Remittances, dirty money and the problems they leave behind

Inward flows of remittances have grown rapidly in recent years, with an average growth rate in the last 3 years (2021-2023) of 10.5% and dominate all other annual financial flows from sources abroad. Despite these trends, which began to increase after the pandemic, the debate about financial inflows has revolved around capital flows and their impact.

Over the years, researchers have paid increasing attention to remittance inflows, given their double-digit growth trends. Although Albania has not yet created economic dependence on these flows, with remittances currently accounting for 5-6 percent of GDP, they have so far been valued as a source of security that finances consumption among vulnerable segments of society and a net inflow of foreign exchange. .

But beyond the benefit, it seems that they have a cost in the Albanian economy. Remittances are putting increasing pressure on the exchange rate and on domestic prices and are an injection of liquidity that has not been managed coherently as their risk is compounded by inflows of other money from informal sources.

Inflows of remittances have helped growth by mitigating the decline in consumption from population movements, but when we mention coherent management this should not be confused with money from informal sources. Remittances circulate and are channeled through the domestic financial sector (even when directed to informal segments of the economy) and thus provide a stable source of funding (deposits) for banks.

Our analysis, based on the period from 2008 to the first six months of 2024, shows that inflows of remittances do not seem to have a significant effect on deposits, as the average level of their flow near 660 million euros per year indicates that are intended for basic household consumption and the real estate market.

Meanwhile, the increase in the flow of remittances after 2021 has an addition that goes not to the consumption of basic goods and services, but directly to the real estate market, which in recent years has seen an increase in property sales.

Results from the evaluations show that remittances are being used to increase housing supply. The analysis behind these results is that remittance income is being used to finance the construction of new housing[1].

But what does not coincide with the increase in supply is the fact that the additional supply of housing has not created pressure in the decline of housing prices.

This fact of keeping prices on the rise shows that the impact of remittances is limited to the pressure that can come from demand and it is the elements of the informal market that influence the non-reduction of the price, since this offer of the housing market is not connected directly with the domestic and foreign market demand for real estate.

Housing prices in the last five years have increased by 23.8%[2], which suggests that this increase has not been affected by remittances, which have an increase in their average flow of up to 10.5% per year.

While increased demand including dubious buyers may be driving this price increase, it is likely that the overwhelming influx of cash in the real estate sector is prompting developers to prioritize luxury real estate properties over affordable housing.

Money laundering appears to exert a significant influence on the property market, distorting prices and creating artificial demand, which hinders housing affordability and reduces supply. Speculative buying by money launderers contributes to real estate bubbles and market volatility, and is now a constant threat to market stability.

Discrepancies between the property’s value and the buyer’s reported income may be indicative of attempts to hide the true nature of the transaction.

The deterioration in all these years did not come from the market but from the involvement of politically exposed persons, or known criminals in real estate transactions.

Moreover, multiple acquisitions of properties by the same entity, especially when they are carried out within short time frames[3] (the media reports many of these cases), are indicators of the distribution of illegal money across different assets.

Illicit money flows into real estate have only exacerbated this problem.

As the effects are not limited to property prices.

Mismanaged real estate investments, housing and commercial premises purchased to justify illegal profits are leading to job market damage for ordinary workers.

Dirty money had an impact through entering the Albanian monetary market, giving effect to the devaluation of three foreign currencies, and this gave effect to the closure of productive activities, or the increase of their debts towards the informal money market

Last year, and continuing this year, this high influx of dirty money is not only undermining public safety, but further adding to the strain on the housing market in vulnerable communities, fueling the flames. of the housing crisis.

Due to the fact that dirty money cannot be cleaned in any type of activity (since construction and certain services manage to clean money in a quick time), this phenomenon that is competing with the formal market, in addition to economic instability and inequality, is affecting aggravation of environmental degradation and pollution creation with effects on the health and cost of individuals, families and other businesses.

Kleptocrats, sanctions dodgers and corporate entities profiting from environmental degradation launder money through real estate. Those who traffic in drugs, human beings, or even contraband launder money through real estate.

There is an increased ethical and social conflict when you see that those who profit illegally from economic instability and environmental degradation invest that income in real estate, when law-abiding citizens can never afford and they will never have access to these investments.

However, money remittance and foreign exchange businesses from the many reported practices[4] are not excluded from the laundering activities, and this is the most tangible part of the effectiveness of law enforcement institutions, which seem to date to be hardly clarifying who ends up. remittances from immigrants and where money laundering begins.

[1] https://www.bankofalbania.org/rc/doc/Vrojtim_mbi_Ecurine_e_Tregut_te_Pasurive_te_Paluajtshme_ne_Shqiperi_6MI_2024_28202.pdf

[2] https://altax.al/en/housing-prices-and-their-affordability-by-albanian-families/

[3] fast-bought properties are generally a money-laundering technique that involves multiple transactions to obscure the origin of the funds

[4] https://rm.coe.int/fatf-report-money-laundering-through-money-remittance-and-currency-exc/16807150ad