Hungary

Hungary Corruption Report

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Snapshot

Hungary_250x163.jpgCorruption in Hungary presents a significant risk to business, particularly in the tax administration and public procurement sectors, which suffer from high levels of corruption. Petty corruption is not widespread, but companies report that unofficial payments are sometimes necessary to resolve certain administrative tasks. Public procurement is vulnerable to irregularities at the local level because of strong informal relations between businesses and political actors. Hungary’s Criminal Code forbids bribery in the public and private sectors, along with most other forms of corruption offenses contained in international anti-corruption conventions. Enforcement of the anti-corruption framework is lacking. Criminal sanctions can be imposed on companies for acts of corruption committed by third parties working on their behalf, as well as if the individual carrying out the act is not prosecuted or convicted. There is no distinction between bribes and facilitation payments, and gifts and hospitality may be considered illegal depending on the intent and benefit obtained.

Last Updated: November 2017
GAN Integrity

Judicial System

European_Commission.svg.pngThere is a moderate to high risk of corruption in Hungary’s judiciary. Bribes or irregular payments in return for favorable judgments sometimes occur (GCR 2015-2016). Public corruption polls reveal that a third of Hungarians perceive corruption and abuse of power as being widespread in Hungary’s judicial system, but almost none report paying bribes to judges (GCB 2013, Eurobarometer 2014). The current government led by Viktor Orbán has significantly weakened the rule of law by weakening the judiciary, including the Constitutional Court (BTI 2016).  The politically influenced appointment of new Constitutional Court judges has raised concerns (FitW 2017). Trust in the independence of the judiciary among businesses has sharply declined in recent years (GCR 2017-2018). About one in five companies considers the degree to which the judiciary is independent to be fairly low or very low (JS 2017).

Companies also have low confidence in the efficiency of the legal framework pertaining to the settling of disputes and challenging of regulations (GCR 2017-2018). Businesses have expressed their frustrations with lengthy procedures in civil courts (ICS 2017). The introduction of a new Civil Procedure Code which is due to enter into force in January 2018 is expected to improve efficiency (ICS 2017). Companies increasingly prefer mediation as a tool to settle commercial disputes in order to avoid lengthy court procedures (ICS 2017). Enforcing a contract in Hungary requires more time than in other OECD high-income countries, but the costs involved are significantly lower (DB 2017). Hungary has signed the New York Convention of 1958 and is party to the International Center for the Settlement of Investment Disputes (ICSID).

Police

There is a moderate risk of corruption when interacting with Hungary’s police. More than a third of citizens perceive police corruption and abuse of power as widespread, but none report paying bribes to police officers (Eurobarometer 2014). The government maintains control over the security forces and it has effective mechanisms to investigate and punish police corruption and abuse of power. However, impunity in the police force is a problem (HRR 2016). Businesses have reasonable confidence in the reliability of police services (GCR 2017-2018), yet more than a third of businesses still pay for security in Hungary (ES 2013).

Public Services

Businesses dealing with public services face moderate to high corruption risks. Companies indicate that irregular payments and bribes are not common when dealing with public utilities (GCR 2015-2016). On the other hand, small facilitation payments or “thanks payments” – a legacy from the communist era – are perceived as a way of getting things done in Hungary and remain commonplace (BTI 2016). The burden of government regulation is considered high, and companies complain that some administrative procedures suffer from a lack of transparency, predictability and excessive red tape (ICS 2017). Loss of human capital through politically motivated dismissals is a problem in Hungary’s public administration (BTI 2016). It is alleged that Hungary has strong political and state corruption networks that use public power and resources to reward friendly oligarchs in a manner which is frequently described as “reverse state capture” (NiT 2017). Furthermore, elected county-level officials were replaced by centrally appointed officials, thereby weakening local self-government and strengthening patronage relations in territorial public administration (BTI 2017).

The number of procedures and time required to start a business are in line with OECD high-income averages (DB 2017). Obtaining a construction permit requires twenty steps, significantly more than the OECD high-income average (DB 2017).

Land Administration

There is a moderate risk of corruption in Hungary’s land administration. Very few companies report that bribery or gifts are needed to obtain building permits (ES 2013, Eurobarometer 2014). Yet, companies should beware of a lack of transparency, regulatory unpredictability and corruption in the construction sector (ICS 2017). Property rights are well-defined in law (BTI 2016), but businesses do not report enough trust in the government’s ability to protect property rights (GCR 2017-2018). The Hungarian state is only able to expropriate property in exceptional cases where there is a clear public interest; expropriations have to be carried out in a lawful way and immediate and full restitution is required for expropriated property (ICS 2017). There are a number of reports from foreign companies that have dealt with expropriations that were improperly executed and without proper remuneration (ICS 2017). The use of so-called “pocket contracts” is a problem in Hungary; these are contracts designed to circumvent legal restrictions on land ownership by foreigners (EUPL 2015). This has allowed foreign persons and companies to claim agricultural subsidies worth approximately EUR 1,1 to 1,8 million (EUPL 2015).

Registering property in Hungary is slightly less time consuming than it is in other OECD high-income countries (DB 2017).

Tax Administration

Companies contend with moderate to high corruption risks in the tax administration. Irregular payments and bribes when meeting with tax officials are common (GCR 2015-2016). In a survey, companies indicated Hungary’s tax administration was the biggest obstacle to their ability to do business (BEEPS V 2016). Over half of firms report being visited by tax officials, while elsewhere in the region only a third of firms report these visits (BEEPS V 2016). Foreign firms expressed displeasure with the retroactive nature of some tax measures, the unpredictability of the tax regime, and the speed with which new economic measures and changes are being introduced (BEEPS V 2016). Concerns about the implementation of the 2015 Advertising Tax in addition to a similar new tax on tobacco products has raised concerns with businesses that indirect expropriations through discriminatory taxation will put them in a position where they are forced to accept buy-outs by domestic firms (ICS 2017). The EU deemed both taxes to be discriminatory and forced the Hungarian government to repeal them, but 2017 reports of draft proposals to implement restrictions and taxes on foreign retail chains have investors worried (ICS 2017). Companies spend significantly more time on tax payments in Hungary compared to the average of high-income OECD countries (DB 2017).

A former employee of the Hungarian National Tax and Customs Administration (NAV), András Horváth, blew the whistle on corrupt practices within the administration. Horváth has alleged that his supervisors instructed employees to refrain from conducting tax inspections into large companies, whom he claims are the main beneficiaries of tax fraud (European Dialogue, 2017). The tax agency has prosecuted Horváth for alleged slander and Horváth has launched legal action against the tax agency for abuse of authority (European Dialogue, 2017).

Customs Administration

There is a moderate to low risk of corruption in Hungary’s customs administration. Bribes and irregular payments during customs procedures sometimes occur, while the efficiency and time predictability of import procedures are regarded as adequate (GETR 2016). Burdensome import procedures are frequently cited by businesses as constituting one of the most problematic factors for trading across borders (GETR 2016). Even though over a third of citizens perceive the Hungarian customs administration to be highly affected by corruption and abuse of power, none report paying bribes to customs officials (Eurobarometer 2014). Companies spend a negligible amount of time and money on complying with import and export procedures (DB 2017).

It was reported in the Hungarian media that several border guards at the border with Ukraine were arrested on suspicions that they took bribes to allow for speedy crossing of the border (Uzhgorod, May. 2017).

Public Procurement

There are very high corruption risks in the public procurement sector. Companies indicate that irregular payments and bribes are very common in the process of awarding government contracts and licenses (GCR 2015-2016). More than half of companies expect to give gifts to procurement officials to secure government contracts (ES 2013). Diversion of public funds is perceived to be very common and favoritism in decisions of government officials is extremely common (GCR 2017-2018). The government has reportedly diverted significant public funds to people with close ties to the ruling elite, particularly in large infrastructural projects (BTI 2016). More than a third of business respondents believe that corruption has prevented their company from winning a public tender in Hungary (Eurobarometer 2014). Companies with strong connections to the government have an advantage over private parties in tenders, while companies operating in sectors where subsidies are available or where price controls are in place appear affected by insufficient transparency and responsiveness (ICS 2017).

The mechanisms overseeing public procurement are very weak (BTI 2016). Competition is limited, partly by a low number of tenders and partly because of the frequent use of direct awards (BTI 2016). Systematic corruption in procurement is found to add 20-25% to the costs of government procurement (ICS 2017). A study by Transparency International (TI) found indications of corruption and overpricing in up to 90% of EU-funded projects (TI 2015). Among the corrupt practices identified were tenders written for a specific party, price inflation, bribes and/or kickback schemes, among other corrupt practices (TI 2015). Local-level public procurement is particularly vulnerable to corruption due to lack of transparency and strong informal relations between local businesses and political actors (EUACR 2014).

A recent example of procurement fraud was uncovered by the EU’s anti-fraud office OLAF (ICS 2017). OLAF found that contracts for work on Budapest’s new EU-funded metro line worth over USD 1 billion had been affected by corruption, and determined that USD 240 million should be refunded to the EU (ICS 2017). Companies are highly recommended to implement special due diligence procedures to reduce the likelihood of encountering corruption in Hungary’s procurement process.

Legislation

Hungary’s implementation of its anti-corruption framework is lagging (ICS 2017); authorities are consistently reluctant to investigate accusations of corruption in a transparent manner (HRR 2016). Politically organized high-level corruption is a key feature of the current regime, while prosecution of corruption generally only targets low-ranking officials (NiT 2017). Hungary’s Criminal Code criminalizes extortion, abuse of office, fraud, trading in influence and money laundering, and makes it illegal to give or receive a bribe in both the public and private sectors. Bribing a foreign public official and failure to report bribery are criminalized (CMS 2016). Criminal sanctions can be imposed on companies for acts of corruption committed by individuals working on their behalf under the Criminal Code and the Corporate Sanctions Act. Company directors and persons with supervisory powers are liable for bribes paid through intermediaries (OECD 2014). Penalties for persons include up to 10 years of imprisonment, and companies may be fined and risk confiscation of assets, debarment from public contracts and state subsidies, and/or forced termination. There is no distinction made in Hungarian law between bribes and facilitation payments, and bribes do not have to be monetary, meaning that gifts and hospitality may be considered illegal depending on the intent and benefit obtained (CMS 2016). The Act on Complaints and Public Interest Disclosures provides whistleblower protection in both the public and private sectors. Public officials and several members of their respective families are required to disclose their assets annually, yet no specific sanctions apply for non-compliance and reports of officials having undeclared assets are common in the Hungarian media (ICS 2017). The Public Procurement Act allows for procurement procedures to be initiated without holding an open public tender, as long as the value of the project does not exceed (approximately) USD 647,000.

Hungary is a signatory to the OECD Anti-Bribery Convention, the United Nations Convention Against Corruption (UNCAC), the Council of Europe’s Civil and Criminal Law Conventions against Corruption, and the Group of States Against Corruption (GRECO).

Civil Society

Despite freedoms of speech and of the press being constitutionally guaranteed, the Hungarian government has been criticized for its tight control over media content (FotP 2016). The state media regulatory body is heavily politicized and has the power to impose sanctions and revoke media outlet licenses (FitW 2017). A high level of media ownership concentration and an advertising market which depends on governmental contracts has led to a climate conducive to self-censorship and political influence (HRR 2016). Access to government information is restricted; a recent amendment in the law allows public agencies to charge large fees for responding to information requests (FotP 2016). Leading political newspaper Népszabadság was abruptly shut down after reporting on allegations of misuse of public funds by senior government officials (FitW 2017). Hungary’s media environment is considered ‘partly free’ (FotP 2016).

The Hungarian constitution provides for the freedom of assembly and association, but pressure on NGOs with priorities that conflict with the government has been increasing in recent years (FitW 2017). Notably, Hungary withdrew its membership of the Open Government Partnership (OGP) in 2016 after the OGP had issued a critical report of the government’s treatment of NGOs (ICS 2017). The government has aggressively harassed civil society organizations (CSOs) receiving support from Norway by using audits and criminal investigations (BTI 2016). The government frequently ignores and neglects CSOs in decision-making processes (BTI 2016).

Sources

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