Adam Rang: E-Residency helping Estonia combat criminality ({{contentCtrl.commentsTotal}})

Adam Rang.
Adam Rang. Source: Author's personal collection.

Is it contradictory for Estonia to both welcome e-residence as well as deter nonresident criminals? Adam Rang, an Estonian entrepreneur who formerly worked at Estonia's e-Residency program, argues that one is not possible without the other.

Estonia is currently working hard on two objectives that seem a little contradictory.

Our country is encouraging people around the world to become e-residents so that they can easily operate in our business environment without having to set foot here. However, our country is also working hard to combat risks associated with nonresidents operating in our business environment, such as money laundering.

The tension between these two objectives was highlighted yesterday in an ERR report, which quotes representatives of the Ministry of Finance and LHV seemingly taking different positions.

I think they both have valid points, but the way this debate is presented could create a false understanding of e-Residency, so I want to explain why welcoming legitimate entrepreneurs and deterring criminals are not contradictory. Developing e-Residency achieves both of these objectives for Estonia, and one is not possible without the other.

I'm not going to bore you all in this article by going over the benefits of e-Residency for e-residents, because the issue here is about whether the program is good for Estonia. But I'm also not going to bother going through the financial contributions that e-residents make to Estonia or how they are helping spread Estonian culture and influence globally.

All that's worth highlighting here is that e-residents pay more into Estonia in taxes and fees than Estonian taxpayers pay to keep e-Residency going, and yet that is a small proportion of their overall contribution to our economy. They can do that because e-Residency enables them to build successful Estonian companies.

So now I'm only going to discuss the risks to Estonia, because e-Residency makes a positive contribution even if we only focus on this topic.

E-residents by any other name

First let's clarify what e-Residency actually is.

E-residents are people who do business in Estonia from abroad. We call them e-residents because Estonia is a digital country where companies can be run entirely online through the use of a digital ID card, which Estonia can issue to these people abroad.

That first part is not actually special. Almost all countries allow nonresidents to do business from abroad, although you might not think so sometimes based on the debate around e-Residency.

In a way, all countries have e-residents in the sense that they have to manage relationships with nonresidents. They just don't call them e-residents or have a digital infrastructure that is as convenient and secure as ours, or a business environment that is as attractive as ours. The fact that they then also have less oversight of nonresidents doing business in their country (by not having an e-Residency program) is not a good thing either.

So we first need to acknowledge that Estonia, like all countries, will always have to consider how it manages its relationships with nonresidents. Our e-residents will still exist even if we stop calling them e-residents.

You can run but you can't hide

To get that digital ID card, though, e-residents have to submit themselves to background checks with the Police and Border Guard Board (PPA) before they can then operate in our very transparent business environment while leaving a digital trail that is monitored by law enforcement. Even if e-residents don't have bad intentions but are a bit careless with the rules of our business environment, such as by not submitting reports on time, then it will come to the attention of our authorities, who will issue warnings and offer help before switching off the card if the e-resident fails to comply.

That digital ID card is very convenient — and legitimate entrepreneurs happen to like convenience — but an ID card cannot be used for money laundering, and it does not provide new capabilities that help with money laundering. For example, a digital ID card can be used to easily manage an LHV account, but it does not mean that LHV is any more or less likely to provide e-residents with that account or change the way that LHV monitors the use of that account in line with their own rules.

Unlike legitimate entrepreneurs, however, criminals do not care much about the ease of doing daily business provided by e-Residency. The kind of jurisdictions that are attractive to criminals don't need to have user-friendly e-services or great ease of doing legitimate business globally from that country. Criminals value other factors, such as lack of transparency and poor legal oversight so that they can hide their activities behind "shell companies."

So they really do not like Estonia or e-Residency due to the police background checks, the digital trail, the monitoring, or the transparency of Estonia's business environment.

For example, Wednesday's article mentioned the suspected cases of money laundering through Estonia by nonresident banking clients that have made headlines around the world. It's important to note, however, that these suspects were not using e-Residency and were not running Estonian companies from abroad.

According to reports, "shell companies" from other countries were being used. In fact, the very concept of a "shell company" doesn't even make sense in Estonia, as anyone can look up key details about any Estonian company, including ownership and financial details, like any taxation paid. In Estonia, you can run but you can't hide your company.

At the same time, though, the same aspects that are a hassle to criminals are not just tolerated, but welcomed by many legitimate entrepreneurs because it enables them to operate with a higher level of trust globally. Without e-Residency, many legitimate entrepreneurs would have no other way to start a company that is trusted by customers, partners and investors. E-Residency works for e-residents precisely because of the enhanced checks on them.

Scale, expectations

Despite all of this, the representative of LHV was right to raise two important issues about e-Residency: scale, and expectations.

Risks to Estonia from e-residents are lower than risks to Estonia posed by nonresidents without e-Residency. However, if the e-Residency program continues to scale up rapidly, those smaller risks scale up as well. The logical thing to do, then, would be to scale up means of combating these risks, still paid for by the scaled up contributions made by e-residents themselves. This is already happening. The PPA is working closely with other state agencies to implement enhanced afterchecks on how e-residents are operating, and this has led to a very small number of e-residents having their cards deactivated for not following the rules properly.

If the problem were scale itself, then we could reduce the risks of criminality by nonresidents to zero if we simply banned all nonresidents from investing in Estonia, but that is not sensible — and neither is just reducing it instead either. No country bans foreign investment, and Estonia is not going to become the first country to do so.

The second valid concern is about expectations. We need to ensure that e-residents don't have expectations that they can automatically open an LHV account or automatically open an account with any other company. Every company has their own preferences for what kind of clients they want to serve, and the role of the state here is simply to help open up the market to ensure that there is as much choice as possible for e-residents and everyone else in our country.

As it happens, however, LHV does serve a significant proportion of e-residents as they do qualify for an account under LHV's own rules and in line with their money laundering risk management procedures. That's because one group of clients that LHV specializes in serving is single shareholder company owners with easily trackable incomes, including among nonresidents. Stripping away the jargon, that basically means freelancers and digital nomads selling their individual services online.

These people benefit the most from e-Residency, and they also happen to have low risk profiles, because if they are genuine entrepreneurs, then they have sold themselves publicly online a great deal already, and it is relatively easy to conduct due diligence on them by matching their account activities with their online public personas.

Develop further to further reduce risks

Estonia doesn't need LHV to serve every type of e-resident, though, because there are many more banks and fintech companies across Europe that are focused on serving other types of e-resident companies. Companies that focus on different types of clients can also focus on dealing with the associated risks. That's why the e-Residency program team has been focused on opening up the market, not wasting time trying to compel specific companies to serve everyone.

In order to reduce risks from nonresidents even further, we need to develop e-Residency even more. Fortunately, we have an excellent team at the e-Residency program (although I'm slightly biased), and all political parties are in agreement about this objective because it is clearly in Estonia's interests.

Perhaps Estonia should even question whether we still want foreign investors who are not e-residents, because it is more hassle and less secure for our state when nonresidents don't have e-Residency. Estonia could make it mandatory for Estonian company owners to have an Estonian digital ID card.

This is happening by default anyway, though, even without any changes to legislation. For example, our Tax and Customs Board (MTA) and our banks are switching off alternative methods for people who don't have a digital ID card, meaning that nonresidents are now being compelled in some circumstances to get e-Residency if they want to operate a company here.

E-Residency is well marketed around the world for what it can enable people to do — conduct legitimate global business with greater ease — but don't let that distract you from the essence of what e-Residency is. It's a trusted digital ID that lets trusted entrepreneurs run trusted companies through our trusted business environment.

Nonresidents make a significant positive contribution to Estonia in many ways, but the risks are lower when we can trust that they are e-residents.

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Editor: Aili Vahtla

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