Cryptography expert Bruce Schneier, in conjunction with a research group, has studied the security of TrueCrypt, to see whether it meets the specifications for a 'Deniable File System' (DFS) – implemented in TrueCrypt as hidden volumes – and is really able to conceal the existence of a volume within a standard system environment.
Hidden volumes are intended to conceal even the existence of encrypted files. It allows a PC owner to deny having specific encrypted data on his PC. Even where a suspect in a police investigation reveals the key to an outer container in order to avoid a jail term, he or she can still deny the existence of a concealed inner container. This is known as deniable encryption. For the authorities, the only solution to this would be to make the private use of encryption itself illegal.