Estonia’s push to become a digital society left it vulnerable to dirty money – Banking Regulator warns

Estonia’s push to become a digital society has left it vulnerable to dirty money and sanction breaches, the country’s top banking regulator has warned.

The Baltic state took center stage in one of the largest-ever money laundering scandals last year – the Estonian branch of Danske Bank helped funnel money from Russia and other ex-Soviet states, a report by the Danish lender showed.

Danske Bank is now being investigated in Denmark, Estonia, Britain and the United States over the 200 billion euros ($227 billion) of suspicious payments.

The Danske debacle was rooted in old school subterfuge – offshore shell companies were used to disguise where the money was coming from.

But Estonia’s population of e-residents, some of whom bank in the country even though they live abroad, potentially offers a high-tech route for suspect funds.

“The lesson of Danske is, I hope, enough for us,” Kilvar Kessler, the head of Estonia’s financial watchdog, the Finantsinspektsioon, told Reuters. “You onboarded customers which were offshore companies.”

“Now e-residents. Exactly the same questions will be asked. Who are they? Why do they need a bank account in Estonia?”

A former Soviet-occupied state on the edge of Europe, Estonia has remodeled itself as a hub for digital innovation through ‘e-Estonia’, a government-sponsored project to move almost all bureaucratic tasks, from voting to medical prescriptions, online.

A key part of e-Estonia is e-residents, foreigners who have been given a digital identity card allowing them to access some online services such as government portals. It can also be a stepping stone to banking in Estonia, a member of both the European Union and the euro zone currency bloc.

Anyone can apply, including citizens of countries subject to U.S. sanctions such as Iran and North Korea.

Banks including Estonia’s largest locally-owned lender LHV, as well as Sweden’s SEB Bank and Swedbank, allow e-residents to open accounts after they prove their identity and business links to Estonia.

Kessler, who has the power to withdraw a lender’s license to operate, has been cautioning bankers for some time that they need to thoroughly vet e-residents before signing them on.

He has stepped up his warnings since the Danske scandal.

Some 50,000-plus people hold the digital identity card but there is no public data on how many also bank in Estonia.

Erki Kilu, the chief executive of LHV bank, said that while only a small number of e-residents opened a personal bank account in Estonia, the 6,000 companies registered in the country by e-residents required an account. One quarter of those bank with LHV, he told Reuters.

Kilu said e-residents were subject to the same checks as other customers who lived abroad.

In an email to Reuters, he said there were also “later screening and monitoring processes”, declining to give further details. The bank does not open accounts for people or companies subject to sanctions.