Estonia has the world’s lowest risk of money laundering, according to the latest Basel AML Index. Our country overtook Finland to move from second place in 2018 to top spot this year.
Wait, what?!
I know there are a lot of people who think there must be some mistake. Surely, they mean Estonia is first in the world for supporting money laundering, not first in the world for combatting money laundering.
Actually, it’s correct. The Basel AML Index is a very respected annual ranking that assesses how a country reduces the risk of money laundering through various factors such as transparency, accountability, legal frameworks, and political risks. Estonia ranks the best in the world in those combined areas.
If I have more time next week (and people are interested), I can go into more detail about why. Right now though, I can see there is an enormous gap between the reality and perception of how well Estonia deals with money laundering so I want to explain some of the biggest misunderstandings (quickly before my newborn baby wakes up).
But what about those huge Estonian money laundering scandals around Danske currently in the news?
This may be currently in the news, but the actual incidents happened quite a while back and were closed down around 2014. The fact that you are now reading about it is a good thing because it is being dealt with seriously. Even the original whistleblower in this case has praised the Estonian government’s response.
However, there’s a key detail in these cases that often gets overlooked. Yes, it involved an Estonian bank branch (although of a non-Estonian bank), but the suspected money launderers used shell companies from other countries, not Estonia. They deliberately avoided doing their activities within Estonia’s business environment because Estonian companies have one of the highest levels of transparency in the world. In fact, the concept of a shell company doesn’t exist here because key details about all Estonian companies are publicly available — such as ownership, financial information, and the operating address in Estonia where someone must be physically present and answerable for the company.
These cases show that, even years ago, criminals were growing cautious about operating in Estonia’s business environment.
But I heard that more than $1 TRILLION DOLLARS crossed Estonia’s borders over the last decade?
This was a claim made in RT and other related websites last year suggesting that Estonia may be the ‘money laundering capital of the world’. According to the article: “The Estonian central bank has admitted that it saw more than $1 trillion in money flows between 2008 and 2017.”
These figures were then picked up — unquestioningly — by other news outlets around the world, which repeated the suggestion that this was evidence of Estonian money laundering.
The figures are roughly correct, but this covers all cross-border transactions in and out of Estonia during that time. How this is evidence of money laundering isn’t explained. The insinuation seems to be that this number is really high therefore there must be lots of money laundering taking place.
So, is it a high number? No. In fact, this number is significantly LOWER than the European average for cross-border transactions per capita during that period!
If you want to go through this in more detail then the Bank of Estonia did an excellent summary here. They don’t just ‘admit’ to the figures, as reported. They are actually happy to explain them in detail.
But things are different now. Estonia now lets anyone start a company from abroad through e-Residency.
Actually, almost all countries allow people to start companies from abroad. E-Residency didn’t invent the idea of non-residents operating in our business environment. By launching e-Residency, Estonia merely offered a much more convenient and secure way to do this (both for the e-residents and the Estonian state overseeing them).
Estonia’s business environment is incredibly transparent and our digital infrastructure (built on top of our digital ID system) enables the state to verify the data that this transparency is based on. Bear in mind that many countries are trying to catch up with Estonia’s levels of transparency in order to respond to money laundering risks, but they are still at a significant disadvantage without a digital ID system to verify data (such as who is actually operating a company). These are part of the reasons for why Estonia ranks so well for a low risk of money laundering. For contrast, look at a country like the UK for example (which happens to be where many of the shell companies in the Danske money laundering scandal were reportedly registered). Companies House, which oversees the UK business register, has almost no capability or powers to verify and punish inaccurate data submitted to its register such as who is the owner of a company. That leads to cases like this.
E-Residency then enables Estonia to extend this secure system to non-residents operating in our business environment too. However, e-Residency is still a privilege, not a right. Applicants have to undergo background checks with the Estonian Police and Border Guard then are continuously monitored while they operate digitally in Estonia.
In fact, not having an e-Residency programme would be riskier for Estonia than having one. Here’s an article I wrote for ERR arguing this in more detail:
Then why do so many people around the world want to be e-residents?
Because ease of business is very different to ease of criminality. E-Residency is popular with legitimate entrepreneurs who value having a trusted company that they can conveniently run online through convenient e-services. Many of them welcome the high levels of transparency and oversight that enable them to operate as e-residents.
Criminals value very different things though, like lack of transparency and lack of oversight. Unlike e-residents, they don’t particularly care about, for example, the user-friendliness of our e-services because they are not genuinely doing daily business.
So why is there such a huge gap between the reality and perception of how Estonia successfully combats money laundering?
It’s clearly absurd if the country that objectively has the lowest risk of money laundering in the world is also widely believed to be the money laundering capital of the world.
Estonia is a great place to do business, whether you live here or not, and that’s not despite the way it deals with issues like money laundering — it’s because of how well it does.
Perhaps, as Estonians, we’ve been a little too cautious about discussing this issue. That’s understandable while investigations into those older money laundering cases are ongoing, but Estonia’s success is built on openness and there’s a lot of misinformation that we should respond to.
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