The European Union has taken a major step towards crippling organized crime by approving a new directive on asset recovery and confiscation. The rules, agreed upon by the Spanish presidency of the EU and the European Parliament on December 12, require member states to establish procedures for tracing, freezing and seizing profits from serious crimes like human trafficking and drug smuggling.
Crypto assets, while not mentioned in the press release, are recognized as an asset class in the European Union and will be included in the directive’s scope.
A “directive” in the EU is a rule that sets a goal for member countries to meet. Each country then decides how to create its own laws to achieve this goal.
The directive aims to strip criminals of their illicit gains, which Europol estimates amount to at least €139 billion per year across the EU. Spanish Justice Minister Félix Bolaños said: “Only if governments have the means to claw back these profits do they stand a chance of fighting organized crime.”
By the end of June last year, crypto inflows to illicit entities dropped 65% , compared to the same period in 2022, according to Chainalysis’ most recent crypto crime report.
All countries will need to reinforce their asset recovery offices and ensure these offices can access relevant national databases. Their role will be to help cross-border cooperation and carry out investigations to identify and trace criminal assets. Where justified, they will be able to freeze property ahead of conviction to ensure its eventual confiscation.
In a breakthrough for many countries, the rules also introduce “confiscation of unexplained wealth” – allowing assets to be seized if they are suspected to be the proceeds of criminal activity within an organized crime group, even without a conviction. Safeguards have been built in around procedural rights.
The directive covers a wide range of serious crimes beyond organized crime and terrorism. Member states will also have to apply the confiscation rules to breaches of EU sanctions, once separate legislation on penalties for sanctions violations comes into effect. Bolaños said: “People and companies profiting from circumventing sanctions will see their yields being seized in the same way as those of traffickers in human beings or drug cartels.”
All countries will need to set up asset management offices to ensure confiscated assets can be properly handled. This includes enabling their sale – if assets are perishable, for example – before a final conviction is handed down.
The agreement will be welcomed by transparency campaigners as an overdue crackdown on dirty money flows enabled by patchy rules across the EU. However, effective enforcement will require political will and resources behind asset recovery teams to work.
The directive also comes hot on the heels of another major EU crypto regulation – the Markets in Crypto-Assets (MiCA) law – which was voted for overwhelmingly in April 2023. MiCA will regulate crypto-assets and service providers across the EU’s single market for the first time when it takes full effect this year. The move is part of a global trend towards regulating crypto assets.
Its backers hope setting clear Europe-wide rules will both support innovation and protect consumers better against risks like hacking, fraud or misleading claims. All providers of services around crypto-asset storage and transactions will need authorization and must meet standards around IT security, safeguarding user assets and more.
As part of the legislation, issuers of new crypto-tokens will face transparency requirements, including publishing a properly documented ‘white paper’. Certain extreme forms of tokens will be banned, such as algorithmic stablecoins without external stabilization mechanisms. And companies issuing stablecoins tied to a fiat currency must hold reserve assets to fully back them.