Security & Fraud

AML Scandals Hamper Estonia’s Digital Society Ambitions

After being implicated in one of the largest money laundering scandals ever, Estonia is struggling to realize its dream of becoming a digital society, according to ReutersThe country’s top banking regulator has cautioned that Estonia is vulnerable to unclean money and potential sanction breaches, stemming from the Estonian branch of Danske Bank that was mired in scandal.

The scandal adversely affected the financial industry, and it involved money from ex-Soviet states like Russia being funneled through the branch. The money amounted to about €200 billion (more than $229 billion USD) of suspicious payments, and offshore shell companies were used to hide it.

As a result, Danske Bank is at the center of a number of investigations by Denmark, Estonia, Britain and the U.S. Now, one of Estonia’s biggest innovations, eResidency, where foreigners can get a digital identity card that lets them use online services through government portals, may potentially be a fast route for online money laundering.

Many of Estonia’s eResidents bank in the country, but live abroad.

“The lesson of Danske is, I hope, enough for us,” said Kilvar Kessler, head of Estonia’s financial watchdog, Finantsinspektsioon. “You onboarded customers, which were offshore companies. Now, eResidents. Exactly the same questions will be asked. Who are they? Why do they need a bank account in Estonia?”

Anyone can apply for eResidency, including citizens of North Korea and Iran. Many Estonian banks only allow eResidents to open bank accounts after they prove their identity and ties to businesses in the country. Kessler has been pushing for more oversight and vetting of applicants.

Ainar Leppänen, head of SEB’s retail banking and technology in Estonia, said the bank looks closely at foreigners without “a clear link to the country,” and that it will perform background checks on those individuals.  Other banks said similar things, and some just generally decided to avoid foreigners altogether.

“We don’t see a business case here right now,” said Erkki Raasuke, Ceo of Luminor, one of the biggest banks in the Baltics. “The potential downside, if some of the anti-money laundering or sanctions-related risks would materialize, can be significant.”

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