Will the proceeds of crime be used to build roads?

Will the proceeds of crime be used to build roads?
This article has been written for Albanian Free Press newspaper and www.afp.al

By Eduard Zaloshnja

The roads which have been built in Albania in the last quarter of a century have been mainly funded by low interest loans granted by international financial institutions such as the World Bank, EBRD, etc. But, a small part of these roads have also been built through state budget money. In the period from 2007 until 2013, another two abnormal sources of funding were used. First, high interest loans were taken in the foreign and domestic financial market (mainly for the Nation’s Road) and secondly, roads were built without paying the construction companies that built them.

As a result, public debt went up from 55% of GDP in 2006 until 70% of GDP in 2013. Meanwhile, the debt owed by the state to private companies went as high as 720 million USD. Under such circumstances, the Albanian government sought the IMF’s assistance. This institution granted a low interest loan of 400 million USD for a period of 4 years. The condition that the IMF imposed was that the government should settle all the arrears owed to private companies and to make budget revenues and budget expenses equal.

These two conditions were met by the Albanian government and this year, the IMF issued the last installment of the low interest loan, officially advising the Albanian government not to increase public debt and not incur any more arrears toward private companies.

Under these circumstances, Edi Rama, who was criticized for being the Prime Minister who did not inaugurate new roads, found a new way of funding for several roads which will be built in the years to come (and for several other public works). This way of funding is called Public-Private Partnership (PPP). According to this method, a private company completes a public work and this company is guaranteed by the state that it will be remunerated for the investment that it makes.

In essence, such method of funding is a form of public debt, which is made official in the state’s treasury (the debt in the state’s treasury is only made official when treasury bonds are emitted or when the state takes out low interest loans or commercial loans). Nonetheless, this way of financing has been used for decades in other countries too.

But, the Albanian opposition claims that the funding of new roads through PPPs is a cover up for the laundering of money generated through the cultivation and the traffic of cannabis. According to the opposition, private companies which will build the roads, will borrow from Albanian banks, which will afford these loans through the illegal proceeds of cannabis.

In fact, such scheme would only work out if the Albanian banking system would not be part of the international banking system, which strictly monitors deposits/payments/transfers of over 10 thousand USD. In the case of the construction of roads, the amounts are gigantic (for instance, Arber Road will have a cost of 400 million USD).

On the other hand, the payment of construction works in cash (without being reflected on the financial statements of the construction firms) would be a criminal offense which would be easily be identified, because there would be a significant difference between reported costs in the financial statement and the costs declared in the estimates for the PPP tenders (If the company has been granted a tender amounting to 400 million USD, it cannot report costs of 200 million USD).

But is there another way of spending dirty money for the construction of roads in Albania?

There is, but it goes through tax havens.

So, a group which has accumulated money from illegal traffics or corruption, could carry them physically in one of the countries which guarantee the discretion of deposits and shareholders of companies which are set up in them (these countries are usually called “tax havens”).

Following the registration of an anonymous company in one of these countries, this money is legally transferred to the construction company which has won the tender for the construction of a new road in Albania. Once the road is built, the state pays the installments to the construction company, until the full amount is paid off.

This way, the construction company has no problems with the law, because it declares that in order to fund its works, it has borrowed from company X, registered in country Y. And then, with the installments that it receives from the state treasury, it pays its dept to company X and makes a profit for the works that have been done.

To see if such scheme of money laundering will be used for the construction of roads through PPPs, investigative journalists and the opposition will go through the sources of financing that will be used by companies winning the tenders. If there are anonymous companies registered in tax heavens among them, then in all likelihood, money laundering is taking place.

The use of tax havens in the past

The use of tax havens for investments in Albania has also been attempted in the past. The most famous case is the one in 2012 for the acquisition of Albpetrol for 850 million USD.

At that time, an anonymous company which was incorporated in Singapore (this company only had a postal address) merged with a very small oil company (which really existed in the USA) to form a consortium and this consortium was granted the tender for the acquisition of Albpetrol. The American company had no financial means to acquire Albpetrol, but this company was needed because a company with experience in the domain of oil was required for this acquisition to take place. Meanwhile, the shell company registered in Singapore would provide the money. Later on, it was discovered that Rezart Taçi was behind the shell company. Taçi had acquired ARMO in a similar way. (For one reason or another, the 850 million USD could not be secured and the tender for Albpetrol failed, while ARMO went bust).

Also, a number of concessions which were granted by Berisha’s government (which are still in force), benefited several anonymous companies established in tax havens. Their owners are not known.

A few words about tax havens

Most of the money going into tax havens is clean. The reason why money goes there is that these countries apply very low taxes or zero taxes for foreign investments. The profits from a fund, company or a deposit created in these tax havens are not taxed by local authorities. This is the reason why the richest companies and richest people in the world put their money in these tax havens.

For instance, over 20 thousand companies have registered their seat in a 10 storey building in Belize, with funds from all over the world.

But, tax havens are also used by people who want to hide their illegal money (proceeds of crime or corruption) or who want to hide their legitimate incomes, to avoid tax in the country of origin (remember the case of Uli Hoeneß, Bayern Munchen’s president). By exploiting the anonymous nature offered by these tax havens, the money deposited in them is used for investments in other countries, which, at first glance appear legitimate.

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