In an interview with e-Residency director Ott Vatter, ERR journalist Toomas Sildam read the Internal Security Service's (Kapo) annual yearbook and learned that e-Residency is directing less of its search for new e-residents toward third countries and more toward Europe, as it is safer. Also discussed were how e-residents have held up against the coronavirus crisis and what countries are hijacking Estonian e-residency.
Toomas Sildam: What high school did you graduate from?
Ott Vatter: Tallinn English College.
TS: Estonia has a successful program called "Back to School." Picture yourself being invited to guest teach a 9th grade class at English College. And Juhan or Madli raises their hand and asks, "Tell me, what is e-residency? Who are e-residents?" What do you respond?
OV: I'd say that e-residency is a digital identity card issued by the Republic of Estonia, and its primary purpose is to handle business remotely and internationally.
TS: How did you feel reading about yourself in Kapo's annual yearbook?
OV: I was happy to read it. We've been in active contact with Kapo; this didn't come as a surprise to us. And I'm sincerely glad that Kapo launched this public discussion. I have always believed that risks should be discussed publicly as well. With each new development come positive things, but there also come risks, and risks must be mitigated.
TS: Kapo claims that the amount of e-residents from countries belonging to a risk group is increasing. What are risk countries?
OV: I can't say who these risk countries are...
TS: Kapo can — India, Nigeria, Pakistan, Bangladesh, Iran, Egypt, Syria, Cameroon. Only half of e-residents who have established a business here are EU citizens. How concerned are you about the rest of them?
OV: Actually, what are they referring to? That the popularity of e-residency has increased in [non-EU] third countries. But our focus is on European countries; we don't focus on third countries.
I am glad that Kapo has caught these [suspicious people] during the application process and that they haven't passed security checks.
TS: Let's look at Kapo's claims. Number one: "There is considerable interest among Estonia's e-residents in the virtual currency industry, which offers anonymity." How should this be translated?
OV: We need to define what constitutes "considerable interest." By now we have conducted our own study of virtual currency licenses, of which 1,500-1,600 have been issued, some 100 of them to e-residents. If we take 70,000 e-residents and know that 100 have applied for a virtual currency activity license, then I wouldn't say that is considerable.
TS: Kapo claim number two: "E-residency is seen as an opportunity to obtain a Schengen visa and various schemes are used for this purpose."
OV: It's true that even prior to e-residency, people were interested in entering the Schengen area using all kinds of tricks. The name "e-residency" may be misleading here, as some may expect that now they can enter the Schengen area, although we have always confirmed that this is not true [that e-residents don't automatically receive Estonian visas].
TS: Kapo claim number three: "KAPO has identified individuals with extremist and terrorist ties among applicants for e-residency." Has Kapo also told you, "No no, we will not accept this person as an e-resident for security reasons"?
OV: To clarify, the Police and Border Guard Board (PPA) conducts background checks on applications, who in turn include Kapo. If you read their text, then it says identified "among applicants." And these have remained applicants. I am glad that Kapo is saying this publicly. Anyone can apply for e-residency, but we hope that they will remain just applications in suspicious cases.
TS: Kapo claim number four: "Failure to take these factors into consideration would damage the image of the e-residency program, the Estonian
economy and the country in general — not to mention the security risks and the threat of criminal activity." Pretty harsh words from Estonia's biggest security authority.
OV: I wouldn't say that they're that harsh. Prevention is Kapo's job. The point of their yearbook was to spur discussion in society.
TS: About what?
OV: Look, concrete steps have already been taken toward mitigating risks. Beginning this July, virtual currency service providers' activity license applications will be subject to additional requirements in order to restore control over this field of activity and keep businesses off the market that don't actually operate in Estonia and are not possible to monitor in Estonia.
Once again, regarding risk countries — we have not focused on third countries for e-residency; we are focusing primarily on citizens of European countries.
TS: They make up just half of all e-residents.
OV: I'm saying that we are currently focusing primarily on EU citizens.
TS: Is this the result of a lesson learned?
OV: This is a completely typical development. When the e-Residency program was established, we focused on the number of e-residents and did not know exactly what the program would lead to or what its monetary value would be to the Estonian state. Now, five years later, we can say that the main benefit and economic impact comes primarily from European countries.
TS: Have there been any known incidents of any of our e-residents being involved in less-than-honest and -transparent things?
OV: That is the prerogative of the PPA or the Tax and Customs Board (MTA). Of course, every economic environment has its bad guys...
TS: Have you received feedback regarding such e-residents?
OV: I believe that the PPA has received such feedback, and if it has proven true, then the [e-resident's] certificates have been blocked as well.
TS: How many such cases have there been?
OV: That is not for me to disclose; you'll have to ask the PPA.
TS: How many digits are we talking?
OV: One digit, in percentage terms. There haven't been many such incidents.
TS: It's as though your e-Residency program has been frozen for now. Foreigners are still required to travel to Estonia in person and prove that they are who they claimed to be in order to receive their e-resident ID and open a bank account, but Estonia is locked down and nobody can get in.
OV: Yes. Right now it's difficult for people to pick up their e-residency cards too, because they can't leave their homes, but you need to pick them up in person from the embassy.
On the topic of bank accounts — e-residents no longer have to own a traditional Estonian bank account. Legally they can have an account at any EU member state's payment institution. The average e-resident does not need a loan or credit card, and they do not need a state guarantee. Transferwise or some other such fintech company suits them.
TS: Perhaps Estonian companies serving e-residents are just naive in encouraging the government that now is a good time to start issuing digital ID cards to new e-residents contactlessly?
OV: If we look at the [current] ID card, it is 15-year-old technology. You don't necessarily need a physical card. I think these companies' argument was based on the fact that now is the right time to react — if people are sitting at home but cannot be active in entrepreneurship, then we should enable them to receive this card contactlessly.
TS: There are definitely several powerful authorities in Estonia that issue their own yearbooks and don't want e-residency to essentially become an online service.
OV: This wouldn't mean that we wouldn't have background checks. It would all be the same, you just may not have the physical card. Everything else — international databases and fingerprints — would remain. We certainly wouldn't reduce security.
TS: E-residents have to provide their fingerprints to the Estonian state?
TS: Demand for the e-Residency program and starting a business in Estonia is bigger than ever before, said Allan Martinson of Xolo. He isn't exaggerating, is he?
OV: He isn't exaggerating. Same reason as I just cited before — people are sitting at home, some have been let go from their jobs, some have long since thought about starting a business, but they can't do it because they don't have the opportunity to leave home.
TS: They're sitting somewhere in the western end of Portugal, they fill out an application to become an Estonian e-resident and how will that improve their lives?
OV: It doesn't matter where they're sitting. With this [e-resident ID] card, they can start a business from wherever. For example, someone comes up with an innovative new protective mask. They have the means for production, but they don't have a business or a developed sales process. Even prior to the crisis already we were seeing that the number of freelancers worldwide is skyrocketing, because people aren't working for the benefit of one company for 50 years anymore; they have several clients, they want to travel all the time, be in different places... That is why virtual entrepreneurship has seen such growth.
Entrepreneurs proposed that we should ditch the physical card in the current situation. It is currently still required, however, and it must be picked up at an embassy, where a representative of the Estonian state confirms that you, Toomas, are indeed Toomas.
TS: How many of the 67,000 e-residents have contacted you over the past month and asked about what is going on in Estonia?
OV: I can't tell you an exact number, but several e-residents have written and asked what would become of their company, whether the Estonian state has any measures for them and what generally lies ahead in Estonia.
TS: What answers are they getting?
OV: Mainly we are trying to offer e-residents the same types of services as offered to Estonian entrepreneurs. Legally speaking, an Estonian company is an Estonian company, regardless of who its owner is.
State measures are currently for businesses with employees registered specifically in Estonia. Unfortunately, most e-residents' companies do not qualify here, as they are freelancers and are not registered as employees of their own businesses.
But we ourselves are actively working on offering background information to e-residents. We have at least three webinars a week with partners, accounting firms and lawyers who advise e-residents regarding how to navigate these difficult times.
TS: In other words, people who work for e-residents will largely be left out in the cold?
OV: We can't yet say that right now, as support measures for microentrepreneurs have not yet been published. Initial support by the Estonian state has been aimed more toward big companies.
TS: Do you have any idea of how many of the 13,000 companies started by e-residents may have to cease operations due to the crisis?
OV: I'd rather not evaluate this, but it will certainly take a heavy toll. But there are also entrepreneurs who are seeing this [current period] as an increase in turnover. If we look at the IT field and digital developments, many companies are offering services that are just starting to come into demand. Innovation in this field — such as how to conduct video meetings, and how to help one another using IT tools.
A few weeks ago, we organized a global hackathon. The work track competition was won by an e-resident from Sri Lanka, who, through his Estonian-registered company, developed a service with which those who need help can describe their problem via a mobile app and receive offers for help. He has 22 employees worldwide, whom he manages via his Estonian company, and he said that once borders reopen, he would be relocating his business to Estonia physically as well.
So there are winners too, as is the case in crises. It can't be said that things are going badly for everyone.
TS: Estonia has advertised that it offers its e-residents a secure and transparent EU economic area in which they can be active remotely. Has this security remained?
OV: Of course it has. The EU remains a secure place, and Estonia's economic environment likewise. If we compare it with others, then when you conduct business via a digital identity, your every step leaves a trace, and currently we don't know of a single instance of a digital identity being hacked.
TS: You yourself have dreamed of Estonia having a unique competitive advantage both during and after the crisis if banks were capable of offering customer-friendly means of opening bank accounts remotely. Are you kidding? Banks won't take such a risk.
OV: When the e-Residency program was created, it was assuming that banks would open accounts virtually.
TS: The e-Residency program was established before Estonia was hit by money laundering scandals.
OV: Agreed. But I nonetheless believe that opening bank accounts virtually would be a competitive advantage. Our banks' current competitive advantage is background checks, and it has very strong know-how.
TS: Of banks operating in Estonia, only LHV serves e-residents.
OV: That's not true; there are other banks as well. Let's just say that it is mainly LHV and Swedbank that serve e-residents.
TS: I read what Estonian e-resident Sapan Aryal, a game developer who lives in Nepal said — that the e-Residency program is useless for many due to the gauntlet of opening bank accounts.
OV: He is probably disappointed because he hasn't been able to open an account with a financial institution.
As the proportion of nonresidents [at banks] has generally been reduced, situations may arise in which certain countries' citizens have been unable to open a bank account. Not everyone may need a traditional account either, but it is necessary for certain types of business activity.
TS: Aryal said that the bank accounts of many e-residents' already established Estonian businesses were closed without any explanation and that many e-residents believe that registering a business in Estonia is too risky now.
OV: The state has never promised that you will definitely be able to open a bank account. Whether or not they will open one for you is still the bank's responsibility and business decision. The state cannot guarantee this, unfortunately.
TS: It must be a pretty lucky break when Estonian banks will open an account to an e-resident they are meeting for the first time and who hasn't previously had a basis for business here.
OV: It may not be. There are very clear customer segments in which banks are interested even now. For example, individual entrepreneurs in the IT field. The primary issue for the bank is that they must understand your business model and must be informed about where or whom your clients are. And if they understand where your money is from and everything is good to go, then a bank won't say no to a client.
TS: Skeptics are saying that it's been five years since the launch of the e-Residency program, there is no startup aura anymore, it lacks freshness. How would you respond?
OV: The beginnings and launch of all such programs are cool and great. E-Residency was likewise launched with great momentum. But there are many external factors that affect it. Estonia is not alone in the EU or in the financial world. As we see changes in the banking sector in attitudes toward nonresidents — this is normal development.
I believe that e-residency has matured, and perhaps the novelty has worn off as a result. But we have replaced freshness with economic impact and a more mature program.
TS: Last year, e-residents paid more than €17 million into the Estonian state budget.
OV: Yes, that is certainly part of it — direct taxes and indirect revenue which have come to the Estonian state via e-residency. Speak nothing of soft power, which is very difficult to measure.
TS: What is your soft power?
OV: Estonia is very clearly known worldwide today for its e-residency, at least in the IT sector. If we're talking about global names, such as Skype or Transferwise, then e-Residency is certainly along the same lines, and a direction in which countries should move in the future. That you aren't tied to your citizenship and state borders, but rather compete in the name of talent with what you've got to offer.
TS: A cosmopolitan factory?
OV: That may be an exaggeration, but...
TS: You guys have liked grand imagery. At the launch of the program, you used the slogan "10 million" — that's how many e-residents we were supposed to end up with. Estonia probably won't reach this amount?
OV: I'd never say never. We don't know that. But the focus right now is on economic impact rather than large numbers of e-residents.
TS: You predicted a total tax and fee revenue of €25-30 million from e-residents this year. This much money will not be coming in. What will actually become of e-residents and e-residency?
OV: This [hoped-for sum] may decrease, but e-residents' businesses have gotten by quite well in the virtual world. There is little Old World industry or physical movement of goods there... I believe that e-Residency as a program and e-residents' businesses will survive.
TS: Last year you received €3 million for maintenance over a two-year period, but you are allegedly having trouble spending it. Are you out of ideas?
OV: [laughs] I don't know where you got it from that we're having trouble with that. Rather it is difficult in the state sector due to major procurements; they all take a long time.
TS: During Brexit you plastered the London Underground with ads calling on Brits to come to Estonia and establish their businesses here.
OV: So we did.
TS: How many came?
OV: I can't tell you a number of businesses off the top of my head, but percentage-wise, we saw 30-35 percent growth in the number of e-residents from the U.K. It was clear that Brits felt the need for a body in the EU.
That was a successful campaign because it was easy to explain our e-Residency program. Everyone understood what Brexit was and how e-residency would create value there.
TS: Estonia is the first and thus far only country in the world that offers e-residency. What do you think, will Estonia remain the only one?
OV: Definitely not. At the end of last year, Dubai introduced its own e-residency, called the "virtual company license," which was established using our logic. The Seimas in Lithuania passed a decision to establish e-residency there by 2021 as well. And Portugal has likewise introduced its own e-residency plan.
We are seeing how more and more similar programs are being developed, and that is completely natural that such welcome competition takes place between countries for modern companies, for the best environment.
TS: What have I forgotten to ask about?
OV: In light of the coronavirus... This is a very big opportunity for our country. We ourselves are used to digitally signing things and doing things digitally in our digibubble and we assume that all societies function the same way. But that isn't the case at all. The entire world is at a standstill because they are used to doing these things physically. But e-residency is one way you could manage your business virtually and keep your activity going. This is a major value that we should be taking better advantage of.
TS: Thousands, tens and hundreds of thousands, of people in Estonia think that the coronavirus is a curse unleashed upon us...
OV: Of course it's a curse. There's nothing pleasant about it. But one must find something positive in anything unpleasant. We as a state have the opportunity to exit this crisis in a positive way.
TS: You're a proponent of German President [Frank-Walter] Steinmeier, who said that the pandemic is not a war but rather a test of our humanity?
OV: [laughs] I can't say that I agree 100 percent with that.
But we as a state overcame the Bronze Soldier crisis [in spring 2007], established a proper cyber unit and brought the NATO cyberdefense center here. We were able to learn from the [money laundering-related] banking crisis, and by now have achieved the know-how for conducting background checks on businesses and selling this internationally as well.
What we can learn from the coronavirus crisis is that the Estonian state has a unique, world-class value that we are capable of offering other countries — we are continuing to function; we have done this for 15 years. There is a silver lining to every crisis.
We are capable of functioning as a society [thanks to digital solutions]. There are some 40 institutions in the EU, and eight of them contacted us — "Listen, we saw that digital signatures are working for you, but work has come to a standstill at our institutions. How do you do this?" Their digital solutions were built in such a way that things were being printed out in one office and being taken by cart to another office.
The situation is bad, but we have it better than others do.
The e-Residency program traces its roots back to an idea submitted by Taavi Kotka, Siim Sikkut and Ruth Annus to a contest held by the Estonian Development Fund in 2014. The program first launched on December 1 of that year.
E-Residency offers foreign citizens secure access to the e-services of the Estonian state. The holder of an e-resident's digital ID card can digitally sign documents as well as log into all online portals and information systems accessible via Estonian ID card. E-residents' digital ID cards do not qualify as identity or travel documents and do not include a photo. E-residency does not grant citizenship, tax residency, permanent residency or permission to enter Estonia or the EU.
Editor: Aili Vahtla