The real estate and construction sectors are being used to launder illicit money from drug trafficking and migrant smuggling in the Western Balkans, leading to rising property prices, according to a report by the Global Initiative against Transnational Organized Crime.
Money laundering through construction and real estate companies “is popular because it remains relatively easy and can absorb large amounts of capital,” the report says, “Spot price: analysis of the flow of people, drugs and money in the Western Balkans“.
Property “can be a place to store a significant amount of capital, potentially increase in value and improve the quality of the criminal’s lifestyle,” the report says. He notes previous research showing that construction and real estate investments “have a long history of absorbing illegal income in the Western Balkans, as the sector is both significant in terms of economic share and poorly regulated. “.
“Residential property is generally recognized as being more risky than commercial property because of its revenue potential,” he says. “In fact, many real estate markets in the region have been distorted by laundered money as prices are artificially pushed by criminals who want to launder their assets there. Although house prices fell in the region in 2020 due to [coronavirus] COVID-19… many places have still posted gains since 2017. ”
Unexplained real estate booms
The report points to some of the money laundering hotspots in the region that have seen sharp increases in house prices in recent years.
In Albania, he reports price increases both in the capital Tirana – which experienced a construction boom and soaring house prices – and the coastal town of Vlora, where prices have also skyrocketed. While the Albanian economy as a whole, in particular the tourism sector, has been affected by the pandemic, real estate activity increased by 5.5% in 2020.
“In Vlora, criminal groups are said to have invested in the tourism sector, including in luxury hotels by the sea. Prices have fallen from € 600 to € 700 per square meter in 2017 at the water’s edge to 1000 € to € 1,200 in early 2021. Experts argued that this increase could not be explained by higher demand from the real economy or by growth in formal incomes, but is largely fueled by crime money organized and corrupt that has been invested in construction and real estate, ”the report says.
The report quotes a real estate agent in Albania, who claimed that a large percentage of people who buy luxury apartments “use illicit money and pay in cash”. Even when payments are not paid in cash, according to experts, verification of the source of funds is “rather sporadic”.
The Serbian real estate sector has also experienced “unusually high growth” between 2018 and 2020, although many new constructions remain empty.
“Like Albania, the construction industry continued to grow during the COVID-19 pandemic despite the contraction of the general economy. One example is the increase in employment and the purchase of materials for the Belgrade waterfront project, ”says Global Initiative. Prices per square meter continued to increase even in a market considered saturated.
“Experts say this increase is most likely the result of a significant amount of illicit funds injected into the market. They suggest that the Serbian real estate market has become the regional hub for money laundering through real estate. “
In Montenegro, Global Initiative estimates that the Kavac and Skaljari clans have assets with a conservatively estimated value of 27 million euros. The Bosnian real estate market, particularly in Sarajevo, “has not only attracted local criminal actors, but also internationally operating drug trafficking groups and Arab investors… [this] confirms the wider vulnerability that the Western Balkans provide an attractive place for foreign companies to launder their money, ”according to Global Initiative.
Kosovo also experienced a construction sector boom in several cities in 2016 and 2019. “A large part of these investments would be funds generated by criminal activities, including corruption, tax evasion and drug trafficking, by people close to the ruling elite, ”the report says. Following a similar boom in North Macedonia, several investigations are opened into money laundering in the real estate sector, including one linked to the fugitive former Prime Minister Nikola Gruevski.
Examining how money is laundered across the sector, the report notes that in several countries in the region, companies applying for a building permit are not required by law to prove their capital or origin. All they have to do is pay the infrastructure tax, which depends on the value of the construction.
It lists many practices that allow illicit money to be concealed, such as prepayments by customers, high obligations to suppliers, statements of large loans from other parties (rather than banks or financial institutions) and direct transactions between buyers and investors or builders. “These methods allow companies to claim that the entire investment is made on the basis of payments from customers and suppliers and loans from third parties, thus allowing the completion of the cycle of laundering the proceeds of crime,” said The report.
More illicit funds to launder
Finding ways to launder larger sums of money has become more pressing as the flow of funds from illegal activities, such as drug trafficking and people smuggling, increases.
Global Initiative’s conservative estimate of the total market value of migrant smuggling in the region (with a margin of error of ± 20%) is between € 33.7 million and € 50.6 million slightly higher total for the three main transit zones for the Western Balkans.
There is also significant drug trafficking in the region, which is both a source and a transit route for narcotics. Albania has long been an important location for cannabis production, despite government efforts to eradicate it, and increasing amounts of the drug are now produced in Bosnia, North Macedonia and Serbia. In addition, the Western Balkans is an important transit region for the trafficking of cannabis, heroin, cocaine and synthetic drugs. The latter are also produced in the region, mainly in Serbia.
“Despite the significant operating costs, organized crime and the illicit trade in licit and illicit goods undoubtedly generate billions of euros each year in illicit global financial flows that are funneled abroad, laundered into local economies. or reinvested in other criminal activities, ”the report says. .
According to an estimate by the United Nations Office on Drugs and Crime (UNODC), money laundering accounts for around 2.7% of global GDP, or $ 1.6 trillion. The International Monetary Fund (IMF) estimates the total between 2% and 5% of global GDP. If we apply these percentages to the Western Balkans, between 1.8 and 4.6 billion euros would be laundered each year.
“These figures are remarkable, especially when put into perspective: for example, in 2021, the budgets of the interior ministries of North Macedonia and Albania each amount to 168 million euros; the Kosovo police have only 87 million euros. Says the report.
Besides the real estate sector, several other means of money laundering are also described in the report. Smaller amounts of illicit proceeds are usually laundered through cash-intensive businesses, such as restaurants, bars, gas stations and taxi companies. Gambling is another way of laundering money in countries where it is permitted.
Banks, according to the report, “play a key role in money laundering, as they often act as gatekeepers of the financial system.” These range from small amounts of illicit money simply brought to the bank, to roles of banks as a major intermediary in larger transactions, and offshore accounts.
Another way to launder money is to buy luxury assets, such as works of art, jewelry, cars and yachts, says the Global Initiative, as does trade-based money laundering or l investment in emerging cryptocurrency markets.
Uneven prevention efforts
Governments in the region have made a number of efforts to combat money laundering, including adopting a revised anti-money laundering framework. However, the report says, there are still gaps, especially with regard to the implementation of these frameworks. “Institutions in the region continue to have a poor record in investigating, prosecuting and convicting stand-alone money laundering cases,” he said.
One earlier report highlights the international nature of illegal activities and shows that not only do drug traffickers in the Western Balkans derive most of their money outside the region, but that a large part of the proceeds of crime are laundered outside the region. region, eg Spain, UK and Dubai.
The latest report warns that even when relatively small amounts of money are laundered, they can have a “significant impact” on local economies. “Money laundering can drive up house prices and make housing unaffordable; it strengthens patronage networks and reduces fairness in the marketplace; it has an impact on access to various types of services and – if it is not punished – it encourages others to follow suit, ”the report says. “In addition, the dirty money produced and laundered in the region perpetuates an ecosystem of crime and corruption that weakens the rule of law and hinders the ability of institutions to deal with the problem.”