Home Fraud, Error and Debt HMRC seeks ‘strategic insight’ as part of crypto investigation tools supplier hunt

HMRC seeks ‘strategic insight’ as part of crypto investigation tools supplier hunt

HMRC: ‘considering the future of cryptoasset investigation services’; inset: Global Government Fintech's article (from 28 April 2023) on the department's ongoing work with Chainalysis

HM Revenue & Customs (HMRC) is on the hunt for ‘strategic insight’ into the volatile world of crypto-currencies as it strives to ensure it is making the most of technology in its battle against crypto-enabled money laundering.

‘HMRC [is] considering the future of cryptoasset investigation services and would like to invite suppliers to provide an in-depth overview of the types of crypoastsets and cryptoasset investigation tools and ancillary services in the markets, as well as some strategic insight as to what this fast-growing market may evolve into as it matures,’ states a ‘cryptoasset investigation tools’ prior information notice.

‘While traditional money laundering methods are still favoured by criminals, technology is transforming the financial services landscape,’ the notice, published on 27 June, states. ‘With the growth of the digital economy, money launderers are looking to exploit these new technologies due to their increasing prominence, their relative ease of use and most importantly the consistent lack of transparency.’

The UK’s tax, payments and customs authority currently has a one-year contract with New York City-headquartered ‘blockchain data platform’ company Chainalysis for the provision of a ‘cryptocurrency investigation tool’. This contract carries a value of £844,604 (about $1m) and runs to 31 March 2024.

The newly published notice states that HMRC is looking to award a 12-month contract with an ‘estimated total value’ of £1.8m (about $2.27m). Although this value suggests a more-than-doubling of spend (compared to Chainalysis’s contract), Global Government Fintech understands that the £1.8m is a proposed maximum two-year spend should the awarded contract be renewed for one year.

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Crypto scams in spotlight

Chainalysis provides data, software and research to government agencies, exchanges and financial institutions in more than 70 countries, according to its marketing. Its products include ‘Chainalysis Reactor’, which is described as investigation software that links real-world entities to cryptocurrency activity.

HMRC’s current engagement with the company follows an earlier contract with the department from 1 April 2022-1 April 2023 focused on ‘Chainalysis Reactor certification for up to 300 users’ and the provision of training during which participants would ‘use real-world examples to derive actionable blockchain intelligence’. This contract was valued at £45,000.

“This [Chainalysis] tool is one of many specialised tools we have to ensure everyone is paying the correct amount of tax, including those who hold crypto-assets,” an HMRC spokesperson told Global Government Fintech in April (for our article on Chainalysis’s current HMRC contract). “It is important we keep pace with new developments in finance and technology by investing in our ability to tackle illicit financial activity, including tracing suspicious crypto transactions.”

Crypto-asset activity in the UK is significant. The country was one of just two ‘high-income’ nations, alongside the US, in the top 20 of the ‘Chainalysis 2022 Crypto Adoption Index’. But the number of reports to the UK’s Financial Conduct Authority (FCA) of crypto-asset scams increased from 1,619 in 2019 to 6,372 in 2021.

Chainalysis already has a contract worth £399,204 with the FCA running from July 2022-June 2024 focused on the analysis of crypto-asset blockchain data. It also had a contract worth £293,988.25 (from March 2020 to March 2021) for the ‘provision of [a] cryptocurrency analytics and tracing tool’ to the Police and Crime Commissioner for Derbyshire (an elected official in a county in the English Midlands).

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Tender is the (anti-fraud) fight

HMRC’s efforts are being led by its Fraud Investigation Service (FIS), which was set up in 2016 and is responsible for civil and criminal investigations into the most serious fraud, money laundering and wrongdoing. Senior FIS figures include chief investigation officer and FIS director Richard Las CBE.

The prior information notice states that the department wants to ‘advise the blockchain and technology industry that HMRC is considering undertaking a tendering exercise to award a new contract for the provision of crypto fraud investigation tools’; and that it is seeking information from the market on best practice implementation ‘and implementation periods’.

The department is planning what it describes as ‘market engagement days’. These are slated for the week commencing 17 July.

It is envisaged that the procurement process for a ‘software package and information systems’ will launch in ‘July/August’ 2023.

The notice includes a caveat that the procurement ‘may not progress in this or any other format’ and is subject to ‘internal governance and approvals’.

Taxing matters

Authorities worldwide have been under pressure to work out how existing tax rules and regulations more broadly should apply to crypto.

In the UK taxpayers will need to state crypto profits separately when filing self-assessment returns from the 2024-2025 fiscal year, according to the government’s Spring Budget 2023. HMRC has just (22 June) closed an eight-week consultation on ‘the taxation of decentralised finance (DeFi) involving the lending and staking of crypto-assets’.

“The vast majority pay the tax due and we are looking at ways to help customers with crypto-assets get their tax right,” HMRC’s spokesperson told Global Government Fintech in April.

Economic secretary to the Treasury Andrew Griffith spoke in April about “fostering innovation by making the UK a safe jurisdiction for crypto-asset activity”. The government has recently (30 April) completed a consultation on plans to ‘robustly’ regulate crypto.

*** Chainalysis published a blog earlier this week stating that its tools had ‘played a role’ helping Israel’s National Bureau for Counter Terror Financing (NBCTF) in helping to seize cryptocurrency from Hezbollah, describing its work as tackling ‘sophisticated state actors… using crypto to funnel money across borders’.