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Estonian and Lithuanian officials said at an industry conference in Tallinn, Estonia, on Wednesday that their crackdowns on cryptocurrency have reduced their nations’ exposure to criminal proceeds, and separately flagged schemes by Russia to evade Western sanctions.

Estonia in 2017 became one of the first EU nations to set up a licensing regime requiring virtual asset service providers, or VASPs, to implement anti-money laundering programs and other controls before giving them approval to operate. In practice, however, the Estonian government subjected VASPs to only the most rudimentary background checks, prompting hundreds of such platforms from around the world to set up shop in the country.

Three years later, amid growing concerns over VASPs’ vulnerability to illicit finance, Estonia raised capital requirements and required them to open physical offices and employ staff in the country and began vetting their owners and directors more thoroughly.

The higher bar for licensing dramatically reduced the number of licensed VASPs in the country from more than 1,230 in 2019 to 148 by the end of last year and stands at 110 currently, Estonian Finance Minister Annely Akkermann told attendees of the ACAMS Baltics Symposium in Tallinn on Wednesday.

“To be absolutely clear, Estonia has not banned ownership of virtual assets and no virtual assets services are banned,” Akkerman said. “But many of these companies have no direct connection to Estonia, which makes effective supervision and risk mitigation unfeasible.”

Estonia in March 2022 further tightened licensing conditions by subjecting VASPs to the travel rule, a global standard requiring financial institutions to collect and share the names, addresses and other details of the parties involved in a transaction with the next institution in line, and by again raising capital requirements, this time from €12,000 to €125,000.

Estonia’s financial intelligence unit, which supervises the industry for anti-money laundering purposes, has meanwhile pulled licenses from hundreds of additional platforms in the past two years for neglecting their AML programs and taking on unreasonable levels of risk.

“We saw cases where one person was the compliance officer for 10 different VASPs,” Laura Aus, deputy head of the FIU, told attendees Wednesday. “This can’t be.”

Displacement

The crackdown may have reduced Estonia’s vulnerability to financial crime enabled by VASPs only to push those very same companies into Lithuania.

Hundreds of cryptocurrency platforms rejected by Tallinn simply moved to Vilnius, a fintech hub that until November featured one of Europe’s laxest VASP-licensing regimes.

Around 800 VASPs had secured licenses to operate in Lithuania by October, up from 230 the preceding March. Only 23 VASPs called the country home in 2020.

Reda Stanyte, head of AML supervision at the Bank of Lithuania, told attendees Wednesday that Lithuanian regulators launched a “clean up exercise” of their own in November, starting with the adoption of a strict licensing regime similar to Estonia’s.

Tougher licensing policies and robust AML enforcement have since reduced the number of cryptocurrency exchanges and other VASPs authorized to operate in Lithuania to 200.

Both Stanyte and Aus, the deputy head of Estonia’s FIU, said VASPs that apply for licenses from multiple EU nations simultaneously appear more interested in finding the weakest set of regulations than serving local customers.

“Forum shopping really isn’t good,” Aus said.

‘Simple’

Akkerman, the Estonian finance minister, said Wednesday that countering Russian sanctions evasion ranks as a top priority for Baltic nations, which together mark the front line of the West’s financial and commercial embargo against Moscow.

Estonian authorities have identified 1,500 cases of suspected attempts to subvert economic restrictions against Russia over the 13 months of the country’s full-scale invasion of Ukraine, most of which involve exports subject to EU sectoral sanctions.

Kristaps Markovskis, head of AML at the Bank of Latvia, the country’s central bank, said Baltic commerce with Turkey, China and Kazakhstan, Azerbaijan and other former Soviet states has risen significantly during the war.

A preponderance of new legal entities in those jurisdictions has accompanied the spike in trade, specifically in economic sectors the West has targeted with sanctions during the invasion.

The pattern suggests those countries have given Russia a backdoor to global markets, said Paulis Iljenkovs, head of strategic analysis at the Latvian FIU, who described a case in which a Latvian exporter shipped more than €100,000 of luxury goods banned from export to Russia to a Central Asian nation and received payment from the Middle East.

A local bank with a “very strong automated screening system” reported the payment as suspicious, Iljenkovs said Wednesday, adding that the FIU identified Russia as the shipment’s final destination.

Russian companies reportedly use any number of schemes to evade sanctions, with varying degrees of sophistication and success.

Baltic compliance officers in Tallinn on Wednesday said that clients who traded and transacted directly with Russian companies largely ceased doing so after the invasion of Ukraine commenced, only to receive payments for sanctions-prohibited goods or services from new partners in Malta, Turkey, the United Arab Emirates and Serbia.

Fairly basic checks on the new counterparties unearthed Russian owners and directors, one of the officers, Siiri Grabbi, who ensures compliance with sanctions at Coop Pank in Tallinn, told attendees.

“You really see Russia behind [these entities],” Grabbi said. “We see those really simple cases, not on a daily basis, but it’s rather often.”

But closing the accounts of exporters suspected of wittingly or unwittingly participating in schemes to bypass sanctions may do little to solve the problem.

“De-risking is not the answer,” Iljenkovs said.

Contact Koos Couvée at kcouvee@acams.org