Financial Crime World

Estonia’s Low Risk Score Despite Recent Money Laundering Scandals: A Look Beyond the Headlines

Introduction

Tallinn, Estonia - In 2019, Estonia achieved a risk score of just 2.68 out of 10 in the Public Edition of the Basel AML Index, making it one of the lowest-risk countries for money laundering and terrorist financing (ML/TF). However, recent scandals have raised questions about the accuracy of this assessment.

Recent Scandals

Despite being rocked by a massive money laundering scandal involving EUR 200 billion in suspicious payments channelled through Danske Bank between 2007 and 2015, Estonia’s risk score remains unchanged. The scandal highlighted several red flags for financial institutions and companies, including:

  • Involvement of politically exposed persons (PEPs)
  • Non-resident legal persons
  • Issues around shell companies in offshore jurisdictions

Criticisms of the Basel AML Index

Proponents of the Basel AML Index argue that it is based on reliable data sources, including the Financial Action Task Force (FATF), Transparency International, the World Bank, and the World Economic Forum. However, critics argue that the index is flawed because:

  • It only measures technical compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations rather than actual risk
  • Fails to consider geographic proximity to high-risk countries, such as Russia
  • Does not address trade-based money laundering adequately

Trade-Based Money Laundering

The FATF has identified three main methods by which criminal organizations move money through the trade system:

  • Use of shell companies in offshore jurisdictions
  • Physical movement of goods
  • Misuse of trade financing instruments

Estonia’s Response

Despite these concerns, Estonia’s government has been praised for its efforts to increase transparency and supervision in recent years. The country has implemented measures such as:

  • Creating a transparent beneficial ownership registry
  • Increasing data sharing between financial institutions

Conclusion

While Estonia’s low risk score is open to interpretation, it is clear that the country faces significant challenges in combating money laundering. As governments and financial institutions strive to improve their AML/CFT defenses, it is essential to consider a range of factors beyond just country risk scores.

Key Takeaways

  • Estonia’s low risk score may seem surprising given its recent scandals
  • The Basel AML Index has limitations and does not fully capture the complexity of money laundering risks
  • A closer examination of Estonia’s AML/CFT regulations and practices suggests that there are valid reasons for its ranking
  • It is essential to look beyond the headlines and consider multiple factors when assessing risk