The Estonian Ministry of Finance has introduced a draft law amending the Estonian Money Laundering and Terrorist Financing Prevention Act (Estonian AML Act). One of the main amendments affects providers of virtual currency to fiat currency exchange (virtual currency exchange) and virtual currency wallet services and the procedure for authorising these service providers.
- deficiencies in licensing regulation,
- insufficiencies in virtual currency regulation; and
- the low entry threshold for entering the market
the risk of money laundering and terrorist financing has increased. Next we will elaborate upon the main changes introduced by the draft law.
Virtual currency exchange and virtual currency wallet service providers are treated as financial institutions
Treatment as a financial institution would mean applying stricter rules regarding anti-money laundering and counter terrorist financing processes and procedures. The main impact of this would be the following:
- virtual currency exchange or virtual currency wallet service providers have to follow the requirements in the Estonian AML Act applicable specifically to financial institutions, which in turn means that more extensive rules will apply regarding the following:
- when and how to identify and verify the customer using information technology means,
- the scope of the risk appetite document and
- periodic reporting obligations to the management board, etc;
- virtual currency exchange or virtual currency wallet service providers cannot apply for partial or full release from the obligation to prepare AML internal procedures;
- virtual currency exchange or virtual currency wallet service providers are required always to appoint an Estonian FIU contact person.
Companies providing a virtual currency exchange or a virtual currency wallet service must have their HQ in Estonia
A company registered in the Estonian commercial register and applying for a licence from the Estonian FIU must have its place of business and headquarters in Estonia. A company that is not incorporated in Estonia has to establish a branch in Estonia in order to provide a virtual currency exchange or virtual currency wallet service.
Managers are subject to a ‘fit & proper’ test
Members of the management and supervisory board and the procurator have to undergo a ‘fit & proper’ test in order to offer virtual currency exchange or virtual currency wallet services.
Under the explanatory memorandum, the managers and the procurator must have the expertise, skills, experience, education and professional qualifications in order to fulfil their obligations in terms of the quality appropriate to their position. This means that managers are likely to be required to prove their previous expertise, skills, experience and professional qualifications in the virtual currency business and ‒ based on the explanatory memorandum ‒ will need to have at least a secondary education.
Under the explanatory memorandum, the impeccable reputation of managers is influenced by their previous or current acts or omissions. This would include any negative media coverage about the manager, involvement in legal proceedings, participation in business activity and the reputation of the manager within society.
In addition, in the application documents the company has to set the area of responsibility for every manager of the company. This means that the members of the management and supervisory board should collectively have the education, skills and experience in order to manage the company properly.
The abovementioned criteria give guidance on ‘fit & proper’ procedures. However, time will show what will be the actual substance of the ‘fit & proper’ test to be developed and applied by the Estonian FIU during the licensing procedure.
Managers, procurator, beneficial owners and owners must submit additional documents if they are citizens of a foreign country
A member of the management or supervisory board, procurator, beneficial owner or owner of a company who is a citizen of a foreign country or countries is required to submit their identification documents and criminal records from all such countries where the person is a citizen along with the application to the Estonian FIU.
FIU procedures for obtaining a licence will lengthen significantly
Based on the law currently in effect, the Estonian FIU must decide to grant or decline a license within 30 business days. Under the draft law the time for the procedure is 3 months and may be prolonged to 6 months as of submitting the application if the Estonian FIU needs additional explanations from the applicant.
Virtual currency exchange or virtual currency wallet service providers who already have a licence are required to bring themselves into compliance with the new requirements within six months from the draft law being adopted. Based on the explanatory memorandum, companies that fail to meet the deadline of six months will have their licence revoked.
The positive effect of the new rules is that they will add credibility to licences granted to virtual currency exchange or virtual currency wallet service providers.
The draft law is expected to come into effect by the end of Q1 or within Q2 of 2019.