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HM Revenue & Customs (HMRC), the UK’s tax authority, has announced that three people have been arrested on suspicion of a £1.4m VAT repayment fraud involving 250 fake companies.
Customs officials have seized three non-fungible tokens (NFTs) in what is believed to be the first law enforcement action in the UK involving the digital asset.
The suspects are alleged to have used sophisticated methods to try and hide their identities including false and stolen identities, false addresses, prepaid unregistered mobile phones, virtual private networks (VPNs), false invoices and pretending to engage in legitimate business activities.
“Our first seizure of a Non-Fungible Token serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC,” said Nick Sharp, deputy director of economic crime at the regulator.
He continued: “We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets.”
HMRC secured a court order to detain the seized crypto-assets worth circa. £5,000 and three digital artwork NFTs, as yet not appraised and/or valued, while the investigation continues.
"This demonstrates that criminals are bringing tried and tested fraud techniques to the NFT space, which is marked by gaps in regulatory oversight that criminals are eager to exploit,” said David Carlisle, policy chief at Elliptic.
There is a positive spin for crypto players in that it shows that criminal elements can be weeded out to help protect and legitimise law-abiding crypto businesses.
According to Carlise, this case demonstrates yet again that criminals cannot hide in the world of crypto. “Enforcement agencies are able to track and trace criminals’ transactions, and seize NFTs and crypto-assets used in illicit activity, robbing criminals of their profits."
The UK is demonstrating increased sophistication in its ability to seize crypto-assets, he pointed out. “This is a major win for HMRC and shows that the agency is adapting rapidly and effectively to evolving criminal techniques in this space."
NFTs first emerged in 2014 and can be thought of as certificates of ownership for virtual assets, such as digital artwork, or physical assets, such as art, music and videos.
The assets have a unique digital signature so they can be bought and sold using traditional currency or crypto.
Although they have been in existence for almost a decade, it was last year that they began to dominate crypto headlines.
For example, Visa paid $150,000 (£110,000) for a "CryptoPunk" NFT as part of what the payments giant said was "a new chapter for digital commerce”.
As the hype has increased, so have the concerns about how vulnerable NFTs are to fraud and anti-money laundering offences.
For example, a report by the US Treasury last week suggested that the booming NFT market, which generated $1.5bn in trading in the first three months of 2021 and grew 2,627 percent over the previous quarter, could become a new target for criminals looking to conceal their illicit funds.
A report by consultancy Chainalysis also said that the amount of money pumped into these digital assets surged from £78m in 2020 to more than £44bn last year, suggesting that fraudsters may be inflating the price.
So far, the regulators' grip and understanding of NFTs has been unclear. For example, NFTs are exempt from the EU’s upcoming Markets in Crypto Assets legislation. This may be because it was published in 2020, prior to the rise in their notoriety.
According to Article 4(2) of the suggested regulation, issuers of “crypto-assets that are unique and non-fungible” are not required to publish or register a white paper.
This may change, however, as the legislation goes through negotiations between the European Parliament and European Council.
The guidance from the Financial Action Task Force (FATF) is also, thus far, unclear.
For example, FATF’s updated 2021 guidance suggests that NFTs are generally not considered to be crypto-assets under the FATF definition.
However, the guidelines outline that it is critical to evaluate the underlying aspects and identities given to a particular NFT, meaning that financial authorities will likely have to consider each NFT on a case-by-case basis in their regulatory approach.
With NFTs now difficult to ignore, we can expect regulators to move fast to try to address ambiguities in current regulatory approaches and bring NFTs into line with other crypto-assets.
