Government wants to legalize unconstitutional contracts between foreign embassies and offshore companies

October 5, 2017

Government wants to legalize unconstitutional contracts between foreign embassies and offshore companies
Photo: MTI/Noémi Bruzák

A 154-page legislative proposal was submitted on behalf of the government last week by Minister for National Economy Mihály Varga (pictured). The bill, titled “Amendments relating to the harmonization of insurance and cash-flow laws” deals mostly with the process of “harmonization of law,” which creates common market standards across the European Union and would bring Hungarian law into line with those standards.

But a closer examination of the bill reveals that Varga included a short passage which has nothing to do with “harmonization of law,” but rather appears to violate Hungary’s constitution, and other laws, by giving Hungary’s foreign embassies permission to do business with offshore companies.

The provision slipped into the bill states that any foreign company with which a Hungarian “foreign representative” signs a contract will automatically be considered a “transparent organization” under the law. This provision appears designed to circumvent a provision of Hungary’s constitution, passed by the Fidesz-KDNP majority in 2012, which states that “support or contract-based payments may only be extended from the central budget to organizations whose ownership and internal structure, as well as the activities directing the use of the support, are transparent.”

By creating a legal framework by which all organizations or companies that sign contracts with Hungary’s foreign representatives are considered “transparent”, regardless of whether they are murky offshore companies with no clear ownership structure, Varga hopes to ensure that no scrutiny or oversight may be exercised over those entities. As points out, this circumvents the constitutional provision which prohibits state funds from being directed to offshore companies. If the 154-page bill is passed by the Fidesz-KDNP majority in the National Assembly, then this one-paragraph provision hidden in the text would make it possible for Hungary to direct state funds to offshore companies whose owners are unknown.

The provision also violates Hungarian law on public financing which, similarly to the provision in the constitution, prohibits state payments to non-transparent organizations or companies.

Such a provision begs the question of what kinds of companies the Hungarian state may be planning to fund via its foreign embassies in the future. But another, one-sentence provision in the 154-page bill suggests that such unconstitutional abuses may have already been taking place for years.

This provision requires that the new criteria for considering an organization or company “transparent” will have retroactive effect as well, meaning that any unconstitutional payments made from Hungary’s central budget to non-transparent offshore companies until now will be retroactively considered legal.

This suggests that Hungarian embassies have previously entered into contracts prohibited both by the constitution and by Hungarian public finance law, contracts which the government now seeks to retroactively legalize.

What is going on? 

Socialist delegation leader Bertalan Tóth directed questions to four ministers on the matter:

Tóth asked Minister of Foreign Affairs and Trade Péter Szijjártó how many embassies had signed illegal contracts with “non-transparent” organizations and for how much money. He also asked who approved these contracts, and whether anyone had been held responsible for them.

He also asked Minister Overseeing the Office of the Prime Minister János Lázár whether he considers it a risk to national security that foreign embassies are doing business with offshore companies.

Tóth asked Minister for National Economy Mihály Varga (who submitted the concerned bill) why he proposed these amendments, and who, from the Foreign Ministry, for example, had requested the easing of restrictions.

He also asked Minister of Justice László Trócsányi whether the proposed law is compatible with the constitution, and what kinds of consequences will be forthcoming if it is revealed that Hungarian foreign embassies had done business with offshore companies.

Ain’t nothing but an offshore party

As we’ve written about extensively, the Hungarian government’s settlement bond program, now defunct, has been implicated in funneling potentially billions of forints in public funds to contracted offshore companies that acted as brokers for selling bonds to foreign citizens in exchange for Hungarian residency. Magyar Nemzet called the program “the most serious corruption story of recent decades.”

If passed, these legal modifications could retroactively pardon any crimes committed through the business dealings between the Hungarian government and various offshore companies.