Estonia had granted foreigners remote access to its digital infrastructure through its e-residency program, which is now linked to cryptocurrency frauds abroad.
Amidst Europe working on improving its anti-money laundering rules, with EU banking watchdog calling for a single set of regulations after going through several related scandals, companies headed by Estonian e-residents have been involved in “a few large-scale exit scams,” where clients are unable to withdraw their assets.
The police’s Finance Intelligence Unit form last week said these companies that are registered overseas are also linked to organizing “suspicious initial coin offerings and the misappropriation of large sums within them.”
The Baltic nation’s reputation recently got a hit after seeing Europe's biggest scandal with Danske Bank accused of funneling $230 billion in illicit funds through the Estonian branch.
Estonia, which has a 1.2 million population, has also been seeing the issuance of digital IDs, a program that started in 2014, to e-residents down from the 2018 peak, having already issued 70,000 from 174 countries.
In June this year, the nation also canceled the licenses of 500 crypto firms, 30% of the total, as part of the clampdown on illicit financial flows.
Still, a new set of frauds have been detected. Officials had warned earlier that the e-residency program, allowing non-residents to run businesses from abroad, needed changes to avoid criminal abuse and improve its security.
Police have also moved to curb down on companies that exchange and help clients hold digital currencies.
The e-residency team is currently working “hand in hand” with the police and the FIU. “The survey doesn’t show that all fraudsters have been e-residents, but that there have also been e-residents among fraudsters,” said its head Ott Vatter.
According to the police, a “considerable connection” with e-residents is raising the risk of reputational damage in the crypto sector of Estonia, where about a third of companies, 554, providing crypto services have at least one e-resident as a related party.
Compared to 1,234 companies with cryptocurrency licenses at the end of last year in the country, as of August, there were only 353.