In Whose Interest? SHADOWS OVER THE HUNGARIAN RESIDENCY BOND PROGRAM. Boldizsár Nagy

Transcription

1 In Whose Interest? SHADOWS OVER THE HUNGARIAN RESIDENCY BOND PROGRAM Boldizsár Nagy

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3 Boldizsár Nagy Associate Professor, Central European University and Eötvös Loránd University with the contribution of Miklós Ligeti Legal Director and József Péter Martin Managing Director Transparency International Hungary 1

4 The Investment Migration Council (IMC) is the worldwide association for investor immigration and citizenshipby-investment, bringing together the leading stakeholders in the field and giving the industry a voice. The IMC sets the standards on a global level and interacts with other professional associations, governments and international organisations in relation to investment migration. The IMC helps to promote high professional standards as well as to improve public understanding of the issues faced by clients, professionals and governments in this area. Transparency International (TI) is the world s leading non-governmental anticorruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption. Transparency International Hungary (TI-HU) is the Hungarian chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at national and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anticorruption expertise in Hungary Boldizsár Nagy, Investment Migration Council, and Transparency International Hungary. All rights reserved. Reproduction in whole or in parts is permitted, providing that full credit is given and provided that any such reproduction, in whole or in parts, is not sold or incorporated in works that are sold. Written permission must be sought if any such reproduction would adapt or modify the original content. Published in Geneva November 2016 Cover photo: istock.com ISBN: Every effort has been made to verify the accuracy of the information contained in this report. All information was believed to be correct as of 1 September Nevertheless, the authors or publishers cannot accept responsibility for the consequences of its use for other purposes or in other contexts. The Investment Migration Councils is a non profit association registered in Geneva, Switzerland, registration number CHE Transparency International Hungary s Court Register number is

5 In Whose Interest? SHADOWS OVER THE HUNGARIAN RESIDENCY BOND PROGRAM 3

6 Acronyms Act No. I of 2007 on the Entry and Residence of Persons with the Right of Free Movement and Residence (FreeA) Act No. II of 2007 on the Entry and Stay of Third-country Nationals (ThirdA). Államadósság Kezelő Központ (AKK) - Government Debt Management Agency Central and Eastern Europe (CEE) Corruption Perception Index (CPI) Deutsch-Ungarische Industrie- und Handelskammer (DUIHK) / Német-Magyar Ipari és Kereskedelmi Kamara - German-Hungarian Chamber of Commerce European Court of Human Rights (ECtHR) European Economic Area (EEA) Fiatal Demokraták Szövetsége (FIDESZ) - Magyar Polgári Szövetség (MPSz) - League of Young Democrats - Hungarian Civic Alliance Gross domestic product (GDP) Hungary State Special Debt Fund (HSSDF) Investment Migration Council (IMC) Member of Parliament (MP) Office of Immigration and Nationality (OIN) Third country national (TCN) Transparency International (TI) Treaty on the Functioning of the European Union (TFEU) 4

7 Table of Contents About this report: aims, constraints, main findings Aims Constraints Main findings A short, official description of the scheme Chapter 1 The frame. Hungary and EU migration policies I. Hungary does not have a defined, clear set of immigration preferences. It does not maintain a consistent immigration policy with clearly and publicly identified priorities a) The normative elements of the Hungarian migration policy b) The Hungarian immigration policy and discourse regarding third country nationals Chapter 2 The birth of the Hungarian investment immigration programme II. The emergence of the investment immigration regime, based on the settlement bond a) Circumventing the rules on drafting Acts b) Two individually proposed Bills within a week Chapter 3 The rules in the book and in practice III. The rules in force a) The structure b) Acquiring residence permits c) Changes in the system since its inception IV. The rules in practice a) Eligible and ineligible persons b) Place of submission of the request for the residence permit c) The dual commencement of the procedure: technically with the designated company, legally at the consulate d) The procedure with the OIN e) The trap: no access to long-term EU resident status f) The designated companies and the Hungarian Government Debt Management Ltd. (ÁKK)

8 Chapter 4 Economic (ir)rationalities V. The economics of the scheme a) Financing the state debt: the settlement bond is irrelevant b) Inserting the designated companies between the state and the investor c) The unreasonable high fee paid to the designated companies Chapter 5 (Contribution by Transparency International Hungary) Corruption, rule of law, shadows over the program VI. Hungary, the rule of law and corruption: General assessment VII. The implementing companies: suspicious, worrying and obscure elements a) Selection b) Ownership c) Intermediaries d) Revocation e) Lack of transparency Conclusion Epilogue Annex 1 ÁKK Framework Contract Sample Annex 2 Sample of Bond Certificate/Security Annex 3 Designating of HSSDF Annex 4 HSSDF authorising HSSD Management Annex 5 Amendment before closing vote 11 November Annex 6 HSSDF flowchart of the procedure in Annex 7 HSSDF Cayman Islands registration

9 Executive Summary 7

10 Executive Summary There are strong indications that the Hungarian Residency bond programme (also settlement bond programme, or investment immigration programme) does not contribute to the Hungarian economy but is used for enrichment of a number of politically influential individuals in the country and companies they cooperate with. Transparency International s Corruption Perception Index ranked Hungary 51st of the 168 countries assessed, three ranks below its 2014 assessment. Hungary lags behind other countries in the region that joined the European Union in There are strong grounds for concern that the Hungarian Investor Immigration regime has fallen victim to the party state capture of the country. The report s main findings are that the system as it operates is a construction of and controlled by a few members of the Hungarian Parliament. The investment immigration programme (settlement bond) cannot be justified by the state s economic interests, as it does not generate investment into the economy, nor does it produce jobs. The real beneficiaries of the Residency bond programme are those dominantly offshore companies which enjoy monopolies over their respective geographical areas to act as mediators between the investors and the Government Debt Management Agency, i.e. Arton Capital, Hungary State Special Debt Fund, Innozone Holdings, Migrat Immigration Asia and VolDan Investments. The investors do not buy state bonds but securities (shares, promissory notes, etc.) of designated private companies, and therefore do not enjoy the protections offered to investors of Hungarian state bonds. The settlement bond program lacks transparency at many points, including the final beneficial owners of the mediating designated companies mentioned above. Already the emergence of the settlement bond in Hungary involved many irregularities from circumventing the rules on drafting Acts to large inconsistencies in the proposals on the investment immigration programme. Yet, there has been no substantial parliamentary debate on any critical aspect of the proposed investment immigration programme and such important amendments of it as removing the requirement for an initial six months residence before a permanent residence (settlement) permit may be obtained. The selection process of designated companies, which are the only competent entities for promoting the Hungarian investment programme in each country is, at least potentially, an open invitation to corruption. The procedure for applying to become a designated 8

11 There are strong grounds for concern that the Hungarian Investor Immigration regime has fallen victim to the party state capture of the country company for a specific country is controlled by a Committee of the Parliament and lies outside normal administrative law, including the fact that no regular remedies against any decision are available. Conditions have been set up retroactively leading to the revocation of permits. The reasons and procedure for withdrawing licences from designated companies and appointment of other companies to replace them in the specific states have not been properly regulated. Therefore the selection procedure of designated firms is neither transparent, nor fair, and highly vulnerable to corruption. Designated companies charge very high fees for their services amounting to % of the investment expected by the state. The state loses in several ways: it loses significant tax income; it loses its control over its goodwill should any of the companies default and not return the money invested into their papers as envisaged by the investment programme; it loses control over the market as the state does not promote the programme through its own channels; and it loses control over antimoney laundering as most transactions are done offshore. Moreover, the economic impact of the settlement bond in managing Hungarian state debt or creating jobs is insignificant. This report shows that investors neither invest nor actually move to Hungary. The Hungarian immigration investment programmes rather functions as a loosely controlled backdoor into the Schengen area, and a way to generate income for five private companies. The authors of this report conclude that the idea that investors who substantially contribute to a country s economy or budgetary balance should be welcome and enjoy immigration privileges is to be supported as it serves the common interest. But a regime which does not create jobs, does not mobilise the real-estate market and only insignificantly contributes to the liquidity of the budget (in fact at an irrational cost) while generating considerable private profit raises serious questions. If the ultimate beneficial owners of the companies are not disclosed, if millions of Euros of profits are generated for five companies that have been granted a monopoly without open and transparent tender procedures, and if the development and the operation of the system is entrusted to an uncontrollable parliamentary committee which has ultimate power then the shadow of corruption looms large. Arton Capital objected through lawyers to various elements of this report and was given an opportunity to set out its position but declined to do so. 9

12 About this report: aims, constraints, main findings 1 Aims This report has a dual aim: on the one hand it presents the Hungarian investor immigration system as it stands in August 2016 and how it has developed since its inception in On the other hand, it highlights those elements of the system which have raised questions due to their obscure nature, evoking the shadow of corruption. The author was confronted by several serious limitations: there is absolutely no scholarly elaboration of the topic; most of the resources are online journalistic reports, mainly in Hungarian. The goal here was to analyse primary sources inaccessible to the non-hungarian speaker: records of plenary and committee meetings in the Hungarian Parliament, news, commentaries and to assemble in a piecemeal fashion the fragmented information from the websites of stakeholders, from personal interviews and other available sources. Constraints This is not a comparative academic study: it does not aspire to weigh up the Hungarian programme s costs and benefits compared to other existing schemes. It concentrates on the past and present Hungarian scene and offers an account of the creation of the programme, never reported in such depth and scrutinises its functioning to determine whether its public benefits justify the stakeholders considerable private gains discovered, whose trail soon fades into the invisible. 1 * The author is indebted to the Economic Committee of the Hungarian Parliament, to the Office of Nationality and Migration and to the great number of individuals who helped him gain insight into the complexities of the Hungarian residence (or settlement) bond. Most of my interlocutors preferred to remain unnamed, so I adopted anonymity as a general policy. I have retained written notes of these personal conversations. 10

13 Main findings The report s main findings are that the system as it operates is a construction of a few individual members of the Hungarian Parliament, who retain control over the process, frequently by inducing the amendment of the relevant regulations without genuine parliamentary scrutiny, let alone public debate. The settlement bond cannot be justified by the state s economic interests, as it does not generate investment into the economy, nor does it produce jobs. As a loan to the state it increases the indebtedness of the treasury on terms worse than presently available on the market. The real beneficiaries are those dominantly offshore companies which enjoy monopolies over their respective geographical areas to act as mediators between the investors and the Government Debt Management Agency. Their service fees are unusually high and the final beneficiaries enjoying the profit cannot be identified. At the moment, there are only five such companies: Arton Capital, Hungary State Special Debt Fund, Innozone Holdings, Migrat Immigration Asia and VolDan Investments. 2 The investors do not buy state bonds, instead buying the bonds or other equities of these foreign companies, and therefore do not enjoy the protections offered to investors by Hungarian/EU law, except for those investing in the only company registered in Hungary. According to international evaluations, the overall economic and political environment in Hungary is particularly worrying due to its corruption and lack of transparency, to which the settlement bond system only contributes. A short, official description of the scheme The investment immigration programme (as the settlement bond programme will be referred to in this report) has undergone a lot of changes since its inception in This report will follow a chronological approach to reveal the recurring irregularities 2 Details about their place of registration and geographic competence will be presented in section VII, Table 4. 11

14 from its inception through all subsequent iterations. However, to orient the reader, the following is the official description of the programme as expressed by the National State Debt Management Agency ( ÁKK Zrt ): The so-called Residency Government Bonds are zero-coupon government securities issued after January 1, 2015 with denominations of EUR 50,000 for a tenor [sic] of minimum 5 years in accordance with the separate Decree of the Minister for National Economy. The Residency Government Bonds are issued at a discounted price and will be redeemed at par value at maturity. The yield of the Residency Government Bond is calculated in accordance with respective rules of law as a difference between the par value and the discounted price. The Residency Government Bonds can be subscribed by such companies that invest exclusively into Residency Government Bonds and have signed an agreement with the Government Debt Management Agency private Company Limited by Shares ( ÁKK Zrt. ) for such activity. In accordance with Section 110. (11) of the Act in connection with applications submitted after January 1, 2015 an aggregate par value of 300,000 euro of Hungarian Residency Government Bonds shall be subscribed (bought) per applicant. The company as specified above issues a security with at least five years of tenor of which (and not of the Residency Government Bonds) the applicant for a permission of residence in Hungary should hold not less than EUR 300,000 of face value for minimum 5 years. The specific terms of these securities (especially the interest rate or yield) are not specified by the laws of Hungary. The company should have all licences required to carry out such activities in the relevant country. The approval for the company is granted by the Economic Committee of the Hungarian Parliament. Having received such necessary approval of the committee, the company should sign an agreement with AKK Zrt. for the issuance of the Residency Government Bonds (issuance by the State and purchase by the Company). The list of approved companies is published on the website of ÁKK Zrt. 3 3 Information on the Residency Bond ( ) residency and settlement bond will be used interchangeably. 12

15 Chapter 1 The frame. Hungary & EU migration policies 13

16 I. Hungary does not have a defined, clear set of immigration preferences. It does not maintain a consistent immigration policy with clearly and publicly identified priorities. To find the place of immigration related to indirect investment in state bonds, the overall landscape should be mapped. Normative (legal) and policy documents have to be scrutinised to assemble the explicit or implied Hungarian immigration policy of which investor immigration ought to form a part. The normative side is constituted of Hungarian and EU law (supposedly also transposed into domestic law). The policy side relies on a formally existing, but hardly ever invoked Migration Strategy 4 and on the more recent, quite remarkable statements of the Prime Minister and other competent ministers. a) The normative elements of the Hungarian migration policy Before turning to the Hungarian legislation it should be noted that the European Union has a shared competence with the Member States to determine regular migration policies. Article 67 of the Treaty on the Functioning of the European Union (TFEU) states that the Union shall frame a common policy on asylum, immigration and external border control, based on solidarity between Member States, which is fair towards third-country nationals. (Emphasis added). Following a caveat according to which responsibilities incumbent upon Member States with regard to the maintenance of law and order and the safeguarding of internal 4 Az 1698/2013. (X. 4.) Korm. határozattal elfogadott Migrációs Stratégia és az azon alapuló, az Európai Unió által a ciklusban létrehozásra kerülő Menekültügyi és Migrációs Alaphoz kapcsolódó hétéves stratégiai tervdokumentum (The Migration Strategy and the seven-year strategic document related to Asylum and Migration Fund established by the European Union for the years , adopted by Government resolution 1698/2013 (X. 4.) Korm.). 14

17 security 5 remain unaffected by any measure adopted, it establishes the competence of the Union to adopt measures with regard to the conditions of entry and residence, and standards on the issue by Member States of long-term visas and residence permits, including those for the purpose of family reunification and the definition of the rights of third-country nationals residing legally in a Member State, including the conditions governing freedom of movement and of residence in other Member States with a view to ensure the efficient management of migration flows, fair treatment of third-country nationals. 6 The EU has adopted measures in the field of regular migration of third country nationals 7 affecting family unification, 8 students and pupils, 9 researchers, 10 highly qualified personnel 11 seasonal workers 12 and intra-corporate transferees. 13 As the list suggests, there is neither a general immigration regime applicable to third-country nationals within the EU, covering all immigrants including workers or investors, nor is there a specific secondary rule to guide states in their legislation concerning investment immigration. Naturally, the EU has an elaborate regime for the movement of capital as well as for the movement of entrepreneurs (freedom of establishment and of services) who hold the nationality of one of the Member States of the EU (EU citizens), but this does not affect the subject matter of this study. 5 Article 72 TFEU. 6 Article 79 TFEU. 7 Third-country national is used here to denote people who do not enjoy freedom of movement within the European Union. The freedom of movement is extended to nationals of EU and of the European Economic Area Member States, Switzerland and to certain categories of family members of these persons. 8 Council Directive 2003/86/EC of 22 September 2003 on the right to family reunification [2003] OJ L Council Directive 2004/114/EC of 13 December 2004 on the conditions of admission of third-country nationals for the purposes of studies, pupil exchange, unremunerated training or voluntary service [2004] OJ L Council Directive 2005/71/EC of 12 October 2005 on a specific procedure for admitting third-country nationals for the purposes of scientific research [2005] OJ L 289. The directives on studies and on research have been combined into a new Directive, which has to be transposed by 23 May See Directive 2016/801/EU of the European Parliament and of the Council of 11 May 2016 on the conditions of entry and residence of third-country nationals for the purposes of research, studies, training, voluntary service, pupil exchange schemes or educational projects and au pairing (recast) [2016] OJ L Council Directive 2009/50/EC of 25 May 2009 on the conditions of entry and residence of third-country nationals for the pur poses of highly qualified employment [2009] OJ L Directive 2014/36/EU of the European Parliament and of the Council of 26 February 2014 on the conditions of entry and stay of third-country nationals for the purpose of employment as seasonal workers [2014] OJ L Directive 2014/66/EU of the European Parliament and of the Council of 15 May 2014 on the conditions of entry and residence of third-country nationals in the framework of an intra- corporate transfer [2014] OJ L

18 In the absence of EU legislation beyond the fields enumerated above, Hungary is free to set its own immigration priorities, including those related to investors. Traditionally after 1948 and before 1989 Hungary was a closed society with virtually no immigration except for family unification and a trickle of return migrants. The replacement of socialism with capitalism led to increased movement, including forced migration, so acts on emigration and immigration had to be adopted. The present regime is based on two Acts, one regulating the movement of those enjoying freedom of movement in the EU, the other on the entry and residence of third country nationals. 14 The general rule requires three years of legal and continuous stay (residence) before a third country national (TCN) may receive a permanent residence permit. 15 The preferred groups are: 16 dependent direct relatives in the ascending line of third-country nationals who are permanent residents or recognised refugees. The applicants have to have lived in the household of the sponsor for at least a year. spouses of third-country nationals with permanent resident status or who have been granted asylum, provided that the marriage was contracted at least two years before the application was submitted; applicants who were formerly Hungarian citizens and whose citizenship was terminated, or whose ascendant is or was a Hungarian citizen; minor (less than 18 years of age) children of a third-country national with permanent resident status or who has been granted asylum. 14 Act No. I of 2007 on the Entry and Residence of Persons with the Right of Free Movement and Residence (FreeA) and Act No. II of 2007 on the Entry and Stay of Third-country Nationals (ThirdA). 15 The translation of terms of art is always open to debate. I have used the English translation produced by the Ministry of Interior and the Hungarian National Contact Point of the European Migration Network. A 2012 version is available at: ( ), but I have used the one available on a Hungarian digital database of law (Complex). There are two key terms in Hungarian: tartózkodási engedély and letelepedési engedély. The first literally means a permit to stay, but is usually translated as residence permit. The second literally means a permit to settle but is usually translated as permanent residence permit, although settlement permit is also used occasionally. 16 Section 35 (1) ThirdA. 16

19 This means that long term residence (settlement) status is enhanced either on family grounds or on ethnonationalist basis (ascendant dependent relatives, children, spouses, former Hungarian citizens and descendant of Hungarian citizens). 17 As a special case, we should note that entrepreneurs are entitled to simple residence permits (but not to preferential treatment in terms of long term/settlement/permits) if they are owners, chief officers, or members of the governing, representative or supervisory board of a profit-oriented company, cooperative or other entity. 18 This logic is broken by the preference granted to the investor. 19 The rules in force before July 2016 envisaged a two stage process, in which the investor first acquired a short-term residence permit which she had to have for at least six months, 20 after which she was entitled to a long-term residence (unlimited settlement) permit. The amendment adopted in May 2016 and effective on 1 July 2016 eliminated this first, sixmonth, phase and entitled the investor to acquire a long-term residence (settlement) permit immediately. 17 Of course, many former Hungarian nationals were not ethnic Hungarians, nevertheless, the overall thrust of the law is to prefer members of the Hungarian ethnic minority living in neighbouring states. 18 Section 20 (1)(b) ThirdA. 19 On the details of the required investment see below section III. B). 20 The stress on has is justified by the fact that the owner must have accommodation or residence in Hungary, but nowhere is it stated that she has to actually live in Hungary, albeit, in principle foreigners with a residence permit must live at their registered accommodation/residence. 17

20 b) The Hungarian immigration policy and discourse regarding third country nationals. The number of foreigners living in Hungary on 1 January of a given year is not large and has never exceeded two percent of the total population. 21 Table 1. The number of foreign nationals living in Hungary on 1 January each year Foreign nationals living in Hungary on 1 January: Year Total Source: Hungarian Statistical Office html?down=229# ( ) 21 The drop between 2011 and 2012 does not reflect a real decrease just a change of the methodology. See: hu/docs/hun/modsz/modsz10.html. The population of Hungary in 1996 was approximately 10.3 million and had decreased to 9.8 million in

21 These figures include all EU and non-eu nationals. A breakdown of the 2015 data indicative of the proportions is as follows: Table 2. The region and country of origin of foreign nationals living in Hungary on 1 January 2015 Region of origin Africa Asia The Americas Australia, Oceania Europe Number of nationals EU Non-EU Within this group Chinese: USA: Romania: Germany: Slovakia: Austria: Ukraine: Serbia: Russia: Source: Authors selection from Hungarian Statistical Office wnvn001b.html?down=229# ( ) As the numbers of those coming from less common countries of origin have always been minuscule and the overwhelming majority of immigrants were from Central Europe, many of them speaking Hungarian, immigration was a non-issue after the end of Socialism in In July 2012 Judit Tóth, one of the leading scholars on migration and Hungary, summarised the Hungarian regular migration policy as follows: In brief, the country has neither an explicit nor an implicit migration policy, and it intends to become merely a fairly operating Member State in the EU, adhering as much as possible to the common immigration, defence, security, external and asylum policies Tóth, Judit. Migration Law in Hungary. N.p.: Wolters Kluwer Law & Business, 2012, Section 9-11, p

22 We could have expected that the adoption of a formal migration policy in would have been more revealing. This document, which was referred to but not published in a government resolution, 24 has not become part of the public discourse. 25 It is safe to assume 26 that the policy was an exercise in achieving EU compliance with a view to gaining access to the resources of the EU s then new Asylum, Migration and Integration Fund, 27 covering This assumption is corroborated by the fact that the more than hundred pages long document remains silent on emigration from Hungary, which means that it was not a comprehensive migration strategy. The strategy lists measures which could enhance immigration by investors, low and high-skilled employees, as well as students and researchers, and in general is pro-immigration due to the shortage of certain types of labour and due to the shrinking labour force in the aging and decreasing Hungarian population. With respect to investors, the strategy mentions goals including the encouragement of investment into Hungary to stimulate the economy, in particular if the investors create jobs or accelerate economic growth by knowledge transfer or if other [type of BN] investments increase state income. 28 The sober voice of migration policy is the past. The Government spokesperson, Mr. Zoltán Kovács, publicly announced in 2015 that the strategy will be revised, but nothing has emerged. Instead, the Government has developed a fundamentally antiimmigrant, securitising discourse. In 2014 Hungarian Prime Minister Viktor Orbán began using anti-immigration and antirefugee rhetoric. In a speech delivered to the assembly of the Hungarian diplomatic 23 The Migration Strategy and the seven-year strategic document related to Asylum and Migration Fund established by the European Union for the years An abbreviated version in English is available at: sites/default/files/migration%20strategy%20hungary.pdf ( ). The full Hungarian text is available at: kormany.hu/hu/dok?source=1&type=406#!documentbrowse ( ) /2013. (X. 4.) Korm. hat. 25 Google finds fifteen hits if the full title is searched for. None refer to academic or political debate. 26 The author of this report was part of the dialogue the drafters of this policy initiated with the relevant academic community. 27 Regulation (EU) No 516/2014 of the European Parliament and of the Council of 16 April 2014 establishing the Asylum, Migration and Integration Fund, amending Council Decision 2008/381/EC and repealing Decisions No 573/2007/EC and No 575/2007/ EC of the European Parliament and of the Council and Council Decision 2007/435/EC [2014] OJ L 150, pp p. 33 of the adopted Hungarian version. Remarkably, the draft submitted by the Minister for the Interior to the Government for approval had not yet included a reference to the purchase of state bonds, which does now appear in the final text as a form of other income. 20

23 corps on 25 August 2014, Mr Orbán promised rock-hard official and domestic policy not supporting immigration at all. 29 His various statements during 2014 still distinguished between intra-eu mobility and the entry of third-country nationals, as well as between regular and irregular migration. By the spring of 2015, however, all such differentiation had vanished, and the rhetoric is now clearly anti-immigrant and overtly anti-refugee. In less-than-elegant style, Mr Orbán chose the day on which the attack on Charlie Hebdo was commemorated to announce on Hungarian television that [e]conomic immigration is a bad thing in Europe. One should not regard it as useful because it only brings trouble and dangers to the European people, therefore it has to be stopped this is the Hungarian position. 30 Orbán then continued, claiming that we do not want to have significant minorities with different cultural traits and backgrounds; we want to keep Hungary as Hungary. Soon after, on 20 February 2015, a political debate was held in the Hungarian Parliament entitled Hungary does not need subsistence 31 migrants. Speakers from the governing parties FIDESZ and the Christian Democrats constantly confused regular migration, forced migration and illegal migration. The tirades had little merit beyond engendering xenophobic and anti-refugee sentiment. 32 This tenor continued to prevail at the time this report was written. Rather than adducing further quotes, 33 the following long excerpt from the Prime Minister s speech to the general public delivered at one of the greatest national holidays, 15 March 2016, brings the issues together. 29 Government homepage. The country has to be represented with sober mind and courage (Józan ésszel és bátorsággal kell képviselni az országot) (201608/24). 30 The weekly HVG quoting the Hungarian News Agency MTI, nem_tudunk ( ). 31 The term in Hungarian is megélhetési which is a pejorative expression usually referring to someone who pursues a profession without vocational drive, i.e. merely to earn money. It is frequently translated as economic migrant, which is much less pejorative than the Hungarian original. 32 The parliament s political debate on subsistence immigration, 20 February 2015, documents/10181/308218/ny pdf/ d-c d-b21c-29c c. 33 See further, Boldizsár Nagy, Hungarian Asylum Law and Policy in Securitization instead of Loyal Cooperation, German Law Journal Vol. 17 (2016) No. 6, pp

24 Europe is not free, because freedom begins with speaking the truth. In Europe today it is forbidden to speak the truth. A muzzle is a muzzle even if it is made of silk. It is forbidden to say that today we are not witnessing the arrival of refugees, but a Europe being threatened by mass migration. It is forbidden to say that tens of millions are ready to set out in our direction. It is forbidden to say that immigration brings crime and terrorism to our countries. It is forbidden to say that the masses of people coming from different civilisations pose a threat to our way of life, our culture, our customs, and our Christian traditions. It is forbidden to say that, instead of integrating, those who arrived here earlier have built a world of their own, with their own laws and ideals, which is forcing apart the thousand year old structure of Europe. It is forbidden to say that this is not accidental and not a chain of unintentional consequences, but a planned, orchestrated campaign, a mass of people directed towards us. It is forbidden to say that in Brussels they are constructing schemes to transport foreigners here as quickly as possible and to settle them here among us. It is forbidden to say that the purpose of settling these people here is to redraw the religious and cultural map of Europe and to reconfigure its ethnic foundations, thereby eliminating nation states, which are the last obstacle to the international movement. It is forbidden to say that Brussels is stealthily devouring ever more slices of our national sovereignty, and that in Brussels today many are working on a plan for a United States of Europe, for which no one has ever given authorisation. 34 The total confusion surrounding regular migration and the settlement bond (government residency bond) 35 is graphically illustrated by the remarks of the Head of the National Defence and Law Enforcement Commission, Lajos Kósa, who in a debate on the 2016 amendment of the rules on the settlement bond, 36 addressing a Socialist Member of Parliament and his critical views, said: 34 No doubt, it is contrary to expectations that the head of government of an EU Member State would utter these words at a formal, widely televised celebration and then would have it translated and posted on the Prime Minister s official website. But that is the case: see ( ). 35 Although the formal designation of the bond is government residency bond, this report will use it interchangeably with settlement bond as the latter s Hungarian equivalent (letelepedési kötvény) dominates the public dialogue. 36 Debate on Bill T/ ( ). 22

25 You [the Socialist party BN] may naturally mix up buyers of the settlement bond with migrants, moreover you personally have several times mixed up migrants with those Hungarian nationals who, utilising their European rights work elsewhere, not in Hungary - there are roughly 350 thousands of them and you have said several times that they were migrants too, which is complete nonsense [ ] [T]he buyers of the settlement bond go through a similar procedure only in respect of the procedure, the legal procedure as the migrants but they must not be mixed up with them [ ] You [the party BN] prefer to say that they pay to the FIDESZ, which is a simple lie, as they buy state bonds, moreover it is typical that the person who buys Hungarian state securities in order to buy settlement bond /Sic-BN/ that person moves into Hungary and since she/he has money to buy state securities and since her/his conditions are such having gone through a national security screening she/he brings her/his wealth here as well. 37 This report will make it clear that contrary to what Mr Kósa s said: settlement bonds are not purchased by foreigners acquiring the right to settle, but by specially selected, mainly foreign (offshore) companies. Therefore, those buying the securities of these companies do not directly invest in Hungarian state bonds (settlement bonds): quotation marks around investor will indicate this here; nobody buys state securities in order to buy settlement bonds; whether payments end up with FIDESZ or not is an open question in light of the considerable transaction fees (EUR 40 60,000) paid to offshore companies (with one exception) whose owner structure is opaque, to say the least; most buyers never settle in Hungary and even fewer bring their wealth here. 37 Ibid. 23

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27 Chapter 2 The birth of the Hungarian investment immigration programme 25

28 II. The emergence of the investment immigration regime, based on the settlement bond. The emergence of the settlement bond as a legal institution within the Hungarian legal order involved a great many irregularities. First, the Bill proposing specific investment-related immigration rules appeared as an individual proposal from three Members of Parliament. Second, the first proposal was inconsistent: the suggested rule spoke of residence rights in exchange for buying settlement bonds, but the Explanatory Memorandum stated that investors should be entitled to naturalisation. That proposal was replaced within a week by another proposal which involved a totally different procedure and made clear that investors would first receive a short-term residence permit which could then be converted into a long-term residence permit. a) Circumventing the rules on drafting Acts The first irregularity needs no lengthy explanation here. The essence of the matter is that if the government submits a Bill to Parliament, that text must conform to the Act on Legislation, 38 whereas in the case of proposals submitted by individual Members of Parliament, the requirements of the Act may be ignored. Those requirements are not insignificant: if it had been submitted by the government, the text of the Bill ought to have emerged after inter-ministerial consultations and scrutiny, including the compulsory participation of the Ministry of Justice, and it ought to have been accompanied by an impact assessment examining the planned legislation s social, economic and budgetary impacts. 39 The justification for any Bill submitted by the Government should inform Members of Parliament about the social, economic and professional reasons for and goals driving the proposed legislation, including its expected impacts. The justification ought to demonstrate the measure s conformity with EU law 38 Act No CXXX of Section 17(2)(aa) Act No CXXX of 2010, as it stood at the relevant time. 26

29 and the fact that any relevant clearance with the EU had been done. 40 Nothing of the sort ever happened, as the description of the second irregularity will reveal in detail. B) Two individually proposed Bills within a week The first proposal on the settlement bond 41 was submitted by three individual Members of the Parliament (Messrs Antal Rogán, Mihály Babák and Krisztián Kapus) all from the governing FIDESZ-MPSz party. Mr Rogán was at that time the head of the Parliament s Economic Committee, 42 the two other MPs played no significant role, which is reflected in the fact that their names were only subsequently added to the printed proposal, in handwriting. This Bill had a very different content from the subsequent one (which was not submitted formally as a Bill, but as an amendment to the first, though because it actually completely redesigned the whole scheme it will be treated in this report as a new proposal). 1) The first proposal The first proposal would have entitled the minister in charge of immigration to exercise his/her exceptional powers and grant permanent residence permits (settlement rights) to applicants investing EUR The non-appealable decision of the Minister under Section 36 ThirdA originally was envisaged as an exceptional tool intended for a few individual cases. The proposal would have transformed this into a routine, affecting thousands of persons, but exempting them from the Office of Immigration and Nationality scrutiny and all the preconditions of settlement. The Bill s construction was as follows: the Minister is entitled to issue permanent residence permits under exceptional circumstances, which may include: the applicant s particular circumstances, family relations and health condition as special and equitable considerations, as well as the interests of Hungary in terms of economic, national policy, scientific, cultural and sports considerations. 40 Ibid, section T/8879 of 27 October The Committee s formal designation was the Economic and Information Technology Committee of the Parliament of Hungary, but this text will use the short version Economic Committee. 27

30 The investment would need to be declared as in the economic interest of the country. The text of the proposal was vague in terms of the precise nature of the investment. The two-step core of the later, now current regime appeared (a company buys state bonds, the investor buys securities in the company), but the explanation of the proposed rules was not in harmony with the text. First, the Explanatory Memorandum suggested that the investor herself/himself would buys the state bonds (which was not the scheme described in the normative part). Second, the explanation assumed that investors would have other 43 investments in Hungary, which was not provided for at all in the actual amending text. Third (and this led to a minor scandal), the explanation spoke of acquiring nationality (not permanent residence) in exchange for the indirect purchase of the settlement bonds! 44 That clearly revealed that the drafters originally planned the investors immediate naturalisation, entailing all the rights of EU citizens. That this was not simply an error (as claimed by the principal author of the Bill, Mr Rogán) 45 is corroborated by the fact that the other Member of Parliament, co-submitting the original proposal made it clear in an interview with the daily Népszabadság, that he was thinking of naturalisation. 46 Mr Babák also mentioned in that interview that Chinese businessmen had approached him with the idea of creating an investment immigration programme. Mr Rogán was no less outspoken, when during the debate in Parliament he recalled that after a lunch with the delegation of the leaders of Shenzen county which had taken place two months earlier, he had proposed 43 It is presumed that lending money to a state is not an investment, especially if that lending is executed via a mediator company not registered in Hungary and performing no economic activity there. 44 The author of this report published a 2500 words article in one of the leading political and literary weeklies, Élet és Irodalom, entitled Anarchists in Parliament (No. 45, 9 November 2012, p.8), the widely circulated manuscript of which may have contributed to the dramatic change in the draft within a week. 45 I d once again tell the Member of Parliament that this Bill is not about nationality at all. I made a mistake in the Explanatory Memorandum in fact I honestly confess, not me, but one of my colleagues mistakenly wrote that. Antal Rogán at the plenary debate, 29 October felsz=309&p_szoveg=&p_felszig=309 ( ). 46 Kínaiaknak árulná a Fidesz a tartózkodás engedélyt (Fidesz would sell residence permits to Chinese) available at: nol.hu/belfold/kinaiaknak_arulja_a_fidesz_az_allampolgarsagot ( ) The online site of Népszabadság unfortunately has been removed from the web when the printed newspaper was terminated in October Naturalisation would entail slightly more guarantees than permanent residence. The former may only be revoked in case of fraud in the naturalisation process, and even then only within ten years. Beyond disclosing false information, there are further grounds for revoking a permanent residence permit. E.g. it is at the issuing authority s discretion to withdraw a permanent residence permit if the circumstances based on which they were issued have changed to an extent that the criteria for authorization is no longer satisfied, and if a period of five years has not elapsed from the date of issue of the permit (section 37 ThirdA). That option is no longer available if the immigrant has acquired an EU residence permit (after five years). 28

31 that the Government put a solution on the table, but as the Government remained passive, he exploited his right to initiate an Act as an MP. 47 Accordingly, the normative part of the text of the first proposal did not mention naturalisation, only spoke of the Minister s ex gratia power to settle, but the provision s justification ( by mistake ) explained that the naturalisation of the investors is beneficial to the country. The proposal nevertheless led to a public debate, as even the procedure envisaged in it (an ex gratia settlement permit decided by the Minister) entailed that the normal exclusions grounds of national security and public order would have been circumvented. 2) The second proposal The second proposal 48 was submitted a week later on 5 November 2012 and technically appeared as amendment to the first proposal, proposed this time by the Parliament s Economic Committee, whose president Mr Rogán was. Its first paragraph deleted the whole original proposal about the Minister granting permanent residence due to special circumstances. The remainder of the proposal described the system which became law: first, a formal residence permit with an exceptionally long duration (maximum 5 years) is obtained, then a permanent residence permit (settlement permit) of unlimited duration. The procedure now entailed the usual checks for foreigners applying for a right to remain in Hungary. Its content will be discussed in the next section, but first a few words here on the debate surrounding its adoption. The detailed debate on the second, radically new proposal took place on 5 November 2012 between 22:10 and 22:30. No ministry and no MP on behalf of the submitting group commented on the radically revamped proposal, in which in the words of the only speaker from the Opposition, Mr T. Harangozó nothing resembled the proposal submitted a week ago by Mr Rogán, except for its title and the date of submission. 49 As Mr Harangozó, a member of the largest opposition party (the Socialists), found the proposal acceptable, the vote on the amendment (not yet the final) took place on 12 November and achieved a decisive majority. 50 However, that was not yet the end 47 ( ). 48 T/8879/2. 49 Országgyűlési Napló (Records of the Parliament), 5 November 2012 (column) ftp://ftp.parlament.hu/pub/ naplo/ /2012/ ( ). 50 The votes were 238 yes, 65 no, 40 abstentions. Országgyűlési Napló (Records of the Parliament), 12 November 2012 (column)

32 of the story, as on 9 December 2012 one day before the conclusion of the process in Parliament Mr Rogán, again acting as an individual MP submitted a further amendment to the second proposal, 51 which gave Parliament s Economic Committee the exclusive right to designate the company which would sell its own papers and issue the irrevocable promise that it would itself buy state bonds. Interestingly, the minutes of the Economic Committee do not reflect any discussion on this idea, and it appears to have been conceived by Mr Rogán alone. The closing debate about the proposal was again less than twenty minutes long: no supporter of the proposal rose, not even after some very critical remarks from the only contributor to the debate, Socialist MP, István Göndör, who pointed out that the freshly introduced idea that only one company would be competent for each country was a hotbed for corruption. 52 The following day (11 December 2012) the voting in favour of the never substantially discussed regime was overwhelming: the coalition parties and one independent MP all in favour (256 votes), the opposition parties largely against (65 votes) with a significant portion of the far-right Jobbik party abstaining (18). The amendment to the ThirdA creating the Residency Bond Programme was published in the official Journal on 27 December and entered into force on 28 December 2012 as Act No. CCXX. It was never challenged in the Constitutional Court. 51 T/8879/7. 52 Országgyűlési Napló (Records of the Parliament) (column)

33 Chapter 3 The rules in the book and in practice 31

34 III. The rules in force This chapter will first describe the regime as adopted and then it will indicate the impact of the subsequent changes, namely the 2014 and the 2016 amendments. a) The structure The structure of the regime is based on three groups of documents: various sections of the ThirdA and its implementing government decree (114/2007 Government decree); Decree of the Minister for National Economy, Decree No. 4/2013 (II.19) on the specific procedure of issuing the state bonds referred to in the ThirdA Resolutions of the Parliamentary Economic Committee. In fact significant role is played by the law of the countries in which the company entitled to act as intermediary between the investor and the Hungarian settlement bond selling agency (ÁKK) is registered but that is largely beyond the horizon of the Hungarian procedure as will be shown. The structure created in 2012 has the following components. The investor purchases company securities from those companies designated as such by the Parliamentary Economic Committee. These companies are subject to the law of the land of their registration (to be referred to here as designated companies. A full list with details appears in Section VII). The designated company is obliged to use the funds so acquired from the investor for investing (within 45 days after the issue of the permanent residence permit) 53 into the actual residency government bonds, which are specific government bonds issued for this sole purpose. 54 That means that the investor does not directly invest into the Hungarian economy, nor does she acquire wealth in Hungary, not even does she lend money to the 53 Before 1 July 2016, the first, non-permanent residence permit. 54 More on the bonds economic character in section V. A and B. 32

35 treasury by way of buying government bonds. 55 The investor only buys securities (bonds, shares or promissory notes) of a company registered in Liechtenstein, Malta, the Cayman Islands, etc. 56 True, in principle the money drawn into the chain of transactions is ultimately supposed to arrive in the account of the Government Debt Management Agency Pte Ltd., which circulates the government bonds. In this scheme the Agency sells the special bonds exclusively to the designated companies. The identification of designated companies is the responsibility of the Parliamentary Economic Committee. The Committee receives an application from the company to be designated for a certain country (usually several countries) as the sole company entitled to market the investment scheme in that area and as the sole company entitled to sell its own securities with a view to buying government bonds, thereby entitling the investor to acquire residence rights in Hungary. The maturity of the securities of the designated company is linked to the maturity of the government bond it purchases from the investor s money. Once the state pays back the company the value of the state bond, then the company reimburses the investor in exchange for security in the company (bonds, promissory notes etc.) from the assets acquired from the matured settlement bond. The residency government bonds (the settlement bonds), which the company holds are not tradable on a secondary market. The key question, of course, is the designation of the companies with a monopoly over regions. The ThirdA in 2012 had the nucleus of a description, according to which a company had to comply with the following requirements: aa) the company invests exclusively in zero bonds issued by the Hungarian Government for this particular purpose under the conditions decreed by the minister in charge of public finances, with a maturity of not less than five years, of a nominal value of at least 250,000 euro, where the issuer undertakes the commitment to repay the nominal value at the end of the maturity period, and that the bonds are issued at a discount price, less interest, where the discount rate is 1.5 per cent below the secondary market rate of the Hungarian government bond, denominated in euro, with remaining maturity closest to the five-year period at the time of issue of the bond, but at least 2 percent; 55 This may not be clear to the potential investor. VolDan, one of the designated companies claims on its homepage, that You are purchasing EUR 300,000 of government bonds and on this basis you are being granted the permit. com/program ( ). 56 A complete table with the companies actual data is found in section VII, Table 4. 33

36 ab) has a contract - in respect of the activity defined in Subparagraph aa) with the Államadósság Kezelő Központ Zrt. (Government Debt Management Agency); ac) issues registered securities exclusively; and ad) has all permits and authorizations under the law of the given country, which are required for the activity in question. (Section 28(4) as it stood on 28 December 2012) These rules were augmented by a decision of the Parliamentary Economic Committee adopted on 4 March The decision 57 not having the force of law contains a seven item checklist of one could say fairly vaguely determined criteria for the adjudication of the monopoly right. These are: 1. The applicant company may only pursue activity as described in Section 28 (4) (aa) ThirdA; 2. The applicant only issues registered securities; 3. The articles of the applicant company must contain, or the applicant must state, details of how ownership of the security can be proved and about the body maintaining a register of its owners; 4. The articles of the applicant company must contain, or the applicant must state, the designation and the type of the security issued by the company; 5. The company must prove that it is an existing undertaking and has to attach an official document proving that it appears in a company register and also containing the data required by the relevant law. (The text leaves open on which country s company register the applicant must appear.); 6. If the submitted documents do not contain this information, then the applicant must communicate the name of its representative; and 7. The applicant must declare that it is entitled according to the law of the relevant country to issue and sell securities. 57 Available at: ( ). 34

37 This list is not demanding and certainly does not enable the Committee to choose between two applicants applying in respect of the same country if both of them meet the minimal legal requirements. As the relevant law may be that of any country, no specific guarantees against money laundering are built into the system, neither is there any precaution built in against tax evasion. The frequently relied upon requirement simply to state conformity with the law, without any duly certified written evidence also reflects a great measure of faith in the goodwill and reliability of the yet unknown applicants, who presumably are created for the sole purpose of acting as intermediaries between the State Debt Management Agency and the investor. b) Acquiring residence permits The investor is supposed to approach the territorially competent designated company, which sells its securities to the investor to the value of EUR 300,000 (EUR 250,000 before 1 January 2015) and issues the irrevocable promise that it will purchase government residency bonds to the same value within 45 days from the day the investor receives her first permanent residence (settlement) permit. With a certificate and the company s help, a formal immigration procedure starts at the relevant consular representation or other agency entitled to accept the application for a visa and for the settlement permit. In case the investor is in Hungary she/he can submit an application to the Office of Immigration and Nationality (OIN), again with the assistance of a designated company. If the visa and the settlement permit are not denied, the investor may move to or remain in Hungary. Before 1 July 2016, the process entailed a six month period only after the expiry of which could the investor apply for a permanent residence (settlement) permit. The investor s family members are entitled to the same benefits, based on a single investment of EUR 250,000/300,000. According to the relevant EU rules, both a limited period residence permit and a national permanent residence (settlement) permit only entitle their holders to travel within the rest of the Schengen area for 90 days within 180 days. 58 Even in case of such travel the investor must possess a valid travel document, not simply an ID. Only the acquisition of long term EU residency status in Hungary would extend the investor s right to move into and settle in another EU Member State if the conditions envisaged 58 See Article 6 of the Schengen Borders Code. Regulation (EU) 2016/399 of the European Parliament and of the Council of 9 March 2016 on a Union Code on the rules governing the movement of persons across borders (Schengen Borders Code) [2016] OJ L 77, pp

38 by the applicable Directive 59 are met. In order to acquire long-term EU residence status in the first MS (in this case, Hungary), the person must actually live in that country. No more than ten months absence within the five years are allowed, with no longer than six months in a single period of absence. 60 In practice, those travelling within the Schengen area should not be subjected to further entry/exit controls when moving from one Schengen country to the other. Accordingly, if a third-country national possessing a permanent residence permit in Hungary is checked in another member state, that authority will not be able to establish when the third-country national entered that state, as her/ his passport will not bear any stamp evidencing the entry date to the state other than Hungary. Therefore, the calculation of ninety days within any 180 becomes practically impossible. This means that in most cases, persons possessing a valid Hungarian residence permit and a not-expired travel document will be able to remain undisturbed within the Schengen area, and will only encounter difficulties if they intend to engage in a transaction or act (e.g. register a child at school) in connection with which legal residence in that country must be proved. c) Changes in the system since its inception As shown, the first set of eligibility rules for companies were adopted by the Parliamentary Economic Committee in March 2013, which marked the regime s actual launch. The regime s first amendment came later, in a most particular way. The government formally submitted a Bill in on 4 October to amend a number of laws in order to introduce the passenger name record system and to introduce the phraseology of the EU Visa Code. The Bill had nothing to do with the investor immigration scheme. Several amendments were submitted to it, discussed in various parliamentary committees, but the investor settlement programme was totally unaffected. Four days before the final vote on the Bill, on Thursday 7 November 2013, the Minister of the Interior faxed to Parliament a long set of further amendments, in the guise of 59 Council Directive 2003/109/EC of 25 November 2003 concerning the status of third-country nationals who are long-term residents [2004] OJ L16, pp , especially Chapter III Residence in the other member states. 60 Article 4 (3) Council Directive 2003/109/EC of 25 November T/

39 minor amendments to increase the Bill s coherence. 62 There was no discussion of the new ideas in the committees, nor at the Parliamentary plenary. The changes were adopted by a large majority on Monday 11 November These changes deserved attention, as they included conceptual shifts. First, the obligation not to leave Hungary for more than six months, once the investor acquired permanent residence (settlement) status was lifted (Six months continuous absence is a common revocation ground for permanent residence/ settlement permits). In essence, this meant that investors no longer had to live in Hungary. Second, mandatory legal representation in the procedure was ordered. The Minister s explanatory note was terse. On the legal representation it only said: it was justified (but never explained why), and on the lifting of the obligation to live in Hungary it presumed that investor s other investments may necessitate a longer than 6 months absence from Hungary. The importance of these provisions will be assessed later as they became stepping stones towards the present regime, in which the investor does not need to spend a single day in Hungary, despite enjoying certain rights as a settled third-country national across the EU. The second set of amendments were again suggested as an individual Bill, submitted by Mr Rogán, Chairman of the Economic Committee, this time as a private Member of Parliament, on 30 September The adopted text retained all the important elements of the Bill, although it refined its content. Essentially four major changes were introduced: 1. The amount to be invested into the designated companies securities increased from EUR 250,000 to EUR 300,000. Mr Rogán justified the increase of the sum by claiming that interest in the program has constantly grown since its introduction and the Hungarian programme remains one of the cheapest within the EU, even with the EUR 300,000 threshold T/12614/12 see Annex Act CXCVIII of Published on 28 November Ibid. Explanatory Memorandum to the Bill. 37

40 2. The obligation to live in Hungary ( no longer than six months absence ) was lifted with respect to the investor s family members in order to ensure equal treatment (overlooking that the exception for the investor her/himself was justified by the presumed obligations with regard to their investments in other countries). 3. Persons who had already lived in Hungary, on the basis of other residence permits not linked to investments, were allowed to join the programme and apply directly for permanent residence (settlement) on the basis of their investment. 4. Detailed rules were adopted for situations in which the investor intends to apply in a country different from her/his nationality, including from within Hungary. The monopoly rules for the designated companies had to be refined to govern situations when for example, a Chinese investor living in Singapore decided to become part of the programme. The second amendment entered into force on 1 January 2015 as the consequence of Act No. CVIII of 2014, adopted in Parliament on 16 December 2014 and published on 30 December The third set of changes arrived while this report was being written. Again, a major law reform Bill, 66 affecting refugee law, migration law, employment law etc., incorporated a few, but important sections on the investment settlement programme. The most important changes: 1. The obligation to live at least six months under a residence permit before being able to apply for a permanent residence (settlement) permit has been removed; 2. The circle of family members entitled to immigrate has been enlarged; 3. The time allotted for security checks by the specialised agencies has been curtailed from thirty and twenty days (first procedure, appeal procedure) to twenty and ten days respectively; and 4. The total duration of the procedure has been shrunk from 70/30 to 30/15 days, including the time for security checks. 66 T/9634 on amending certain laws on migration and in that context also amending other laws. 38

41 The Explanatory Memorandum 67 to the Bill explained the abolition of the first six months residence obligation with the desire to eliminate the duplication of the procedure, thereby decreasing the burden on the immigration authority. No word was offered to explain how security checks including for example in case of suspicion of money laundering could be executed in ten or twenty days, especially when international data gathering was required. That may be enough to check data in existing data bases, but certainly not for tracking down the source of the wealth enabling the investment. 68 The amendments to the investment immigration programme entered into force on 1 July IV. The rules in practice The following description tries to find a balance between the present legal situation and the one preceding 1 July It bases itself on the laws in force, but will note the changes which occurred in summer 2016 or before. a) Eligible and ineligible persons Only third-country nationals are eligible, defined in the ThirdA as persons who are not Hungarian nationals or stateless persons and who do not have the right of free movement and residence within the EU and the EEA. The principal applicant (the investor ) is entitled to apply on behalf of a spouse regardless of the length of the marriage, dependent descendants (irrespective of age) and dependent parents. That is a wider circle than before 1 July 2016, when family members entitled to immigrate with the investor included only the spouse and minor children. Moreover, before the relaxation of the rules the marriage must have been concluded at least two years before the application. 67 See T/9634, p The daily Magyar Nemzet reported on 27 July 2016 that according to its sources criminals also bought settlement bonds ( ). The report reveals that criminals allegedly moved to other countries, which provided them with certificates of clean criminal records. That issue was raised by written question by Zsolt Molnár MP to the Minister for the Interior Sándor Pintér (Document K/11659), who in his yet unpublished but in the press quoted answer did not refute the claim and did not go beyond generalities about how the security services check applicants. Nothing on the method or coverage of those checks was shared with the MP in the letter. 39

42 The first application in the past aimed at acquiring a residence permit ( tartózkodási engedély ), the maximum length of which was five years. 69 Applicants who did not possess the following were ineligible: a valid travel document; the right to return or travel onward (a visa or other permit to enter another country or to return); accommodation and adequate financial resources; full health insurance or sufficient financial resources for healthcare services; A further requirement was that the applicant must not have been subjected to a national or EU-level entry ban or expulsion; her/his entry and stay did not endanger public security, national security or public health; and was not subject to a SIS alert entailing an entry ban. After 1 July 2016 the residence in Hungary phase on the basis of a residence permit was dropped and applicants whether living in their country of nationality, in another state or in Hungary became able directly to apply for a permanent residence (settlement) permit. Nevertheless, the criteria for eligibility remained the same, with the exception that accommodation in Hungary is no longer required. A new requirement was that the applicant must prove that she/he has no criminal record, or has been acquitted from its consequences. The issued permit must be revoked if the designated company fails to invest on behalf of the investor into the settlement bond within 45 days of the issuance of the permit. 69 That in itself was exceptional. Residence permits on other regular grounds may only grant residence for a maximum of two years. (section 16(2) ThirdA). 40

43 b) Place of submission of the request for the residence permit The rules have become quite complicated. The initial logic was based on the geographic monopoly of the designated companies. It assumed that applicants would apply in their country of permanent residence, which was assumed to be their country of nationality. However, it became clear that many of the investors did not live in their own country, so the rules were relaxed. The principal rule for applying from a country other than the country of origin is that the applicant must legally reside there, with a residence permit of at least one year s duration. The following table reflects the current situation: Table3. Competence of the designated companies in various constellations 70 Place of application In country of nationality or habitual residence Outside of country of nationality or habitual residence, in a third country In Hungary Is there a geographically competent designated country? There is a designated company for the country There is no designated company for that country There is a designated company for the country There is no designated company for that country Company designated for home country exists There is no company designated for home country Competent designated company Only with the designated company In any other country with the company designated for that country With the designated company for that country or, at home with the company designated for the country of nationality With the designated company for the country of nationality or in any other country with the company designated for that country Designated company for the country of nationality Arton Capital* Hungary (if resident of Hungary) Arton Capital Hungary, the (indirectly) designated company for Hungary * Arton Capital is the only designated company which is registered in Hungary. Therefore, it is the only company which meets the requirement of section 35B(6) ThirdA, according to which a person may submit an application in Hungary, provided the person s stay in Hungary is legal and the application is submitted through a company registered in Hungary i.e. Arton Capital, naturally not named in the Act. 70 A full list of companies with detailed data appears in CII, Table 4. 41

44 c) The dual commencement of the procedure: technically with the designated company, legally at the consulate The legal procedure for acquiring a permanent residence (settlement) permit begins at the consulate or other place empowered to receive such an application. However, in order to begin that procedure the investor must have evidence of the designated company according to which the investor had already bought the company s registered papers in exchange for which the company issued the irrevocable promise according to which the company will buy the specific state bonds to the required value (in 2016: EUR 300,000) within 45 days from the issuance of the residence/permanent residence (settlement) permit. 1) The designated company and the future investor It is a matter for debate whether future investors need to seek out the companies or whether the companies have to advertise to draw attention to this opportunity. Mr Lian Wang, co-owner of the designated company with the largest number of applicants, the Hungary State Special Debt Fund competent for China, claims that the company has built up a huge marketing organisation with employees and several hundred agents. 71 Some of the companies are linked to international ventures, 72 even if the company buying the state bonds and selling its own securities must submit itself to the limitation that it only invests in the specific settlement bonds. 73 In August 2016 there were five operating designated companies and three whose licence had been withdrawn. 74 Competences are fluid, for example in May 2016 Arton Capital Hungary replaced the Hungary State Special Debt Fund in respect of Vietnam E.g. Arton Capital Hungary 73 Section 28 (4)(a)(aa) ThirdA. Section 35A (2)(a)(aa) ThirdA as amended after 1 July See section IX on the details of the companies. 42

45 The first step in the procedure is the contact between the designated company and the future immigrant. This is enhanced by a number of law offices offering their services to, mediate between the future investor and the designated company. 75 According to several accounts, 76 Mr Kristóf Kosik and his law office enjoy the privileged position of being involved in a large proportion of the submissions of individual applications to the Office of Immigration and Nationality. 77 According to one of the largest news portals his law office actually drafted the Bill on settlement bonds. 78 Mr Kosik has been the lawyer of Mr Árpád Habony, 79 an informal advisor to the Prime Minister, who has no formal position in the Government but who has been described as having (indirect) connections to at least three of the designated companies. 80 Mr Kosik is also the lawyer of Arton Capital Hungary and the domain owner of the intensely pro-government news portal 81 In fact, he was the person who received the author of this report on behalf of the Parliamentary Economic Committee as advisor to the Committee when the author was on fact-finding mission. Designated companies (with the help of their lawyer partners) offer a complete service, in terms of assisting the client gather the necessary documents and arrange meetings with the consular officials or other personnel empowered to receive the application. Official documents have to be submitted with a certified translation into Hungarian. The service fee is usually required at the beginning of the procedure Examples: ; residency-bond.eu/procedure.html; ( ). Gábor Földvári, founder of Innozone explicitly mentioned in an interview, that law firms and accountants draw the attention of future investors to the programme. ahol_vagyunk ( ). 76 Personal interviews and as well as gazdasag/2015/02/19/egyetlen_ugyved_kaszal_a_letelepedesi_kotvenyeken/ ( ) ( ). 78 Ibid. 79 The 2016 Freedom House Report on Hungary describes him as Orbán confidante Árpád Habony report/nations-transit/2016/hungary ( ) ( ) This is the description in Arton s brochure: The application fees associated with this program are 60,000 and cover legal and procedural representation for the main applicant and all qualifying family members throughout the application process. That includes fees for family. Permanent resident applications, as well as government application fees in Hungary, translation fees, and service fees incurred for performing background checks and validating sources of funds. Fees are paid upfront and are non-refundable. Available for download on entering personal data from: 43

46 2) Contact with the consulate (or the OIN in Budapest) The applicants (and their family members) cannot avoid showing up at least once either at a Hungarian consular representation abroad or at the Office of Immigration and Nationality in Budapest. The reason for this is that the biometric identifiers of the applicant and her/his family members involved in the programme have to be collected. As legal representation is obligatory in the procedure, practically all other steps can be carried out by the lawyer, including the collection of the permanent residence permit once issued. The list of documents to be presented is relatively long, but does not go beyond the trivial. (Application form, passport, birth certificate, marriage certificate where relevant, evidence of clear criminal record, evidence of address in Hungary, CV, power of attorney.) Until 1 July 2016, the application was for a visa and residence permit (of limited duration), since then the application is directly for a long-term (settlement) permit which if received abroad confers a right to enter the country, dispensing with the need for a visa. Remarkably, even before 1 July 2016 the ( short-term ) the residence permits for investors could be longer than those under the general rule. According to the general rule, the maximum length of a residence permit is two years, but investors could obtain a five year residence permit. When applying for a permanent residence (settlement) permit, the entitlement to stay in Hungary is unlimited in time, but the settlement permit itself is valid for five years, which may naturally be extended. Settled foreigners who live in Hungary must also have a Hungarian identity card. That will normally have limited validity (3 6 years). Interestingly enough, Act CXXX of removed the obligation for investors to acquire a national ID card, 84 which is a requirement for all other foreigners seeking a settlement permit. Nor must the investor have a registered address in Hungary. The Bill s Explanatory memorandum 85 this time submitted by the Minister of the Interior is surprisingly frank: 83 Published in the official journal Magyar Közlöny on 13 July 2015, with the provision in question entering into force three days later. 84 According to Act No. LXVI of 1992 on the registration of the personal data and the addresses of citizens, even foreigners who are settled in Hungary must apply for a Hungarian personal ID card, reflecting their data in visual and digital form (on a chip). There is no need for a person to possess a Hungarian ID if the person has a Hungarian passport or driver s licence. 85 T

47 Considering that foreigners [applying in the residency bond programme for a settlement permit] typically do not live in Hungary it is not realistic to require them to apply for a personal ID and for an address card. The procedure of issuing an ID and an address card constitutes an extra bureaucratic burden both for the authority and for the client, which is an obstacle to the fast and efficient issuance of permanent residence (settlement) permits for the national economic interest. According to the Bill those foreigners who acquire permanent residence (settlement) permit based on the national economic interest living in Hungary will continue to be under the scope of the [Act on the registration of the personal data and the addresses of citizens Act LXVI of 1992]. We could hardly imagine stronger proof that the investors are not investors: they are not even required to live in Hungary in order to bring their family into Hungary, to contribute to GDP at least through their consumption. They simply lend money to a usually offshore company, which in exchange finances the budget at not insignificant interest rates, while collecting EUR 40 60,000 from investors who do not set foot on Hungarian soil, ever in their lives. The consular office acts only as a postman. The substantive decision on the settlement permit is taken in Budapest, at OIN. However, the consul performs one important filtering function: it is her/his task to assure that the right designated company is involved, with the (shared) monopoly with respect to the applicant, and that no encroachment into the monopoly of another designated company occurs. 86 Remarkably, if the consul notes that a company has transgressed its competence and recruited a client from a geographic area reserved for its competitors, she/he is under an obligation to notify the Parliamentary Economic Committee. In the pre-1 July 2016 system this had to be accomplished through OIN, but after that date the consul is supposed to contact the Committee directly and denounce the encroacher, which could lead to the revocation of its licence. That is a clear reflection of the very close ( ever closer ) union between the companies seeking to retain their profitable monopolies and the Economic Committee keen to assure them Section 35B(3) ThirdA As regards the submission of an application for residence permit, the consul or other entity authorized to accept applications for residence permit, or the competent immigration authority shall check as to whether residence can be considered lawful under Subsection (1) hereof, as well as the applicant s nationality so as to verify the extent of authorization granted for the company under Subsection (4) of Section 35A, and shall reject the application if identifying any infringement of the provisions of this Section. In the event of any infringement of the provisions of Subsection (5) of Section 35A, the consul or other entity authorized to accept applications for residence permit, or the competent immigration authority shall forthwith notify the Parliamentary Standing Committee for Economic Affairs. 87 The founder of the Euro-Asia Investment Company, Mr Rafael Raj recalled in an interview how Antal Rogán MP, then chair of the Economic Committee, intervened when Raj s company, originally competent for Singapore, started to sell its papers to Chinese investors. ( ). 45

48 d) The procedure with the OIN The application ends at OIN. In an interview at OIN the author was told that roughly ten percent of the applications are submitted from within Hungary. 88 The overall workload is high, and it is the impression that except for basic checks of the genuineness of documents and waiting for the security agencies (Police, Agency for Constitutional Protection and the Counter-Terrorism Centre) contribution, nothing more is done. The procedure is automatic, no discretionary powers are involved, the case worker may not deliberate the usefulness of issuing the permit, and since local residence is no longer required, even the usual checks of the genuineness of the address, health insurance etc. are essentially voided. Deadlines are short and getting shorter. Since 1 July 2016 OIN has had to complete the whole procedure including the security checks by the external agencies in thirty days. 89 Unless exclusion grounds are found, the permit must be issued. According to the data provided to this author by OIN, 90 from the start of the programme until 31 March 2016 there were only three instances in which the first residence permit was refused for national security considerations (out of 3500 applications decided), and a single application was denied for the same reason from among the 2252 applications for a permanent residence (settlement) permit. The less than stringent nature of the procedure is reflected in the fact that evidentiary rules are very liberal: for example, the dependency of the family member may be proven by a single statement from the applicant, there is no proof of cohabitation, shared household or any other form of regular and substantive support required of a family member who requests admission along with an investor. Similarly, according to a stakeholders accounts to this author, residence requirements (where applicable) were and are taken lightly: no onsite checks are/were ever conducted. The provision of an address for a modest fee 88 The precise numbers are 3515 applications from commencement until 31 March Of these, 273 were submitted in Budapest. Source: OIN communication to the author. 89 Section 35C ThirdA. 90 On file with BN. 46

49 was also part of the full service in certain cases. 91 The importance of living in Hungary vanished when the amendment entered into force on 1 July 2016, as the requirement for an initial six months residence before a permanent residence (settlement) permit may be obtained was removed. Moreover, as described above, the settlement permit may be acquired without a day s sojourn in Hungary. The settlement permit s importance lies in the fact that it amounts to a Schengen visa entitling ninety days stay within 180 days within the Schengen area. e) The trap: no access to long-term EU resident status The laidback approach to the presence requirement is a trap. Whereas the national permanent residence (settlement) permit may be issued by the Hungarian authorities to persons who never actually set foot in Hungary, the EU, and for that matter the Hungarian rules on EU long-term resident status have not changed: they very much require the connection between the immigrant and the country of immigration. Council Directive 2003/109/EC of 25 November 2003 concerning the status of third-country nationals who are long-term residents and its transposing rules in the ThirdA establish a great many factual requirements for acquiring the right to be a long term (almost permanent) resident of the EU and with that, the conditional right to settle in another Member State. Article 4 of the Directive is unequivocal: it expects Member States to grant long-term resident status only to those third-country nationals who have resided legally and continuously within its territory for five years immediately prior to the submission of the relevant application. Mere legal residence without continuous physical presence will not satisfy this requirement, as was corroborated during an interview with OIN staff. Moreover, not only do resources and all-risk health insurance have to be proven, but Member States are allowed to require third-country nationals to comply with integration conditions (Article 5(2)). This latter requirement may be required by a state other than the Member State granting the long-term status if the thirdcountry national wishes to move to this second EU Member State. 92 The practical consequence of these rules is that the investor and her/his family must actually live in Hungary for five years and meet a lot of requirements including e.g. participation in language courses of the second Member State where applicable before they are allowed to take up residence beyond three months in another EU Member State. 91 Personal interview with a lawyer affiliated with one of the designated companies. 92 For further details see Articles of the Directive. 47

50 f) The designated companies and the Hungarian Government Debt Management Ltd. (ÁKK) Designated companies must conclude a framework contract with ÁKK. 93 Following a parliamentarian s request, ÁKK has revealed its framework contracts with the designated companies (as they were in an example is provided in Annex 1). The text of the contract refers to the bonds as Residency Government Bonds issued on behalf of the Hungarian State by the Minister for National Economy. The bonds are to be offered by Hungarian Government Debt Management Ltd. (ÁKK) in four series each year and may be divided into tranches. 95 Allocation of bonds is private, no external actor may purchase them. The bonds carry a discount interest rate. The actual discount rate should be 1.5% lower than the secondary market rate for the Hungarian Government bonds, denominated in euros, with the remaining maturity as close as possible to five years at the time of the bonds issue but in any case not less than 2%. 96 Upon the bonds maturity their par value is paid to the designated company. Designated companies are supposed to produce originals or certified copies of documents testifying that they meet the selection criteria discussed above in Chapter III A. In addition, ÁKK requires that a statement be submitted according to its rules on preventing money laundering and the financing of terrorism. That statement should enable the identification of the beneficial (real) owner. However, no evidentiary material need accompany the statement. 93 Section 35A(a)(ab) ThirdA ( ). 95 Detailed rules on the bond are set in Decree 4/2013 (II.19) issued by the Minister for National Economy on the specific rules for issuing the government bonds specified in the ThirdA. 96 Section 35A(2)(aa) ThirdA. 48

51 Chapter 4 Economic (ir)rationalities 49

52 Whereas the previous chapters reviewed the legal and practical aspects of the scheme mainly from the point of view of the investor, this chapter turns to focus on the scheme s economic content. V. The economics of the scheme From an economic perspective, three aspects can be identified: The impact of the four times yearly issuance of settlement bonds on the national budget and balance of payments, taking into account the de facto interest rate paid to the subscribers; The economic or other benefits of inserting the designated companies between the Government Debt Management Agency and the investor ; and The ratio between the cost to investors of buying the designated company s securities and paying for its services, and the benefits provided by the company. a) Financing the state debt: the settlement bond is irrelevant At the time of issuing the first series of settlement bonds in 2013, the total central government debt stood at HUF 21,881 billion 97 (EUR 74 billion). The yearly gross financing requirement stood at HUF 7,917 billion. 98 The sum collected through settlement bonds in 2013 was HUF 32 billion (EUR 0.1 billion). 99 The interest rate paid 97 Year-end figures. See Government Debt Management Agency Ltd. (ÁKK), Government Debt Management Report 2013, p. 31, available at: ( ). The yearly average EUR/HUF exchange rate for 2013 was HUF297/EUR1: The report uses rounded figures. 98 Government Debt Management Report 2013, p Ibid., p

53 by the Government Debt Management Agency for those bonds is 2.83% ( coupon ), which was indeed somewhat lower than the interest on five-year Hungarian treasury bond 2018/A, which was set at 5.5%. The capital collected in 2014 grew to HUF 140 billion (EUR 0.45 billion). 100 These data show that the contribution of the settlement bond to financing the state debt was insignificant, less than 0.5 percent. Accordingly, even if the cost of that loan was at that time lower than the cost of a normal treasury bond (in terms of the interest rate applied to it), its introduction could not be economically justified, especially if we consider the transaction costs of establishing a new regime. It is even less rational in Back in Hungary was still suffering greatly from the recession, experiencing negative GDP growth in 2012 (-1.72%). 101 However, recent years have witnessed modest growth. The index reflecting the fragility of an economy, the credit default swaps index, has dropped by almost 500 basis points since After this consolidation in the economy and the dispelling of the danger of default on state bonds, the interest rate the state must pay to creditors has decreased. A normal three year euro-bond issued in will yield 2% interest above Eurostat s harmonised consumer price index (including all items except tobacco). As the consumer price index in 2016 is around 100% (i.e. zero inflation), the interest rate on that bond will amount to 2% in the first period. The most recent quarterly report from the Government Debt Management Agency declared that At the end of March [2016] the 1-year benchmark yield stood at 0.99%, the 3-year yield at 1.51% and the 10-year yield at 2.94%. 104 Therefore, if the settlement bonds issued in 2016 guarantee at least 2% interest (as is the case, through the discount sale price) then the state is borrowing more expensively than it could on the open market, where it could borrow at an interest rate between 1.51 and 2.94 %, closer to the former. 100 Government Debt Management Agency Ltd., Government Debt Management Report 2014, p.42, available at: hu/uploads/gnzo9275.pdf ( ). 101 OECD data, ( ) ( ). 103 ISIN: HU (2018/X) Government Debt Management Agency Ltd. (ÁKK), Government Securities Market Quarterly Report First Quarter 2016, p. 2, available at: ( ) 51

54 b) Inserting the designated companies between the state and the investor Many have questioned the need to interpose the designated companies between the state and the investor. 105 Why could the Government Debt Management Agency not sell those special bonds through the normal channels for foreign buyers? It is not by chance that when a group of 51 Members of Parliament laid a motion to establish a commission of inquiry concerning the scheme, 106 one of the issues to be investigated was precisely this. The promoters of the scheme, primarily Mr Antal Rogán, remarkably never explained the need to insert these companies. They often spoke as though the investors would be buying state securities, whereas they knew fine that the investors would be excluded from all the guarantees accruing to a state bond, and would have to satisfy themselves with the guarantees the Cayman Islands, Liechtenstein, Malta and other states of registry offer to the owners of shares, bond and promissory notes of local companies. 107 The presence of companies registered outside the Hungarian jurisdiction and financial oversight is detrimental both for the Hungarian state and for the investors. The state s losses are manifold: It loses a significant tax income as it is beyond doubt that these companies are very profitable. Counting 3500 applications and (on average) EUR 47,000 fee per application, EUR million income has been generated by the eight companies involved. The loss in tax revenue is in the range of tens of millions of euros and that loss is not compensated by any service or other non-material benefit to/for the state. It loses its control over its goodwill. Should any of the companies default and not return the money invested into their papers, the buyer will believe that the Hungarian State is resiling from performance (See Annex 2 reproducing the extremely simple security of one of the companies). 105 See e.g. the motion laid by 51 Members of Parliament proposing the establishment of a commission of inquiry seeking answers to six questions, one of which was to find the reason for inserting the designated companies into the scheme instead of simply relying on Hungarian representations abroad. Motion H/9628 of 10 March 2016, available at: hu/irom40/09628/09628.pdf ( ) ( ). 107 See e.g. T/8879, the original proposal by Mr Rogán, which already provided that the investors would only buy company securities, while the Bill s Explanatory Memorandum speaks of persons who in the above described way buy state securities. 52

55 It loses control over the market. As the state itself does not promote the scheme through its own channels and cannot design its marketing strategy, it may never be certain that the potential investors have been reached and encouraged appropriately to buy bonds indirectly. It loses control over money laundering. As the state bonds are purchased by companies which have a framework contract with the Government Debt Management Agency, it would be awkward for the agency to raise money laundering suspicion in transactions with its steady and verified partner designated and authorised for this role by the Parliamentary Economic Committee. But the companies selling their own papers to the investors might be much less vigilant: nothing in Hungarian law or authority obliges them to choose a responsible bank to hold the account into which the future immigrant s funds are paid. Neither do they control where the money comes from. VolDan, for example, made it very clear that the service fee is payable in cash to their bank, and that they do not insist that the funds arrive from the investor s bank account. 108 c) The unreasonably high fee paid to the designated companies VolDan and Arton charge EUR 60,000, 109 the Hungarian State Special Debt Fund (according to publicly available data for 2015) EUR 45,000, Innozone EUR 40,000 (according to a draft contract available on their home page), 110 Migrat Immigration Asia Ltd. has no website and no source revealed its fees. Considering that HSSDF and VolDan dominate the market, 111 it is safe to assume that the average fee is above EUR 45,000. If we assume that the value of a service and its fee ought to be in balance (a synallagmatic contract), a disproportionate construction with most of the benefit accruing to one side could lead to a defect in the intended legal effects, as the Hungarian Civil Code terms it. 112 According to its rule 6:98 on gross disparity in value ( ) Arton Brochure From its inception to 31 March 2016, 2979 Chinese and 221 Russian applications for residence permits have been registered. 112 Act V. of

56 (1) If, at the time of the conclusion of the contract, the difference between the value of a service and the consideration due without either party having the intention of making a gratuitous grant is grossly unfair, the injured party shall be allowed to avoid the contract. The contract shall not be avoided by the party who knew or could be expected to have known the gross disparity in value, or if he assumed the risk thereof. Is demanding EUR 45,000 or EUR 60,000 grossly unfair for the service provided by the designated companies? A solicitor/barrister appointed by the court may bill EUR 17 per hour in Hungary. A commercial law firm may charge EUR per hour. The service provided by the designated company is not too complex, several steps may be automated (checking certificates, translating documents, maintaining contact and reserving reception slots with the consulates) and a significant portion of the whole process is executed by Hungarian lawyers interacting with OIN on behalf of the client. According to unconfirmed news reports, they may charge EUR 5000 per case. 113 The chief executives of the designated companies in their rare interviews point to their marketing expenses and costs of maintaining presence in the designated countries. As there is no access to the finances of the designated companies, their outlays for recruiting clients cannot be checked. However, that should not be a central issue when comparing a service and its price. We can in fact assume that an interested investor would approach a company with exclusive competence for her/his case, even if it did not make the slightest marketing effort. 114 Therefore, the fairness of the size of the service fee has to be assessed in the light of the actual support provided to the investor. If the actual legal work which is the core of the process is worth a maximum of EUR 5000 (and even that may constitute an excess charge), then the ancillary performance of the designated company may certainly not merit an 8 11 times higher fee. In fact, the only accessible balance sheet, that of Arton Capital Hungary for 2015, shows HUF 331 million (rounded) revenue yielding a HUF 200 million (rounded) pre-tax and 180 million (rounded) after tax profit. 115 The question remains: who are the final beneficiaries of this considerable profit? The issue will be developed further after the chapter on the general assessment of corruption in Hungary ( ). 114 Mr Gábor Földvári, the representative of Innozone Holding made it clear in an interview that advertisements do not really bring clients. The investors are hunted down by (local) companies specialised in immigration business. Indians (in respect of whom Innozone has a monopoly) invest to have a safety net, not in order to live in Hungary, but to be able to leave India behind and to assure their children s future within the Schengen area. Hány feleségem lehet Magyarországon? (How many wives can I have in Hungary?) Origo, 19 July ( ). 115 Data derived from an analysis provided by Ceginfo.hu to its subscribers. 54

57 Chapter 5 Corruption, Rule of Law, shadows over the programme 55

58 VI. Hungary, the Rule of Law and corruption: General assessment 116 As a member of the European Union since 2004, Hungary has a democratic system with institutions originally established to respect the separation of powers and legal checks and balances. There was a consensus among political parties and in the public discourse between 1989 and 2010 which according to Montesquieu s century doctrine, legislative, executive and judicial powers need to be separated and the government needs to be controlled by independent institutions. The government of the FIDESZ party, based on a supermajority, i.e. more than two-thirds of the mandates in the parliament resulting from successive landslide victories in national elections in 2010 and in 2014, has broken this consensus and re-engineered the public arena to its own liking. Essentially, FIDESZ has constructed a de facto upper house of government by appointing its own loyalists to public institutions. As a consequence, state institutions initially designed to control the power of the government s executive branch, such as, inter alia, the Constitutional Court, the Supreme Court and the judicial administration, the prosecution service, the Court of Auditors, the Media Board, the Economic Competition Office, the National Bank of Hungary, the National Election Committee, and the country s system of ombudspersons have been replenished with government appointees. The two FIDESZ governments after 2010 eliminated the autonomy of many of these institutions, resulting in many of these bodies becoming the instruments rather than controls of the Government s power. The Government s determination to follow the path of illiberal democracy 117 has in some cases run contrary to European legal standards. This has happened in the case of the President of the Supreme Court (now called the Curia), and the former Parliamentary Ombudsman for Data Protection and Freedom of Information. The terms of office of both these authorities leaders has been terminated prematurely and the dismissed former leaders have been replaced with Government appointees. In its 116 Chapter VI was written by Miklós Ligeti, legal director of TI Hungary and József Péter Martin, managing director of TI Hungary. 117 This term for the Hungarian state was first used by Prime Minister Viktor Orbán in 2014, in one of his speeches in Romania when he stated that the new state that we are building is an illiberal state, a non-liberal state. The full text of this speech, see: july-2014/

59 relevant decision, issued in May 2014, 118 the European Court of Human Rights held that the premature termination of the Supreme Court President s mandate had violated the right of access to a tribunal. As regards the issue of abolishing the institution of the Data Protection Commissioner and the premature termination of the previous commissioner s mandate, this case was brought before the Court of Justice of the European Union, which concluded that Hungary had infringed European law. 119 Furthermore, some provisions of the new Constitution of Hungary, known as the Fundamental Law, were also in contradiction with European legal norms. As of 1 January 2012, when Hungary s new Constitution entered into force, the mandatory retirement age of judges was lowered to the general retirement age, i.e. from 70 to years. The Court of Justice of the European Union delivered a judgment 121 concluding that Hungary had failed to fulfil its obligations 122 deriving from the acquis communautaire. The Government s determination to weaken the capacity of independent institutions entailed an instrumental approach towards legal norms, including the Constitution. Between the takeover by the FIDESZ government in 2010 and the entry into force of the Fundamental Law, Hungary s old Constitution was amended twelve times. The country s newly adopted Fundamental Law, although supposed to be long lasting, has been amended six times since it came into force. These constitutional changes have always lacked any proper ex ante public debate. The Council of Europe s Venice Commission concluded in its opinion that frequent constitutional amendments are a worrying sign of an instrumental attitude towards the constitution. 123 Through these measures Hungary has been steered towards a centrally managed democracy and state capitalism. The quality of democracy has deteriorated since across the whole CEE region, as stated in the Freedom House report. Moreover, the increasingly interwoven relationships between oligarchs and politicians has become a global phenomenon. Nevertheless, this shift in Hungary catalysed according to János Kornai by the Government s obsession with centralisation has caused a unique U-turn in the region, and a departure from the Western concept of democracy and the Rule of Law. The new Hungarian system has challenged property 118 See case Baka v. Hungary (ECtHR) Application No /12, judgment (merits). The judgment became final on 14 March 2016, when the Grand Chamber affirmed the section ruling on a decision adopted on the abovementioned date. 119 Hungary breached the requirements of Directive 95/46/EC. See, Case C-288/12 Commission v Hungary ECLI:EU:C:2014: General retirement age is dependent on the birth year and varies between 62 and 65 years. 121 Ibid. 122 Under Council Directive 2000/78/EC. 123 For Venice Commission criticism on this point, see Opinion on the Fourth Amendment to the Fundamental Law of Hungary, CDL-AD(2013)012, Strasbourg, Council of Europe, 17 June 2013, AD%282013%29012-e. 57

60 rights and the freedom of civil society in a number of cases and actions. Centralisation has reached unprecedentedly high levels as the central Government has accrued tremendous powers to itself, with the potential to influence state institutions imminently, outside the executive branch of power, which seems unusual in the EU. The elimination of control institutions from Hungarian public life per se has increased the risk of corruption. According to Transparency International s Corruption Perception Index (CPI) 124 Hungary is deemed to be moderately corrupt in global terms, reaching 51 points in 2015 on a scale from 0 ( very corrupt ) to 100 ( clean and non-corrupt ), which is 3 points less compared to the country s score in the previous year. With this performance, Hungary ranked 51st of the 168 countries assessed, three ranks below its 2014 assessment. The perception of Hungary s anti-corruption performance has dropped in the last decade among the countries which joined the European Union in 2004 and later. Hungary s scores have not changed dramatically, what has worsened is its position relative to other countries. 125 In 2004, the year of the country s accession to the European Union, Hungary was in the vanguard of this group of eleven countries, preceded only by Estonia and Slovenia. By 2015, Hungary s had dropped to the bottom of the group, followed only by Bulgaria and Romania. As far as the EU s results are concerned, Hungary was the block s nineteenth most corrupt country out of 27 member states in In 2013, Hungary s sank to twentieth of 28 Member States, where it remained in 2014 as well. In 2015, Hungary dropped to 22nd among EU members. 124 The CPI is a composite index scores countries on how corrupt their public sectors are regarded by the business community and experts. A detailed description of the CPI s methodology is available at Transparency International s website: transparency.org/research/cpi/overview. 125 There was a methodological change in 2012 which makes it difficult to compare the nominal results before and after that date. 58

61 The table below shows the change in the perceptions of Hungary s anticorruption performance between 2012 and COUNTRY CPI 2015 CPI 2014 CPI 2013 CPI 2012 CHANGE OF SCORE* 1. Estonia Poland Lithuania Slovenia Latvia Czech Republic Croatia Slovakia Hungary Romania Bulgaria *From 2014 to 2015 Source: Transparency International Hungary Transparency International Hungary warned in 2008, that corruption as a trend was becoming institutionalised 126. After 2010, however, parallel to the major deterioration in the Rule of Law and to democratic principles, the nature of corruption has changed as it has become more centralised. This led to a situation where Hungary has become vulnerable to a special kind of state capture, i.e. in which parties re-politicise the state in pursuit of political monopoly, which we call a party state capture (the other form of state capture is the corporate one where strong oligarchs take control of a weak government). This form of state capture entails systemic corruption and in a number of cases is even legalised. Powerful oligarchs either outwit the government or, more frequently, are in symbiosis 126 See page 10 in Corruption risks in the business sector, National Integrity System Country Study, Hungary, 2008, transparency.hu/wp-content/uploads/2016/05/corruption-risks-in-the-business-sector.pdf 59

62 with influential public decision-makers, allowing them to extract public money from the system through intentionally designed and professionally-managed conduits. Under such state capture, the corruption can be interpreted not necessarily or primarily through the traditional principal agent model but by the endeavours of the elite through which it shapes a system-like character. The state capture in Hungary has entailed insider or crony capitalism, an economic system in which rent-seeking crucially distorts the functioning of the market economy. Corruption itself appears a tool of rent seeking, where money can be made based not on market performance but on political connections. Hungarian economic actors are prone in a number of sectors to seek the grace of the Government instead of competing in a regulated market. Rent-seeking and cronyism enhance suboptimal transactions through the misallocation of resources, thus preventing sustainable growth. If the institutions do not serve the public good by being inclusive, they become extractive, i.e. provide grounds for the elite s abuse of power for their private interests. The combination of state capture and crony capitalism has led to a deterioration of institutional performance. In business sector players judgement, the regulatory environment in Hungary is unpredictable, and investors face a huge administrative burden. This is illustrated by a recent World Economic Forum survey, 127 which concluded that Hungarian state institutions transparency and anticorruption performance was particularly worrisome. Out of 140 economies surveyed worldwide, Hungary ranked 119 in transparency of government decisions and in diversion of public funds ; and 125 in favouritism in government decisions. Entrepreneurs find that corruption is the second most frequent obstacle to doing business in Hungary. The business environment has come to be perceived as unsatisfactory. In 2014 the Hungarian environment was assessed as the worst by investors of the five countries in the region (behind the Czech Republic, Poland, Slovenia and Slovakia), 128 which had an obvious negative effect on the level of private investment and thus economic performance. In our judgement, Hungary can be understood as a country captured by its incumbent political elite and governed by a symbiotic conglomerate of the ruling Fidesz party and its closest, oligarchic allies, where the disruption of control institutions has led to 127 These findings result from the Economic Opinion Survey of World Economic Forum s Global Competitiveness Report/ Global Competitiveness Index 2015/2016, see Report_ pdf. For a detailed description of the survey s methodology, see See the survey of the German-Hungarian Chamber of Commerce (DUIHK): AHK-Konjunkturumfrage Mittelosteuropa (2014), available 60

63 systemic abuses of the Rule of Law. This process has encouraged the exploitation of legislative power with the aim to gain immediate profit. The peculiarities of Hungary s prevailing party state capture have undermined the central values of a democratic society and the foundations of a functioning market economy, such as the Rule of Law, the sanctity of property rights and the prohibition of the Government arbitrarily interfering with existing individual contracts. The rise of rent-seeking tendencies and the emergence of cronyism in the economy have been marked in Hungary by unilaterally designed legislation which, by injuring the Rule of Law, cast doubt on democratic participation and the underpinnings of a liberal society. VII. The implementing companies: suspicious, worrying and obscure elements As the preceding chapters show, the companies selling their own securities and purchasing state bonds sprang up in an environment where corruption is widespread. The companies themselves are surrounded by suspicious, worrying and obscure elements. 129 It is appropriate to offer a comprehensive view of the actors before considering a few concrete issues. In June 2016 five of the eight companies which had originally been licenced still had valid licences. Only one of them is registered in Hungary, the other four having their seats in the Cayman Islands, Liechtenstein and Cyprus (two companies). The seats of the three companies no longer entitled to participate in the programme (but retaining their obligations towards those clients who had bought their securities) are Liechtenstein, Malta and Singapore. 129 A personal example: the author of this report agreed to interview a senior person, responsible for the programme at one of the foreign-headquartered companies. As a matter of courtesy he sent his questions 30 minutes before the actual meeting was to take place. Fifteen minutes later the interviewee cancelled the meeting, claiming she was not entitled to respond and required approval from Schaan, Liechtenstein. That approval never came, even though the author continued to inquire about it for weeks and offered to get into direct contact with the decision makers. 61

64 Table 4 Hungarian settlement bond active designated companies and companies whose licences had been withdrawn (as of 28 June 2016) Companies with valid licence Name Seat Licence issued by the Economic Commission of the Parliament Arton Capital Hungary Budapest, Hungary Székely Mihály utca 8. Cg May 2013: United Arab Emirates 26 June 2013: Afghanistan, Pakistan, Malta 25 September 2014: Egypt, Morocco, Tunisia, Algeria, Yemen, Oman, Iran, Qatar, Kuwait, Lebanon, Iraq, Saudi-Arabia, Syria, Libya, Jordan, Bahrain, UK, Switzerland 15 February 2016: USA, Indonesia, Kazakhstan, Nigeria, Singapore, Thailand 31 May 2016: Vietnam Hungary State Special Debt Fund Sole and exclusive agent : Hungary State Special Debt Management Limited Innozone Holdings Limited Cayman Islands, Camana Bay, Grand Cayman, 89 Nexus Way, KY January 2013 Incorporated in the British Virgin Islands under the number January 2013 Authorisation date not shown on authorisation document Cyprus, Limassol, 195. Arch Makariou III. Avenue, 3030 Limassol, P.O. Box: 613 Registration number: March 2013: Peoples Republic of China, Vietnam 8 April 2013: Extends competence for Chinese and Vietnamese nationals applying from within Hungary 31 May 2016: Narrows competence to China and Chinese nationals as HSSDF has in a letter dated 10 May 2016 relinquished its competence for Vietnam and the Vietnamese nationals 29 April 2013: Cyprus, India 10 June 2013: Majority owners of companies registered in Cyprus may submit application in Hungary Migrat Immigration Asia Ltd VolDan Investments Limited Cyprus, Limassol, 1113 Arch Makariou III. Avenue, 3021 Limassol (On the licencing document) or Chalkidonos 10, 3070 Limassol, Cyprus (on the website of the Hungarian Government Debt Management Ltd.) Registration number HE Schaan, Liechtenstein (No address given) From web: c/o GM Trust reg. Landstrasse Schaan Liechtenstein registration number: FL December 2015: Malaysia, Mongolia and South Korea, + their citizens applying from within Hungary 10 June 2013: Russia, Ukraine, Turkmenistan, Georgia, Belarus, Uzbekistan, Poland, Slovakia, Czech Republic, Montenegro, Serbia, Bosnia-Hercegovina, Romania, Croatia 26 February 2015: South Africa, Kenya Azerbaijan, Austria, Turkey 62

65 Geographic competence Representative s names Homepage Afghanistan, Pakistan, Malta, Egypt, Morocco, Tunisia, Algeria, Yemen, Oman, Iran, Qatar, Kuwait, Lebanon, Iraq, Saudi- Arabia, Syria, Libya, Jordan, Bahrain, United Arab Emirates, Switzerland, UK, USA, Indonesia, Kazakhstan, Nigeria, Singapore, Thailand, Vietnam + their citizens application in Hungary (Except nationals of Switzerland and UK) Radosztina Veselinova BALOGH ( ) Peoples Republic of China + its citizens application in Hungary Attila BOROS and dr. Lian WANG ( ) Cyprus, India +their citizens application in Hungary + majority owners of Cypriot companies in Hungary Gábor FÖLDVÁRI ( ) That website was no longer available on 24 August 2016 and no other replaced it Malaysia, Mongolia and South Korea + their citizens application in Hungary János BODÓ No website as of 21 June 2016 Russia, Ukraine, Turkmenistan, Georgia, Belarus, Uzbekistan, Poland, Slovakia, Czech Republic, Montenegro, Serbia, Bosnia-Hercegovina, Romania, Croatia, South Africa, Kenya Azerbaijan, Austria, Turkey + their citizens submitting in Hungary, except for the citizens of the EU states (Austria, Czech republic, Croatia, Poland, Romania) Jozef HERMANN ( ) 63

66 Table 4 (continued) Hungarian settlement bond active designated companies and companies whose licences had been withdrawn (as of 28 June 2016) Companies with withdrawn licences Name Seat Licence issued by the Economic Commission of the Parliament S&Z Program Limited Discus Holdings Ltd Schaan, Liechtenstein (No address! in parliament s document. From web: Bahnhofstrasse Schaan) Registration number FL Valetta, Malta, 236 St Paul Street, VLT June 2013: Egypt, Morocco, Tunisia, Algeria, Yemen, Oman, Iran, Qatar, Kuwait, Lebanon, Iraq, Saudi-Arabia, Syria, Libya, Jordan, Bahrain, United Kingdom, Switzerland 25 September 2015: Revocation of all licences as obligation to buy the Settlement Bond was not performed in time 29 April 2013: South Africa, Kenya, Nigeria (including applications by their nationals submitted in Hungary) 10 June 2013: USA Kazakhstan, Thailand 4 July 2013: Azerbaijan, Austria, Turkey 15 December 2015: Revocation of all the licences EURO-ASIA Investment Management Pte Ltd Singapore, 28C Stanley Street registry number E 10 June 2013: Singapore 15 December 2015: Revocation of all the licences Source: author s compilation based documents from the Economic Committee and other publicly available sources The following sections will review the worrying or suspicious elements which emerged within the legal framework and actual practice described above. a) Selection The criteria of selection are partly incorporated in the ThirdA, partly in a legally non-binding resolution (4/ ) of the Economic Committee, adopted on 4 March The resolution gives no hint of why exactly these criteria 131 have been selected. It only refers to authorisation under the law for designating ( ). 131 Described above under III.A). 64

67 Geographic competence Representative s names Homepage Egypt, Morocco, Tunisia, Algeria, Yemen, Oman, Iran, Qatar, Kuwait, Lebanon, Iraq, Saudi-Arabia, Syria, Libya, Jordan, Bahrain, United Kingdom, Switzerland Walter WACHTER No website. Strange trace at sz-program-limited/ ( ) South Africa, Kenya, Nigeria, USA Kazakhstan, Thailand, Azerbaijan, Austria, Turkey János Demeter ZSOLDOS (Still up and running on 21 June 2016) Singapore Engel Law Firm (Later: Engel and Eszes Law Firm) Still up and running on 21 June 2016) companies and then adds: The committee found it necessary to fix the conditions of approval based on the provisions of the Act also in a separate resolution. The meeting adopting the resolution was held on 4 March Mr Antal Rogán submitted the criteria as later reflected in the resolution. He stated that the Government Debt Management Agency cannot sell the bonds directly [because of the exclusion of the option by the Act he himself had suggested -BN], then admitted that some of the companies to be established may be created in offshore areas, mentioning the Cayman Islands, but defending this idea by reference to large banks which also have subsidiaries dealing with securities in those offshore areas. As Chair of the Committee he asked if there were any questions or remarks. None came. The resolution was adopted without debate and since it is a decision 132 The protocol s symbol is Ikt. sz.: GIB/9-1/2013. GIB-7/2013. sz. ülés (GIB-145/ sz. ülés). 65

68 of the Economic Committee, nineteen members of which participated at the meeting, the remaining 367 Members of the Hungarian Parliament were excluded from deliberating the selection criteria. The actual decisions on the designation of companies for certain countries were purely formal and do not refer to any deliberation of the advantages or disadvantages of designating the given applicant. Annex 3 on the recognition of the largest company, HSSDF clearly reveals that designation occurred on the day of the submission of the application, which obviously does not leave much time for checking the genuineness of the certificates and other documents attached, especially as that was the day when the Committee also adopted the general rules on designation. The total exclusion of competition with respect to the target groups guarantees exorbitant fees through the companies monopolies, which are not justified by any economic or administrative reason. When indirect competition actually broke out between HSSDF and EURO-ASIA Investment Management Ltd., as the latter was also selling its securities to Chinese nationals, the Committee first confirmed HSSDF s monopoly and then revoked the EURO-ASIA Investment Management s licence. Why HSSDF, which was competent for Vietnam, gave up its entitlement to be taken over on the same day by Arton is also an open question. There is no regulated procedure for applying, 133 no deadlines are fixed, let alone legal remedies. So the selection is neither transparent, nor fair. b) Ownership When introducing the scheme involving the intermediary companies, Mr Rogán insisted that their foreign registration (occasionally in offshore territories) should not be viewed as a cause for concern, as the companies will have to reveal the real owners. 134 However, when one portal started to scrutinise the identity of the real owners it 133 Mr Erik Bánki, chair of the Economic Committee after Antal Rogán publicly admitted in December 2015 that no tender was advertised nothing is specially announced, people apply he said to the daily Magyar Nemzet. He also added that he was unaware of the precise procedure for the application. He told the journalist that when an application form reaches the Economic Committee, they deal with it. ( ). 134 See e.g. his remarks at the 4 March 2013 meeting of the Economic Committee GIB/9-1/2013. GIB-7/2013. sz. ülés (GIB- 145/ sz. ülés). 66

69 encountered a non-transparent web. 135 The only company registered in Hungary is owned by Arton Group Gmbh Vienna and Milen Georgiev Keremedchiev, 136 as well as by Radosztina Veselinova Balogh, who is the representative of the company. The former two owners have the same local representative, Tibor Balogh. 137 Milen Keremedchiev, a former Deputy Minister at various ministries in Bulgaria is Vice President of Arton Capital Ltd, 138 a global company which is also linked to Arton Bank in Dominica. Arton Capital is a very visible global corporation but its Vienna outlet is much less so. A recent well-researched article in the Austrian media has revealed that in fact Arton s presence in Vienna consists of nothing more than an address at Meinl Bank, and the mailing address of that company in Hungary is a run-down flat with a rusted postbox. 139 Ownership of the remaining four active companies is more-or-less obscure. 140 Indirect signs point to persons who do not show up in the official documents 141. But even if the companies ownership was not obscure, a further shadow would be cast on the system by the fact that several of the designated companies operate through sister companies, including in the exercise of their entitlement to collect fees. c) Intermediaries The Hungary State Special Debt Fund has created another legal entity, Hungary State Special Debt Management Limited, registered in the British Virgin Islands and ( ) Excerpt from the Hungarian registry of companies downloadable from hu/?cegadatlap/ /taroltcegkivonat ( ) ( ). 139 Melichar Stefan, Offshore-Deals statt Balkanroute (2016) News, [Austrian printed newspaper] 2016/19, pp Corruption Research Centre in their research note on the settlement bond quote Mr Rogán s speech in the Economic Committee introducing the owners of HSSDF: Next we come to the applicant. The applicant has practically satisfied all requirements. From my perspective, the most reassuring thing is the names involved. Simon Mu, a reputable Chinese banker and investor, is involved. Simon Mu is in charge of the firm, Wanhua, which has one of the most important Chinese interests in Hungary, according to Borsodchem s leadership. I therefore believe that from Hungary s perspective he operates with exceptional local knowledge, and he is a serious man, who I had previously investigated when he was President of the Asian Development Bank, which is the European Bank for Development and Reconstruction s Asian counterpart, for many years, and again, as I mentioned, has indisputable knowledge about Hungary. Attila Boros, though he now lives in Brussels, is an experienced businessman with several Hungarian firms in his history. The other two Chinese businessmen are not known to me personally, but they have impressive resumés, and although I do not know their knowledge of Hungary, they must be recognized as associates of Simon Mu. ( 141 It was widely reported in the press that Mr Árpád Habony (unofficial advisor to the Prime Minister and friend of Antal Rogán) and his girlfriend may have been invited to a helicopter tour over Hong Kong to the value of USD 3400, by Jonathan Chan, who was named by Rogán as one of the owners of the designated company with competence for China. Habony s helicopter tour: Plot thickens in settlement bonds scheme (2016) The Budapest Beacon, ( ). 67

70 appointed as its sole and exclusive agent. (See Annex 4) The flowchart on HSSDF s website 142 clearly shows that the EUR 300,000 should go to its HSBC Bank account in Hong Kong, whereas the fee for the actual work with the client (EUR 45,000) to the bank account of the second company, which has no legal connections to Hungary. VolDan (as well as the since excluded S&Z) have licenced a company registered in Belize, Moranville Ltd. to promote the programme within the geographic areas of the designated companies. 143 Moranville s address is/was 1 Mapp street, where major Belizean service providers have their seat. Moranville Ltd. was co-owner of Moranville Hungary Ltd between 2013 and 2016, which was then wound up. 144 Arton uses a company in the United Arab Emirates to contract through a Client Facilitator Agreement and client fees are in fact channelled through Mashreq Bank in Abu Dhabi. 145 The representative of that company in the UAE is the director of Arton Capital in Hungary ( ). 143 Remarkably, the website containing the image of the agreement is no longer accessible. The referring website is atlatszo.hu/2014/10/18/torocskeitol-a-solyom-airwaysig-a-letelepedesi-kotvenyek-titokzatos-utja/ ( ) ( ). 145 Cf Melichar Stefan, Offshore Deals statt Balkanroute (2016) News, [Austrian printed newspaper] 2016/19, pp

71 This report may not be able to trace the financial and other interactions between the designated companies and their partners, but there are good reasons to believe that the extension of the chain to them only made sense if the motivation was either tax optimisation (to put it politely) and/or the concealment of the final, actual beneficiaries of the enormous service fees. d) Revocation Within a very short period of less than three years, the licences of three companies have been revoked. The first company to lose its entitlement to trade in its papers was S&Z Program Limited, practically covering the whole Middle East. At the 24 September 2014 meeting of the Economic Committee Mr Rogán announced that according to the information he received S&Z did not fulfil its obligations to buy government bonds within 45 days from the date of delivery of the residence permits. 146 No documentation 146 Protocol of the meeting of the Economic Committee Ikt. sz.: GAB/21-2/2014. GAB-8/2014. sz. ülés (GAB-8/ sz. ülés). 69

72 was attached to Mr Rogán s proposal. In the same speech he recommended extending Arton Capital Hungary s competence to the eighteen countries in respect of which S&Z Program Limited had had competence until that day. It is unclear whether Arton submitted an application at all. If that did indeed happen, it enabled yet another manoeuvre to be made behind closed doors, as without it Arton could not have submitted a request for extension before the day the competence from S&Z was withdrawn. However, the two decisions were taken at the same meeting and the decisions are both dated 25 September An even more worrying element surrounds the revocation of the licences of Discus Holdings Ltd and EURO-ASIA Investment Management Pte Ltd. Both decisions were taken on 15 December 2015 and both justified the revocation by reference to a decision adopted on the same day, setting a minimum requirement in terms of applications (not counting family members). That decision 147 set the criteria retroactively as well as for the future. The fairly loose formulation speaks of the need to attract a hundred applications (without family members) in the past three years. That of course made no sense as less than three years have elapsed since the formal commencement of the programme and the establishment of the criteria for being licenced by the Committee in Spring 2013, therefore no revocation of these permits could have occurred before the expiry of the three years in As to the future, the decision required yearly 100 individual applications per company to avoid the threat of revocation of the licence for insufficient activity. The nulla poena sine lege principle was spectacularly ignored: at the very same meeting the licences were withdrawn from apparently totally innocent companies on the strength of not collecting a given number of applications which they had never been obliged to collect. That was a flagrant denial of the Rule of Law. 147 Resolution 12/ of the Economic Committee on the repeal of approval of the undertaking for insufficient activity (in Hungarian). 148 Even if the entry into force of the original law is taken as the starting date (28 December 2012), the three years have not yet elapsed. 70

73 e) Lack of transparency A total lack of transparency characterises the programme, especially its implementation. Vital data concerning the companies were not published until civil society activists demanded it, and occasionally sued the data owners. The ownership of most of the companies remains invisible. No credible reasons have been offered for establishing the intermediary system. The representatives of the companies hide from the public eye, and even the official participants (OIN, the Economic Committee) are extremely hard to reach. It took several weeks (and the mobilisation of a considerable amount of social capital) for this author to organise an interview with these stakeholders. In Transparency International Hungary s judgement, there are sufficient reasons to suspect that the Hungarian government, when designing the residency bond program, has employed its regulatory power to promote private interests and to generate profits of individual companies, as a result of which intermediary agencies (the designated companies) with obscure proprietary background enrich themselves through the sale and purchase of government residency bonds. To reveal information pertaining to the operations of these intermediary agencies and to establish the volume of residency bonds purchased, Transparency International Hungary, in collaboration with political daily Magyar Nemzet has requested public interest information from the Parliament economic committee and from the Government Debt Management Agency. Particular questions related to licensing processes of in the designated companies and to the number of residency bonds subscribed by each of them. In lack of proper response, Transparency International Hungary commenced a court freedom of information process against the Parliament economic committee and of the State Debt Management Agency. The defence of both defendants is based on secrecy regulations, which, in their interpretation, apply to the purchase of state residency bonds and prevent any information from becoming public. Both litigations are pending. Even when the data can be assembled, glaring inconsistencies in the puzzle appear. For example, VolDan was founded in Liechtenstein on 22 May 2013, its application to become a designated company was registered in the Hungarian Parliament on 23 May but the application itself is dated four days later, 27 May. 149 As mentioned previously, HSSDF was given a permit on the very day it applied for it. Exclusion criteria were adopted and applied on the same day. Publicly available documents seem to constitute merely a façade. We must conclude that decisions were made before the public discussions, occasionally mixing up the sequence. 149 The Big Bond Business. (In Hungarian) Prezi presentation by Átlátszó ( ). 71

74 Conclusion The Hungarian Investor Immigration regime does not live up to its name. It does not entail any investment into the Hungarian economy. The immigrants do not directly contact the settlement bond circulating agency. They actually buy dubious securities from intermediary companies which in turn purchase five-year zero bonds issued on behalf of the Hungarian State at a discount. The economic impact of the settlement bond is negligible in managing Hungarian state debt. Most of the investors do not move to Hungary. Therefore, the system simply functions as a loosely controlled backdoor into the Schengen area as the short deadlines and the lack of human and other resources thwart the detailed scrutiny of those who would not qualify under the regular immigration rules, whether for the suspicion of laundering criminal proceeds in order to obtain a permit or for not having an appropriate residence and income guaranteeing self-sufficiency. The essence of the system is the operation of the designated companies. The system was designed and adopted with minimal parliamentary scrutiny, mostly at the initiative of a single person, the former chair of the Economic Committee, Mr Antal Rogán. According to present practice, five companies enjoy monopoly over providing access to the programme. They function as inevitable entry points. The fees charged are unusually high and disproportionate to the actual services. Through a complex web of further contributing companies this income disappears from the eye of the Hungarian tax authorities, even though there are indications that there might be Hungarian natural and legal persons at the end of the invisible chain. The idea that investors who substantially contribute to a country s economy or budgetary balance should be welcome and enjoy immigration privileges is to be supported as it serves the common interest. But a regime which does not create jobs, does not mobilise the real-estate market and only insignificantly contributes to the liquidity of the budget (in fact at an irrational cost) while generating considerable private profit raises serious questions. If the ultimate beneficial owners of the companies are not disclosed, if millions of Euros of profits are generated for five companies that have been granted a monopoly without open and transparent tender procedures, if the development and the operation of the system is entrusted to an uncontrollable parliamentary committee which has ultimate power then the shadow of corruption looms large. 72

75 Epilogue Between the moment of completing the report and sending it to print important developments emerged. News appeared according to which the company designated for China (HSSDF) introduced a new construction (only on its website in Chinese language) according to which the applicant contributes half of the investment and the other half is lent by the China Construction Bank. At the end of the five year period, the investor does not get back her/his share, the bank gets back the lent sum and the interest after it and the designated company cashes in the value of the state bond. ( euros). 150 The far right party, Jobbik made a proposal, according to which it would vote for a planned amendment of the Fundamental Law (requiring 2 more votes than FIDESZ has), on condition that the Government stops the settlement bond program. On 25 October 2016 the party submitted a bill 151 to eliminate the program altogether, claiming in the justification of the bill, that even financially well-endowed migrants should not be allowed to come and settle in our country and stressing that the question of the settlement bond has repeatedly surfaced in the context of the suspicion of corruption, support of off-shore companies and the disappearance of public money. Although the governing party formally refused the deal offered by Jobbik, in October 2016 several leading politicians, including the Prime Minister started to publicly talk about ending the program 152. They claim this is independent from the bargain offer of 150 Letelepedési kötvény féláron (Settlement bond at half price) Magyar Nemzet, 1 October letelepedesi-kotveny-fel-aron ( ) 151 T/12669 on amending the ThirdA ( ) 152 The Government s official webpage reported on the interview Mr Orbán gave to the national public radio on 28 October. In the interview the Prime Minister also confirmed that the Government is working on a response to the fact that the country s financial situation has changed, as two of the world s largest credit rating agencies have upgraded Hungary s credit rating, and the third will hopefully follow suit in the near future. The question now is how to finance Hungary s financial requirements. Before the end of the year Minister for National Economy Mihály Varga will put his proposal for this before the Cabinet, and one of the elements of that proposal will refer to residency bonds, Mr. Orbán said. On the subject of residency bonds, the Prime Minister said that: In 2012 Hungary did not have access to markets, and in fact at the time the groups ranged against us succeeded in making it extremely difficult for Hungary to access financial resources. hu/en/the-prime-minister/news/the-constitutional-amendment-is-a-national-cause-and-cannot-be-linked-to-party-politicaldebates ( ) 73

76 Jobbik to get the desired change 153 of the Fundamental Law through and is justified by the changed economic environment in which the state can finance itself from the open market in a more economical way, after two of the three largest credit rating agencies have removed the Hungarian bond from the not recommended for investment category to that of recommended for purchase 154. So next year may bring the end to the program which insignificantly contributed to the hard-currency financing of the state budget, created no jobs or investment, entailed an uneconomical scheme leading to stellar private profits of unidentifiable private persons. The scheme may be gone but its long shadow will survive it and is more likely to become a textbook case on manuals on corruption than in the books of successfully mobilising foreign capital for a nation in need of it. 153 The change is unrelated to the settlement bond, but cuts deeply into migration as it intends to prohibit the settling into Hungary of foreign populations and in essence is a move against the EU s plan to relocate asylum seekers ( ) 74

77 Annexes 75

78 Annex 1: ÁKK Framework Contract Sample 76

79 Annex 1: ÁKK Framework Contract Sample 77

80 Annex 1: ÁKK Framework Contract Sample 78

81 Annex 1: ÁKK Framework Contract Sample 79

82 Annex 1: ÁKK Framework Contract Sample 80

83 Annex 1: ÁKK Framework Contract Sample 81

84 Annex 1: ÁKK Framework Contract Sample 82

85 Annex 1: ÁKK Framework Contract Sample 83

86 Annex 1: ÁKK Framework Contract Sample 84

87 Annex 1: ÁKK Framework Contract Sample 85

88 Annex 1: ÁKK Framework Contract Sample 86

89 Annex 1: ÁKK Framework Contract Sample 87

90 Annex 1: ÁKK Framework Contract Sample 88

91 Annex 1: ÁKK Framework Contract Sample 89

92 Annex 1: ÁKK Framework Contract Sample 90

93 Annex 1: ÁKK Framework Contract Sample 91

94 Annex 1: ÁKK Framework Contract Sample 92

95 Annex 1: ÁKK Framework Contract Sample 93

96 Annex 1: ÁKK Framework Contract Sample 94

97 Annex 1: ÁKK Framework Contract Sample 95

98 Annex 1: ÁKK Framework Contract Sample 96

99 Annex 1: ÁKK Framework Contract Sample 97

100 Annex 1: ÁKK Framework Contract Sample 98

101 Annex 1: ÁKK Framework Contract Sample 99

102 Annex 1: ÁKK Framework Contract Sample 100

103 Annex 1: ÁKK Framework Contract Sample 101

104 Annex 2: Sample of Bond Certificate/Security 102

105 Annex 3: Designating of HSSDF 103

106 Annex 3: Designating of HSSDF 104

107 Annex 3: Designating of HSSDF 105

108 Annex 3: Designating of HSSDF 106

109 Annex 4: HSSDF authorising HSSD Management 107

110 Annex 5: Amendment before closing vote 11 November

111 Annex 5: Amendment before closing vote 11 November

112 Annex 5: Amendment before closing vote 11 November

113 Annex 6: Flowchart describing the process in 2015 as seen on the webpage of HSSDF 111

114 Annex 6: Flowchart describing the process in 2015 as seen on the webpage of HSSDF 112

115 Annex 6: Flowchart describing the process in 2015 as seen on the webpage of HSSDF 113

116 Annex 7: HSSDF Cayman Islands registration 114