HUNGARY
Summary

Sanctions

None

FAFT AML Deficient

No

Medium Risk Areas

 

US Dept of State Money Laundering Assessment

Compliance with FATF 40 + 9 Recommendations

Corruption Index (Transparency International & W.G.I.)

Failed States Index (Political Issues)(Average Score)

 

ANTI-MONEY LAUNDERING

 

FATF Status

Hungary is not on the FATF List of Countries that have been identified as having strategic AML deficiencies

 

Compliance with FATF Recommendations

The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Hungary was undertaken by the Financial Action Task Force (FATF) in 2016. According to that Evaluation, Hungary was deemed Compliant for 5 and Largely Compliant for 13 of the FATF 40 Recommendations.

Key Findings

Hungary has a rather mixed understanding of its ML/FT risks. The NRA does not include sufficient depth with regard to potential ML/FT threats, vulnerabilities and their consequences. It also does not demonstrate the characteristics of a comprehensive assessment based on a robust methodology. The Hungarian authorities have not yet adopted a national AML/CFT strategy in the light of the outcome of the NRA, nor have they defined consequential policies and necessary actions coherently.

Hungary’s use of financial intelligence and other information for ML/FT and associated predicate offence investigations demonstrates to a large extent the characteristics of an effective system. The good quality, timely and relevant work produced and assistance provided by the Hungarian Financial Intelligence Unit (HFIU) to other competent authorities contributes significantly to the efforts to detect and disrupt ML threats and deprive criminals of ill-gotten gains. However, law enforcement and other competent authorities did not demonstrate that they make appropriate use of financial intelligence and other relevant information for ML/FT investigations.

Although the number of investigations and prosecutions for ML are on the rise, the fight against ML activity is not a priority objective. The ML prosecutions are not commensurate with the risks and threats identified in the NRA. ML is treated mostly in a self-laundering context, with a limited number of cases highlighting structured ML schemes. The dependence of the ML offence on the identification of a specific predicate offence is a factor that has weighed on the effectiveness of the AML-system.

The mandatory seizure/confiscation regime is legally sound and stringent, although the dependence on the predicate offence is a restraining factor. The statistics do not demonstrate the actual effective and successful application of the seizure/confiscation rules. However, some case examples are indicative of large amounts of proceeds susceptible to confiscation. The potential of the Asset Recovery Office (ARO) to provide support to investigations should be further exploited.

Hungary adopts a proactive approach against terrorism, albeit not particularly focused on the FT-aspect. In the absence of FT-targeted investigations and prosecutions, an effectiveness assessment must rely mainly on structural elements. Although the professionalism and good intelligence work of the Counter Terrorism Centre (TEK) and the HFIU are recognised, there are a number of considerations highlighting some weaknesses that should be addressed to achieve a better performing CTF regime.

Hungary has a legal basis to apply targeted financial sanctions regarding terrorist financing, but implementation has technical and effectiveness-related deficiencies. The Application of freezing measures under the EU framework results in delays. Moreover, there are concerns related to the implementation procedures under the FRM Act. Deficiencies were also identified with regard to the national freezing mechanisms under the AML/CFT Act, in relation to communicating information to service providers and the application of criminal procedural measures for the enforcement of freezing measures.

Hungary has not undertaken a formal domestic review to determine if there is a subset within the NPO sector which may potentially be at risk of being misused for FT. There are doubts about the level of transparency of the NPO sector. No authority or mechanism has been designated to conduct outreach to the NPO sector on FT issues and to monitor the NPOs posing a higher FT risk.

AML/CFT supervisory activities in Hungary are not fully commensurate with the perception of ML/FT risks. While the Central Bank of Hungary (MNB) demonstrated a basic understanding of ML/FT risks for some FIs, this is not the case for all FIs. DNFBP supervisors do not identify and in principle maintain an understanding of ML/FT risks in their respective sectors, even though there are exceptions to this. Onsite inspections for compliance with AML/CFT obligations do not focus on areas of higher ML/FT risks. While the MNB and DNFBP supervisors are equipped with powers to impose administrative sanctions, the dissuasiveness of the sanctions imposed could be enhanced in order to create a greater incentive for all obliged entities to fully comply with the AML/CFT obligations.

Hungary takes steps in relation to combating proliferation. However, the country’s reliance on the EU framework for implementing the UNSCRs relating to targeted financial sanctions to combat PF results in a time-gap which has a negative impact on the system’s effectiveness. Even though in practice there is a mechanism in place for the dissemination of information by the authorities on updates made in the relevant UNSC lists, no legal basis exists for implementing sanctions before these are transposed into EU Law.

Hungary demonstrates many characteristics of an effective system of international cooperation. Respective authorities use a wide and comprehensive framework of multilateral, bilateral and national legal instruments and other cooperation mechanisms to seek and provide good quality and timely international cooperation. The countries that gave input on the international co-operation of the Hungarian authorities found it to be generally satisfactory.

Risks and General Situation

Hungary has a primarily cash-based economy with a GDP of about EUR 110.100 billion in 2015. Although the country is not a financial centre, it has a well-developed financial services industry. The banking sector (comprised of thirty-two banks) is the largest part of Hungary’s financial sector. Between 1-3% of the banks’ customers are in general classified as high-risk (e.g. offshore companies, foreign clients, clients from high risk jurisdictions, or certain types of businesses). The level of financial inclusion is considered as high, with 76% of the adult population maintaining an account at a formal financial institution.

Hungary’s national risk assessment (NRA) was finalised in 2015. It was adopted by the AntiMoney Laundering Sub-Committee (the main coordination and policy making body regarding the fight against ML and FT, chaired by the Ministry for National Economy, MNE). The scope of the NRA includes money laundering, crimes-generating assets and terrorist financing. Participation comprised representatives of the most relevant departments of the ministries involved in the AML/CFT sphere, the competent authorities as well as the private sector. Two working groups were established, notably the law enforcement task force (led by the Hungarian Financial Intelligence Unit, HFIU) and the task force of supervisory agency (led by the Hungarian Central Bank, MNB).

The NRA indicates as “risks/threats” fraud, corruption, trafficking in human beings and drug trafficking. With regard to the latter, Hungary has been identified as a transit country for illegal drugs coming from Turkey and Asia and moving to other European destinations. Hungary is primarily a country of origin and transit for victims of trafficking in human beings. The statistics provided also refer to other predicate offences, such as kidnapping and illicit arms trafficking, which usually also generate significant proceeds. The law enforcement authorities have observed an increase in organised crime groups, using Hungary for operations for cyber-related fraud, and the use of shell companies and the banking system to launder the proceeds.

The relatively large shadow economy is a major risk factor in a considerable number of suspicious transaction reports made by financial service providers. The widespread use of cash and the lack of cash limitations are considered as ML-vulnerabilities in the NRA. The latter also indicates that foreign companies domiciled in Hungary, as well as off-shore companies holding current accounts at Hungarian banks, pose significant risks if misused for illegal activities, mostly related to VAT frauds and “social engineering” frauds. The NRA also points to the use of straw men in the establishment of companies, opening of bank accounts and execution of transactions as high risks.

There are no serious indications of a terrorism-favorable environment in the Hungarian context. The competent authorities have under scrutiny the recent phenomenon of foreign terrorist fighters. Even if as to date there have been no concrete indications of terrorist-related activities, the authorities have identified several risk situations that need to be monitored. Amongst those are potential risks posed by charity NPOs, increased use of virtual currencies as well as Hungary’s geographical proximity of countries with higher risks and cross-border movements of cash on the so-called Balkan route.

 

US Department of State Money Laundering assessment (INCSR)

Hungary was deemed a Jurisdiction of Concern by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR).

Key Findings from the report are as follows: -

 

Hungary is not considered a major financial center; however, its EU membership and location make it a link between the former Soviet Union and Western Europe. The country’s primarily cash-based economy and well-developed financial services industry make it attractive to foreign criminal organizations. Law enforcement has observed an increase in organized crime groups using Hungary and the region as a base of operation for cyber-related fraud, including social engineering fraud, and for laundering criminal proceeds through shell companies and the banking system. Hungarian officials believe cash transactions, offshore companies, and front companies are the largest money laundering and terrorism financing risks. The use of cash and false information regarding the identity of the accountholder hinders transparency, making it difficult to track funds derived from criminal activity.

Hungary has been identified as a transit country for illegal drugs coming from Turkey and Asia and moving to other European destinations. Particular vulnerabilities may exist on the Hungarian-Ukrainian border related to tobacco smuggling, which the National Tax and Customs Authority and the Police strive to prevent, and trafficking in persons.

Authorities believe money laundering cases mostly stem from financial and economic crimes, such as tax-related crimes, cyber-fraud, embezzlement, misappropriation of funds, and social security fraud. Illicit proceeds also result from narcotics trafficking, prostitution, trafficking in persons, and organized crime activities. Other prevalent economic and financial crimes include real estate fraud, forgery, and the copying/theft of bankcards. There is a black market for smuggled goods, primarily related to customs, excise, and value-added tax evasion. No international terrorist groups are known to operate in Hungary.

 

____________________________________________________________________________________

 

SANCTIONS

There are no international sanctions currently in force against this country.

 

____________________________________________________________________________________

 

BRIBERY & CORRUPTION

 

Index

Rating (100-Good / 0-Bad)

Transparency International Corruption Index

48

World Governance Indicator – Control of Corruption

61

 

____________________________________________________________________________________

 

INVESTMENT CLIMATE - Executive Summary (US State Department)

Hungary maintains an open economy and attracting foreign investment remains important for the Hungarian government. Hungary is an EU member with strong legal protection of investment, receiving approximately $98 billion in FDI since 1989. The automotive, software development and life sciences sectors have received the most investment. The Hungarian Investment and Trade Development Agency (HITA) operating under the State Secretary for Foreign Affairs and External Economic Relations in the Prime Minister’s Office has the primary government responsibility for attracting FDI to Hungary. The Hungarian government encourages investments in both manufacturing and high-value added sectors such as research and development centers, manufacturing facilities and service centres. Hungary's high-quality infrastructure, labor force, and central location are often cited as features that can make it an attractive destination for investment. Despite these advantages, some businesses assert that obstacles to investment remain and FDI has lagged in recent years.

Hungary had been a leading destination for FDI in Central and Eastern Europe, reaching a peak in 2005 with $7.4 billion of FDI inflow. FDI inflows in 2008 were promising, reaching $6.96 billion, although the pace of inflows has particularly slowed since the 2008 global financial crisis and Hungary’s relative advantage compared to regional competitors has diminished. In 2010, FDI had dropped to $1.97 billion as companies became more cautious about committing to large investments. Hungary showed some signs of FDI growth in 2013, with FDI reaching $4.62 billion, although this was largely reinvestment by existing companies with relatively few new investors to the market. 2013 FDI levels were still well below those in 2005, 2006 and 2008. Countries within the EU account for 72.2% of total FDI, while the United States is the largest non-European investor with 4% of FDI (there are approximately 200 companies in Hungary of U.S. origin). The economy has showed signs of recovery -- after GDP fell 1.7% in 2012, it grew 1.1% in 2013 and is expected to grow 2% in 2014. The government also reduced its fiscal deficit to under 3% of GDP, a result that allowed Hungary to exit the EU’s Excessive Deficit Procedure (EDP) in 2013, while also paying off its debts to the IMF early. That same year, Hungary’s debt management agency returned to international markets by issuing foreign currency-denominated bonds for the first time in 21 months.

Obstacles to investment include a persistent lack of transparency and predictability, reports of corruption and excessive red tape. Hungary received a poor rating – coming in 20th of 28 EU member states -- in Transparency International’s 2013 Corruption Perceptions Index. In January 2014, the Hungarian government made a surprise announcement they were awarding a $17 billion nuclear construction project to a Russian state-owned company after indicating to interested foreign investors since December 2010 that they were planning an open tender for bids.

Since 2010 the government has passed a number of tax changes, such as reductions in personal income and business tax rates, purportedly to increase Hungary's regional competitiveness. However, Hungary also implemented a number of so-called “crisis taxes” to reduce its budget deficit in order to exit the EDP. These taxes, along with other regulatory measures and fees, targeted certain sectors including banking, energy, telecommunications, and large-sized retail operations. The GOH also made -- over the objections of the private sector energy firms affected -- three successive mandatory cuts in the regulated price of household utilities, several utility companies decided to accept a government buyout of their holdings as a result. Originally billed as “extraordinary measures” that would last only three years, the taxes in the financial and energy sectors remain, and the re-elected Fidesz government shows no signs that they plan to eliminate these taxes. Many affected firms have said that the government adopted these measures with little to no consultation with other stakeholders. Hungary remains a relatively open place to invest with significant investor protections, but these and other government interventions have generated some concern among the industries affected.

 

____________________________________________________________________________________

 

FURTHER REPORTS

AML News / Updates

7 August 2012  -  press release presents a new study on corruption risks in the Czech Republic, Hungary, Poland and Slovakia

Read Press Release

 

 

This is my page