The analysis revealed that nested virtual asset services allow smaller providers – including those operating from jurisdictions with weak supervision or lacking a valid license – to operate through larger service providers. By publishing the results, the FIU aims to raise awareness among market participants and law enforcement authorities about how cryptocurrency exchanges and their nested services can be exploited for criminal purposes.
“Estonia was among the first countries to start issuing licenses for the provision of virtual asset services. In 2021, there were more than 600 valid licenses, whereas today there are 37. This experience has given us extensive information about service providers – knowledge that can also benefit other countries,” said Markko Kard, Deputy Head of the Estonian FIU. “During the analysis, we observed many virtual asset service providers operating anonymously, failures to apply due diligence measures, legal entities incorrectly registered as natural persons, multi-layered nested structures resembling Russian nested dolls, and many other practices that do not comply with anti-money laundering and counter-terrorist financing standards,” Kard explained.
The study conducted an in-depth analysis of transactions by 12 virtual asset intermediaries and their correspondent relationships with licensed crypto platforms. Millions of blockchain data points and publicly available information were used for this purpose. The findings were also compared with data from the FIU’s database.
The main outcome was the identification of red flags related to the concealment of legal entity ownership structures and beneficial owners, the location and country of registration, shortcomings in risk management, and blockchain or service model characteristics. Taking these red flags into account will help virtual asset service providers better identify correspondent relationships and determine when enhanced due diligence measures are required.
The Estonian FIU was established in May 1999 within the Police Board. In January 2021, it became an independent government agency under the jurisdiction of the Ministry of Finance. Strategic analysis of money laundering and terrorist financing risks, threats, trends, patterns, and typologies is a statutory function of the FIU.
