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International Internet Magazine. Baltic States news & analytics Saturday, 08.08.2020, 09:08

Background check on Estonian e-residents needs fundamental changes

BC, Tallinn, 29.07.2020.Print version
The background check on applicants for Estonian e-residency and international information exchange need fundamental changes to reduce the possibility for foreigners with a valid criminal penalty and business ban to become e-residents, the National Audit Office finds in the audit report titled "Effectiveness of the e-Residency program," published on Wednesday, cites LETA/BNS.

The National Audit Office concluded that, by the end of the first five years of the e-residency program, the revenues of the program launched in December 2014 have started to exceed the expenses. However, the current ex-ante and ex-post controls do not ensure that the participants of the programme are law-abiding.

"The e-residency program is something that has added to the reputation of Estonia and brought income," Auditor General Janar Holm said, pointing out that e-residents have created more than 1,300 jobs in Estonia, with the average wages around the country’s average.

"On the other hand, we must keep in mind that the more well known the e-residency programme, the wider spread the news, should something go wrong. It has been stated in the e-residency white paper that a small country’s greatest enemy is a poor reputation, whether it's being thought of as a tax haven or a refuge for criminals. Major risks are not mitigated right now," Holm said.

The National Audit Office identified that the Police and Border Guard Board has issued digital IDs of e-residents to foreigners with valid criminal offences in a foreign country.

"We made an inquiry to the Finnish criminal records database and it appeared that 48 e-Residents with Finnish citizenship had, during the application for the digital ID, a valid criminal penalty in Finland, whereas a quarter of them were serving actual prison sentence and a fifth had been punished for economic offences," Holm said. "They probably would never have become e-residents, had this information been available to the Police and Border Guard Board earlier."

According to the Police and Border Guard Board, they are unable to obtain information, during the issue of the digital ID of an e-Resident, from the criminal records databases of other countries if such information has not been entered in international databases. But information is not moving as smoothly as needed within the Police and Border Guard Board, either.

The Police and Border Guard Board has not revoked the documents of some e-residents who have committed a crime in Estonia during the validity of the digital ID. In Estonia, one of the obstacles in obtaining information in ex-post controls is that there are no IT solutions that would allow making mass inquiries to the criminal records database. The required IT solutions have not been prepared due to the management and staffing issues at the Information Technology and Development Center of the Ministry of the Interior. The Information Technology and Development Center has admitted to having trouble completing the IT solutions related to the e-residency on time. 

Furthermore, the Police and Border Guard Board has issued digital IDs to foreigners with a valid business ban abroad and has not revoked the digital IDs of such foreigners. As a result, the e-Residents with business bans are board members in Estonian companies.

Estonia recognizes business bans issued by Finland. According to the Police and Border Guard Board, they were unable to use information on Finland’s business bans in ex-ante controls up to April 2019 due to the lack of IT solutions. In ex-post controls, the Police and Border Guard Board is still unable to verify Finland’s business bands for the same reason. With other countries there is no exchange of data on business bans as this presumes agreements between the countries.

As explained by the Tax and Customs Board, they have no means and options for assessing a person’s tax behavior, including the presence of a business ban, which is why the  Tax and Customs Board makes inquiries to Estonian databases only. At the same time, most of the e-residents have never been to Estonia or engaged in business here. Because of that, the use of Estonian databases only is not sufficient to assess the law-abidingness of the foreigners regarding taxes and business.

The National Audit Office does not find it reasonable that Estonia is issuing digital IDs to foreigners whose activities so far or intention of contributing to Estonia are completely unknown to authorities. The digital ID of an e-Resident is issued without an obligation for foreigners to contribute to the development of the Estonian economy, education, science or culture, even though it is the legal purpose of issuing the document. Also, the renewal of the digital ID does not depend on whether the foreigner has contributed to Estonia or not.

The National Audit Office found that the revenues of the e-residency program exceed the expenses by almost 10 million euros, but the income of the program depends on a small number of companies. Ninety-five percent of the revenue is paid by 6 percent of the companies.

However, Enterprise Estonia, the governing body of the program, does not have a consistent and uniform overview of the total revenue and expenses of the program. The National Audit Office has found that there is no accurate overview of the expenses of the first years of the e-residency program. Even though cost accounting has been improved since 2018, all expenses incurred by public institutions regarding e-residency have still not been taken into account. Therefore, it is difficult to make informed decisions in managing the program.

The e-residency program has introduced new entrepreneurs to the Estonian business landscape. Of the more than 12,000 e-resident entrepreneurs, most, or 82.5 percent, can be considered new. The rest of the e-residents have had prior connections with Estonian companies.

The amendment to the law due to the e-residency program has increased the risk of reputational damage to Estonia. Due to the e-residency program, an amendment was made to the Commercial Code at the beginning of 2018, allowing a company's management board to be located abroad. Together with the incomplete requirements for applying for licenses of virtual currency service providers, a situation has occurred in which a number of Estonian companies were established operating abroad and licensed by Estonia in a field that the Financial Intelligence Unit has assessed to be at high risk for money laundering and terrorist financing. The  Police and Border Guard Board was unable to supervise the companies due to their location abroad.

Even though the management board of a virtual currency service provider is no longer allowed to be located abroad, this option was available for two years. Should it appear that any Estonian-licensed virtual currency service providers committed fraud, it could damage Estonia's reputation.

The digital ID has been renewed by every tenth e-resident whose digital ID card had expired, meaning by nearly 1,900 e-residents in total. The results of the survey held among e-Residents showed that the e-residents justified the non-renewal with the fact that the e-residency program did not meet their expectations. Problems with opening a bank account were mentioned the most.

The main reason for it being difficult for e-residents to open a bank account in Estonia is that banks have no certainty that the e-residents' companies will be operating in Estonia. If the companies' activities had a relevant connection to Estonia, it would reduce the risks for banks.

The results of the survey showed that the public e-services and private services necessary for business are available to the e-residents, on the whole, but the use of banking services is an exception. Therefore, the National Audit Office finds it important that the e-residency applicants are explained the conditions for opening a bank account in Estonia and take these into account in marketing the program.

During the first five years of the e-residency program, or the years 2014-2019, Estonia has granted e-residency digital ID cards to more than 63,000 foreigners from 174 countries. A

digital ID allows them to use the public e-services available in Estonia and establish a company.

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