VSquare experts analyzed about 300 crypto companies registered in Estonia and Lithuania and found dozens of cases of fraud, money laundering, sanctions evasion and illegal financing of criminal organizations.
The partners of the European media initiative in a large-scale investigation were:
- Delfi (Estonia);
- Siena (Lithuania);
- Frontstory.pl (Poland);
- Paper Trail Media, Der Spiegel and ZDF (Germany);
- Der Standard (Austria).
The Estonian government created a licensing system for virtual asset providers in 2017. But presented as a pioneering and innovative structure, it “metastasized into the Wild West” of shadow firms operating in the country, which led to a huge flow of illegal funds through the European Union, journalists stated.
“The term ‘EU licence’ has become a selling point for international fraudsters who have used the jurisdiction to lend credibility to their illegal operations. As a result, over the past six years, there have been 1,644 licensed crypto companies operating in Estonia: one for every 800 residents of the country,” they emphasized.
In many cases, they headed companies and required the requirements AML– service people without relevant competencies and experience. The researchers identified among them a taxi driver with large debts, a welder with a ban on doing business, a person in social housing and an unemployed plumber. Collectively, these four held positions such as director or anti-money laundering specialist in 60 companies.
“I was just a shell. I didn’t work with transactions and didn’t know how many millions went through there,” admitted unemployed plumber from Tartu Sergei Bezrodny.
However, the man is the former head of 24 international cryptocurrency companies.
Garantex, a digital asset exchange registered in Estonia, was sanctioned by the US Treasury Department’s Office of Foreign Assets Control (OFAC) in April 2022. According to the regulator, the platform carried out transactions worth more than $100 million associated with illegal entities. Among the latter were the Russian hacker group Conti and the darknet marketplace Hydra.
Researchers discovered that the exchange helped finance, through cryptocurrencies, the Russian paramilitary group Rusich, which has been involved in hostilities in Ukraine since 2014 and became one of the foundations for the creation of the Wagner PMC.
It was difficult for such a structure to raise funds through the banking system due to strict rules on money laundering and SWIFT sanctions against Russia, but its crypto wallets received assets worth hundreds of millions of euros. Using Elliptic blockchain analysis tools, journalists discovered that at least $8,697 was transferred to the group through Garantex.
Estonian exchange operator Garantex Europe OÜ lost its license in March 2022. Nevertheless, the company continued to operate. According to Delfi, the prosecutor’s office has opened a criminal investigation into illegal economic activities.
In November 2021, OFAC imposed sanctions against the crypto exchange Chatex (a legal entity of Izibits OÜ, previously managed by Bezrodny), which, like Garantex, operated from the Federation Tower in Moscow.
In June, against the backdrop of the fleeting Wagner rebellion led by Yevgeny Prigozhin, experts recorded a surge in ruble activity on the cryptocurrency market. This allowed experts to suggest that blockchain has become an important channel for the movement of Russian assets in the context of financial sanctions.
According to journalists, the Coinsbit exchange previously registered in Estonia contributes to this activity, allowing the conversion of rubles into digital currencies. Representatives of the platform have repeatedly confirmed that there are no restrictions for Russian citizens.
On the platform’s website there is a mention of the Estonian company ITEcosystem OÜ, which lost its crypto license in July 2020. Officially, the founder and director of the company is Ukrainian citizen Yaroslav Yarovenko. From open sources, all that is known about the formal head of an enterprise with a multibillion-dollar turnover is that in 2014 he was convicted of stealing women’s shoes from a Zara store in Kyiv.
Journalists also found hundreds of warnings online about scams related to Coinsbit services. According to the Trustpilot portal, the exchange’s trust rating is 2.2 out of 5 based on 205 reviews.
At the moment, the declared operator of the exchange is registered in the Seychelles.
According to experts, the licensing rules introduced by Estonia in 2017 were unsuccessful.
“This is a clear example of bad legislation. This would never have worked,” commented an ex-official who participated in the development of the regulation on condition of anonymity.
However, the possibility of legalization turned out to be very attractive for companies in the industry. According to the Financial Supervision Authority, as of mid-2021, almost 55% of all virtual asset service providers in the world were registered in Estonia. A significant part of them were associated with structures operating in Russia (440) and Ukraine (203).
Since then, authorities have initiated sweeping reforms to clean up the sector. Most companies did not agree or were unable to follow the updated rules, and out of 1,644 licensed crypto firms in the country, only 78 remained (at the time of writing).
Many of the businesses that ceased operations in Estonia have relocated to other European jurisdictions, including Lithuania, which now has over 800 crypto companies.
One of them is Arbismart. In February 2022, the company announced the move due to the introduction of “new draconian rules” by the Estonian Financial Inspectorate. Journalists have discovered many accusations of fraud against the company, and the amounts lost by investors amount to up to €50,000, according to their statements.
The company is registered in the name of a resident of Ukraine, who confirmed that his personal data is indicated in the register. However, he assured that he knew nothing about Arbismart and had nothing to do with it.
Payeer, a crypto processing company previously managed from Estonia, also opened a company in Lithuania. The researchers noted that the site is very popular among Russian users, and on the Internet it is easy to find instructions on how to circumvent financial sanctions through it.
The operator of the Mercuryo digital asset platform, MoneySwap OÜ, followed Payeer’s path. The Estonian regulator revoked the company’s license due to an opaque ownership structure and compromising information on the Internet (accusations of fraud). In Lithuania, the platform has created a new commercial enterprise called MoneyAmber UAB.
According to journalists’ estimates, at least 68 Lithuanian crypto companies have ties to firms operating in Estonia, using the same brand, name or Internet domain.
Let us recall that in May the Council of the European Union, which includes 27 countries, unanimously approved a bill to regulate the crypto-asset market (MiCA). EU member states have also approved new measures to combat money laundering.
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