In Whose Interest? Shadows over the Hungarian Residency Bond Program

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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 2004.

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 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 15-24 % 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 anti-money 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.