K-Blog / 2024. július 24., szerda

Ultimate Beneficial Owners in Hungary - where are we now?

In Hungary, the efforts to combat money laundering mostly rely on implementing EU rules. Rules on the access to ultimate beneficial ownership (UBO) registry were implemented in 2021, adhering to the minimal requirements outlined in the relevant EU Directive. From the perspective of investigative journalists and NGOs, the UBO-register has not been a significant advancement. In Hungary this is primarily due to regulatory deficiencies and the enduring use of methods that aim to hide assets. With only a few rare cases, the ownership register has had limited impact on the effectiveness of investigative reporting. The Hungarian government did little to provide journalists unrestricted access to data on ultimate beneficial owners of businesses and assets. In fact, after a journalist recently published relevant data derived from the UBO register, certain sections of the database were abruptly shut down.  The CJEU decision in late 2022, which imposed stricter restrictions on third-party access to the UBO records, ultimately resulted in the removal of the public interface of the register in Hungary. While the Court has acknowledged that the press and NGOs should be allowed access to the database provided they can prove a legitimate interest, in practice, these regulations would still necessitate a complex procedure to receive the data. Regarding Hungary, it is important to note that the new European AML standards are unlikely to effectively prevent the most commonly used methods of hiding assets.

 

Discovering assets and owners

 

Many Hungarian representatives of the press and NGOs have analysed thoroughly the deficiencies surrounding the identification of ultimate beneficial owners of legal entities. However, these investigations were less focused on traditional cross-border money laundering and terrorist financing, and more on the enrichment of domestic politicians and their associates. From this standpoint, the most extensively studied subject pertains to the identification of the owners and beneficiaries of prominent businesses that receive significant amounts of public funds (such as subsidies or public procurement contracts). Additionally, there is a focus on understanding how these businesses may be influenced or controlled by political elites. Some of the concerned  businesses have strong links with politicians. Conducting this type of information gathering is crucial, as publicly available asset declarations of politically exposed persons rarely provide a complete picture of their financial interests and potential sources of income.

 

Photo by Diane Helentjaris on Unsplash

Although as of now,  Hungary lacks a publicly accessible UBO-register, journalists and non-governmental organisations (NGOs) have developed alternative techniques and use publicly available platforms at their disposal to carry out thorough investigations. Corporate transparency rules and the subsequent development of platforms have led to the availability of extensive company data, even in the absence of UBO records. Basic company information is readily accessible to the public electronically at no cost, and the same applies to financial statements and court filings – these are important resources for investigative journalists and NGOs alike. (Although some of these interfaces are challenging to use due to varying captchas and signup prerequisites.) 

 

As demonstrated above, generally corporations and firms are required to disclose the names and other identifiers of their direct owners and managers, and this information is readily available in the Central Corporate Register.  In case of smaller companies, the requirement to disclose ownership information applies to all owners. However, for private limited companies that have shares, this requirement only applies if a shareholder holds at least 50% of the shares or, if the direct and indirect shareholding exceeds the 75% threshold. For specific operations, such as investment fund management, information about the shareholders who exceed the 5% level must be revealed as well. (Note: the disclosure requirement does not extend to investors.)

 

In case of listed companies (currently there are around 80 operating in Hungary), while the company register does not require disclosure of information about direct owners, the Budapest Stock Exchange rules mandate that listed companies must also disclose the name of the direct owners holding at least 5% of the shares. Any business in which a corporation or firm holds a direct or indirect stake of more than 20% must be also reported in the annual financial reports. (Furthermore, the share registers of all companies that have shares are accessible, although these registers are not electronically disclosed. According to the legislation, any individual can see the share registers during business hours at the registered office of the firm.)

 

Several for-profit companies gather a large amount of financial and company data in bulk. These business information platforms provide user-friendly interfaces that allow for simple tracking and monitoring of ownership links between different organisations and persons. Additionally, these services often provide modules that establish connections between the entity's name and other accessible datasets, such as e.g. the EU tenders and public procurement database. Modules that draw up network maps are available as well. Typically, the annual cost of the subscription for such  business information services varies between €150 and €600 per year, depending on the service provider and the extent of the business information subscribed to. Consequently, it is rare to find any fact-finding portal, NGO, or even a large company or law firm that does not utilise a similar database in their daily work. Irrespective of the access to the UBO-registry, these business information platforms serve as the back-bone for Hungarian fact-finding activity. 

 

That said, it is crucial to take into account the beneficiary, management and ownership ties that are not included in readily accessible databases, as hidden links provide for concealing assets and interests. This is especially important since, eighteen months after the CJEU ruling, the ability of third parties to access publically available UBOs has been greatly limited. 

 

Concealed assets and interests

 

Despite the extensive corporate disclosure requirements, both Hungarian and international enterprises use diverse techniques to conceal their ultimate beneficial owners.
Common methods for achieving this include 

– establishing intricate or fragmented corporate ownership frameworks (such as e.g. creating a 'loop' in the ownership structure)

– incorporating phantom and nominee entities and individuals (strawmen) into the ownership chain

– incorporating various investment funds that lack direct owners (as explained below), or utilising foreign offshore companies into the ownership structure

 

Previously, abuse of the share register was a prevalent practice as well: businesspeople with strong ties to the government intentionally avoided registering themselves in the share register. While this action deprived them of their shareholder rights, they could remain in the dark. Strawmen could promptly execute the directives of the hiding owner in the general meetings. Another potential for abuse arises in case of "common shares" – in this case only the representative shareholder is recorded in the share register.

 

A known technique of hiding beneficial owners involves a shareholder who has preference dividend shares, in spite of having a minimal ownership stake – so minimal that it is not required to be reported. This method was discovered by a Hungarian investigative journalist through meticulous research. The journalist demonstrated how the profits of a real estate management company belonging to one of Hungary's most prominent entrepreneurs could have been transferred to the Hungarian Prime Minister's son-in-law using an intermediary strawman.

  

Aside from the conventional corporate structure, there are alternative legal structures that help maintain the confidentiality of beneficial owners, as they are not bound by corporate transparency regulations. Hungary  has a history of the rapid growth and prevalence of trusts and private equity funds (and to a lesser degree, venture capital funds) during a period of less than 10 years. These types of trusts create ambiguity regarding the identification of the beneficial owners, since the assets are transferred from the owner (trustors or investors) to the trustee. Journalists thus are unable to determine the investors and beneficiaries through traditional research sources. While the UBO register contains relevant beneficial ownership information about fiduciary trusts, access to these records was already restricted before the CJEU judgement. Although the sanction regulations against Russia include trusts, their enforceability remains uncertain. This problem can be considered significant since there are indications that it is rather easy to hide foreign assets in Hungary by forming more complex trusts and abusing vague transparency regulations.

 

The most problematic area of hiding assets is private equity funds. This type of investment form became very popular in Hungary and its presence is particularly common in the corporate structure of companies that are the largest beneficiaries of public spending. Domestic regulations practically do not impose any transparency requirements on investors of private equity funds. Normally these funds are designed to acquire firms, with the fund manager solely responsible for managing the assets, which are originally provided by the fund's investors. The fund provides a return to the investors (unit-holders) after a specified period of time. This scheme is widely used internationally. However, the Hungarian context reveals that in many cases the fund managers are in reality controlled by the unit holders and merely act as strawmen. The primary objective of the establishment of these private equity funds is to maintain the anonymity of the formal investors. In some cases, even the fund managing companies are themselves owned by private equity funds. Private equity funds have indeed a significant presence in the Hungarian economy, and as it was revealed by the portal Valasz Online even the state invested into some of them in an entirely opaque way. Currently, there are over 200 private equity funds in Hungary, with estimates indicating that thousands of billions of forints are now held in these funds, and they also appeared in the ownership structure of the largest, most capital-rich and most profitable companies.  (E.g. approximately 50% of Hungary's second largest bank is owned by private equity funds. Furthermore, the consortium that secured the concession to maintain and construct Hungary's principal roadways for a period of 35 years is also owned by private equity funds.) The identities of the ultimate beneficiaries of their profits remain unknown. With this the Hungarian elite has set up an scheme that is similar to using offshore companies, while it can be kept under Hungarian jurisdiction with captured oversight bodies and small likelyhood that information is leaked to the public.

 

Furthermore, option contracts and other contracts that provide rights for third persons are not publicly available. This is how one of Hungary's main private broadcasters TV2 has been taken over by oligarchs around a decade ago. These instruments are also commonly applied to conceal the true identity of the ultimate beneficiaries.

Unfortunately, the establishment of the publicly available UBO-register in 2021 did little to address the asset hiding procedures described above.

 

UBO-register in Hungary 

 

The notion of ultimate beneficial ownership has been recognised in the Hungarian legal system (particularly in the anti-money laundering regulations) since the 2010s. In 2015, civil society activists proposed a referendum on the inclusion of the ultimate beneficial ownership record in the publicly available company register. (This proposal was dismissed by both the Election Commission and the Curia, primarily because the notion of "ultimate beneficial ownership" was deemed unintelligible to the general public.) As demonstrated above, while the company registration system includes a substantial quantity of data, it has major flaws and deficiencies, and the government has shown little interest in addressing these flaws or implementing measures to effectively prevent asset concealment.

 

This  situation changed when the European Union (EU) implemented the 5th Anti-Money Laundering Directive (AMLD) in 2018, which required all member states to establish UBO registries which are accessible to the general public as well. Hungary essentially transposed the legislation by the Act XLIII of 2021 on Setting Up and Operating the Data Reporting Background Relating to the Identification Obligation of Providers of Financial and Other Services (UBO Act). The Act took effect on 22 May 2021. Prior to the adoption, the Hungarian Act on Anti-Money Laundering (AML Act) had already included provisions for the UBO-registry, but the Government failed to implement it effectively. According to the previous regulations, it was expected that individual entities such as companies, foundations etc. would be responsible for reporting their own beneficial ownership data to the register, while the UBO Act placed this responsibility on account servicing payment service providers (ASPSP,  e.g. banks) and other service providers such as e. g. auditors, lawyers etc. They have to fulfil this obligation as part of their customer due diligence tasks. The acquired data is then transmitted to the central UBO-register, which is maintained by the national tax authority through direct data connection. The tax authority, however, is not responsible for the accuracy of the records, and there is no follow-up verification by any competent authority. (The records undergo verification solely by other service providers.)

 

Levels of access before the CJEU-judgement

 

Photo by Maksym Kaharlytskyi on Unsplash

 

The UBO Act also regulates different levels of access to the UBO-register. 

(1) In order to carry out their statutory tasks, tax and police authorities, the public prosecutor's office, the court and the supervisory bodies have unrestricted access to the UBO-register.

(2) ASPSPs and other service providers who are obliged to apply customer due diligence procedures may access the register as part of their duties. 

(3) Corporates and other entities were also granted access to their own UBO-data.

(3) Third parties, including any individual or entity, could also obtain certain records from the UBO-register, against payment of a fee.

Third parties had unlimited access to the records of companies, foundations, associations, and law firms. [Here, using past tense is intentional, as recent amendments have abolished general third party access.]

(4) In the case of fiduciary trusts access to UBO-records is restricted to third parties who could demonstrate their purpose for obtaining the data and their legitimate interest. (The Act considers ‘a legitimate interest’ to be basically one of the following: a close [kin] relationship, a close business connection or merger, or a pending property lawsuit.) To increase the difficulty for third parties to access the UBO-regsitry, the law has imposed further barriers: before accessing the UBO-registry, individuals must first submit an authorization request to the Ministry of National Economy. This request must include all relevant facts, data, evidence, and documents that demonstrate the above-mentioned "legitimate interest". The Ministry has a period of 30 days to make a decision about the authorization. It is unsurprising that in many cases, certain trust service providers have advertised their services by claiming that this legal instrument may be used by wealthy persons to hide a portion of their assets.

 

The aforementioned access regulations basically adhered to the content of the Directive. However Hungary implemented these regulations in a restrictive manner, with no genuine purpose of granting third parties or the public access to the UBO-registry. This is further evidenced by the fact that the provisions regarding third party access became effective more than a year after the law was adopted, in July 2022. 

 

 Data accuracy and reliability

 

The reliability of the data in the UBO-registry can be questioned as well. The AML Act is lax about the requirements set for service providers (banks, auditors, lawyers) to find the ultimate beneficial owners, however they should follow the guidelines of the supervisory bodies. (Such supervisory bodies are e.g. the National Bank for banks and other financial service providers and the Hungarian Bar Association for lawyers.) These bodies, however, have no legislative powers in this matter, and guidelines are not legally binding. The Hungarian National Bank's guidelines on identifying beneficial owners merely remain soft recommendations. (They suggest that the responsibility of identifying strawmen should be assigned to administrators, recommend utilising Google street view to identify phantom enterprises. Moreover, they refer to articles by investigative journalists as important resources.)  As a consequence, when dealing with complicated corporate setups or entities, ‘hybrid trusts’ and  private equity funds, banks are seldom in a more advantageous position than journalists. Furthermore, before 2024, as long as the ownership structure appeared transparent and there were no uncertainties, service providers were not obligated to perform customer due diligence on the ultimate beneficial owners.

 

The UBO Act imposes sanctions on entities that fail to provide reliable information, but in fact, these sanctions hardly enhance the trustworthiness of the UBO-registry. As previously mentioned, the service providers, as a component of their customer due diligence processes, record ultimate beneficial ownership data in the UBO-registry. When an authority, the prosecution’s office, court, supervisory body, or service providers (excluding banks that hold accounts) identify a significant difference between the recorded owners in the UBO-registry and the information they maintain, they report it to the registry. This also results in a decrease of the so-called ‘TT-index (UBO-index)’  of the entity in question. If this happens 2–4 times, the entity will be categorised as having 'uncertain' or 'unreliable' UBO-data and will be asked to rectify their UBO-data at their banks. If the errors are not rectified, the tax office will disclose the name of the entity publicly. Furthermore, it is prohibited to do transactions above HUF 4.5 million with businesses categorised as "unreliable". As of June, 2024, the tax authority's register only includes 1 -1 operator in both the unreliable and the uncertain categories. The low number is unlikely to be the result of full compliance with customer due diligence guidelines and dissuasive sanctions.

 

Other methods of concealing assets pose a significant challenge for the UBO-register as well – for instance, options and preference dividend shares do not necessarily appear in the regular due diligence process, and even if they do, ultimate beneficial ownership provisions may not apply to the beneficiaries of these agreements and shares. 

 

An even more significant loophole exists in the case of the private equity funds examined in depth above (as well as venture capital funds). Their beneficiary ownership structures are only partially addressed in the AML regulations, and they are not addressed at all in the UBO Act. In theory, investment in such funds does not create ownership and management rights, and the fund managers are considered the ultimate beneficial owners. Nonetheless, as demonstrated above, in numerous cases the practical control and management remains with the investors. As stated in a Q&A released by the Hungarian National Bank, individuals who possess units in these funds can only be acknowledged as ultimate beneficial owners if the investment regulations of the private equity funds contain provisions that grant the original owners of the assets the ability to exert influence over the management of said assets.  If, during the customer due diligence process, service providers discover indications of potential influence, it is theoretically possible that the unit-holders would be considered ultimate beneficial owners. However, this would necessitate a comprehensive examination of all the underlying agreements, as well as the investment rules, which service providers would understandably have limited capacity to undertake. Moreover, as the UBO Act does not apply to private equity funds at all, service providers who would eventually collect investor data on private equity funds, are not required to transmit the records to the central database.

 

The aforementioned indicates that the UBO-register had shortcomings in terms of both quality and depth, and its usage was relatively limited among Hungarian investigative journalists and anti-corruption NGOs.

 

Death by judgement

 

The European Court of Justice delivered an enormous blow to third party access to the UBO-register in its 22  November 2022 ruling, according to which the 5th AML Directive, which allows for quasi-unrestricted third party access, is not compatible with the GDPR. Consequently, the applicable clauses of the Directive were substituted with the prior rules allowing third parties to access beneficial ownership data only once they had proved their "legitimate interest". Nevertheless, the Court's judgement clarified that the restriction should not impede the press and NGOs from accessing the beneficial ownership registry in their research efforts to combat money laundering and terrorism financing. 

 

Interestingly, in Hungary, third party access to the UBO-registry had not yet been eliminated at that time, and one of the most exciting fact-finding articles based on the UBO-register was actually published after the judgement.  Furthermore, this newspaper article was exactly about private equity funds. In December 2022, Direkt36's journalist admitted that she was just surfing in the UBO-registry’s public interface, when she discovered that, contrary to expectations, the registry indeed contained information on the beneficial owners of private equity fund units. This was presumably a systemic failure, as the recent and intricate legislation created ambiguity for service providers regarding the necessary information to be included in the beneficial ownership registry. While conducting the data search, the journalist discovered that out of the 119 private equity funds operating in Hungary as of the end of 2022, the UBO-registry had records on 37 of them. Furthermore, in 26 instances, the owners of the units were also disclosed. The investigation uncovered that these private equity funds, responsible for overseeing substantial assets, were undoubtedly connected to business circles aligned with the government. The investigation has also revealed the deficiencies of the existing regulations concerning the accuracy of customer due diligence. For instance, a prominent Hungarian oligarch admitted his involvement in a private equity fund that was mistakenly associated in the article with another well-known oligarch (!).

 

The story concluded abruptly and unfavourably when, within a span of less than six months after the investigative article was published, all information regarding private equity funds vanished from the official UBO-register. The National Tax Authority asserted that the inclusion of these funds in the register was an error, and private equity funds are not subject to the UBO law. (As said above, customer due diligence is obligatory for them as well, but according to the tax authority’s  interpretation the data does not need to be posted to the registry.)

 

It is worth mentioning that the connection between private equity funds and government-affiliated oligarchs, as well as the transparency of their ownership and governance structure, was discussed in the EU Rule of Law Report 2023 as well. During that period, the Government contended (in Spring 2023) that the lack of information on the ultimate beneficiaries was consistent with the judgement of the Court of Justice of the European Union (CJEU). In 2023, the Government initiated the development of a new national anti-corruption strategy. The initial draft of this strategy included certain steps to address the issue of concealing wealth through opaque legal structures, but these measures were ultimately excluded from the final version of the strategy that was officially adopted in 2024.

 

In late 2023, the Government amended the UBO Act and practically abolished third party access to the UBO-register, and the publicly available interface was shut down. The amendment was justified by the CJEU-judgement. According to the actual regulation, access in all cases could only be granted to third parties if they can demonstrate a legitimate interest with documents and obtain prior authorization from the Ministry. Basically the restrictions for fiduciary trusts became applied to all entities. While the law outlines specific situations where a legitimate interest should be recognised, such as kinship, litigation precedence, or close business relationships, it does not explicitly include journalists or representatives of NGOs who fight against money-laundering, terrorism and corruption. Therefore, it is questionable whether the Ministry would approve a similar access request within the allotted 30 days. As far as we know, no Hungarian journalist or NGO has yet applied for permission to access data from the current UBO-register. This is not surprising considering the administrative difficulties and uncertain outcome of the process,  particularly because the reliability of the data obtained through this complex procedure is still questionable. 

 

The current UBO Act can hardly be considered as compliant with the AMLD, especially taking into consideration how other EU countries have amended their laws – according to Transparency InternationaI’s research many countries have indeed found solutions to grant access to journalists and NGOs to the UBO-register following a single authorization procedure.

 

In the lack of reliable UBO-registry, journalists and NGOs need to rely on previously described alternative data sources. Nevertheless, it is crucial to reiterate the constraints of these investigating methods, since browsing corporate registry data without access to information on ultimate beneficial owners is insufficient to uncover foreign ownership connections, sanctioned assets, or the dubious accumulation of wealth by pro-government individuals. 

 

Although the upcoming EU legislation shows improvements by aiming to establish consistent procedures for determining ultimate beneficial ownership, it still lacks provisions that would facilitate the identification of the ultimate owners of private equity fund units, for instance. Regrettably, the Hungarian government consistently undermines the standards set by the European Union in the fight against money laundering. This is likely done to safeguard oligarchs with close ties to the government and to maintain Hungary as an appealing regulatory environment for individuals seeking to conceal their assets. Without sufficient government intervention, there is no possibility of swift progress on this matter.

 

What's next?

 

In order for the ultimate beneficial ownership register to fulfill the function for which it was created, at least the following issues should be addressed by the law:

(1) The legal regime should cover the various hybrid and innovative forms of asset disposal, such as private equity funds, hybrid trusts, etc. Ultimate Beneficial Ownership registries should also cover the data on investment unit holders – especially if such funds are set up exclusively to manage the assets of a single major investor. (As in reality it is impossible to verify the actual informal rights of investors over assets on the basis of the investment rules alone)

(2) Every effort should be made to ensure that the actual ownership register is as accurate as possible, and strict sanctions should be introduced to this end. The accuracy of record-keeping should also be subject to specific checks by supervisory bodies.

(3) Uniform, binding guidelines should be introduced on the methods for determining beneficial ownership

(4) The procedure for third-party access should be significantly simplified (for example, by abolishing the need for a ministerial authorisation)

(5) Even after the CJEU ruling, it is important to emphasize and explicitly state in the law that the right of access to the beneficial ownership register must be guaranteed to the press and NGOs involved in the fight against money laundering and terrorist financing

(!) Ultimately, the topic of access to beneficial ownership information should also be addressed beyond the anti-money laundering and due diligence agenda, as it is one of the key tools to enhance the overall greater transparency of the business sector and would be of great use for those aiming to enter into financial relations with other businesses or make investments. In this framework, a more comprehensive UBO regulation could also contribute to better company ownership and trade register data.

 

 

Tovább az eredeti oldalra!