The real estate and construction sectors are being used to launder illicit money from the drugs trade and migrant trafficking in the Western Balkans, leading to a hike in property prices, according to a report by the Global Initiative Against Transnational Organised Crime.
Laundering money through construction and real estate businesses “is popular because it remains relatively easy and can absorb large amounts of capital”, says the report, “Spot Prices: Analyzing flows of people, drugs and money in the Western Balkans”.
Property “can be a place to store a significant amount of capital, potentially appreciate in value and enhance the quality of the criminal’s lifestyle” says the report. It notes earlier research showing that investments in construction and real estate “have a long history of absorbing illegal revenue in the Western Balkans, given that the sector is both meaningful in terms of economic share and poorly regulated”.
“Residential property is generally recognised to be at greater risk than commercial property because of its turnover potential,” it says “In fact, many property markets across the region have been skewed by laundered money as prices are artificially driven up by criminals who want to launder their assets there. Although real estate prices dropped across the region in 2020 due to [coronavirus] COVID-19 … many places still showed gains since 2017.”
Unexplained property booms
The report homes in on some of the money-laundering hotspots in the region that have seen strong increases in property prices in recent years.
In Albania, it reports price hikes in both the capital Tirana – which has experienced a construction boom and a spike in property prices – and the coastal city of Vlora, where prices have also soared. While Albania’s economy as a whole, especially the tourism sector, was hit by the pandemic, real estate activity expanded by 5.5% in 2020.
“In Vlora, criminal groups have allegedly invested in the tourism sector, including in luxury hotels at the seaside. Prices have increased from €600 to €700 per square metre in 2017 at the waterfront to €1,000 to €1,200 in early 2021. Experts have argued that this increase could not be explained by higher demand from the real economy or the growth of formal revenue, but instead is largely driven by cash from organised crime and corruption which has been invested in construction and real estate,” says the report “In Tirana, additional luxury projects are currently planned in the city centre which do not reflect market forces.”
The report quotes an 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 the funds is “rather sporadic”.
Serbia’s real estate industry also experienced “unusually high growth” between 2018 and 2020, even though many of the new builds remain empty.
“Similar to Albania, the construction industry continued to grow during the COVID-19 pandemic despite the contraction of the general economy. An example is the increasing employment and procurement of materials for the Belgrade waterfront project,” says Global Initiative. Prices per square metre have kept rising even in a market seen as saturated.
“Experts argue that this increase is most likely the consequence of a significant amount of illicit funds being 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 own property with a conservative estimated value of €27mn. Bosnia’s 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 broader vulnerability that the Western Balkans offer an attractive location for foreign businesses to launder their money,” according to Global Initiative.
Kosovo too saw a boom in the construction sector in several cities 2016 and 2019. “A large part of these investments are allegedly funds generated through criminal activities, including corruption, tax evasion and drug trafficking, by people close to the ruling elite,” says the report. Following a similar boom in North Macedonia, there are several open investigations into money laundering through the real estate industry, including one linked to fugitive former prime minister Nikola Gruevski.
Looking at how money is laundered through the sector, the report notes that in several countries across the region, companies that apply for a construction permit are not obliged by law to show proof of their capital or its origin. They just need to pay the infrastructure tax, which depends on the value of the construction.
It lists numerous practices that create scope to hide illicit money such as prepayments by clients, high liabilities to suppliers, declarations of large loans from other parties (rather than banks or financial institutions) and direct transactions between buyers and investors or builders. “These methods enable companies to pretend that the whole investment is carried out based on the payments from customers and suppliers and loans from third parties, thus allowing for the completion of the cycle of laundering of criminal proceeds,” says the report.
More illicit funds to launder
Finding ways to launder larger amounts of money has become more pressing as the flows of fund from illegal activities, such as the drugs trade and people smuggling, increases.
Global Initiative’s conservative estimate of the total value of the migrant-smuggling market in the region (with a ± 20% margin of error) is between €33.7mn and €50.6mn for the three main transit zones, with the total for the Western Balkans somewhat higher.
There is also a sizeable drugs trade 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 stamp it out, and growing amounts of the drug are now produced in Bosnia, North Macedonia and Serbia. On top of this, the Western Balkans is a major transit region for the trafficking of cannabis, heroin, cocaine and synthetic drugs. The last are also produced in the region, mainly in Serbia.
“Despite the significant operating costs, organised crime and illicit trade in both licit and illicit goods undoubtedly generate billions of euros every year in illicit global financial flows that are channelled abroad, laundered into local economies or reinvested in other criminal activities,” says the report.
According to an estimate from 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) puts the total at between 2% and 5% of global GDP. Applying these percentages to the Western Balkans, between €1.8bn and €4.6bn would be laundered every year.
“These numbers are remarkable, especially when put in perspective: for example, in 2021, the budgets of the interior ministries of North Macedonia and Albania each amount to €168mn; the Kosovo police force has only €87mn at its disposal.” says the report.
As well as the real estate sector, several other ways of laundering money are also charted in the report. Smaller amounts of illicit proceeds are typically laundered through cash-intensive businesses, such as restaurants, bars, filling stations and taxi companies. Gambling is another way to launder money, in the countries where this is permitted.
Banks, according to the report, “play a key role in money laundering, as they often act as gatekeepers to the financial system”. This takes place from small amounts of illicit money simply taken to the bank, to banks’ roles as an important intermediary in larger transactions and to offshore accounts.
Another way of money laundering is through purchases of luxury assets, such as works of art, jewellery, cars and yachts, says Global Initiative, as is trade-based money laundering, or investment into the emerging cryptocurrency markets.
Patchy prevention efforts
Governments from the region have made a number of efforts to tackle money laundering, including through the adoption of a revised anti-money laundering framework. However, says the report, there remain gaps, especially when it comes to the implementation of these frameworks. “Institutions across the region continue to have a poor track record of investigations, prosecutions and convictions of stand-alone money laundering cases,” it says.
An earlier report points to the international nature of illegal activity, and shows that not only do drug traffickers from the Western Balkans make most of their money outside the region, but that much of the assets from crime are laundered outside the region, for example in Spain, the 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 real estate prices to 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 left unpunished – it creates incentives for others to follow suit,” says the report. “Furthermore, the dirty money being made and laundered in the region is perpetuating an ecosystem of crime and corruption that weakens the rule of law and hampers the ability of institutions to deal with the problem.”