Estonia: Change to Success

Estonia: Change to Success

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Despite the shocking and unanticipated effects of the first pandemic wave in spring 2020, the focus has shifted, now that the second wave is rolling in, from supporting affected individuals with state salary supplements and banking-sector-provided grace periods to the necessity for a more holistic view in order to help affected industries survive.

Therefore, it is essential to focus on finding opportunities, which can, when accompanied by adaptability, communication, technology, and creativity, alter the future. A great example on how to turn adverse impacts to future benefits is the AML Bridge Estonia project. This project, currently in a pilot phase, represents cooperation between four Estonian large banks, technology wizards from anti-money laundering start-up SALV, and experts from the Estonian Financial Supervisory Authority, Financial Intelligence Unit, and Data Protection Inspectorate. The aim of this project is to show that joint crime-fighting in banking is the finest method to combat financial crime.

Even though the Money Laundering and Terrorist Financing Prevention Act encourages sharing relevant data to fight crime, the requirements of banking secrecy and data protection have held the leash in effectuating this. However, this is gradually changing, as the relevant technology is continuously improving – both the centralized X-road Estonia e-platform, which permits the secure exchange of or access to the originator’s data, and privacy-enhancing technologies that allow for the extracting of and sharing of data while protecting the privacy and security of sensitive information have proven to work solidly. All this has paved the way for the AML Bridge Estonia project, which leverages these synergies with the aim of showing results and possible scalability beyond local market as soon as April 2021. 

Another change in the same field, which will become effective on January 1, 2021, involves the separation of the current Estonian Financial Intelligence Unit from the police and its establishment as a new authority under the government of the Ministry of Finance.” The government considers the prevention and fight against money laundering and terrorist financing a priority, and with this move, it aims to achieve more cooperation and clearer connections with the Estonian Financial Supervisory Authority, the Estonian Tax and Customs Board, and the Ministry of Finance, to develop an effective strategic analysis function to swiftly spot anomalies and address risks.

When it comes to combating money-laundering and protecting non-sophisticated investors, the state authorities are increasingly shifting their focus to FinTechs and virtual currency service providers. In March 2020, the national rules governing the provision of virtual currency services were tightened. Among other things, capital requirements of service providers were increased and a requirement was introduced that the registered seat, the seat of the management board, and the place of business of the undertaking applying for the licence have to be in Estonia (or a foreign company has to operate in Estonia via a branch that is registered in the Estonian commercial register and that has a local place of business and local seat of the head of the branch). It has been reported that the regulatory changes have helped to tidy the market considerably, as approximately 1300 activity permits were repealed by the end of August.

Along the same lines, especially due to a few scam allegations that were brought to light this year, there have been calls to address the crowdfunding market to protect non-sophisticated investors from misleading campaign statements and fraudulent activities of crowdfunding platform providers and project owners. As the European Union Crowdfunding Regulation no. 2020/1503, which will apply to investment- and business-loan-based crowdfunding service providers, was published in October 2020, the government is preparing for its implementation. However, as the regulation does not cover crowdfunding platforms that facilitate consumer lending, a bespoke national regime will be put in place. The government is currently preparing a new special act to encompass both crowdfunding as well as virtual currency service providers and the draft law is expected to be published in December 2020.

By Merit Lind, Partner, and Kristin Kamilla Kirss, Counsel, Fort

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.