Client note Anti-money laundering regime in Hungary Alicante Amsterdam Beijing Berlin Brussels Chicago Dusseldorf Frankfurt Hamburg Ho Chi Minh City Hong Kong London Milan Moscow Munich New York Paris Prague Rome Singapore Tokyo Warsaw Washington DC Associated offices: Budapest Vienna Zagreb
Contents Page 1 A background to money laundering 3 Hungary and the fight against money laundering 5 Current criminal approach to money laundering 6 Current administrative approach to money laundering 9 Schedule on data to be obtained when complying with identification process provisions FURTHER INFORMATION If you would like further information on money laundering in Hungary please contact any of the following or your usual contact at the firm. CONTACTS Budapest Dr László Partos Christopher Noblet This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice. Lovells 2002
A background to money laundering WHAT IS MONEY LAUNDERING? Layering Money laundering has historically not been an independent but a collateral crime. It is always preceded by some activity that is contrary to the criminal law. The persons committing money laundering are trying to legalise - launder - the incomes originating from this earlier crime and thereby recycle these incomes into the legal economy. Layering is the process of the gradual separation of illegal incomes from their sources via complex layers of financial transactions, with the purpose of concealing their real origin, ensuring the anonymity of the source of the income and making it as difficult as possible to follow the audit trail created in the process. Money laundering has 3 phases: placement layering integration. Placement This term covers the physical disposal of cash proceeds derived from illegal activity. In the placement phase, criminals deposit the cash incomes of criminal acts at financial service institutions from where they may forward them, shortly afterwards, within the country or abroad, often in another currency. Money laundering can be caught often most easily in the placement phase. After smuggling into the country income originating from crimes committed abroad, it can be placed by various methods to create the impression that it originated from normal business activity and in the legal economy. It is typical that persons pursuing money laundering activities try to purchase businesses with an intensive cash turnover (for example, casinos, restaurants, exchange centres, etc), to merge their legal incomes coming from these enterprises with dirty money. Integration Integration involves the provision of apparent legitimacy to the financial proceeds of crime by returning them into the economy, at the end of the layering process, as bona fide business funds. As a common practice, payments are effected in cash, therefore actual turnover or the volume of the income cannot be easily ascertained from bank account information. WHY IS THERE A PROBLEM? Confidence in any country s banking and financial services marketplace is essential for its success. If this confidence is lacking because of a perception that the market is not transparent or regulated to internationally accepted standards this will detrimentally impact on such market and the market s participants. The International Monetary Fund has cited certain issues including risks to bank soundness and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers as potential macroeconomic consequences of failing to prevent money laundering. - 1 -
The issue of clamping down on money laundering activities can be a particularly sensitive issue for relatively new democracies such as Hungary. Countries in this position may be very keen to identify new sources of capital to assist in the development of their economies and there may therefore be a temptation not always to look so closely at the sources of such capital. However, it can be a dangerous precedent if measures are not in place as early as possible to prevent money laundering. The longer these steps are postponed the more difficult it will be to implement them. This delay may also increase the chance that institutions, be they governmental or financial service institutions, themselves will use practices that are not transparent and may encourage money laundering and similar activities such as bribery. THE FIGHT AGAINST MONEY LAUNDERING LEAD BY THE FATF Money laundering is increasingly becoming an international problem. Therefore any effective steps to prevent money laundering must be increasingly taken on an international basis. Co-operation is required between countries and through international bodies such as the United Nations. No longer is it sufficient for countries to develop their anti-money laundering policies on their own. One of the more significant steps in the fight against money laundering was the establishment of the Financial Action Task Force on Money Laundering (FATF) at the G-7 Summit in Paris in 1989. The FATF was established as an inter-governmental body primarily to formulate national and international policies, against money laundering. The FATF has also a quasi regulatory role in that it monitors countries progress in implementing antimoney laundering measures. Much publicity has been given to the blacklist produced in this regard by the FATF listing non-co-operating countries and territories. - 2 -
Hungary and the fight against money laundering EVOLUTION OF THE PROBLEM IN HUNGARY DURING THE LAST DECADE the Philippines, Russia, St Kitts and Nevis, St Vincent and the Grenadines and the Ukraine. Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable, much more than established financial centre countries implementing comprehensive anti-money laundering regimes. Differences between national anti-money laundering systems will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective systems. Since the early 1990 s, after opening its frontiers, Hungary has become a very important transit country between the West and the East. In the early 1990 s Hungarian legislation could not keep up with the many changes, and the Hungarian legal system and the relatively underdeveloped financial system rendered Hungary a very good place to conceal and legalise criminal income through money laundering. Hungary s first major step in implementing a antimoney laundering regime was when it enacted Act XXIV of 1994 (the Money Laundering Act ) on the prevention of money laundering. Also in 1994, money laundering was included in the Hungarian Criminal Code as a crime. Hungary signed in 2000 and ratified in 2001 the 1990 Strasbourg Convention on laundering, search, seizure and confiscation of the proceeds of crime. During the summer of 2001 the FATF put Hungary on the list of the Non-Co-operative Countries and Territories. The list at the date of this note includes: the Cook Islands, Dominica, Egypt, Grenada, Guatemala, Hungary, Indonesia, Israel, Lebanon, the Marshall Islands, Myanmar, Nauru, Nigeria, Niue, The FATF has laid down 25 legal or practical points the satisfaction of one or more will cause a country or territory to be listed as a Non-Cooperative Country or Territory in the international fight against money laundering. When a country is so listed, this empowers the member states of the FATF to implement sanctions against individuals or businesses having accounts in such a country. Hungary has been placed on the list because it did not prohibit the possibility to open anonymous bank accounts or open accounts using a fictitious name and it allowed circumstances that inhibited financial institutions identifying the actual owners of legal entities and companies and had at the time refused to change the above prior to Hungary acceding to the EU. In the light of being included on the blacklist and even more so following the 11 September terrorist attacks in the US, the issue of money laundering became very much at the top of the agenda in Hungary. Anti-money laundering legislation in Hungary was strengthened by the enactment on 19 December 2001 of the Act on the fight against terrorism, on the strengthening of resolutions in order to prevent money laundering, and on certain restricting orders ( Act on Terrorism ). This new legislation amended the Money Laundering Act, the Act on Financial Institutions and Securities, the Governmental Decree on Savings Deposits, the Civil Code and the Criminal Code. This new legislation prohibits the opening of anonymous savings deposit accounts and banks are required to identify the account holder of the - 3 -
existing anonymous savings deposit accounts that is, the baptising of such accounts. Banks are now obliged to take certain measures to ensure the identification of their client and keep data for 10 years after the agreement with the client has terminated. The documents relating to the account must include the name, the place and date of birth of the depositor or the beneficiary. The same identification process must take place when the depositor (or beneficiary) of an already existing anonymous savings deposit account wishes to make any transaction in respect of such account. The new legislation provides that a bank may amend unilaterally terms and conditions in respect of anonymous accounts. From 1 July 2002, in the case of deposits of two million Hungarian forints or more, a bank must send to the Hungarian Police Headquarters the identity data defined in the Money Laundering Act of the depositor (or the beneficiary) when baptising an anonymous account. Act XXIV of 1994 on prevention of money laundering - as amended by the Act LXXXIII of 2001 Government Decree 299/2001. (XII 27) on the execution of the Act XXIV of 1994 on prevention of money laundering Government Decree 297/2001. (XII 27) on currency exchange activity Government Decree 287/2001. (XII 26) on deposit cheques Government Decree 285/2001. (XII 26) on bonds. In March 2002 a representative of the FATF visited Budapest. Following consultations at this occasion between the FATF and the Hungarian government it was proposed that Hungary s inclusion on the FATF blacklist will be reconsidered at the FATF meeting to be held in June 2002. From 1 January 2005, a bank will be entitled to baptise anonymous accounts on the written request of the depositor (or the beneficiary) only with the approval of the Hungarian Police Headquarters. The police may deny the approval if there are circumstances which give rise to a suspicion of money laundering. Set out below is a list of the most recent legislation which has been introduced against money laundering: Act LXXXIII of 2001 on the fight against terrorism, on the strengthening of resolutions in order to prevent money laundering, and on certain restricting orders Act CXX of 2001 on capital markets Act CI of 2000 on proclamation of the Strasbourg Convention on laundering, search, seizure and confiscation of the proceeds of crime - 4 -
Current criminal approach to money laundering According to section 303 of the Hungarian Criminal Code (as amended by the Act on Terrorism); those (including natural persons and legal entities) who, in order to conceal the real origin of profits resulting from any criminal act punishable with imprisonment, make use of such profits in the course of their business activity or transact any kind of financial or banking operation with such shall commit the offence of money laundering and shall be punishable with up to five years imprisonment. Those who, by negligence, make use of profits resulting from offences committed by third persons in the course of their business activity or transact any kind of financial or banking operation with such, shall be punishable with up to two years imprisonment. Money laundering will be considered as aggravated if the money laundering is committed professionally, either in the scope of a money laundering organisation or by a manager or clerk of a financial institution, brokerage firm, investment fund, insurance company or gambling house or a public personality or attorney. In 2001, around 1,600 filed reports were filed with the police and from these criminal procedures were started in eight cases. In the six years preceding 2001 criminal procedures were started in only 10 cases. Of these cases no one has yet been found guilty of money laundering in Hungary, and there has only been one case to reach the courts. Current reports indicate that there have been as many reports in the first quarter of 2002 as in the whole of 2001. The vast majority of such reports have come from banks. According to section 303/B of the Hungarian Criminal Code, anyone, who intentionally fails to comply with the reporting obligations provided by the Money Laundering Act, shall commit an offence and shall be punishable with up to three years imprisonment. In the case where this person is negligent the punishment has a maximum of two years. Although Hungary has strict criminal regulations against money laundering, in practice, they have a limited real deterrent effect as in the case of money laundering the detection of the crime is the key issue. Since the Money Laundering Act entered into force in 1994, it is mainly banks who have reported suspicious transactions to the police. - 5 -
Current administrative approach to money laundering The Money Laundering Act sets out the obligations of financial service institutions in respect of the prevention of money laundering. First the Act defines which entities fall within the definition of financial service institutions and then sets out the detailed obligations to which financial service institutions are subject. FINANCIAL SERVICE INSTITUTIONS The Money Laundering Act provides a list of entities with specific anti-money laundering obligations as follows: (a) financial service companies; (b) postal service companies; (c) insurance companies; (d) investment service companies; (e) real estate agents; (f) accountants, auditors, book keepers, tax advisors; (g) casinos; (h) professional dealers, sellers and agents of certain goods, for example, works of art, with a value of at least two million Hungarian forints (approximately 8,000 euros) if cash consideration is paid in consideration for the goods; (h) voluntary pension funds; (i) all the clients, officers and employees of the above (hereinafter together referred to as financial service institutions ). Regarding legal advisors, lawyers, law firms and notaries, the Government is required to submit to Parliament detailed regulations applying to such persons before 30 November 2002. Up to this date the provisions of the Money Laundering Act do not apply to these entities. OBLIGATION TO IDENTIFY THE CUSTOMER Pursuant to section 2 of the Money Laundering Act, the financial service institution may accept transaction orders involving the receipt or delivery of cash in Hungarian forints or in a foreign currency amounting to two million Hungarian forints (approximately 8,000 euros) or more only from such individuals who prove their identity by producing identification documentation as required by the Money Laundering Act and whose identification is made by the financial service institution. If the above value is transferred pursuant to separate but apparently related contracts, the identification process must be carried out when the aggregate of such transactions reaches two million Hungarian forints. The identification must take place when entering into a written contract. Also the client must provide, if applicable, - 6 -
a written declaration in order to identify the actual owner on behalf of whom he is acting. In the absence of such declaration the financial service institution must refuse to execute the agreement. If the customer is a legal entity or other type of organisation, as well as ascertaining the identity of the person acting on behalf of such entity, the legal entity or organisation must also be identified. Identification is unnecessary if the financial service institution has already identified the legal entity or other organisation in the scope of another transaction. The financial service institution can only accept orders concerning banking or financial transactions from organisations seated abroad if the organisation is registered as one entitled to render financial services pursuant to the law of the relevant country, and if it names its client. These provisions need not be applied, if due to the nature of the transaction the foreign financial service institution gives the payment order on its own behalf, or a foreign principal - which is not a financial institution - orders the financial service institution directly on its own behalf. Article 2/B of the Money Laundering Act provides a list of information that must be obtained when identifying a client (see schedule to this note for further details). During the duration of a contractual relationship, the client has to inform the financial service institution of any change in the facts given in the course of the identification process or of any change affecting the real beneficiary within five working days of such change. Information must be kept for 10 years after the termination of the contractual relationship. REPORTING OBLIGATIONS If there is any data, facts or circumstances indicative of money laundering, the financial service institution is obliged to identify the customer promptly and file a report within 5 days with the Hungarian Police Headquarters regarding the suspicion of money laundering. For the carrying out of this obligation, every company must appoint one or more compliance officers from its staff. SUSPENSION OF THE EXECUTION OF SUSPICIOUS TRANSACTIONS The financial service institution may temporarily suspend the execution of suspicious transactions if there is any data, facts, or circumstances indicative of money laundering or if prompt intervention by the police is needed. The Hungarian Police Headquarters must be informed by phone, fax or e-mail of such transaction and they have 24 hours from notification to check the background of the case. If the suspicion is not considered to be well founded by the police, the transaction must be executed. OBLIGATION TO DECLARE CASH WHEN CROSSING THE BORDER A person who has one million Hungarian forints (approximately 4,000 euros), or the equivalent in foreign currency, or more in cash on his person when entering or leaving Hungary, must make a declaration to the customs authority and provide the information described under Article 2/B of the Money Laundering Act (see schedule to this note for further details). IDENTIFICATION OF PERSON EXCHANGING FOREIGN CURRENCY In the case of exchange transactions amounting to 300,000 Hungarian forints or more, the financial service institution must identify the client and obtain certain identity information as set out in the Money Laundering Act and print this information on its invoices (see schedule to this note for further details). SECRECY RULES According to the Money Laundering Act, the fulfilment of any of the above mentioned reporting obligations cannot be regarded as a violation of bank secrets or any other restriction - either legal or contractual - concerning data or information supply. Those who fulfil their reporting obligation in the case of money laundering or initiate the same shall - 7 -
not be indictable for a violation of business secrets or bank secrets, even if the report they made in good faith turns out to be unfounded. Bank secrets include all data available to the financial service institution concerning the person, data, financial situation, or business of any given customer, as well as the balance and turnover of their accounts kept with the financial service institution, or the content of the agreements signed between the customer and the financial service institution. INTERNAL CONTROL According to the Money Laundering Act, each financial service institution is obliged to draft its own internal regulations on the basis of the model regulations of the relevant supervisory authority and taking into consideration, if so provided, the recommendations of the Hungarian Police Headquarters in order to perform its prevention obligations. Such regulations have to be approved by the relevant supervisory authority. If the internal regulations are not filed with the supervisory authority then the supervisory authority is entitled to restrict the activity of the financial service institution or withdraw its permission to carry on business. In the case of establishing a new financial service institution one condition to acquiring a permission to carry on business is the filing of a draft of these internal regulations. have circulated sample regulations in January 2002 among the representatives of different professions. ADMINISTRATIVE SANCTIONS The supervisory regulator of many financial service institutions (for example, banks, insurance companies, investment service companies, voluntary pension funds) is the Hungarian Financial Supervisory Authority ( PSZÁF ). PSZÁF is entitled and obliged to supervise the activities of such financial service institutions. Where it identifies a breach of law, for example, noncompliance with the anti-money regulations (either the law or internal regulations), PSZÁF is entitled to impose different sanctions on such financial service institutions depending on the severity of the breach. PSZÁF is entitled, for example, to give the relevant financial service institution a warning, to suspend or stop its activity, to withdraw its permission, to impose a fine on it (from 100,000 HUF to 500,000 HUF) if any breach of the provisions relating to the identification process occurs or to initiate procedures before other authorities. These regulations have to include the name of the person who is appointed as compliance officer responsible for the fulfilment of the prevention obligations of the financial service institution. The money laundering prevention activity is coordinated by the compliance officer of the financial service institution. In accordance with the new legislation, every financial service institution must agree its detailed internal money laundering regulations by 5 February 2002. Such regulations must describe which transactions are suspicious from a money laundering point of view, what reaction is deemed to be appropriate and when, and how the clients must be identified. The Hungarian Police Headquarters and other authorities (Financial Services Authority, Ministry of Finance, Ministry of Economics, etc.) - 8 -
Schedule on data to be obtained when complying with identification process provisions The Money Laundering Act provides the list of information that must be obtained when identifying a client. The financial service institution has to require the production of certain documents proving the identity of the client in the course of the identification process. 1. GENERAL OBLIGATION TO IDENTIFY THE CUSTOMER 1.1 In the case of a domestic individual the required documents are: a residency card and an identity card, or passport. The facts to be obtained in the course of the identification process are: surname and forename, previous name, maiden surname and forename home address place and date of birth nationality maiden surname and forename of mother type and number of the identity document name and abbreviation of the issuing authority of the identity document. 1.2 In the case of a foreign individual the required documents are: passport or an identity card, provided that it authorises a stay in Hungary or a Hungarian residence permit. The facts to be obtained in the course of the identification process are: the same facts set out above under point 1.1 if they can be established on the basis of the identity document the place of residence in Hungary. 1.3 In the case of a domestic legal entity or similar organisation the required documents are: the residency card and the identity card or the passport of the person(s) authorised to act on behalf of the organisation (if the identification of the organisation has not been done before) a document proving that: (i) the organisation has been incorporated by the court of registration, or it has put in its request for incorporation (ii) in case of an individual contractor, that he has a tax number or he has put in his request for registration by the tax authority (iii) if applicable, the registration has been made, or an application has been lodged, with another competent court or authority - 9 -
where the identification process is made before the filing of an application for registration with the court of registration or relevant authority, the deed of foundation/articles of association of the organisation. The facts to be obtained in the course of the identification process are: name, abbreviation of name address of its head office and its branches its main activity number of its identity document name and designation of those who are authorised to represent the organisation the information necessary to identify the delivery agent the most important facts regarding the financial transaction or related to it. 1.4 In the case of a foreign legal entity or similar organisation the required documents are: the residency card and the identity card or the passport of the person(s) authorised to act on behalf of the organisation (if the identification of the organisation has not been done before) the document proving that registration according to the law in its own country has been done. The facts to be obtained in the course of the identification process are: name, abbreviation of name address of its registered office and its branches its main activity number of its identity document name and designation of those who are authorised to represent the organisation the information necessary to identify the delivery agent 2. OBLIGATION TO DECLARE CASH WHEN CROSSING THE HUNGARIAN BORDER WITH MORE THAN ONE MILLION HUF IN CASH 2.1 In the case of a Hungarian individual, the facts to be obtained in the course of the identification process in the above case are: surname and forename, previous name, maiden surname and forename home address place and date of birth nationality maiden surname and forename of mother type and number of identity document name and abbreviation of the issuing authority of the identity document the amount in question the currency of the amount. 2.2 In the case of a foreign individual the facts to be obtained in the course of the identification process are: the same facts as set out above under point 2.1 if they can be established on the basis of the identity document the place of residence in Hungary. 3. IDENTIFICATION OF A PERSON EXCHANGING FOREIGN CURRENCY OF AT LEAST 300,000 HUNGARIAN FORINTS 3.1 In the case of a domestic individual the facts to be obtained in the course of the identification process are: surname and forename, previous name, maiden surname and forename type and number of identity document name and abbreviation of the issuing authority of the identity document. the most important facts regarding the financial transaction or related to it. - 10 -
3.2 In the case of a foreign individual the facts to be obtained in the course of the identification process are: the same facts set out above under point 3.1 if they can be established on the basis of the identity document the place of residence in Hungary. 3.3 In the case of a domestic legal entity or similar organisation the facts to be obtained in the course of the identification process are: surname and forename, previous name, maiden surname and forename, type and number of the identity document and name and abbreviation of the issuing authority of the identity document in respect of the person(s) authorised to act on behalf of the organisation name, abbreviation of the name address of its head office and its branches. 3.4 In the case of a foreign legal entity or similar organisation the facts to be obtained in the course of the identification process are: the same facts as set out above under point 3.3 if they can be established on the basis of the identity document the place of residence in Hungary in respect of the person(s) authorised to act on behalf of the organisation. April 2002-11 -