Police do know about this and can (hypothetically) check to see if there is another encrypted volume inside. Also didn't Truecrypt shut down because they had some huge security vulnerability.
Most implementations so far have been kind of shaky (e.g. relying on having a bunch of "unpartitioned" space on the drive, which would seem weird), but it's technically feasible to have a single encrypted volume which decrypts to two results based on the key. For plausible deniability, one would have to make sure the clean volume had recent browsing history, et cetera. Maybe this is a real-world use for ad-browsing bots.
How can they check? It's certainly possible that Truecrypt has some implementation issues, but I can't see why it's not theoretically possible to do this well.
Well, driving around in a $300k car that you can't explain purchasing is a HUGE clue that you're a drug dealer but it's not enough on its own to charge you with anything. You won't get thrown in jail until you cough up the location of the stash house based on the car alone.
What do the proponents of these encryption laws expect the penalties to be for 'suspicion of possession of encrypted material'? I don't see any way to create effective deterrents here without making it easy to persecute anyone for any reason. Imagine cops planting USB keys with random bits on minorities they don't like, etc.
Edit: or worse, 15-year-olds planting USB keys with random bits on teachers they don't like and claiming it's CP and then watching them get fired and go to prison for 'refusal to decrypt' shudder
Sure, everything you said is correct. But the alleged drug dealer will probably face an IRS audit and get charged with tax evasion, based on the fact the he has an unusually expensive car. The car's existence will provide investigators with a path to follow in tracking down the suspect's finances, laundering activities, income sources, etc. It's not the entirety of the case (like you said, not enough to charge you with a crime), but it is a clue that an investigator can launch from.
Just because something isn't proof, doesn't mean it isn't evidence. And if I am doing something my government disproves of, I'm going to try and be mindful of all evidence that can expose that. (Note that I'm NOT making any value judgements here) If an inner-hidden volume isn't as hidden as I thought it was, then that's a security risk to me.
a) 'forced decryption' legislation is toothless. That is, suspicion, but not proof that encrypted material exists and is within your power to decrypt is not enough to throw you in jail for contempt or some other charge.
b) It becomes extremely easy for bad actors like racist cops or asshole teenagers to frame anyone and everyone they want and put them in prison forever.
The first layer contains something embarrassing but legal like gay porn, and the second layer contains the stuff you really want to hide.
You just unlock the first layer and act really embarrassed if forced and never acknowledge the existence of the second layer.