A construction boom in the Balkans and dirty money

The offshore company Mellimate entered the real estate market in Macedonia in 2010, acquiring several properties in a building in the very center of Skopje. At that time, the development of urban planning in the central Skopje municipality of Centar was overseen by Vladimir Zdravev, the chairman of the municipal council.

Zdravеv played a key role in changing the urban plan of the community, which allowed for the construction of the controversial "Skopje 2014" project. The transformation of Skopje was a project of former Prime Minister Nikola Gruevski, who has been in hiding in Hungary since 2018. It brought many neoclassical buildings and monuments to Skopje, as well as filling the pockets of many officials from the then administration.

Ten years after the arrival of Mellimate, the property was sold to a company controlled by the Zdraviev family, which at that time already had a significant real estate portfolio. The number of apartments in Skopje increased by 30% from 2002 to 2021.

In the middle of this year, Zdraviev was arrested on suspicion of siphoning money from state funds by inflating the prices of statue castings in Italy, commissioned as part of the "Skopje 2014" project in the late 2000s and early 2010s, around the same time that Mellimate entered the real estate market in Skopje. The prosecution did not disclose details about the frozen assets but noted that Zdraviev "was conducting transactions of illegal funds through offshore companies."

Even a superficial look at the real estate market in Skopje indicates that Zdraviev is not the only one. Investing in construction and real estate sales for money laundering has a long history in the Western Balkans, as this sector holds a significant place in the economy and is poorly regulated.

According to data collected during the 2021 census in North Macedonia, around 70,000 housing units in Skopje are vacant. The number of apartments in the city increased by 30% from 2002 to 2021, while the population grew by only 3%.

Despite the fact that there are many new apartments in Skopje, Belgrade, Novi Sad, Pristina, Tirana, and other major cities in the Balkan region, the market has high prices and is controlled by sellers. And when it comes to buying, cash is king. Along with the increase in the supply of apartments, the prices per square meter are also rising.

This is a situation that worries organizations fighting against money laundering in the Balkans. "Construction continues beyond proportions and real plans, but not without economic effect," said Slađana Taseva, head of the Macedonian branch of Transparency International and former chair of the country's Anti-Corruption Commission. "Money comes in and is spent."

Thousands of apartments are vacant, and construction is still in full swing. Major cities in the Balkan region have been experiencing a construction boom over the past five or six years. However, this construction boom is not accompanied by a growth in population. In Pristina, according to the latest census data from 2011, about 15,000 housing units are unoccupied. The construction boom has only just begun to gain momentum, and since then, 575 permits have been issued for residential buildings with multiple apartments, covering a total area of nearly six million square meters.

The next census will begin this fall. Accurate data on the situation in other cities is hard to find, but comparing the number of apartments and households in Serbia, for example, shows that the country has about 1.1 million more apartments than households. The population of Serbia is 6.8 million people.

Despite the large number of apartments, prices per square meter are rising. Major cities in the Balkan region have experienced a construction boom over the past five or six years. In 2020, the price per square meter in Belgrade reached as high as 10,400 euros, which is the highest price per square meter for a sold apartment in the capital, while in Novi Sad it was 3,500 euros.

Investing in real estate is generally considered a good investment, but in countries with weak oversight and widespread corruption, this market becomes an easy target for individuals looking to launder money obtained through criminal means. "Investing in the construction and sale of real estate for the purpose of laundering dirty money has a long history in the Western Balkans, as this sector holds a significant place in the economy and is poorly regulated," notes the report by the Global Initiative Against Transnational Organized Crime, GI-TOC, on illegal financial flows in the Balkans from August 2020.

The state cares more about those who want to build because money comes first. Buying apartments during construction has special advantages when it comes to money laundering: the origin of the money is often not checked, and it can be paid in cash in installments, meaning that the money doesn't necessarily have to go through the banking system where it could attract attention. The profit from selling real estate purchased during construction is often higher. Paying subcontractors above market prices is also one way that irregularly acquired money enters the financial system, and there are also those who provide direct loans for real estate construction without involving banks. "Cash transactions can avoid the attention of [institutions] in the formal financial system, as the origin of the money is unknown," says the GI-TOC report.

According to GI-TOC, one of the indicators of suspicious activity is a significant increase in average prices per square meter of residential space between 2017 and 2020 - about 500 euros in Albania, 400 in Kosovo, 300 in North Macedonia, and 700 in Serbia. "Prices continued to rise even during the pandemic," noted GI-TOC in its report from August 2020. However, research on this phenomenon is insufficient.

Money laundering investigations in the Balkans: "Money comes first." The Special Prosecutor's Office in Tirana, the capital of Albania, along with Italian authorities, began an investigation in 2021 based on intercepted conversations indicating that the organized crime group 'Ndrangheta' based in Calabria was attempting to bribe Albanian officials to obtain construction permits. The investigation was initiated after the conversations were aired on the Albanian television channel Ora.

The Albanian Special Prosecutor's Office for Organized Crime and Corruption did not respond to questions about the progress of the investigation. In Serbia, according to data from the State Administration for the Fight Against Money Laundering, 86% of real estate transactions in 2020 were conducted in cash, which is a serious red flag. From 2018 to 2020, the Agency reported that 66 investigations into money laundering were initiated, of which 48 individuals were charged. Eleven of the accused were convicted of money laundering through construction and real estate trading.

In North Macedonia, a report by the Financial Intelligence Unit published in 2020 indicates that the construction sector ranks first in terms of money laundering risk. There are about 6,500 companies operating in the construction sector, which earn approximately 1.5 billion euros annually. Most transactions in this sector are conducted through banks, but many are done in cash, especially when it comes to deals involving individuals rather than legal entities.

"The practice of the same individuals acting both as investors and as sellers of new buildings is accompanied by large amounts of cash for both construction and sales," states the assessment from the Financial Intelligence Unit for the period from 2016 to 2018.

During this period, this agency initiated 16 cases related to money laundering, including companies primarily engaged in construction. BIRN was unable to determine the outcomes of these cases.

According to the Basic Court in Pristina, 32 money laundering cases were initiated from 2014 to 2021. However, the records do not specify the sectors into which this money was funneled. The Special Prosecutor's Office in Kosovo did not respond to BIRN's inquiries.

In North Macedonia, Nuri Bairami, a member of the Commission for the Fight Against Corruption, criticized the government's approach to developing and implementing the National Anti-Corruption Strategy.