Various U.S. agencies have the power to exercise civil forfeiture over assets they deem related to criminal activity. Because the forfeiture is “civil,” the U.S. government does not need to initiate criminal proceedings to confiscate one’s property, including crypto assets. Because property does not need to be involved in the offense directly—only “traceable” to one—the U.S. government may confiscate assets owned by a person who is innocent of any offense. For these reasons, an investor maintaining a crypto portfolio with a service provider subject to U.S. laws is exposed to the risk of seizure. This article describes a step-by-step approach to civil forfeiture by the U.S. authorities. It is based on the firm’s recent experience challenging U.S. Customs and Border Protection’s (CBP) civil seizure action.

Step 1: Before the Storm

Considering the nature of blockchain technology, it is possible that an asset’s prior owner used it for illegal business. This trace of illegality may follow the assets, leading to seizure. To hedge your risks and prepare a “paper trail” for contesting a seizure, it is advisable to:

• Exercise due diligence in choosing your counterparties and trading spaces. It is prudent for any investor to investigate from whom they are buying. Room for such investigation may be limited due to many market participants doing business anonymously. But trading on regulation-compliant exchanges—or using similar authorized institutions—is less risky than buying from anonymous sellers;
• Keep a record of all your crypto transactions. Proof that you acquired the assets in a legitimate way—e.g. on an exchange—will go a long way in a seizure proceeding;
• Check your mail regularly. Any seizure begins with a formal notice. The applicable deadlines are tied to the sending date. If you miss the notice, you might inadvertently abandon your property.
• Use providers not subject to U.S. jurisdiction. The U.S. government may seize your assets only if it can reach them. If you keep your assets with a service provider that must comply with the U.S. government’s directions, you face a heightened risk of seizure.

Following this advice will lessen the risk that your assets get seized by U.S. authorities. It will also make the process of contesting any seizure easier.

Step 2: Notice

The forfeiture action will begin with a notice. The U.S. government must send one to your known address. For example, a CBP notice may contain the following information: (1) the details of the seized assets, (2) the applicable deadlines, and (3) a “menu” of options available to you. The latter may include:

1. Administrative review. After you submit a petition, the agency officer will review your case based on your explanations and evidence attached to the petition. The officer has wide discretion to grant or reject the petition, in full or in part. Administrative appeal through a supplementary petition may be available from the officer’s decision.
2. Concession. You make a settlement offer to the agency. For example, it can be that you give up some of the seized property in exchange for the release of the rest.
3. Abandon. You can let the authorities keep your property. If you take no action in response to the notice, the authorities consider you to have abandoned the property.
4. Judicial action. You may decide to start court proceedings. First, you will need to file a demand with the agency holding your assets. Then, the agency will request a U.S. Attorney’s office to start a court action to forfeit the seized property. Picking the administrative review process (see option 1 above) may foreclose judicial action.

You have a limited time to act after receiving the notice. The notice will stipulate the applicable time period. 

Step 3: Response

Unless you decide to abandon your assets by not responding to the agency, you will have to prepare a written response.

If you decide to contest the seizure, filing an administrative review petition might be the most natural response. If it succeeds, you have a chance to get your property back without litigation. If it does not, you may still be able to sue for the return of your assets.

The petition does not need to correspond to some mandatory form. But it should (1) describe the seized property, (2) explain your ownership title to it, and (3) state the reasons for lifting the seizure. It should also include evidence to support your statements. Depending on the chosen route, you may also need to fill out an additional form that the agency sends to you along with the notice.

Carefully review the instructions for filing your response. You may be able to file it electronically. For example, CBP has an online system set up for this purpose.

Step 4: Litigation

You can recover your property in court. Suing is an option right after you receive the notice. But it may also be available if your petition is denied.

U.S. civil forfeiture actions have the following features:

• U.S. government as plaintiff. The seized property’s owner may not be able to sue the government directly. The judicial action option typically requires that (1) the owner send a demand to CBP requesting it to start litigation, based on which (2) the CBP relays the case to a U.S. Attorney, (3) who, in turn, files suit in a U.S. court.
• In rem action. The U.S. government will not sue you as the property’s owner. Instead—because of a quirk of U.S. civil procedure—the seized property will be the defendant. And the action will ask the court to forfeit your property in the government’s favor. Your role in the proceeding will be that of a claimant, i.e. the party asserting its property interest in the seized assets.
• Federal court jurisdiction. Depending on the applicable statute, the U.S. Attorney suing the property may have several jurisdictional gateways. A very likely choice would be a federal district court for the district where the property was at the moment of seizure. If the notice states that your assets were taken at a certain address, you can use the U.S. court-finder system to check what court may have jurisdiction over the case.
• Statute of limitations. You might expect that, if the offense had transpired a long time ago, the related seizure actions would be precluded by the applicable statute of limitations, which is, at most, five years from the moment the offense is discovered. However, the statute of limitations does not start to run if the property is not under U.S. jurisdiction. Hence, for example, if your cryptocurrency is seized shorty after it is credited to your U.S.-based account, the statute of limitations does not start to run until the moment the funds are deposited in the account.

The U.S. government’s position in the litigation is likely to be that the seized property is related to a violation of a certain statute. For example, if you fail to pay customs duties on imported cash, the authorities may seek to forfeit the cash. The government will have the burden of proving the link between the seized property and the violation. But the applicable standard is preponderance of the evidence, which means that the U.S. authorities will not need to establish the link with a criminal-case certainty, only that the connection is more likely than not.

Any claimant challenging a seizure should be aware of the innocent owner defense. Essentially, under the applicable statute (18 U.S.C.A. § 983(d)), if the property interest is held by an “innocent owner,” that interest cannot be forfeited. One of the requirements to qualify as an innocent owner is that you “did not know of the conduct giving rise to forfeiture.” This may be a powerful tool to contest the government’s forfeiture claims in situations where your property was seized because of an offense with which you had no involvement.

Conclusion

Even an innocent owner of crypto assets may find his property seized by the U.S. government. In light of this, due diligence and good record-keeping are key when transacting with crypto assets. While the notice of seizure may make several out-of-court procedures available to the property’s owner, a dispute over an illegitimate seizure might end up in court. Here, a weighty weapon in your arsenal could be the innocent owner defense.