Anti-money laundering legislation in Western Balkan countries: an analysis of the legal, social and economic impact of the regulation on the housing market

In some countries, one of the main vehicles of the money-laundering is the real estate market and frequently legislation doesn’t guarantee the payment traceability and detectability of the origin of the resources used (Agarwal and Agarwal, 2008). In the real estate market, the money laundering operations involve many providers as developers, financiers, real estate companies, brokers, etc… (Financial Crimes Enforcement Network, 2008) and each country has adopted different solutions in order to manage these issues.The lack of an efficient legislation has direct relevant effects on the property values. Anyone who wants to launder money is willing to pay higher than normal market ranges, thereby causing real estate bubbles (Boles, 2017). The detection of the money-laundering phenomenons could be completed taking into consideration the characteristics of the financier, of the new owner, the premium paid and the number of transactions made by the same buyer (Ferwerda e Unger, 2013).There aren’t evident results achieved by the anti-money laundering legislation in the Western Balkan Countries real estate market. The actual policy doesn’t permit to underline the social cost caused by the absence of an effective control mechanism. The objective is to present an analysis model applicable in the Balkan countries that allows to evaluate the new anti-money laundering regulations in the real estate market. The analysis is divided in three parts: the first part will analyse the Balkan legal background in relation to the AML legislation, second part will analyse the legal, social and economic consequences of the implementation of AML measures and the third part will be focused on an economic analysis of the phenomenon.FIRST PART. The starting point is the analysis of the legal background of the Balkan countries and we need to underline that, regardless of the EU membership, the AML legislation it’s quite uniform. The Balkan area we find regulations that limit the private interest in order to protect the public one that is identified in the economic order. This limitation is esplicated in particular with the imposition of controls obligation for any advisors operating in the market. The main consequence is a lack of balance between the contracting parties, because the advisor has direct control on costumer. This mechanism is contextualized in the real estate market implies the principle of ‘identification and knowledge of the client’. According to this principle the banker that is a private counterparty as the client, before the conclusion of a contract has the right to check if the client can justify the origin of the money. In the case in which the check has a negative result, the contract can’t be concluded. But we have to remind that also in the cases where the control has a positive result and the contract is concluded, the banker exercise its power to control during the execution of the contract. In addition, if during the execution the banker detects a suspect of money-laundering, the bank has the duty to recede unilaterally interrupting the contractual relationship. According to this mechanism in this way we can’t talk about autonomous regulation of interests because the AML legislation imposes the conditions of the regulation and transforms the private counterpart in a controller with limited powers.What are the consequences of this process? From a legal point of view there is a reinterpretation of some principles of civil and commercial law that were born in the roman law they are now the base of the civil law tradition. So, for example, it changes the interpretation of the concept of bona fide. A general principle that has the objective to create a mutual loyalty between the parties. But if the fundamental criteria in the determination of the good faith are lies and these ones define the difference between the categories could know/could not know (K.K. Sabirov, 2021), to what to extent can we say that the client or the banker is lying? In particular, is the bank acting in good faith when identifies the client but doesn’t inform him about the aim and the consequences of the identification process? Does the client that is subjected to a sort of questioning from the banker still have a sense of loyalty to the latter? The banker’s power to control has led to change the interpretation of the principle of ‘diligentia quam in suis’. This principle is translated in a contractual liability only for the amount of care that the obligor customarily exhibits in his own affairs, rather than the care that may be expected from a reasonable man. (Hausmaninger H., 1985). Is unavoidable that the required diligence of the banker expands, and he must have not only economic knowledge but also legal knowledge. In addition, we need to underline, that the non-conclusion or the withdraw from the contract doesn’t stop the circulation of illicit money. In the first case, anyone who wants to launder will find a different way to do it, in the second case the bank has to return the money to the client and this one will find another way to do it. The result of AML regulation is a reduction in contractual banking relationships and the creation of a mistrust in banks since citizens feel controlled. Last but not least, we have to think that the AML regulation imposes restrictions for those that the Government can control (bankers, notaries, real estate agents …). But what happens if these providers aren’t necessary? Nowadays we hear more and more about house bought using the blockchain, that implies a direct interaction between private parties, without using any real estate market professionals. What shall we do in these cases? Shall we control ourselves as private citizens?SECOND PART. These consequences may seem not relevant, because we rarely think about them but we often think about the application of the regulation without considering if it’s heading the right direction. The main question is: is it right to limit more and more the private interest in order to protect the public one? Are we really protecting the public interest as well as the economic order? The AML regulation in Europe it’s quite uniform but the results aren’t the same. In terms of actual facts, two EU members, Croatia and Bulgaria, are in the FATF grey list. The European Commission reports underline a particular attention in fighting money laundering in Romania. On the basis of the latest report from the Global Initiative on illicit financial flows, in Bosnia Herzegovina it is estimated that money laundering ranges from 400 milion to one billion euros. In addition, the Global Initiative against organized crime underlines that “Despite efforts to prevent illicit finance – such as the adoption of international frameworks, Financial Action Task Force (FATF) standards and the EU’s anti-money laundering (AML) directives – financial institutions in the Western Balkans remain highly vulnerable to sophisticated criminals and the inherent risks in the formal financial system. Financial institutions such as banks, microfinance institutions, cryptocurrency services and money transfer servicesTHIRD PART. For this reason the analysis cannot be separated from the study of the economic impact on the property values caused by money laundering. The objective is to identify reliable measurements to detect potential money laundering events in the real estate market.The third part analyses the development of real estate values in the main Balkan cities in the last 20 years to calculate property price indexes and the price/rent ratio for different Balkan countries markets (i.a. You, Yu, Lin, 2013). Data will be collected by the official publication made by the national institute of statistics and it will be focused only on the housing sector.The analysis will be focused on the regulatory innovations in the field of money laundering to identify with an event-study approach the effects of the policy on the price dynamics. Specifically, following the Nanda and Ross approach (2012), it will be verified the property prices reaction caused by the introduction of the AML regulation, using aggregated index and temporal dummy variables linked to the entry of the new legislation. The result will permit to underline potential benefits arising from the restriction imposed by AML regulation on the reduction of real estate bubbles. If it will be possible, the analysis will be completed considering also samples of similar properties (on the base of a propensity score match) in order to identify the property types that are more influenced by the new regulation.In addition, the evidences will permit to evaluate potential benefits as reduction of money laundering cases on the houses accessibility for Balkan citizens and the sustainability of home financing.