A Guide to Anti-Money Laundering for Crypto Firms
As part of Estonia’s mission to become ‘the world’s most advanced digital society’, the government established the e-Estonia program. e-Estonia was put into action in 1996 through the Tiger Leap Initiative, a roadmap to develop the country’s IT infrastructure. This forward-thinking approach led to Estonia pioneering a wide range of digital services including:
- 1996- E-banking
- 2000- Online tax portal
- 2002- Digital ID and signatures
- 2007- Cybersecurity
Estonia’s e-residency program, which launched in 2014, has made Estonia a popular destination for fintech startups and financial institutions looking to expand or open branches in the EU. E-residency allows people from all over the world to apply for a government-issued digital ID which gives them access to Estonia’s business environment. Holders can use this ID to establish a company with an EU presence and run it from wherever they’re based, including opening a bank account and managing payments. To date, 85,000 e-residents have signed up and paid more than €63 million in taxes.
The Estonian government has even launched an e-Residency marketplace, which provides information about selected banking, blockchain, crypto and insurance firms in the country, to help other firms select the right vendors.
The emergence of Estonia as a fintech hub means the country’s regulatory environment is of interest beyond its borders, and it could have implications for the growth of the fintech sector, particularly crypto firms, as well as other digital disruptors across Europe.
What is the FIU Estonia?
Estonia’s regulator is the Financial Intelligence Unit (FIU) of Estonia. Established in 1999, the FIU became an independent government agency at the start of 2021 under the jurisdiction of the Ministry of Finance.
The FIU’s primary responsibility is to monitor transactions as part of Estonia’s efforts to combat money laundering and terrorist financing. According to the country’s Money Laundering and Terrorist Financing Prevention Act (see below), companies that fall under the FIU’s remit, which covers the entire financial sector including virtual currency wallets, must report any suspicious activity, unusual transactions or failure to adhere to sanctions. The FIU then shares this information with the Police and Border Guard which uses it to initiate criminal proceedings.
A separate body, the Finantsinspektsioon (the Financial Supervision and Resolution Authority), is responsible for supervising participants in the financial sector including banks, insurance companies, investment firms and payment providers. The Finantsinspektsioon also manages crisis resolution.
Anti-money laundering (AML) in Estonia
In addition to the EU’s anti-money laundering directives, the primary money laundering regulation in Estonia is the Money Laundering and Terrorist Financing Prevention Act which was passed in 2017. The act was amended in January 2020 to cover virtual currency service providers so they receive the same treatment as other financial institutions. As a result, crypto firms must:
- Revise internal anti-money laundering procedures
- Appoint a compliance officer
- Conduct a ‘fit and proper test’ to confirm the firm’s management has the relevant experience and education
- Establish the firm’s main place of business as Estonia
- Make sure it has a payment account with an institution registered in Estonia or the EU
The amended regulation had an immediate impact on Estonia’s crypto sector. In 2020, the Ministry of Finance withdrew licenses from over a thousand firms to reduce the risk of money laundering after it emerged that many were taking advantage of the country’s e-residency program to serve customers in the US, Russia, Latin America and Asia.
In October, the crypto sector came under further pressure when FIU director Matis Mäeker complained that the substantial profits of crypto firms flow to other countries instead of benefiting the Estonian economy. Mr Mäeker claimed the FIU was considering tightening licensing rules and raising minimum capital requirements from €12,000 to €350,000.
How to comply
The first step in complying with AML regulations in Estonia is to become familiar with the sixth and latest money laundering directive from the EU (6AMLD). 6AMLD introduced several updates which members states had to impose into local law by June 3rd 2021:
- Legal innovations to launch criminal proceedings, including 22 predicate offenses which must be outlawed
- Broader scope of criminal liability to cover legal persons such as limited liability companies, publicly listed companies and partnerships
- Longer minimum prison term for individuals and new punishments like fines and disqualifications from commercial activities
- Guidance to improve international cooperation in criminal proceedings
Compliance teams should also review and understand Estonia’s regulatory framework, especially the Money Laundering and Terrorist Financing Prevention Act, and adjust their risk-based approach to meet the country’s requirements.
Finally, compliance teams should monitor the potential impact on the finance sector of the latest developments in Estonia’s regulatory environment. Of particular importance is the country’s efforts to find a balance between promoting its e-residency program and concerns that foreign companies use Estonia as a base without contributing to economic growth.
Comply with Estonian AML Regulations
To find out more about EU regulations that apply in Estonia, download our 6AMLD report.
Alternatively, request a demo to explore our transaction screening and customer screening/monitoring tools in more detail.
Originally published December 21, 2021, updated December 21, 2021
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
Copyright © 2022 IVXS UK Limited (trading as ComplyAdvantage).