Conflicting recent media reports have managed to place Estonia both at the top and near the bottom of the scale in its ability to combat money laundering. Last year's high-profile Danske and Swedbank scandals in particular caused some concern internationally, yet according to a recently published, respected index, Estonia actually went up one place (to first place, no less) since last year. Clearly, then, the picture must be a nuanced one. Entrepreneur and e-residency expert Adam Rang helps us paint a clear picture of the realities.
Out of roughly 200 countries on our planet, how well do you think Estonia ranks for its risk of money laundering?
There have been two different answers to this question in the media lately. Depending on where you get your news, you might think that Estonia has either the lowest or the highest money laundering risk in the world. But only one of these answers is based in reality, and the other is a false perception. It's important we know which is which because this issue goes to the heart of our international reputation and our ability to prosper as a country.
Headlines around the world have linked the country to a string of high profile money laundering cases centered around a branch of Danske Bank based in Estonia, the full scope of which is still under investigation. Then came the widely reported revelation that more than €1.1 trillion had crossed Estonia's borders over the last decade.
This is what led to Russia's state-run RT network to conclude in a report last October that "Estonia may be the world's money-laundering capital."
In my own work promoting Estonia as a place to invest and start a company, I've been questioned by journalists about that figure as well as the Danske scandal, which they think must surely undermine my claims that Estonia is a trustworthy location for business.
There are a few flaws with this line of thinking. The €1.1 trillion figure included all transactions from Estonian residents and non-residents between 2008 and 2017. I'm sure a lot of people reading this article will have sent money in or out of Estonia during that period, yet I'm sure you weren't all laundering money so a certain amount is normal (and desirable) for a healthy economy.
Nothing exceptional about Estonia's cross-border payment volume
As it happens, cross-border payments are usually several times a country's GDP, especially for smaller countries with open economies like Estonia so the normal figure would have been around… $1 trillion (most media reports referred to the sum in U.S. dollars rather than euros-ed.).
At 3.1 times GDP, according to the Bank of Estonia, Estonia's ratio is similar to the ratio for Belgium, France and Finland, and lower than in Germany. In fact, when you look at the value of international transactions per capita in Estonia then that is substantially below the European average.
As for the Dankse scandal. Well, that is currently in the news, but not currently taking place. The fact that you can now read about the ongoing investigations and repercussions is a good thing because it reflects how seriously the issue is being dealt with — and that is what affects Estonia's current anti-money laundering risks. In fact, the original whistleblower has praised Estonia's ongoing response.
And there's another key point that often gets missed in the media coverage about these cases.
They took place at the Estonian branch of a Danish bank so some arguments have focused on whether Estonia or Denmark should bare more responsibility for not spotting the problem earlier. Yet this discussion only focuses on the bank accounts that were being used.
A key part of this story is the shell companies that were controlling those bank accounts. Some Estonian companies were reportedly involved in the scandal, but these were otherwise real businesses connected to real people in Estonia who are now being held to account. The shell companies though were registered abroad in countries like the UK where transparency in business happens to be considerably lower than in Estonia, because company ownership is not properly verified there.
AML report and some caveats
Last week, to the suprise of many, it was then reported that Estonia actually now has the lowest risk of money laundering in the world.
The Basel Institute on Governance released its annual Basel AML Index, which assesses how countries around the world reduce their risk of money laundering through factors such as transparency, accountability, legal frameworks, and political risks. This credible and comprehensive independent report concluded that Estonia now ranks the best in the world in those combined areas.
One key part of the report warns that countries are generally performing very poorly when it comes to transparency about company ownership, even though this is widely agreed to be essential for the fight against money laundering. Authorities around the world simply don't have a clear understanding of who owns their companies. In Estonia, however, our digital ID system helps us verify who is operating Estonian companies. This information, along with many other key company details such as financial data and place of business, is publicly available online. Even Estonian company owners who don't live here are included in this transparent system through e-Residency and must appoint a local contact person who must be licensed, understand their responsibility to detect money laundering and can be held to account if they fail to do so.
Unfortunately, the report also notes that Estonia may not keep its lowest risk status for long. One of the indicators used to compile Estonia's high score this year is based on data that will soon be re-evaluated under a different methodology. That is expected to lower our score in future. However, this is still an incredibly comprehensive and credible report and its assessment about the threat of money laundering globally and its praise for Estonia's business environment are broadly accurate.
Without being complacent, we should be able to recognize the reality of how Estonia is building a trusted business environment and have the courage to correct false perceptions, such as those that would rank Estonia at the opposite end of the table for risk of money laundering.
The risk of money laundering will never be completely reduced to zero in Estonia or elsewhere, so we must continue to make progress in deterring, detecting and punishing perpetrators as the risks evolve. That needs to be done in co-operation with the rest of the international community, which could learn a lot from Estonia, especially when it comes to transparency.
Editor: Andrew Whyte