Why are virtual currency service providers seen risky from AML perspective?
Numbers show that almost 55% of all virtual currency service providers in the world were registered in Estonia (based on the research provided by Estonian FIU).
The implementation of due diligence measures by most Estonian licensed service providers has proven to be significantly insufficient and there is a high risk that anonymous virtual currencies will be used for criminal purposes, including money laundering and terrorist financing.
The analysis shows that the amendments made to the law in 2020 did not fulfil their purpose: a large part of market participants see compliance with the contact person and Estonian location requirement as just a formal obligation, many operate at the same address and use the same contact person, and persons nominated as contact persons do not comply with the law.
Here are some of the key facts of the analysis of virtual currency service providers in Estonia, carried out at the end of 2019.
253 active virtual currency service providers licenses.
In total 4.8 million customers, of which 2 million are active customers. Compared to 2019, the number of customers has increased almost 4.5 times.
The turnover of 253 active virtual currency service providers with an Estonian activity license totalled 20.3 billion euros (from July 2020 to July 2021), with a total of 66.3 million transactions.
More than 85% of the turnover in the virtual currency services sector (€ 17.7 billion) was generated by 15 service providers (July 2020-July 2021)
Between 1.01.2020 and 30.09.2021, 170 companies out of 253 paid state or labor taxes in the total amount of 21.6 million euros in 21 months, i.e. the average monthly tax amount was 2,400 euros per company.
15 largest virtual currency service providers have 2/3 of their customers in Europe, just over a fifth in Asia (7% in Russia), 6.5% in North America, 3.5% in Africa, 2.5% in South America and 0.5 % in Oceania. 0.6% of Estonian customers (approx. 13,500). More than a quarter of customers (27%, approx. 550,000) do not have any residents of the European Union (EU) among the actual beneficiaries.
About 5/6 of the virtual currency service providers with an Estonian activity license have only one person with an Estonian background.
44% of virtual currency service providers have at least one former or current e-resident among related parties.
Almost 75% of the companies that have an Estonian license to offer virtual currency services are service providers of related parties.
Most virtual currency service providers do not have a payment account with an Estonian payment or credit institution and are serviced by Lithuanian payment and e-money institutions.
The analysis of the addresses of the places of business also indicates a weak connection with Estonia: about 2/3 of the providers of virtual currency services with an Estonian activity license were initially registered to only four addresses in Tallinn.
Virtual currency service providers have mostly 1-2 employees or no employees at all in Estonia.
There is a significant number of applicants for a virtual currency service license who do not have an impeccable business reputation.
Almost 75% of the active virtual currency service providers licensed in Estonia (253 in total) have not sent any notices on suspicious transactions to the FIU in 2021.
The due diligence measures of the vast majority of virtual currency service providers are not commensurate with the risks, the size of the customer base or the volume of services provided when establishing or during a customer relationship.
Offering nested services which is a correspondent relationship.
In such an environment, it may also be difficult to prosecute money laundering or terrorist financing through service providers. The requirements set out in the AML Act are not sufficient if the state does not have the opportunity to actually monitor compliance with these requirements and to react when violations are identified. The above leads to a situation where the Estonian state today bears mainly the reputation risk.
The facts and risks presented in the study do not apply to many service providers - they are strongly connected to Estonia, their business plans are understandable, they have hired teams with sufficient experience and size, and they use adequate risk control measures to manage risks.
The survey can be found here:
https://fiu.ee/aastaraamatud-ja-uuringud/uuringud#virtuaalvringu-tee--2