Is Hungary’s assault on the rule of law fuelling corruption?

Hungary’s descent towards authoritarianism under right-wing leader Viktor Orban, who has exerted control over almost all aspects of the public sphere, has placed the country’s anti-corruption efforts in the spotlight. In the Transparency International Corruption Perceptions Index 2017, Hungary scored a pitiful 45 on a scale of zero to 100, three points below the previous year and 10 points down since 2012.

On 20 June 2018 Hungary’s parliament passed a series of laws, known as “Stop Soros”, that criminalise any individual or group that offers help to an illegal immigrant. The passing of the Stop Soros law continues worrying trends in the public arena that began with the rise to power of Orban’s Fidez party in 2010.

What are these trends, and what do they mean for the fight against corruption and the rule of law in Hungary?

Centralised system of legalised corruption

Earlier this year, Fidesz won the Hungarian elections with 49 per cent of the vote. This translated into a commanding two-thirds majority in Hungary’s parliament. However, according to Jozsef Peter Martin, executive director of Transparency International Hungary, long before they secured this powerful majority, “Fidesz has re-engineered the public arena, and it is accurate to say that Hungary is a captured state.”

Almost all major institutions in Hungary serve the interest of Fidesz – who control approximately 90 per cent of all media, while friends and supporters occupy key positions in state institutions meant to balance government power. The judiciary remains independent, but is currently at risk.

This centralised, top-down state, both politically and economically, has been followed by an increasingly centralised system of corruption. Some systems, such as government residency bond schemes and tax exemptions for companies supporting sports have been deliberately built to channel public money to Fidesz and its cronies. Alarmingly, these activities are legal as the legislation is tailor-made and instrumentalised by the governing party.

“Hungary seems to be a kind of laboratory of transparent corruption,” says Martin. “It shows that transparency is a necessary – but alone insufficient – condition to fight corruption.”

In 2016, it was revealed that in 2014 the national bank of Hungary set up six foundations, funding them with public money grants of about US$1 billion, as well as property worth US$25 million. Details of the foundations’ spending was not made public until two years later, and critics say these foundations are often run for the benefit of the government and its allies.

In another government scheme, companies were able to make pre-tax donations to sports clubs. Around €1.6 billion (US$1.83 billion) in funds has been diverted from the tax system in the past seven years. At the end of last year, thanks to litigation by TI Hungary, a court declared that these donations counted as public money and should be subject to the same scrutiny as all other public funding.

Hungary’s golden visa scheme, which operated between 2013 and 2017, is another example of the murky boundary between government policy and private gain.

“The Hungarian case is especially peculiar since profits from the Golden Visa programme do not appear to benefit the country but rather find their way into unknown pockets via companies, all but one of which are seated in offshore tax havens that trade in Hungary’s Golden Visa bonds”, says Miklós Ligeti, head of legal affairs at Transparency International Hungary.

The EU as cash-cow

Between 2007 and 2020, Hungary will have received on average three-and-a-half per cent of its annual GDP for development purposes from the European Union, mostly in the form of European Structural and Investment (ESI) Funds. In some years, like in 2017, this share increased to six or seven per cent of GDP. These funds go largely into public infrastructure, although the way in which contracts are awarded is far from clear.

In an analysis of all public procurement contracts in 2013, the Corruption Research Center Budapest found that four Fidesz-linked businessmen, including Orban’s son-in-law, won 12 per cent of all contracts. In 2015, TI Hungary estimated that Hungarian public contracts were overpriced, on average, by 25 per cent compared to the market value.

Closing space for NGOs

The fight against state-sponsored corruption becomes more difficult as the space for civil society closes. On the night of the election, a Fidesz official and government spokesmen said that organisations that interfere with political decision-making should be banned.

Days after the election, a pro-government magazine published the names of hundreds of Orban critics, including those of staff members at TI Hungary, in a move widely seen as an intimidation tactic.

The passing of the “Stop Soros” law, while not affecting anti-corruption organisations directly, has a chilling effect on the ability of all NGOs to function in Hungary. This continues the pattern set by Fidesz during its last term in office, reaching a low point in July 2017 after passing strict new rules for NGOs with foreign funding. Shockingly, even money received from the European Union is counted as foreign, and organisations who receive it suffer stigmatisation as “foreign funded organizations”.

In early June, OLAF, the European Anti-Fraud Office that investigates fraud and corruption in the EU budget, revealed in its 2017 report that Hungary was the second most investigated country. Between 2013 and 2017 OLAF recommended that it repay the most of any EU country proportional to what it received in ESI funding. Perhaps it is not surprising that in May of this year the European Commission proposed a new mechanism to tie EU funding to the rule of law – something that Transparency International has advocated for since last year.

Space for hope?

Although collaboration between TI and the government in Hungary is very rare, there is one exception. Despite pressure at a political level, TI Hungary has been working with the government on an administrative level for the past two years to increase transparency and efficiency in how European Funds are spent.

TI Hungary has been monitoring the execution of two major public works: the construction of the last section of the M6 highway, and the construction of major flood defences in the Tisza Tur delta. In each case, a large budget will be distributed via public procurement processes to various private sector companies who have the expertise to carry out the work.

The General Directorate of Water Management and the national infrastructure authority (NIF National Infrastructure Development Plc), which are responsible for both projects, have signed Integrity Pacts with TI Hungary that commits them to undertake the process with transparency and anti-corruption best practices in mind. The eventual winning bidders will be expected to do the same. By working with committed individuals, and involving the public in the process, TI Hungary is hoping to achieve change in the public procurement environment in Hungary.

While worrying trends and backsliding on the rule of law continue in Hungary, there are rays of hope in the fight against corruption. That will only be successful if European leaders monitor EU funds and work together to hold the Hungarian government to account.

This web feature is based on work under the Integrity Pacts project, coordinated by Transparency International and 15 partners in 11 EU countries, with funding from the European Commission. For more information, have a look at the project website. If you need more information, don’t hesitate to get in touch.