Dirty money risks encroach on Estonia’s digital utopia

A woman walks past Danske Bank’s Estonian branch in Tallinn, Estonia January 22, 2019. (Reuters)
Updated 02 February 2019

Dirty money risks encroach on Estonia’s digital utopia

TALLINN: Estonia’s push to become a digital society has left it vulnerable to dirty money and sanction breaches, the country’s top banking regulator has warned.
The Baltic state took center stage in one of the largest-ever money laundering scandals last year — the Estonian branch of Danske Bank helped funnel money from Russia and other ex-Soviet states, a report by the Danish lender showed.
Danske Bank is now being investigated in Denmark, Estonia, Britain and the United States over the 200 billion euros ($227 billion) of suspicious payments.
The Danske debacle was rooted in old school subterfuge – offshore shell companies were used to disguise where the money was coming from.
But Estonia’s population of e-residents, some of whom bank in the country even though they live abroad, potentially offers a high-tech route for suspect funds.
“The lesson of Danske is, I hope, enough for us,” Kilvar Kessler, the head of Estonia’s financial watchdog, the Finantsinspektsioon, told Reuters. “You onboarded customers which were offshore companies.”
“Now e-residents. Exactly the same questions will be asked. Who are they? Why do they need a bank account in Estonia?“
A former Soviet-occupied state on the edge of Europe, Estonia has remodelled itself as a hub for digital innovation through ‘e-Estonia’, a government-sponsored project to move almost all bureaucratic tasks, from voting to medical prescriptions, online.
A key part of e-Estonia is e-residents, foreigners who have been given a digital identity card allowing them to access some online services such as government portals. It can also be a stepping stone to banking in Estonia, a member of both the European Union and the euro zone currency bloc.
Anyone can apply, including citizens of countries subject to US sanctions such as Iran and North Korea.
Banks including Estonia’s largest locally-owned lender LHV , as well as Sweden’s SEB Bank and Swedbank , allow e-residents to open accounts after they prove their identity and business links to Estonia.
Kessler, who has the power to withdraw a lender’s license to operate, has been cautioning bankers for some time that they need to thoroughly vet e-residents before signing them on.
He has stepped up his warnings since the Danske scandal.
Some 50,000-plus people hold the digital identity card but there is no public data on how many also bank in Estonia.
Erki Kilu, the chief executive of LHV bank, said that while only a small number of e-residents opened a personal bank account in Estonia, the 6,000 companies registered in the country by e-residents required an account. One quarter of those bank with LHV, he told Reuters.
Kilu said e-residents were subject to the same checks as other customers who lived abroad.
In an email to Reuters, he said there were also “later screening and monitoring processes,” declining to give further details. The bank does not open accounts for people or companies subject to sanctions.
Ainar Leppanen, responsible for SEB’s retail banking in Estonia, said it took a cautious approach to foreign customers without “a clear link to the country,” applying additional measures such as “background checks.”
He said customers were checked against international sanctions lists and described the number of e-resident customers of SEB as “insignificant.”
A spokeswoman for Swedbank said it performed “due diligence ... to ensure that their businesses have a clear connection to Estonia” before taking on e-resident customers.
Some banks, however, generally steer clear.
“We don’t see a business case here right now,” said Erkki Raasuke, chief executive of Luminor, one of the largest banks in the Baltics.
“The potential downside, if some of the anti-money laundering or sanctions-related risks would materialize, can be significant.”
Closer scrutiny of e-residents is part of a wider effort to curb financial crime by authorities in Estonia since the Danske scandal.
In addition to the e-residency program, the country’s digital pedigree — video calling company Skype was built there – and pro-business culture have made it an attractive outpost for companies working with cryptocurrencies.
It typically takes just hours and an online form to open a business in Estonia and some 600 digital currency companies are registered there.
“There is a money laundering risk with cryptocurrency operators. We have made it too easy for these crypto operators now. They get a reputational benefit from their link to Estonia. We get the reputational risk,” Madis Muller, Estonia’s deputy central bank governor, told Reuters.
Lawmakers are considering giving police the power to scrutinize cryptocurrency companies and withdraw their licenses if executives fail a “fit and proper” test of their reputation and ability to do the job.
Under proposals before parliament, cryptocurrency companies will also be required to have a business presence in Estonia, something that many lack.
“I understand that most would not be able to comply — and would not qualify to keep their license,” said Muller.
National elections in early March, however, could delay such reforms, as lawmakers would have to restart negotiations if they do not sign off the rules by February 21, when they disband.
Estonia’s vision of an advanced digital society open to all is a point of pride for its 1.3 million people, many of whom remember the constraints of life under Soviet rule.
Azerbaijan, which also declared its independence from the Soviet Union in 1991, became the second country to launch an e-residency program last year.
As part of its digital branding, Estonia has gifted symbolic e-residencies to Microsoft founder Bill Gates, German chancellor Angela Merkel and Pope Francis, among others.
“Digital is not 100 percent secure but it is more secure than analogue,” Estonia’s president Kersti Kaljulaid told Reuters in an interview at the presidential castle. “An e-resident bank client has passed a background check.”
The Estonian police vet all applicants for e-residency, checking identity documents such as passports and examining international police records to ensure the applicant has not committed crimes overseas.
The process typically takes between four and six weeks and does not require applicants to visit. Once issued, the cards can be collected at Estonian embassies.
Roughly one third of e-residents come from Finland, Russia, Ukraine and Germany, according to official data that lists one e-resident in North Korea and roughly 400 in Iran. They are not named. Others come from dozens of countries around the globe from Britain to Panama.
Madis Reimand, the head of Estonia’s Financial Intelligence Unit (FIU), the arm of the police that monitors money laundering and crypto operators, said e-residents did not pose “big risks” although he said care should be taken in vetting them.
But Reimand was critical of cryptocurrencies. “We see really big threats from virtual currencies, especially threats of fraud and money laundering.”
It is a far cry from 2017, when at the height of the cryptocurrency boom, the then manager of the e-residency scheme suggested Estonia to set up its own digital means of exchange, the ‘estcoin’.
In the last weeks of 2018, the number of applications for e-residency slipped, according to official data.
Although the scheme is growing year-on-year, at its current pace, it would take until 2488 to reach its original goal of 10 million people, something Estonia had set its sights on when the scheme was launched roughly four years ago. ($1 = 0.8755 euros)

INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

Updated 18 August 2019

INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

  • Tarkan Demirbas tells Arab News how smart technology will woo 9 million Gulf smokers and reduce risk

Alongside politics and religion, there is one other dinner party subject virtually guaranteed to push people to opposing extremes: Smoking.

In much of the world — especially the West but increasingly in the Middle East and other emerging markets — tobacco has been marginalized to the point where smokers feel shunned and lonely in many social environments, banished to pavements or poorly ventilated kiosks in airports.

After a series of multi-billion dollar lawsuits around the globe for the undoubted bad effects smoking has on health, Big Tobacco — the giant multinational companies that made billions out of the nicotine habit but neglected to say exactly how bad it was — is nowhere near as big as it once was.

All of which leaves Tarkan Demirbas with something of a challenge. He is vice president for the Middle East of one of the biggest tobacco companies, Philip Morris International (PMI).
Think Lucky Strike and the Marlboro Cowboy, legends of the industry and of marketing before grim, litigious reality overtook
the business.


BORN • 1968, Erzurum, Turkey.

EDUCATION • Bogazici University BSc Industrial engineering. • University of West Georgia, MBA.

CAREER  • Senior management positions at PMI in Hungary, Colombia, Malaysia, Singapore, Switzerland. • Vice President Middle East.

Demirbas is on message for the new anti-tobacco era. “There is no doubt that the best way to reduce the risks of smoking is to not smoke or use any nicotine product at all,” he said recently at an event in Dubai’s Capital Club, an oasis of tobacco-friendliness in the anti-smoking desert of the Dubai International Financial Centre.

On the surface, that seems a strange line from somebody who for the past 15 years has been promoting PMI’s products around the world, from southeast Asia through Budapest and on to Bogota with a stint at PMI’s Swiss HQ along the way.

But it coincides with a new direction PMI has taken. The new buzz-phrase in the company is “a smoke-free future.”

PMI launched the initiative with a “commitment and ambition to replace cigarettes as soon as possible with better alternatives to smoking for the millions of men and women who would otherwise continue to smoke.”

That might sound like turkeys voting for Christmas, but there is a sound business logic, as Demirbas explained. “The reality is that the vast majority of smokers simply do not quit. Even the World Health Organization’s own predictions forecast that there will continue to be more than 1 billion smokers by the year 2025,” he said.

“This is why a growing number of experts believe that public health policies should not be based solely on discouraging initiation and encouraging cessation, but need to leverage the potential of scientifically substantiated smoke-free products for the benefit of smokers and public health,” he added.

Technology is key to the campaign, and the product that PMI has come up with is IQOS. The Dubai event marked its regional launch. Imagine a slim mobile phone with a stubby cigarette sucking out of one end, encased it in a stylish carrying case-cum-charger, and you have an idea of IQOS.

Unlike other electronic smoking devices which vaporize nicotine juice, avoiding the harmful effects of the pathogens produced by burning tobacco, IQOS stays with the weed but does not burn it.

By heating tobacco sticks — called Heets — that look like mini-cigarettes to 350 degrees Celsius, the nicotine that smokers crave is released, but the tobacco is not burnt. Demirbas cites respected scientific sources as well as PMI’s own research indicating that 95 percent of the harmful by-products of tobacco are avoided.

Amid jokes that the Marlboro Cowboy would find it hard to use IQOS and ride his horse at the same time, nicotine-hooked cigarette smokers at the event said the result was pretty close to the “real thing.”

There is potentially a big market to go for, globally as well as regionally. Worldwide, some 150 million people use PMI’s tobacco products, still overwhelmingly traditional cigarettes. By 2025, he aims to get 40 million of those onto heated tobacco products like IQOS.

“This year, our priority is to go deeper into existing launch markets. We are encouraged by the results to date, including that there approximately 8 million smokers who have completely abandoned cigarettes and switched to IQOS. Japan is the best example of IQOS’ success, where we have achieved nearly 17 percent of the national share of the market,” he said.

IQOS is currently in nearly 50 markets, including Japan, Korea, Canada, a number of European countries such as Germany, the UK and Spain, as well as Russia, Ukraine and Colombia.

PMI passed a significant milestone in its campaign to go global with IQOS when the American Federal Drug Administration authorized IQOS and other variants. It will market its products in the US in partnership with Altria, the big investor which has made a commitment to the “smoke-free future” with multibillion dollar funding of Juul, the market leader in the worldwide vaping craze.

 “There are 40 million American men and women who smoke. Some of them will quit, but most won’t, and for them IQOS offers a smoke-free alternative to continued smoking,” Demirbas said.

Progress towards smoke freedom remains elusive in China, the world’s biggest market, where PMI markets Marlboro and in turn promotes traditional Chinese tobacco brands around the world.

The UAE joined the list of countries heading smoke-free last year when an IQOS stand appeared in Dubai International Airport’s duty free section. The UAE was ambivalent about the value of trying to lure smokers off tobacco and onto safer products, with the Emirates’ health authorities warning against the use of e-cigarettes and vaping devices. 

But the IQOS airport stand was a sign of a change of heart, and was followed by public pronouncements that vaping would also be made legal. Users in the UAE had previously resorted to some pretty furtive measures to get their nicotine fix, but non-tobacco nicotine products appeared to be here to stay, judged by the large numbers of people seen sucking on devices in many outdoor public places.

After the UAE launch, non-cigarette nicotine is going mainstream. The Heet sticks will be on sale for around DH20 (SR20) per pack — roughly the same as a pack of Marlboro — in most traditional smoking shops, while the devices — retailing at around Dh250 — will be sold in Carrefour supermarkets and, eventually, branded flagship stores.

Demirbas sees the UAE as a testing ground for expansion into other Middle Eastern markets, with Saudi Arabia high on the list of targets. PMI already knows there is an appetite for its device in the Kingdom from the large numbers of Saudi citizens buying them at Dubai airport.

At the airport, they have to present national ID cards or passports as proof of age — 18 is commonly the age limit for buying tobacco products in the Gulf region — as well as making a declaration that they are already smokers who wish to quit cigarettes. “I stress that we are trying to convert existing smokers, not trying to get anybody started on nicotine,” Demirbas said.

“From a public health standpoint, we see great potential for reduced risk products in Saudi Arabia. In our view, it is important to set the right regulatory framework to ensure companies adhere to best practices and comply with local legislation with the adult consumers of these products in mind, particularly as alternative forms of nicotine consumption are being recognized in leading global markets, including Saudi Arabia,” he said.

“Our ultimate goal is to convert all the 9 million adult smokers across the GCC, who would not otherwise quit, to IQOS,” he added.

PMI faces significant competition in its mission. Juul, the trendy but controversial device that has grabbed a big slice of the global market as the “iPhone of the vaping business.” Several other vaping products already have a foothold and a cachet that could be challenging for PMI.

At the Capital Club, the test audience for the IQOS launch was a mixed band of cigarette and vape users who gave the new product serious consideration. Some were sold on it straight away, others said they would give it a try and were gifted samples by PMI. The stylish look of the new product was a big selling point for the tech-style savvy consumers.

Others were put off by the charging process that has to be carried everywhere and used between smokes. One complained that the taste was simply too similar to the cigarettes he had been trying to kick for years.

As Big Tobacco seeks to reposition itself in the new anti-smoking age, the multibillion dollar nicotine industry will always be controversial. Maybe IQOS will be the hi-tech product that helps millions finally kick the smoking habit. Demirbas hopes so.

“We’ve invested $6 billion in it. It’s the most advanced technology there is,” he said.