The crypto swamp in the Baltics – BitcoinBlog.de – the blog for Bitcoin and other virtual currencies

A research collective reveals how cryptocurrencies are used in the Baltics to launder money and circumvent sanctions. Estonia was the center for a long time, but after the tightening of regulations, the industry is moving to Lithuania. A lot of things sound too absurd to be true.

At the beginning of October, the Eastern European research collective VSquare reported extensively on money laundering using cryptocurrencies in the Baltics. It’s a long, somewhat confusing article that meanders through the topic and is peppered with absurdities that leave you amazed.

Originally, Estonia was a center of crypto money laundering. The country set up a licensing system for crypto startups in 2017, which, a former official comments, “never worked.” At first, only a few companies signed up. However, at the end of 2017, the number of licenses issued exploded, so that by mid-2021 a whopping 1,644 crypto companies were registered in the country, almost 55 percent of all crypto companies worldwide, according to Vsquare. These companies are linked to almost every other country in the world, but most often to Russia (440) and Ukraine (203).

The significant factor in the explosion of Estonian crypto companies was agencies that helped obtain a license. 668 crypto companies can only be assigned to three such agencies. A key part of the registration was meeting AML standards to combat money laundering. The agencies ensured this in a bizarre way.

Welders and pensioners as money laundering officers

The journalists came across an apartment in a social housing building in the Estonian capital Tallinn, where eight crypto companies were registered. Their 65-year-old resident was listed as a money laundering officer without being qualified for this in any way. Among the companies was a subsidiary of the Kazakh stock exchange Intebix, which was co-founded by the son of a local oligarch, and payment service providers such as Steveyc, Venus Exchange and Paytechno, which are considered vehicles for fraudsters.

This appears to be a pattern: people in difficult financial circumstances and with no experience in money laundering became money laundering officers in dozens of crypto companies at the same time. For example, the journalists met a welder who looked after 22 companies, one of which, ReliabilityStabilityIncome, was blacklisted by the Russian Central Bank in 2021 because it was suspected of being a pyramid scheme.

The trail of money leads reliably to Tallinn

Russia’s attack on Ukraine changed many things. Suddenly many companies in Estonia found themselves on Western sanctions lists, such as Garantex, Chatex and Coinsbit. These exchanges partly operated in Moscow, but were registered in Estonia in order to build a bridge to the EU. They willingly processed transactions for Russian criminals, such as the neo-Nazi mercenary group Russitsch and presumably the Wagner Group.

Because they are based in the EU, the stock exchanges would actually have been obliged to impose sanctions against Russian citizens from 2022. Nevertheless, they have allowed the exchange of cryptocurrencies for Russian rubles. A Coinsbit employee frankly stated on Telegram that there are no restrictions for Russian citizens.

In addition to mass murderers, these exchanges also willingly catered to fraudsters. In connection with Coinsbit, for example, the investigators found hundreds of fraud warnings. The sanctioned exchange Garantex is also connected to the wallets of the gigantic former darknet market Hydra, for which it laundered Bitcoins worth the equivalent of almost 140 million euros. The notorious North Korean hacker group Lazarus and the Russian Conti ransomware hackers, who are linked to Russian intelligence, have also used Garantex.

Virtually every “crypto crime” — fraud, money laundering, hacks, ransomware, drug trafficking, sanctions evasion — leaves a trail of money that leads unerringly into Estonia’s crypto economy.

As recently as March 2022, a YouTube video in Russian explained how to circumvent the sanctions using Payeer, an exchange and payment service provider operating out of Estonia. The company says it has millions of customers, most of them in Russia. Payeer was founded in Russia in 2012, but has since changed locations several times and found a grateful home in Estonia.

The swamp dries up

At a certain point, the Estonian financial regulator realized that the law gave it little opportunity to refuse licenses. If they tried to do this, the company in question sued and usually won in court.

“The Estonians realized that they had lost control,” explains a Polish lawyer, “most of the companies were shell companies that had nothing to do with the local economy. They paid no taxes, hired no employees, and brought nothing but reputational damage to the country.”

So the country reformed regulations. Success didn’t take long to arrive: the stricter laws dried up the crypto swamp almost overnight. Most companies lost their licenses or fled. Of the 1,644 Estonian crypto companies, just 78 remained in the country.

Sanctions infiltrate P2P

However, even among those who remained, there are still black sheep. Some exchanges are trying to circumvent the sanctions by moving ruble trading to P2P platforms. For example the MEXC exchange. It has a license in Estonia, has a daily trading volume of 500 million euros and allows non-fiduciary P2P trading of rubles against cryptocurrencies. Since it only takes dollars and euros into custody, it does not directly violate any requirements. When asked, Estonia’s financial regulator said it was currently reviewing MEXC’s license.

In other cases it simply doesn’t matter. For example, at Garantex, an exchange that operated in Moscow and was registered in Tallinn. In mid-2022, the financial regulator searched the office and found that 90 percent of customers were not verified. The exchange lost its license but continues to operate without a care in the world, allowing its customers to circumvent sanctions against Russia.

Crypto Boom in Lithuania

However, the majority of Estonian crypto companies moved to other European countries, such as Lithuania, where the crypto industry is currently experiencing a real boom. Here too, the regulation is relatively mild. Although there is a minimum deposit of 125,000 euros for crypto companies, this can also be made using cryptocurrencies.

An example of the migration to the neighboring country is Arbismart, a cryptocurrency wallet that generates interest but is under strong suspicion of fraud. After Estonia revoked her license, she settled in Lithuania. It is registered in the name of a Ukrainian who, when asked, explains that he has nothing to do with the company.

Payeer, which lost its license in Estonia in 2023, also now operates from Lithuania. You rub your eyes: a company that has been widely suspected of money laundering since 2012 receives a license in an EU country. A Russian woman who lives in the Netherlands is named as responsible; the phone number provided is dead. As an deposit, Payeer simply uploaded a report from a Lithuanian expert who confirmed that the Russian woman held cryptocurrencies worth 125,000 euros.

MoneySwap also founded a new company, MoneyAmber, in Lithuania after its exit from Estonia. According to reports, the exchange is popular with scammers and Russians. The parent company, Mercuryo, is managed from Cyprus; one of the shareholders is the brother of a manager of Russia’s state-owned Sberbank, while a co-owner receives direct income from that bank.

VSquare discovered at least 68 crypto companies in Lithuania that were previously registered in Estonia under the same name. Another 39 have clear connections to Estonian service providers and agencies. Some of these agencies also simply migrate and simply offer their services, including the alleged AML checks, in Lithuania. This is how it happens that suddenly many students in Lithuania are working part-time as money laundering officers for 1-20 euros per hour.

A total of 800 crypto companies are registered in Lithuania. As in Estonia, probably less than 10 percent of these will be anything other than money laundering shell companies. The crypto swamp that has spread across northeastern Europe is far from dried up, despite Estonia’s tougher crackdown and financial sanctions.