Hungary’s controversial Golden Visa scheme: ins and outs
In early March, the Organized Crime and Corruption Reporting Project (OCCRP) launched a series of investigations into the EU member states’ Golden Visa programmes. The investigations show how governments have been trading citizenship or residence rights for investment and the risks such schemes may pose. The Hungarian government, in particular, has been operating, by design, a highly controversial programme. While currently no longer accepting applications, there have been talks that the government may resume the programme after the 2018 parliamentary election.
The Hungarian Investment Immigration Program allows non-European Union citizens to acquire Hungary’s permanent residency status by investing at least €300,000 in special Hungarian government bonds. Different to other Golden Visa schemes, individuals investing in the Hungarian programme are fully repaid after five years with a fixed interest rate of two per cent.
Another unique feature of the programme is that foreigners do not directly invest in the residency government bonds. The investment is made through designated intermediary companies with opaque ownership structures.
Five intermediary companies are currently allowed to sell bonds in different regions of the world. They were selected by the Hungarian Economic Committee of the Parliament without a public procurement process. Except for one, all intermediaries are registered outside Hungary, including in places like Cayman Islands and Cyprus. Little to no information about the real owners of these companies is available.
Applicants to the programme must pay the full investment amount to the intermediary company operating in their region. The intermediary keeps a part of the funds and invests the rest (€271,000) in state bonds. After five years, repayment is made through the intermediary company. Moreover, intermediaries may also charge applicants additional services fees.
According to the latest investigation by OCCRP, “[d]espite the large payments by those seeking residence permits, it is still unclear whether the program made any profit for the Hungarian state. The winners who reaped handsome profits were a handful of offshore companies nobody knew much about.” Hungary’s net loss resulting from the residency bond programme reached approximately 5 billion HUF (€16 million) by the end of 2017.
In numbers
At the time of accepting applications, the Hungarian residency programme was among the most popular residence-by-investment programmes in Europe. Between 2013 and 2017, 6,585 third-country nationals and their 13,300 family members were granted permanent residence permits under the programme. The great majority of investors come from China. During the same period, 5,432 Chinese citizens spent €1.6 billion to buy residency bonds for themselves and their families.
Corruption risks
As with other Golden Visa schemes, Hungary’s residency state bond programme may also be vulnerable to corrupt individuals or other criminals who could misuse the programme to gain access to Europe, launder their money or even escape from justice. While the programme mentions that due diligence and background checks on applicants need to be made, it also promises that the whole application process is concluded in 20 days, raising doubts over how comprehensive these checks can be. There is evidence, for instance, that a Russian national with a criminal record received a permanent residency permit under the programme.
According to new investigations by Direkt, it appears that two Syrian men with controversial backgrounds — one of whom is suspected of being a member of an international money laundering network and another is on a Unites States’ sanction list for assisting Syrian President Bashar al-Assad. The investigation also reveals shortcomings in the due diligence process / security screenings of the Hungarian programme. “[T]he security screening was treated as a formality, an unpleasant, but automatic part of a bureaucratic system. It was not a question whether an applicant will or will not pass the security screening, the only question was when he would do so”, said one of the sources.
There are other features of the programme that may offer opportunities for corruption, including the selection of intermediary companies, the lack of information on their ownership structure, and the generous profit margins on each application.
According to the OCCRP investigation, Hungarian journalists have discovered several links between the main beneficiaries of the residency bond programme and Hungary’s political elite. Among others, the main advisor of Prime Minister Orbán appears to have connections with the Chinese market, where, between 2013 and 2017, intermediary companies made a profit of at least €244 million in service fees related to applications to the programme.
Before any decision to revive Hungary’s residency state bond programme is considered, the government should undertake a critical review of the programme so far. In particular, an analysis of benefits and losses should be carried out. In the event that undue gains by individuals or companies involved in the program are identified, these should be investigated and the funds recovered to benefit the Hungarian people.