In your report, “Cash is King: Impact of the Ukraine War on Illicit Financial Flows in South Eastern Europe,” you highlighted that global illicit financial outflows constitute 3-5% of the world’s GDP, while illicit financial flows (IFFs) in the Balkans are estimated at around 6% of the region’s GDP. What factors can account for the notably high level of IFFs in the Balkans, and why does this issue remain relatively obscure?

The mixed blessing of being strategically located between Asia and Western Europe enables criminal networks in the Balkans to cross the blurry divide between legal and illegal markets. The region has traditionally served as a gateway route for drug trafficking, human smuggling, and illicit trade. Moreover, the substantial recent infrastructure investments are a powerful catalyst for capital and commercial flows. 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 interferences are the primary driver of IFFs. The issue of illicit finance is particularly prevalent in Bosnia and Herzegovina due to the division of responsibilities between entities, state level, cantons, etc., where responsibilities are intertwined and institutions are exceptionally fragile, as well as insufficiently staffed and financed to counteract the problem.

How is Moscow capitalizing on the region’s vulnerabilities, such as weak regulatory controls, a fragile rule of law, and a substantial informal economy, to facilitate illicit financial flows (IFFs)? Additionally, what advantages does the region, and certain countries within it, offer to Russian elites and to Moscow while seeking to evade sanctions?

The Western Balkans (WB) 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. For instance, since it is only a potential EU-membership candidate, Bosnia and Herzegovina is not required to align with the EU’s Common Foreign and Security Policy (CSFP). The country has not followed the EU’s sanctions against Russia since 2014. Furthermore, the country’s alignment with the EU’s restrictive measures has significantly declined since 2021. Even though Serbia has condemned the invasion of Ukraine at the UN and other international forums, it has not formally introduced sanctions against Moscow.

When it comes to North Macedonia and Montenegro, despite the fact that they have faced harsh criticism from the EU, they continue to offer ‘citizenship for investment’. Notwithstanding the numerous EC warnings and recommendations that Montenegro should phase-out the investor citizenship scheme as soon as possible because it poses risks of money laundering and corruption, the Montenegrin government recently hit new records in granting honorary citizenships. From 31 August to 8 November 2022, the government granted 296 new citizenships (287 were based on the Economic Citizenship Programme; for five, the state interest was not specified in the decisions). The largest number of recipients came from Russia (110), followed by China (67).

In March 2023, and under EU pressure, Albania temporarily shelved its controversial cash-for-passports scheme.  However, the Albanian government declared it would not give up on another thorny economic programme of ‘fiscal amnesty’, under which any Albanian or foreign citizen can deposit up to 2 million in non-declared money into the national banking system, enjoying legal immunity and a 5–10% tax.

EU member states, such as Bulgaria, must directly apply EU regulations on sanctions, meaning tax authorities should initiate freezing procedures even when no national regulation stipulates this (the Bulgarian legal system only provides a procedure to seize assets but not to freeze them). However, Bulgaria so far has not imposed any sanctions against Russian citizens or companies featured on the EU sanctions list despite the fact that they were first imposed already in 2014 after the annexation of Crimea. According to the latest data, nearly 300.000 Russians own over 500.000 properties in the country and, while the national tax agency acknowledges that it should apply the EU regulations on sanctions, this promise remains a dead letter.

Can it be argued that, through illicit financial channels, Russia has expanded its malign influence in the region, particularly in Serbia, Montenegro and North Macedonia, following the aggression against Ukraine? What potential adverse effects might this phenomenon have on Balkan stability and the European integration process? 

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 brutal invasion of Ukraine shed a harsh light on the sobering dangers of kleptocracy and the risks to which Europe – and the world – has exposed itself by taking a lax approach to dirty money. Russia’s war in Ukraine could exacerbate these circumstances and 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.

Due to imposed travel bans, Serbia is one of the few remaining routes for Russians to establish themselves in the region. Since the start of the invasion of Ukraine, Russian nationals have registered more than 5.000 companies in Serbia, over 1.000 being limited liability companies and nearly 4.000 entrepreneurial businesses. The establishment of so many companies in the country offers fertile ground for money laundering. As observed in the Serbian national risk assessment by the national Administration for the Prevention of Money Laundering, limited liability companies and entrepreneurs pose a particularly high degree of threat with respect to money laundering. Through such means wealthy Russians could seek investment opportunities and use existing connections to launder money in real estate and other sectors traditionally vulnerable to IFFs in the region.

Since the onset of the war, a significant number of Russians, potentially exceeding 200.000, have relocated to Belgrade, establishing hundreds of companies and enterprises. With Serbia relaxing its citizenship requirements, many may soon acquire Serbian passports, granting them unrestricted access to the EU. Does this trend pose any security risks for the EU?

Without a doubt! The Law on Citizenship enables the Serbian government to grant citizenship through a special procedure under certain conditions. According to an analysis by Radio Free Europe, in the first half of this year, the number of Russian citizens who received citizenship in Serbia is roughly the same as the number from the entire last year. At the same time, in 2022, the number of Russian citizens who received a Serbian passport tripled compared to the year before the invasion. This poses serious security risks, given that individuals who hold Serbian passport can freely travel to Schengen zone countries without visas, especially in light of how vulnerable the region is to illicit finance. IFFs promote rent-seeking and criminal behaviour, reduce governments ‘capacity to support development and inclusive growth, undermine the rule of law, and jeopardize the business environment. Illicit flows drain public resources, reduce the scope and quality of public services thus undermining confidence in state institutions.

Are there viable solutions for addressing the issue of IFFs in the Balkans, and what role could the EU play in combatting this problem effectively?

Europe needs a strategic decoupling of its economy from Russia’s. Priority should be given to breaking energy dependence and dismantling Russian oligarchic networks across the continent. In the more vulnerable economies of South-eastern Europe (SEE), Russia’s weaponization of trade must be opposed by pursuing a policy of strategic investment by the EU and the US.

There is a critical need to increase the quantity and quality of data available on the nature and magnitude of IFFs so as to comprehend their key drivers, channels and trends, and initiate a stronger policy response. As a transnational problem, the push to curb IFFs requires coherence within and between national and international normative frameworks and coordinated action within the scope of EU enlargement and the Berlin Process.

To prevent Russian companies from evading sanctions, the EU should prioritize halting Russian IFFs, including by accelerating the integration of the SEE into the rollout of the newly designed Anti-Money Laundering Authority (AMLA). Stricter measures should be taken to halt indirect Russian investments through EU companies, especially in the green energy sector.

Not all of the funds that run through IFFs originate from a predicate crime. Capital that has been generated legally, quasi-legally or informally may be transferred through illegitimate channels and held in offshore jurisdictions. Thus, the SEE countries must allow money laundering to be investigated as a separate crime. Authorities have also been slow to act in areas that have long been vulnerable to illicit finance, such as beneficial ownership transparency, which directly relates to preventing, detecting, prosecuting and sanctioning financial crimes. Enforcement of transparency requirements for beneficial ownership is vital, as is the stricter security vetting of investments by third parties in the SEE and European companies or operations.

As a matter of urgency, the SEE countries must prioritize updating their investment and national security strategies to incorporate a robust FDI screening mechanism as an essential defence against foreign malign influence and an additional safeguard for boosting quality foreign investment.