Fears Russian war in Ukraine to increase illicit financial flows in Western Balkans

Fears Russian war in Ukraine to increase illicit financial flows in Western Balkans
The prevalence of cash and informal economies facilitates the flow of illicit funds into the legitimate financial systems in the Western Balkans. / bne IntelliNews
By bne IntelliNews July 27, 2023

Illicit financial flows (IFFs) in the Balkan region are already proportionally large as a percentage of GDP. A new report from Global Initiative Against Transnational Organized Crime warns that an increase in such flows are likely as a result of Russia’s war in Ukraine. 

The report reveals that IFFs – illegally earned, used or moved across an international border – in the region are “manifold, multi-directional and, proportionally, large”, amounting to around 6% of the region’s GDP, against 3.5% globally. This figure is as high as approximately 8% in Bosnia & Herzegovina, and 7% in Kosovo, according to quoted data from the Center for the Study of Democracy. 

“The common denominator of the Western Balkan countries is their vulnerabilities kindled by institutional weakness and state capture,” says the report. 

“Illicit capital moves in and out of the Western Balkans in every direction and on a staggering scale, enabled by an ecosystem of state capture, organised crime and a rampant shadow economy.”

Explaining this, it says: “The strategic geographic position of the Western Balkans, between Asia and Western Europe, enables criminal networks to cross the indistinct divide between legal and illegal markets. The Western Balkan region has traditionally served as a gateway route for drug trafficking, human smuggling and illicit trade.

“The porous borders, the interdependent nature of the Western Balkan economies and the large informal sector – exceeding 25% in all countries covered – provide a permissive playing field for the movement of illicit funds. Most of all, the overall governance features of the Balkan countries, plagued by chronic corruption and clientelism, weak rule of law, corrupted and disabled criminal justice institutions, and undue political interference, are the primary driver of IFFs.”

The problem is particularly acute in Bosnia, which Global Initiative attributes to the division of responsibilities between entities, state level and cantons; “responsibilities are intertwined and institutions are exceptionally fragile, and insufficiently staffed and financed to counteract the problem”. 

In the Western Balkans as a whole, the prevalence of cash and informal economies facilitates the flow of illicit funds into the legitimate financial systems, according to the report. Experts emphasise that smuggling cash remains the primary method for moving illicit money across borders, concealed in vehicles or hidden among legitimate goods. Smaller sums are laundered through cash-heavy businesses like restaurants, bars, beauty salons and petrol stations, making illegal funds indistinguishable from legitimate profits and easily infiltrating the banking system.

A global problem 

This is within the context of the huge global scale of the problem; worldwide illicit cross-border financial flows are estimated at between $1 trillion and $1.6 trillion a year. 

These IFFs, the report says, “are harming economic development on a national and global level”. 

Commenting on the damage, it explains: “IFFs promote rent-seeking and criminal behaviour, reduce governments’ capacity to support development and inclusive growth, undermine the rule of law and jeopardise the business environment. Illicit flows drain public resources, reduce the scope and quality of public services and thus undermine confidence in state institutions.” 

Circumventing sanctions

The report looks at the major enablers and vulnerabilities of illicit finance after Russia’s invasion of Ukraine in the six Western Balkan countries plus EU members Bulgaria and Croatia. 

Faced with tough Western sanctions, “The Kremlin has repeatedly taken advantage of its integration into the Western financial system to exploit governance gaps through the corrosive effect of illicit finance,” the report says. 

“Russia’s war in Ukraine could … accelerate further IFFs in the Balkan region – a crucial entry point and essential route for a plethora of illegal activities, such as drug trafficking, human smuggling, illicit trade and contraband,” it warns. 

Most of the countries in the region have aligned with Western sanctions, but not all. 

“The Western Balkans remains one of the most vulnerable soft targets for the Kremlin’s ongoing hybrid war against the EU and the democratic West. The combination of state and media capture, simmering ethnic divisions between and within countries, the slow pace of EU accession and the legacy of Russian cognitive bias make the region a gateway for sanctions evasion,” the report says. 

No to sanctions

Serbia has refused to join the sanctions. With travel bans in place, the country has become a key route for Russians to enter the area. Since the Ukraine invasion, over 5,000 Russian companies have been registered in Serbia, with 1,000 as limited liability and 4,000 as entrepreneurial businesses. This creates an opportunity for money laundering, the report says.

Since 2014, Bosnia has also not adhered to the EU's sanctions on Russia. Moreover, its alignment with EU restrictive measures has notably decreased since 2021. While officially backing EU measures in response to the Ukraine invasion, Bosnia struggles to establish a coherent foreign policy position and lacks a systematic approach to implementing sanctions, Global Initiative said.

Even in staunchly pro-Western countries there are issues. The report criticises the ‘citizenship for investment’ schemes in North Macedonia and Montenegro, as well as Albania’s ‘fiscal amnesty’, under which any Albanian or foreign citizen can deposit up to €2mn in non-declared money into the national banking system, enjoying legal immunity and a tax of only 5-10%.