Spain is different.” So said that famous Spanish tourist-authority slogan – and so it is, though not in the ways they want to crow about. The sun, sea and sangria destination that attracts 55m tourists a year has, over the past four or five years, acquired a dark underbelly, as the demand for a place in the sun has turned Spain into the money-laundering capital of Europe. Vast sums amassed through arms-smuggling, drugs and prostitution are being recycled into holiday homes for us British and other north Europeans.

Three headlines that have appeared during the past few months sum up what has been happening here since 2001, the year before the introduction of the euro: “Spain, Europe’s brothel”, proclaimed El Pais. “Spain, Europe’s second home”, said La Vanguardia. “Black money gathers strength in Spain”, ran a story, also in El Pais.

“People come to Spain to launder their money because there is an end market made up of people who want to take up residence here. Everyone depends on the end user, the Mr and Mrs Smith from Britain. That’s the way it works,” says Antonio Flores, a property lawyer in Marbella, a town which has become a paradigm of the corrupting power of the dirty money washing up on Spain’s Mediterranean shore.

Various events and forces – the collapse of the Soviet Union, the Balkan wars and the peculiar characteristics of the Spanish economy – have combined to bring organised crime, practically nonexistent here before the mid-1990s, to Spain. The other is the euro. Sometime before “E-day” on January 1, 2002, a lot of people woke up to the fact that the francs, deutschmarks and pesetas under the mattress were about to become worthless, so they looked around for ways of converting them into something more durable. What they found was property, and in Spain they found not only a booming property market but a culture where, thanks to a stamp duty of around 10%, almost every property transaction involves a degree of black money as both buyer and seller agree on a lower, fictitious official price, and settle the difference in cash.

All property transactions in Spain are overseen by a public notary, who takes care of conveyancing and pockets 2.5% of the purchase price. When it comes to completing the transaction, the notary will clear his throat and announce that he has to go to the lavatory, thus allowing the parties to complete whatever part of the deal is being done in cash without having to witness it himself. Everyone does it, rich and poor alike.

According to the Bank of Spain, in 2001, 100,000 Spanish properties changed hands for cash. In June, the Agencia Tributaria (Spain’s Inland Revenue) announced that it was trying to recover tax on €11 billion that changed hands during the first nine months of 2001, most of it spent on property, luxury cars and works of art. Critics of the tax department say that there was a Europe-wide agreement to turn a blind eye to money-laundering in 2001 so as to smooth the transition to the new money.

“There’s a big difference between the person who had some money stashed in a sock in francs or deutschmarks and needed to get rid of them before the euro, many of whom did so by buying property, and the huge sums we’re dealing with now that originate in drug-trafficking or the traffic of arms or human beings. These are people who are looking for legitimate ways to recycle their dirty money,” says Ines Barba, a criminal lawyer in Malaga. Leaving aside the fact that €11 billion would fill a pretty big sock, the point she is making is that the pre-euro spree opened people’s eyes to Spain’s potential as a place to launder money. “The suitcases of money didn’t start arriving until after the euro was introduced,” says Antonio Flores.

In the days of the peseta you needed a big suitcase, if not a sea trunk, but with the advent of the euro and the €500 note (worth about £345), even a small briefcase can fit millions. In a new twist on drug mules, women transport cash back to eastern Europe in condoms stuffed with €500 notes which are inserted into their vaginas. When the deputy mayor of Marbella, Isabel Garcia Marcos, was arrested, police found €350,000 worth of €500 notes in her house. Nearly two-thirds of all the €500 notes in circulation in the EU are to be found in Spain.

In 2005 the police investigations into organised crime and money-laundering led to the confiscation of €4 billion in money and property, a hundredfold increase on the year 2000. This increase is attributed not just to the euro. While at first the money was brought into the country from criminal operations conducted abroad, now, increasingly, the money originates from criminal activities in Spain. Bear in mind that Spain is the main European entry point for hashish from Morocco and cocaine from Latin America. Cocaine busts in Spain, typically in the northwest province of Galicia, where many have family links to South America, tend to be measured in tonnes, not kilograms. Recorded crime, however, remains low, at 49.3 offences per 1,000 inhabitants, about 20 points below the EU average.

Javier Gaspar, of the Guardia Civil police force and a specialist in organised crime, says: “Around 2000, these mafiosi from various countries, mainly in the East, set up operations centres in Murcia and Levante. They brought their bodyguards and conducted operations in their own countries from Spain. But now they have bases in Barcelona, Malaga, Valencia and Madrid. Their three main sources of income are arms, prostitution and drugs, and all of this produces money that has to be laundered.”

As we shall see, there are many factors that attract money-launderers to Spain, but the key element is construction, and to understand this, the sheer scale of building in Spain – and not just on the costa – has to be appreciated. In 2005, 800,000 new homes were built in Spain, more than in Britain, France and Germany put together. Another 860,000 are scheduled for 2006. One in every three new buildings in Europe is being built in Spain, to the point that there are now 23m homes for a population a of a little over 40m. Nearly 2m of these are officially empty, and far more are unoccupied for most of the year. Of the 800,000 built in 2005, only 350,000 were needed to cope with population growth and immigration. The rest, therefore, are second homes, concentrated on the Mediterranean coast. Altogether, 34% of Spain’s Mediterranean coast is already built up; the figure rises to above 50% in areas such as the Costa del Sol and Costa Blanca.

And it’s not just the coast. Up to 15 miles inland, in parts of Valencia and Andalusia, the countryside is disappearing. On the 25-mile stretch of road that runs inland from Marbella to Malaga, there are dozens of holiday developments. Marbella itself is a place apart, geographically in Spain but otherwise in a world of its own. It is not just some Skegness-in-the-sun like Torremolinos: it is more international than that, far more Dolce & Gabbana than fish and chips, a place for the pampered who can choose between any number of beauty and health clinics to prepare them for a browse around Prada or Cartier. Women with big hair and implants, 50-year-old men sporting 30-year-old abdominals – like an animated version of Hello!

This frenetic pace of development poses serious questions of sustainability, both because of Spain’s limited ability to generate electricity and its even more fragile water supplies. A huge new urban development of 13,500 flats near Toledo, south of Madrid, was given the green light despite the fact that there was insufficient water to maintain it. Water has since been diverted from hundreds of miles away.