Crypto Platforms in Estonia Facilitate Fraud and Money Laundering, Report Claims
An investigative report by Vsquare, a network of media outlets focused on cross-border investigations, alleges that Estonia’s lenient licensing regime for crypto companies has been exploited by bad actors to commit financial crimes. The report reveals numerous cases of fraud, money laundering, and sanctions evasion linked to these crypto platforms. It also suggests that some of these entities have connections to Russia’s intelligence services and sanctioned banks. The estimated damages caused by these international fraud cases exceed €1 billion. The report highlights the example of Cyfroncapital OÜ, which had a valid Estonian crypto license and developed the mobile app for the Russian crypto pyramid scheme Finiko.
Flaws in Estonia’s Crypto Licensing System
The investigative report exposes flaws in Estonia’s crypto licensing system. The country introduced a crypto-friendly regime in 2017 to attract digital asset businesses. However, over a third of the licensed entities used the services of just three company formation agencies. These agencies hired individuals with questionable backgrounds, such as taxi drivers, welders banned from welding, jobless plumbers, and people living in state-funded homes, to act as anti-money laundering officers and executives for more than 60 crypto firms.
Links to Russia’s Intelligence Services and Sanctioned Banks
According to the report, these “Estonian” companies with fake profiles and hired actors had connections to Russia’s intelligence services and sanctioned banks. They were responsible for numerous international fraud cases causing substantial damages. The report cites the example of Cyfroncapital OÜ, owned by Kirill Doronin, the mastermind behind the Russian crypto pyramid scheme Finiko. Cyfroncapital had a valid Estonian crypto license for almost three years before it expired in July 2022. The report also reveals that funds collected by Finiko were laundered through Garantex, a cryptocurrency exchange operated by the Estonia-registered entity Garantex Europe OÜ, which was sanctioned by the U.S. Treasury Department.
Estonia’s History of Money Laundering Scandals
Estonia’s banking sector has previously been embroiled in a major money laundering scandal. Danske Bank’s Estonian branch was at the center of an investigation into the transfer of $150 billion from Russia and other former Soviet states. The scandal also implicated banking giants Citigroup and Deutsche Bank. These incidents highlight the country’s vulnerability to financial crimes and underscore the need for stricter regulations in the crypto industry.
Tightened Regulations and Impact on the Crypto Industry
Following the tightening of regulations with amendments to its Money Laundering and Terrorist Financing Prevention Act in March 2022, Estonia has revoked licenses of several crypto companies. Many of these entities have moved to other European jurisdictions like Lithuania, which is now home to over 800 firms operating in the digital asset space. This shift reflects a broader trend across Europe as countries strive to enhance their regulatory frameworks and combat financial crimes within the crypto sector.
Hot Take: Estonia’s Crypto Licensing Regime Exposes Vulnerabilities
Bad actors exploited Estonia’s once liberal licensing regime for crypto companies to defraud investors and commit other crimes, an investigative report claims. The authors say they discovered dozens of such cases, including scams and schemes for sanctions evasion and money laundering. Since Tallinn tightened its rules, many of these entities have left Estonia, whose banking sector was accused of similar sins in recent years, and on a larger scale.
The lax requirements for crypto businesses in Estonia created an environment ripe for financial crimes. The report’s findings demonstrate the urgent need for stricter regulations and oversight in the crypto industry to protect investors and prevent illicit activities. Estonia’s history of money laundering scandals, both in traditional banking and now in the crypto sector, highlights the country’s vulnerabilities and the importance of robust regulatory frameworks. As Estonia strengthens its rules, it is crucial for other jurisdictions to learn from these experiences and implement effective measures to combat fraud, money laundering, and sanctions evasion in the crypto space.
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