What is money laundering?

Money laundering is a process used by criminals to attempt to disguise the true origin of ill-gotten gains – income from illegal activity. Money laundering is a crime that is preceded by crimes that yielded the material gain (antecedent crimes). Decades ago, the only recognised antecedent crimes were drug-related ones, which netted particularly large criminal gains; however, now any crime that results in criminal gains can be considered a money laundering antecedent crime.

Three basic stages of money laundering are classically distinguished. The first is placement, in which the criminal gains are placed into the financial system where it can be exchanged or placed into other, non-cash financial instruments. The second phase is layering, where a number of transactions are used to conceal the origin of assets, such as dividing assets into several parts and moving them around via multiple accounts between different companies. The third stage is integration, where assets are dissolved into the legal economy, such as through buying real estate, stocks or companies.

The first stage described may also be preceded by the rapid conversion of the proceeds of a cybercrime to cash or other alternative means of payment, which can then be placed into the financial system once again.

Money launderers’ main objective is, however, to cover up the link between the money and the crime, in order to leave the impression that the funds are of legal origin.

What is terrorist financing?

In recent years, terrorist crimes have posed a greater security risk in society. Terrorist crimes are committed by both members of numerous terrorist organisations and individuals who share their ideologies. At first, such attacks generally involved bombings and armed assaults, but now new methods are being found, such as using trucks as a weapon. The definition of a terrorist crime is also broadening to reflect the new methods being used.

Financing of terrorism is also seen in increasingly broader terms. Terrorist financing is primarily any kind of support or funding provided for terrorist acts, the people committing them, terrorist organisations or individual members of the organisation – whether directly or indirectly, through assets or service, fundraising or even an activity such as providing lodging. Also considered terrorist financing: support rendered to members of terrorist organisations or perpetrators of acts of terror and their close family members, including defraying everyday expenditures or actions such as buying food or medicines for family members.

What are international sanctions?

International sanctions are a set of measures established by the European Union (EU), the United Nations (UN) or the Estonian Government. A sanction is a non-military measure imposed for the purpose of preserving or restoring peace, avoiding conflicts and strengthening international security, supporting and bolstering democracy, and adhering to the principles of rule of law, human rights and international law. 

Measures can be non-economic (such as entry restrictions, suspension of cooperation etc.) and economic. Economic measures can be classified as trade (embargoes, for instance) or financial sanctions.

What do international financial sanctions mean?

Is there anything more I should know about the rules related to international financial sanctions, or will my bank take care of everything for me?

Is it true that it is not allowed to provide money even for buying food or medicine if a person appears on the international financial sanctions list?

Could I face penalties if I transfer funds to a person on the international financial sanctions list?

If anyone asks to go through my bank account for receiving money from abroad, should I be concerned?

Yes, this is not safe. If you receive a request like this, you should ask yourself why the money cannot be transferred directly to the person’s own account. Cases where a person has no bank accounts at all and banks refuse to open accounts are exceedingly rare and there is always a good reason for this. Perhaps the bank has a well-founded suspicion that the person is involved in money laundering.

There are a number of dangers related to receiving money sent from abroad and intended for another person, starting from the fact that we do not know the nature of the transaction, to the possibility that you could wind up with a loan obligation or accusation of money laundering or terrorist financing. The last two are criminally punishable.

Why do banks ask for so much information when an account is opened?

Banks are required by law to follow the principle “know your customer” in order to prevent money laundering and terrorist financing as well as to apply international restrictive measures such as international sanctions and prevent violations. To open an account at a bank anywhere in the world, customers are asked for personal data, and the amount of information requested depends on the laws in each country.

The number of money launderers, terrorists and other criminals targeted by these rules make up a negligible share of the population, and thus a person opening an account may wonder how it all relates to them. The reason is simple. Without knowing their customer – which entails asking them for information – it isn’t possible to distinguish criminals from ordinary citizens or law-abiding business people.

Why do banks ask for information from people who are already their customers, even though the bank “sees” their activity?

Banks' obligation to know their customers is not a one-off action. A bank receives much necessary information about their customers in the course of everyday customer service (e.g. customers take loans, execute transactions), but some data are required by law to be updated and banks cannot obtain such data without asking customers. Such data may include contact addresses, tax residency or data on place of work.

Updating customer data cannot be completely automated based on registers and transactions; it has to take place by communication between customer and the bank, so the bank can be sure that the data are correct and current.

In addition to regularly updating data, banks may contact customers for information on a transaction. The reasons for this can be many: perhaps the transaction varied from the customer’s ordinary transaction profile or the bank processing an international payment was asked for an explanation about the transaction.

What is tax residency?

Tax residency is a term used in tax law, basically meaning which country’s tax laws a person’s income is taxed under. Tax residency is determined according to the rules of the country that is an individual’s permanent place of residence, or the place where a legal person is registered.

For instance, if a person has spent at least 183 days of the past 12 months in Estonia and the Tax Board has confirmed Estonia as the person’s country of tax residency after receiving a request to that effect, he or she is considered under Estonian law to have Estonian tax residency.

Many countries use additional identification numbers that facilitate administration of taxation. Estonia does not use such separate numbers. For individuals, their Estonian personal identification code serves as the identification number; for legal persons, their registry code.

Who is a PEP?

The acronym PEP stands for politically exposed person – a person with a government background who is currently or has recently been entrusted with a prominent public function, or relatives or close associates of such persons. Identifying PEPs is important because banks are obligated to apply more stringent due diligence measures in regard to PEPs.

Relatives of PEPs include their spouse or person deemed equivalent to a spouse, children, parents and their spouse or persons deemed equivalent to a spouse. Close associates of PEPs include individuals who co-own a company or have any legal connection with a PEP or are in close business relations with a PEP. Persons with beneficial ownership of legal entities or arrangements known to have been founded for the benefit of a PEP are also considered close associates.

What happens if my mother, father, sister or brother is a member of parliament – will I face restrictions on use of money?

Who is the beneficial owner?

Banks are required to collect information on beneficial owners both for money laundering and prevention and for compliance with obligations arising from the Tax Information Exchange Act.

A beneficial owner is an individual who:

• taking advantage of their influence, exercises influence over a transaction, operation or another person and in whose interests, for whose benefit, or on whose account the transaction or operation is performed;
  
• exercises ultimate control of the company’s shares or voting rights or exercises ultimate control of the management of the company;
  
• holds over 25 per cent of shares or voting rights through direct or indirect shareholding or control, including in the form of bearer shares,or exercises control over the management of the legal person in some other manner.
  

If after the exhaustion of all possible methods to establish the beneficial owner, the beneficial owner cannot be determined yet there is no doubt that such a person exists, the member of the highest executive body is considered to be the beneficial owner.

Can an individual be the beneficial owner?

Yes, if the account holder is not the actual owner of the funds or operations are performed on the account for the benefit of some other person. In such a case, the beneficial owner is the person in whose interests the transactions are executed.

Why is a non-resident a higher-risk customer?

Solely having non-resident status does not automatically mean a higher degree of risk. However, non-residents are often assigned a higher risk level at the outset of a customer relationship, due to the particularities of the country of location. Often it is difficult or more time- and labour-intensive to ensure full application of due diligence measures in regard to non-resident customers. The bank must follow the “know your customers” requirements and in case of any doubt that the requirements have been met with sufficient diligence, the non-resident customer (the same goes for resident customers if necessary, of course) be treated as a higher-risk customer, and heightened attention must be devoted to their activities.

The high risk level of non-residents from certain countries may be due solely to the country of residency. Such countries are often either risk countries with insufficient measures in place to prevent money laundering and terrorist financing or countries subject to international sanctions.

Can an e-resident open a bank account?

E-residency makes it possible to authenticate and verify via information technology the identity of persons who wish to become customers, meaning that it is not necessary for them to visit a bank branch in person. E-residents are essentially ordinary non-residents. As a result, banks’ requirements for e-resident customers may be more stringent than for residents, and opening an account at the bank depends on meeting the requirements of the specific bank.

Is video identification just as secure as visiting a bank in person?

Authentication by information technology is equivalent to verifying the identity of a customer face to face. In both cases, the “know your customer” requirements must be fulfilled, and the person wishing to become a customer must fill in a form and respond to questions from the bank in the form of a direct interview.

Authentication using an IT tool allows the bank to perform database queries simultaneously with the authentication process, using face recognition software if desired. Insofar as a recording is made of the authentication process, the bank can review the process later if needed.

Authentication using an IT tool, the quality of information stream and information system itself are subject to requirements established by a Minister of Finance regulation.

Why are there limits on my account for use of funds?

The limits are necessary to reduce the risk of possible losses. Although banks do their utmost to protect customers’ accounts, it is impossible to completely rule out the risk of unauthorised access to the account. The limit on transactions is namely the measure that keeps a criminal from accessing the funds on the account. If an incident is discovered, the bank can ensure the safety of the remainder of the funds on the customer’s account.

Who has the right to obtain data about me?

Credit institutions have the right and responsibility to disclose bank secrets to certain authorities or persons if required for performing functions set forth in legislation. Persons entitled to bank secrets are listed in the Credit Institutions Act. Bank secrets may be divulged to persons not specified in the Act only with the customer’s consent expressed in a form reproducible in writing.

Will my bank send data about me to the police?

A bank will not send customer data to the Police and Border Guard Board at its own initiative (except for when it is authenticating a person through the PPA database). However, banks are required to forward customer data to the Police and Border Guard Board if the latter is conducting criminal proceedings and the data are sent in response to an inquiry.

Can the bank refuse to delete data received from me?

The Money Laundering and Terrorist Financing Prevention Act obliges credit institutions to retain documents related to authentication of customers (and the data in such documents) for at least five years after the end of the business relationship.