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The secret society of corruption
The Budapest Times - Wednesday, 24 June 2009

Today several billion forints have been stolen from you again

While most people are badly affected by the HUF 400 billion (EUR 1.42 billion) austerity programme, politicians and state officers (and their entourages), inflict the same level of damage to the country each year. It goes by many names – party financing, for instance – although it is in fact pure and unadulterated theft. Many say that it should be brought to an end, but nothing happens. What’s more, these thefts are executed in increasingly professional and sophisticated ways. We spoke to well-informed people about the country being plundered.

Chains, tariffs, and bribed freight workers

A leading municipality politician met company representatives in a hotel lobby. Their discussion lasted 20 to 30 minutes and mostly concerned the economic situation and the city leaders’ plans. Only a few sentences were devoted to why the meeting itself was arranged. The politician told the business people the companies to which they should pay HUF 100 million (EUR 355,910), and he, in return, would arrange an assembly decision that would reflect their interests.

Our source wanted to remain anonymous. He said that he had been in the hotel lobby – at the kind of meeting that probably takes place throughout Hungary every day. Corruption is a general phenomenon, and it exercises an increasingly defining influence on how the state operates; as shown by academic research and the discussions we have had with people who can see how politicians, state officers and the people around them steal taxpayers’ money, and how they make decisions to favour others.

We carried out interviews of one to two hours with 13 business executives, business consultants and lawyers who know the meeting point between the state and the business sector. They undertook to speak only anonymously, and if the events cited in the article would not allow them to be identified. Even so, the corruption mechanisms and methods are also revealed in the studies carried out by Transparency International and the Centre for Corruption Studies of Corvinus University, Budapest.

‘Much grain is lost on the way from the field to the granary’

“I was shocked to discover that everyone found it insignificant that bribery of 10 to 20% was considered normal,” said a lawyer, who often works for large companies receiving state commissions. Another source, who is involved in construction development projects, said he had not had a single project in the last five years that had not involved bribing someone. “It is a far-reaching and deeply rooted phenomenon that has now reached a critical point,” one business executive was quoted as saying in the Corvinus University study. The people we spoke to indicated that not every politician, state officer and company leader was corrupt, but that the number of corrupt individuals was high enough to keep the system operating.

Several signs indicate that corruption is actually spreading, infecting more and more fields. The “corruption-perception index” released by Transparency International (in which analysts and business people identify the problems in a certain country) placed Hungary in 47th place (slipping from 39th a year before) on the list of 180 countries. The Corvinus University researchers, in their study published in April this year, point out that the cases of misuse that have been revealed indicate an increasing proportion of “multi-player, interlinking schemes”, and they conclude that “corrupt deals are being institutionalised”.

The cases of abuse are no longer about a business executive bribing a mayor or an assembly member, as a whole chain has developed between these two end-points that includes mediators, distributors of money, and smooth operators who call themselves lobbyists. The result is that everyone bites a small piece off, and as the number of players grows, so does the level of corruption. “Much grain is lost on the way from the field to the granary,” the leader of a company with a one billion forint turnover said.

The amounts stolen can only be estimated, but the figures currently available are alarming. The interviews carried out with business executives reveal that the usual fee in state commissions is around 10 to 20%, and Transparency states that the cases of misuse could raise public procurement prices by as much as 20 to 25%. The latest available figure is from 2007, when the state spent some HUF 1.75 trillion (EUR 6.23 billion) on public procurement procedures. Even if we take the lowest rate of 10%, that points to some HUF 175 billion (EUR 623.29 million) of taxpayers’ money vanishing, while Transparency’s highest estimate of 25% would suggest HUF 437 billion (EUR 1.56 billion).

Several sources noted that bribery was not always paid in public procurement cases involving HUF 10-20 million (EUR 35,591-71,305), although some added that “small favours” may still be necessary. “The decision-maker is given a laptop for personal use, and that stays with him accidentally,” a financial advisor said by way of an example. One business executive mentioned that the bonus of a head of a municipality-owned company was paid via his company.

‘The higher you go, the larger the amounts’

Cases of misuse in public procurement procedures reveal only the tip of the iceberg. The Zuschlag case made it clear that amounts of state support are also stolen, and a similar suspicion arises in the case of large state-owned companies. [The former Socialist MP and 15 associates face charges of fraud committed as part of a criminal organisation and embezzlement of state funds to the value of HUF 75 million (EUR 266,956)]. In early April this year, the legal representative of MVM (Hungarian Electricity Works) reported “suspicious deals of the former management” to the police, while news portal Index.hu, referring to the internal investigation at the company, wrote that the suspicious money transfers uncovered amounted to billions. Also in April, Dániel Antal, the former head of the Hungarian Railway Office, which closed last year, told Magyar Nemzet (only estimating and without mentioning any concrete cases) that around HUF 11 billion (EUR 39.14 million) in public money was lost at Hungarian State Railways (MÁV) through corruption each year. MÁV denied the charges and indicated that they would take legal measures against Antal.

Another category is those cases of bribery when certain permits or assembly decisions involve “fees” being paid. Some forms of it are quite basic, such as when an official in charge of issuing a building permit is bribed. “He himself would not ask for anything, but if you give him money, he will get faster. You give him euros because you know that his family is planning a holiday, or you give him a gift voucher,” said our source who works in real estate development, adding that “the higher you go, the larger the amounts”.

Simple thefts, bribery cases and damage done by state tenders that are awarded without any genuine bidding process total several hundred billion forints, even by the most conservative estimates, which is also a significant amount for the national economy. Note that the crisis-management package planned by the Bajnai administration, which badly impacts on the majority of the population, amounts to HUF 400 billion this year. Amidst a crisis, the public amounts that one can steal are smaller, but that does not stop greed. A high-ranking IT manager said: “as there is no work, the companies raise the prices,” and so there are some who would, instead of the usual 10%, “give as much as 12.5%.”

In the light of the amounts involved, the supposition that the disappearing amounts only finance political parties and their campaigns is not valid. According to the TNS Media Intelligence agency, during the intense election campaign of 2006, the Hungarian Socialist Party (MSZP), Fidesz, Alliance of Free Democrats (SZDSZ) and the Hungarian Democratic Forum (MDF) spent some HUF 5.5 billion (EUR 19.59 million) altogether. That is much more than is allowed by law, but is still less than the estimated amount of corruption, which means that only part of the stolen money is transferred to political parties. The survey carried out by Transparency had the same findings, and our sources also made similar remarks; saying that most of the money probably ends up in private pockets.

‘Politicians have higher rates’

Politics still plays a key role in corruption. Several sources (working in the IT industry) stated unanimously that more valuable procurement deals (ones involving several hundreds of millions or billions of forints) can only be won if an influential, high-ranking politician provides his support. Head of Hungarian Competition Authority (GVH) Zoltán Nagy, in an interview in February this year, said companies that form cartels in the building industry – a field considered to be highly polluted by corruption – “are certain about the political protection they are given”, and when GVH causes them inconveniences, politicians try to put pressure on the office. We attempted to find out some details of that, but nobody from the office was willing to speak to us.

Our source in real estate development – who mainly works with local governments – said they may bribe public administrators every now and then, but “95% of the sums go to politicians”, adding that “it is much cheaper if something can be arranged on a public administration level, as politicians have higher rates”.

The governments usually announce certain anti-corruption packages, but all prove to be inefficient, similarly to the ever-updated versions of public procurement regulations. Our sources said public procurement procedures represented fertile grounds for corruption. “These are terribly bureaucratic, well-protected by rules, offer thousands of loopholes, and this environment provides opportunities for manipulation,” the former head of a multi-billion-forint turnover company explained. We learned that the key aim of these procedures – fair and transparent competition  – does not take place. “If you hear about a project only when you see the announcement, you have no chance of winning it,” the head of an advisory firm said.

A former employee at a law office that specialises in administering public procurement procedures believes that even the announcement of larger tenders are delayed until there is a political decision made on who the winner will be, a claim that was supported by several business executives. “In large-scale state development projects there is a starting fee of 10%, and without that you should not even enter the game,” a leading IT executive said, who called this phase of gaining projects “pre-evaluation”. This happens long before the tender is announced, when the idea has just come up at a ministry or another government body. When a company hears of such plans, it first asks an influential politician whether they should go for the project or not, our sources working – independently of each other – in the IT sector explained.

If the politician says yes, that does not mean that the company is already on the right track. As many as three applicants may be promised that their bids will be favoured. “For the politicians it does not matter who wins. The point is that they get the money,” a former business executive told us.

The “pre-evaluation” phase is followed by “actual sales activity”; when the company must convince those announcing and managing the tender (individuals and offices) to choose their offer. In this phase it is not only who has better connections which counts, or who pays more money in bribes, but also who submits a more professional bid – as some officials “would not lift a finger without getting certain amounts”, while many are impossible to bribe.

In addition to decency, another reason for this is the general fear among decision makers that if any misuse is revealed, they will be the ones who will be charged. A former business executive said that decision makers usually ensure that the winner’s bid is acceptable both professionally and in terms of price. Thefts cannot be prevented in this way, however, because regardless of who wins, the 10% set in the “pre-evaluation” phase will be paid to the politician who provides support.

Mediators, undetectable amounts, self-acquittals

Corruption deals are arranged via mediators; some of these offer their services directly to companies. “They knock on the door, say that they know someone, and that he could arrange things,” a former business executive explained, adding that it is often hard to say whether these people actually have good contacts or they are simply con artists. A high-ranking executive calls them “political hyenas, who cannot really help, but are excellent at hindering things”.

Mediators with real influence and close contact with decision-makers rarely offer services themselves, and so must be approached. “For instance, they went to school or worked together with a particular politician,” a former executive said, adding that there are many of this kind, and that “there are ten different links to a politician”. A source from the real estate development field said that in the case of the Budapest local councils, it is usually lawyers and minor district politicians who mediate in corrupt dealings. His experience indicates that, as a result, it is rare that the company offering the bribe actually meets “the end-point”, namely the politician. If a personal appointment does takes place, then “there is not much to talk about as the conditions have been set long ago”.

This scheme is comfortable for both the briber and the bribed. “When a business executive meets a politician, they may only wink at each other, but would not mention concrete details, and a bag full of money would never go from one to the other,” a former executive explained, adding that “two or three steps are made on the politician’s side, and the same two or three on the company’s side”. The executive of the bribing firm does not necessarily know who settled the deal, and in most cases is only told that “he now has a subcontractor who can arrange things”.

‘You just send the money on a round trip’

Although several sources mentioned examples of actual cash still being paid as bribes, in most cases a mediator is used. The most popular solution seems to be that the winning company concludes an agreement with the enterprise selected by the politician, which will not carry out any real activity but will merely receive the money. There are many such enterprises, some of which are large, high-profile companies, while others are small, unknown limited companies. Their business profile typically includes advisory, marketing or research services, as the result of these is hard to see and their value is hard to estimate. “You pay a daily fee of HUF 160,000 (EUR 568.54), as if you had hired the best advisor, while in reality you only get a typist,” a source explained.

Several tried-and-true methods exist for removing the money. “If you have a group of firms, you just send the money on a round trip via various transactions, which are supported by proper contracts, and finally someone will withdraw the amount as a shareholder’s loan”, a source who works on business misuse at an advisory firm said. Many sources mentioned the use of offshore companies, registered in places such as the Seychelles or the Cayman Islands, where tax rates are fixed and low, and the owners are not named in public registries.

Obscurity is a benefit to those who want to remove dirty money with the help of these companies. However, it may be a tell-tale sign if a company that deals with state commissions frequently buys unusually expensive studies from offshore companies, and so the amounts usually follow more-complicated routes. “You pay the bribe as a dividend to the owner, and then money can be mobilised more freely. If that owner happens to be a foreigner, then he or she is free to conclude the contract for advisory services with an offshore company, and no-one will ever reveal the background,” a specialist in establishing offshore companies said, adding that “paying a dividend also has a disadvantage, namely that the related tax must first be paid, so some of the dirty money will flow back to the state. When the bribe ends up at an offshore company, its owner can use it the way they want, and can even bring it back to Hungary, through his Cayman Islands-registered enterprise, by founding a limited company in Budapest, for instance.”

‘The contract must be kept, even if it is crooked’

It is hard to detect the route taken by the money, and there is certainly no written trace of bribery, yet everyone keeps gentleman’s agreements. “The contract must be kept, even if it is crooked,” the executive of a company with a turnover of billions of forints said, while another source noted that “if I don’t pay they will make life difficult for me”. There is a strong bond of trust between those bribing and those being bribed, which is described by a media firm executive as “the basis of corruption is not how much money is given, but whether it is accepted”.

Mutual dependence is further strengthened by the fact that in most cases there is a post-payment, our sources say. One source working in the real estate development field states that they did not panic when an important decision – supported by a promise of bribery – was not passed by a municipality. “Since you pay afterwards, you have a secure position. After a failed vote you get the explanation that one group did not speak to the other, so they did not know that it was previously arranged,” our source explained, adding that in such cases the assembly usually addresses the issue once again, and when the green light is given, the transfer can be made.

Such an atmosphere of trust makes some of the players of corrupt deals self-confident. The meeting in the hotel lobby mentioned at the beginning of the article was organised in a public place, and the discussion with the politician was carried out at a normal volume. “They did not seem to be afraid at all,” our source said, adding that one of their mediators “often writes in his notebook how to split the money among the players. If next to the name of a local government he writes 20+5+5, it means that HUF 30 million (EUR 106,635) bribe must be divided up correspondingly. But, of course, even if you discovered that notebook, it would reveal nothing”.

However, other sources mentioned that everyone is very careful and circumspect. One of the executives interviewed noted that he put his mobile in a special bag to prevent tapping. A high-ranking executive said that electrical jamming equipment is often switched on in the offices of companies mediating state commissions, or the walls are covered with a metal net that blocks radio waves. “Everyone is terribly nervous,” our source said, adding that when concrete sums come up during talks, they are simply written on small bits of paper, which are later burnt.

Nervousness is further increased by the fact that the authorities have recently uncovered several cases of corruption, and secret service methods were used. “Since the real estate scandal broke in Budapest’s District VII, corruption opportunities have disappeared in many districts,” two independent real estate sources said. “The politicians are scared because of the Hunvald corruption case (that involves District VII mayor György Hunvald, who is currently being held in custody) and that means that nothing can be arranged”, one of them said.

‘If you don’t do it, you can’t get close to the cake’

In relation to the scale of the corruption, only a few cases are uncovered, which is partly due to vigilance, and also the sophisticated techniques of mediating and extracting the money. It is highly probable that a key factor is that corruption is a common phenomenon, not associated with any particular political forces. “The problem of party financing cannot be linked to left-wing or right-wing parties, as all the important political players are in the game,” the study issued by Transparency last year indicates. Our sources, who had had experiences with representatives of all the major political forces, agreed with this statement.

Stopping or at least hindering the theft of public money is also difficult because even those players who say that they have had enough are reluctant to fight against it. “They suffer from it, and everyone frets about it. At professional forums or friendly gatherings, when the issue comes up, everyone seems to feel uncomfortable about having to be involved in such a thing. Let me stress that 99% of the people in question are normal,” the former head of an IT company said, while another source added that “some have become so sick of it all that they have found jobs in different fields”.

Many, while displaying allergic symptoms, still think that they have no other choice. “If you don’t do it, you can’t get close to the cake. Everyone has a family, and you are the breadwinner,” a source said. Another one justified his involvement by saying “I could not get on otherwise. If you are responsible for a project, and you do not succeed, that gives you a bad feeling. This way you can have success.”

Some individuals feel that they are clean, saying that they never bribe anyone, although they admit that they have been involved in deals for state commissions in which they, bending under the pressure coming from above, agreed to involve a subcontractor. Others take a reigned or cynical approach. A business executive of a large company that deals with many state commissions, said “if you live in this country, you have to accept that is how things work. The country is like this. The whole system operates this way.”

– This article was written as part of a Transparency International and Freedom House project, which aims to clean up party financing, and for which several media organs joined forces. Gergely Brückner of Figyelõ principally contributed to this report.

The battle against corruption can be won
Figyelő - June 4th, 2009

Transparency International urges parties to sign anti-graft declaration
Politics.Hu - May 7th, 2009

The Hungarian chapter of Transparency International (TI) on Wednesday urged Hungary's political parties to sign an anti-graft declaration, the organisation told MTI in a statement.
The declaration would oblige the ruling Socialists, and the opposition parties Fidesz-Chrisitan Democrats, Democratic Forum and Free Democrats to abide by a number of anti-corruption rules.

TI hopes that the parties addressed will review their commitment to anti-corruption every year on December 9 -- World Anti-Corruption Day -- and gradually tighten up their ethical expectations. sign anti-graft declaration

Hungary slips in Transparency International ranking
Budapest Business Journal - September 23rd, 2008

Hungary fell eight positions from last year to 47th on Transparency International's 2008 Corruption Perceptions Index.

Hungary fell behind the Czech Republic in the ranking for the first time. It was also behind Estonia and Slovenia.Transparency International's local branch criticized the lack of transparency in Hungary's party and campaign financing and its overly complicated public procurement system in a press release. It also cited the weakness of law enforcement and light sanctions in corruption cases as big problems.

“If no effective action is taken against corruption, Hungary may easily slide down the ladder in the next few years,” the statement said.

Hungary scored 5.1 on a scale of 1 to 10 in the 2008 index, down from 5.3 in 2007. The change is within the statistical margin of error, the statement noted.