Rather than being threatened by the arrival of e-residents, we should discuss the draft of the Commercial Code. 1Office partner Ivar Veskioja offers affirmative solutions for eliminating fraud.

Several interest groups want to draw attention to the general problems of the existing business environment.

Creditors’ main concern is primarly aimed at local fraudsters that the government has not dealt with. It is very unlikely that an Indian programmer or a Ukrainian online shop owner could sustain a large debt in Estonia. To successfully scam others, you need to gain trust, which is not easily achieved by foreign residents. Below I am sharing some solutions to eliminate this potential fraud.

Positive credit registry has been written into the coalition contract, however no steps have been taken towards enforcing it.

Positive credit rating

Positive credit rating is required in the United Kingdom for every credit purchase. This is applicable to both companies and individuals with the registers being held by private companies. In Estonia, the government could be the key holder of such a register. E-government has a huge advantage of having access to information that has been collected over the years. Converting disclosed tax information, employee register, monthly VAT tax return and “1000 Euro invoices” into credit ratings would give creditors fresh and relevant data to check the reliability and trustworthiness of the company. The government could tie this register to the Company Registration Portal, creating the world’s most transparent business environment – although why settle for a smaller goal? Giving credit to a business with a negative credit rating would reduce if the creditors were more aware of the potential risks involved.

Register of disqualified company directors and cross border cooperation

Disclosed information about the 10,000 listed companies with 700 so called “front men” is there, yet they have not been set any business restrictions. Is setting a register of disqualified company directors too complicated? The Minister of Justice Urmas Reinsalu’s suggested registry of businesses that hold the status cessation of trading would help restrict the business of foreign residents. Notaries are currently only checking Estonian and Finnish entries. Citizens from outside these countries are able to do business without restrictions. The data in the register has to be suitable for restriction of entries within the business portal.

Failing to submit annual financial reports should be sanctioned and lead to substantial fines

Monitoring the filing of annual finance reports creates a better opportunity to check these claims. Enforcing payment of fines would discipline small companies and tax evaders who are currently counting on compulsory liquidation. The tax office has every right to freeze the bank accounts of companies that have not paid the fine. To increase it’s impact it is feasible to take into account previous year’s turnover when setting the amount of the fine.
In Sweden, the first fine for not filing annual financial reports is 5000 Swedish Krona. There is an additional option to stop the business from operating until the fine has been paid. In Great Britain, the first fine is 150 pounds and this periodically increases.

A more forceful method would be the restriction of any activity of the board members and any of them dealing with companies shares that have not filed the annual report; or when the report has not been approved by the tax office.

Summary

The described methods are only some of the possibilities for dismantling the fears relating to acceptance of e-residents to Estonia. Should applying these methods not work, there is always the option to make e-bills compulsory for the private sector and allow the tax and revenue office to access it.

Of course there are concerns about possible leaking of business secrets. Yet the E-Government could have a leading role in creating a secure system that would challenge these concerns. Additionally, this will reduce necessary man hours by having computers process a large amount of data, and simultaneously maintain the status quo of the E-government at the forefront of developing the digital economy.

Perfecting business legislation will improve the productivity of honest businesses and entrepreneurs. A well managed business environment would be an additional benefit to the well received e-residency project.

Author:
Ivar Veskioja
1Office Group
Partner