By Suzana Salim
giace.org
New Policy Brief Reveals How Illicit Financial Flows Are Fuelling State Capture and Sanctions Evasion in Europe’s Geopolitical Faultlines
A new policy paper from the Center for the Study of Democracy (CSD), published under the Governance & Integrity Anti-Corruption Evidence (GI ACE) programme, has revealed that illicit financial flows (IFFs) in the Western Balkans and Black Sea region surged to an estimated USD 31 billion in 2023 – up from USD 13 billion in 2010 and more than double the estimated annual average of USD 15 billion between 2010 and 2021, the years preceding Russia’s invasion of Ukraine. The report finds that IFFs have spiked sharply since the war began in 2022, reaching as much as 10% of GDP in some of the countries studied, contributing to growing regional instability and undermining democracy.
The report, Illicit Financial Flows and Strategic Corruption (Policy Brief No. 157), published in April 2025, shows that these IFFs – fuelled by sanctions evasion, trade in dual-use goods, and entrenched criminal networks – are displacing legitimate investment, facilitating state capture, and reinforcing geopolitical divides across Europe’s most fragile borders.
Armenia has emerged as the top hub for re-exporting dual-use goods, such as microchips and electronic components, to Russia, often through established illicit networks, smuggling routes, and misinvoicing techniques. Serbia, Georgia, Moldova, and Bosnia and Herzegovina follow closely behind. These countries have increasingly become conduits for sanctioned goods, operating through legal grey zones and vulnerable free trade zones, according to the study.
Ruslan Stefanov, lead author of the paper, said:
“Our research demonstrates how illicit finance is being weaponised to circumvent Western sanctions and fund Russia’s war machine – with devastating consequences for democratic governance and economic transparency. Europe must close these loopholes if it wants to be taken seriously as a geopolitical actor.”
The report calls for urgent action from the EU, UK, Norway, and Switzerland, including:
- Establishing regional sanctions-evasion monitoring groups;
- Aligning dual-use export regulations with EU standards;
- Enhancing due diligence in trade and financial sectors;
- Using tools like CSD’s State Capture Assessment Diagnostics (SCAD) to identify risks.
GI ACE Programme Director Paul M. Heywood said:
“This work provides powerful evidence of how illicit financial flows are being weaponised to evade sanctions and sustain authoritarian influence in Europe’s border regions. It highlights the urgent need for stronger monitoring and regulatory tools – and shows how data-driven research can inform more effective, targeted anti-corruption responses across the EU and its neighbourhood.”
The policy paper draws on trade data analysis, field research, and extensive regional case studies. It also highlights the role of European businesses, some of which – knowingly or not – have contributed to sanctions circumvention by exporting goods to intermediaries in third countries.
This research is funded by the GI ACE programme which generates actionable evidence that policymakers, practitioners and advocates can use to design and implement more effective anti-corruption initiatives. This GI ACE project is funded by UK International Development and hosted by the Centre for the Study of Corruption at the University of Sussex. The views expressed do not necessarily reflect the UK government’s official policies.
Download the full report: https://giace.org/resources/illicit-financial-flows-and-strategic-corruption/
For media enquiries or interviews with the authors, please contact: Suzana Salim (ss2387@sussex.ac.uk)