Asset recovery and cryptocurrency: A case study

This article was first published on KNect365 Law and is available here.

The full value of litigation judgments and arbitral awards is rarely paid out in full to claimants. In fact, almost two-thirds (59%) of respondents to Burford’s 2018 Litigation Finance Survey report having uncollected recoveries or unenforced judgments valued at over $10 million.

After pursuing a costly, time-consuming dispute, the last thing a claimant wants to do is to commit even more resources to chase a defendant who refuses to pay a judgment after being defeated at trial. Perhaps the only thing that can make what’s already a bad situation even worse is contending with a recalcitrant debtor or sophisticated fraudster who happens to be using cryptocurrencies such as Bitcoin; it may seem like a dead end. How can you recover assets from someone who has specifically gone out of their way to hide their wealth in digital currencies?

As the case study below shows, options are available and paths to recovery do exist—but finding them requires expertise, investment and creative problem-solving.

What is cryptocurrency?

Bitcoin (BTC) is a digital currency based on a protocol that allows data to be stored in a transparent and unalterable way in a decentralized ledger, essentially, a database that everyone has a copy of, known as the Blockchain. Bitcoin is the first example of a cryptocurrency, an asset class similar to that of traditional “fiat” currencies, but whose supply is controlled by lines of code, rather than central banks. Transactions are verified using cryptography. Cryptocurrencies are typically traded via exchanges, which act as digital marketplaces connecting buyers with sellers, and stored using digital wallets.

Much has been written about the anonymity of Bitcoin and the unbreakable cryptographic verification and encryption used to secure records of transactions in the blockchain. It is no secret that this is why it is often favored by criminals, techies and investors alike. In fact, it is precisely because of this underlying technology that every Bitcoin transaction of any size is publicly viewable, provided, of course, that one knows what to look for!

Background

Burford’s case study concerns two UK residents (for our purposes, we’ll refer to them as Jones and Smith) who ran a series of fraudulent schemes that netted them tens of millions of pounds. After the frauds were uncovered, Jones and Smith entered insolvency, no doubt hoping to come out clean the other side upon discharge. Needless to say, Jones and Smith were not forthright with the trustees and the investigation uncovered neither assets recoupable to the estate, nor answers concerning the whereabouts of the millions in pilfered investor funds. If the trustees were to make any recovery, it was clear that a highly complex, long-running and expensive investigation would be required.

Recognizing they were out of their depth, the trustees sought help from Burford and its team of asset recovery specialists. We have experience partnering with resource-strapped insolvency estates, in which our role typically entails identifying assets, formulating a legal route to recovery, and funding the ultimate recovery of those assets. In the case of our debtors, it became clear early on in our investigation that Jones and Smith had likely squirreled away some of the fraud proceeds into cryptocurrencies. Far from being a dead end, we uncovered actionable intelligence with the use of traditional tools in the insolvency war chest that led us to new third-parties, offshore accounts, and sight of fund flows suggestive of Jones and Smith’s access to substantial liquid assets that they did not disclose to the trustees.

Process

We had reason to suspect that Jones and Smith held undisclosed cryptocurrency assets: Our initial desk-based research identified various domains for bitcoin investment websites registered by known proxies of Jones and Smith at around the time of their bankruptcies, when they were registering other offshore businesses that were used to siphon proceeds of the fraud. Additionally, we knew from their backgrounds that Jones and Smith were tech-savvy investors, so it seemed possible that they knew their BTC from their ETH, and how cryptocurrency investing and trading could make them some money.

Our suspicions were confirmed when we obtained documents that appeared to show payments, albeit nominal sums, being made by Jones and Smith to UK-based cryptocurrency exchanges. We got hold of these documents via a combination of traditional disclosure orders and overseas discovery mechanisms. What we did not understand, however, was why the exchanges also appeared to be making payments back to Jones and Smith.

We approached one of the UK-based exchanges for disclosure of all records relating to Jones, Smith and their proxies. The exchange disclosed a host of information, including bitcoin wallets, bitcoin addresses, and transaction IDs, information which (aside from the exchange) is only usually held by the holder of the Bitcoins or the parties in a Bitcoin transaction. Bitcoin addresses, for instance, are like email addresses, but instead of sending messages they are used to send and receive Bitcoin. The exchange also disclosed details of a six-figure sum deposited into the exchange from an offshore account held by third-party company incorporated in a banking secrecy jurisdiction. Crucially, the exchange disclosed that the contact on the account and the owner of the company was Jones and Smith’s known proxy.

Results

What our analysis showed was that Jones and Smith’s bagman attempted to pay a UK bitcoin exchange on three separate occasions: First, direct from his Belize bank account; second, from a Dubai account held by a third-party company; and third, via a third-party payment processor. On the first two occasions, the payment was returned because the bagman failed the exchange’s KYC and AML tests. By verifying the bitcoin addresses and transaction IDs associated with his third payment in the blockchain (at www.blockchain.com/explorer) and cross-referencing with the payment dates we saw on various account statements, we were able to map Jones and Smith’s crypto fund flows, transactions from one wallet/address to another, during the period of their insolvencies.

Conclusion

Ultimately, Burford’s inkling that Jones and Smith held digital assets lead us to seek disclosure from cryptocurrency agents, such as exchanges, that ultimately lead us to previously undisclosed bank accounts, third-party companies and domains outside of the jurisdiction. This crucial intelligence contributed to our overall understanding of Jones and Smith’s modus operandi and our global enforcement strategy, particularly when used in conjunction with the traditional powers available to insolvency practitioners.

As this case study shows, Bitcoin should never be a dead end for asset recovery—provided you have the resources and right partner in place. As the largest provider of litigation finance in the world, and with a leading in-house asset recovery team, Burford can provide a combination of asset recovery expertise and bespoke financing that can enable clients and law firms alike to transform legal paper without adding cost and risk to corporate balance sheets.