Author: Etleva GJONÇA, PhD
Date: 15-01-2026
The Western Balkans are moving toward EU membership, but progress remains uneven. Montenegro has advanced furthest, while Albania has opened all chapters and pursued justice reform. Yet weak enforcement, corruption, and limited administrative capacity persist across the region.
Illicit trade exposes these failures. Smuggling, tax evasion, and counterfeiting undermine market governance, fiscal capacity, and institutional coordination, making illicit trade a test of EU readiness, especially under Chapters 23 and 24, covering rule of law, justice, and internal security.
The scale of the problem
Recent enforcement data underline the persistence of illicit trade in the Western Balkans. In 2023, coordinated operations by EU anti-fraud authorities seized hundreds of millions of illicit cigarettes and large quantities of raw tobacco, preventing revenue losses of over €150 million. Montenegro featured prominently, reflecting the region’s role along major transit routes linking Asia, the Middle East, and Europe.
Tobacco accounts for a large share of illicit trade, with an estimated one in five products consumed illegally in parts of the region. In Bosnia and Herzegovina and Montenegro, illicit tobacco flows are also a source of illicit financial inflows. Beyond tobacco, counterfeit goods—including consumer products and medical items—continue to enter through established smuggling routes. Recently, Albania has been listed among leading global sources of counterfeit exports. Meanwhile, recurrent corruption cases at borders across the region highlight persistent enforcement gaps.
Why illicit trade persists
Illicit trade in the Western Balkans is not simply a law-enforcement problem. It is rooted in structural weaknesses that make illegal activity easier—and often more profitable—than operating within the formal economy.
First, informality remains widespread. In many countries, the informal economy is commonly estimated at around one-third of GDP, with Serbia generally at the lower end of the regional range. When such a large share of economic activity takes place off the books, smuggling, tax evasion, and under-reporting are easier to conceal and harder to sanction.
Second, weak enforcement and corruption lower the risks associated with illicit activity. Gaps in customs controls, tax administration, and inspection capacity allow illegal operators to function with limited fear of detection, eroding trust in institutions and discouraging voluntary compliance.
Third, market distortions reinforce informality. In Serbia, state-owned enterprises dominate key sectors and benefit from subsidies, state guarantees, and protection from bankruptcy, crowding out private firms. In Bosnia and Herzegovina, publicly owned companies often enjoy special legal treatment, accumulate tax arrears, and control large shares of economic assets, tilting the playing field and encouraging informal practices.
Finally, limited digitalisation compounds these problems. Weak e-invoicing systems, fragmented data sharing, outdated risk-analysis tools, and heavy reliance on cash make it harder to detect trade misinvoicing, VAT fraud, and money laundering.
As a result, illicit financial inflows remain significant. In recent years, they have surged across the region, in some cases exceeding 10 per cent of GDP. Tax evasion (in Albania and Serbia), VAT fraud (in Albania and North Macedonia), money laundering (in Kosovo), and repeated cases of large-scale trade misinvoicing (in Serbia) have been key drivers.
What needs to change
Reducing illicit trade requires more than tougher policing. Economic, fiscal, and institutional reforms must move in parallel.
Aligning excise duties and tax rates with EU standards would narrow cross-border price gaps for tobacco, alcohol, and fuel, reducing incentives for smuggling. Stronger competition policy—combined with limits on preferential treatment for state-owned enterprises—is essential to restore a level playing field and encourage formal investment.
At the same time, digitalising customs and tax administration through e-invoicing, real-time risk analysis, and integrated monitoring systems would significantly reduce misinvoicing and fraud. Incentives for business formalisation, alongside stronger regional cooperation among customs and law-enforcement authorities, can further disrupt cross-border illicit networks.
Some progress is visible, but implementation remains uneven. Albania has strengthened integrity measures in customs, yet oversight of state-owned enterprises and alignment with EU customs IT systems remain weak. In North Macedonia and Montenegro, excise taxation and enforcement frameworks are only partially aligned with the EU acquis. Serbia has adopted a State-Owned Enterprises reform framework, but implementation has lagged. In Bosnia and Herzegovina, deeper alignment with the EU customs acquis and stronger administrative capacity remain critical.
Illicit trade is not a side issue in the accession process. It tests whether countries can enforce EU rules in practice—across tax collection, customs, competition, and law enforcement—not just adopt them on paper. Countries that struggle to control illicit markets, protect public revenues, and ensure fair competition will find it difficult to meet the core requirements of EU membership.
