study published on 4 February 2022 that the emerging digital art market and use of NFTs may present new risks, including facilitating money laundering and terrorist financing. It made several non-regulatory and regulatory recommendations, including updating guidance and training for law enforcement, customs enforcement and asset recovery agencies and applying anti-money laundering and counter-terrorist financing requirements (such as suspicious activity reporting and know-your-customer procedures) to certain art market participants.
In a drive to regulate the cryptocurrency market, in 2018 the UK Treasury launched a Cryptoasset Taskforce and, in January 2022, it announced plans to extend regulations on financial promotions to adverts for cryptocurrency. As part of efforts to clamp down on tax evasion, HMRC has issued "nudge" letters to crypto investors, along with guidance on how crypto-transactions should be recorded and how they are taxed. Meanwhile it is understood that HMRC currently has more than 20 criminal investigations on its books for offences such as tax fraud and tax evasion involving crypto assets, such as Bitcoin.
As in the UK, enforcement authorities in the U.S. are demonstrating both the technical capability and intent to follow and recover crypto currency thought to have been laundered through blockchain and transactions conducted outside the traditional financial sector. The Department of Justice (“DoJ”) recently seized approximately $3.6bn in crypto currency that was stolen when Bitfinex, a virtual currency exchange, was hacked in 2016. A married couple has been arrested in connection with the investigation and face federal charges of conspiracy to commit money laundering and conspiracy to defraud the U.S.. In the DoJ’s press release detailing the seizure Assistant Attorney General Kenneth A. Polite Jr. stated that the U.S. authorities “will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system,” and added that the DoJ would take “a firm stand” against those who sought to use virtual currencies for criminal purposes.