Hungary achieves a high level of compliance with the Financial Action Task Force (FATF) 40+9 Recommendations on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), per the 2005 International Monetary Fund's Report on the Observance of Standards and Codes (ROSC). This conclusion is further confirmed by a 2008 U.S. Department of State report. In 2005, the country was fully or largely compliant with 38 of the 40+9 FATF Recommendations. Further, the passage of the 2007 Act on the Prevention and Combating of Money Laundering and Terrorist Financing transposes the third European Union (EU) money laundering directive into Hungarian law, which requires all EU member countries to implement the FATF Recommendations. This Act removes the major shortcomings noted by the 2005 ROSC: gaps in the CFT legal framework and implementation shortcomings in the AML regime in Hungary. A 2007 IMF report also notes that since the 2005 IMF ROSC, Hungary has made further progress in improving its AML/CFT regime. In a recent development, Hungary's Financial Intelligence Unit, the Anti-Money Laundering Department underwent a major organizational overhaul in 2007, when it was moved from the Hungarian National Police to the Hungarian Customs and Finance Guard.

General Overview

The 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) observed that Hungary demonstrated a high level of compliance with the Financial Action Task Force (FATF) 40+9 Recommendations pertaining to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), and had made considerable progress in strengthening its AML/CFT framework and structure. This was evident from the enactment of the 2003 AML Act, which amended and repealed the 2001 and the 1994 Acts on money laundering in Hungary. Per the ROSC, Hungary was fully compliant with 24 Recommendations (R) and 3 Special Recommendations (SR); largely compliant with 11 recommendations; partially compliant with 4 recommendations and 5 special recommendations; and non-compliant with 1 special recommendation. The 2008 report by the U.S. Department of State (DoS) report mentions the passage of a 2007 Act on the Prevention and Combating of Money Laundering and Terrorist Financing Act. This Act transposes the third European Union (EU) money laundering directive into Hungarian law, which requires all EU member countries to implement FATF Recommendations. The Act removes the major deficiencies noted by the 2005 ROSC: gaps in the CFT legal framework and implementation shortcomings in the AML regime. The U.S. DoS also reports that Hungary has been working assiduously to enhance its AML/CFT enforcement regime since the FATF removed the country from its list of Non-Cooperative Countries and Territories (NCCT) in 2003. The report refers to the conclusions of the 2005 IMF ROSC, according to which Hungary was fully or largely compliant with 38 of the 40+9 FATF Recommendations. The 2007 Article IV Consultation report by the IMF also notes that, since the 2005 IMF ROSC, Hungary has made further progress in improving its AML/CFT regime.

As the 2008 U.S. DoS report observes, the Hungarian Financial Supervisory Authority (Penzugyi Szervezetek Allami Felugyelete, or PSZAF) is the integrated financial sector supervisor. The PSZAF supervises all financial services providers for their AML/CFT compliance, with the exception of cash processors, which are supervised by the National Bank of Hungary (Magyar Nemzeti Bank, or MNB). The PSZAF expanded its organization to create a new division, the Financial Forensic Division, to handle money laundering and other financial crimes in 2006. The new division coordinates AML/CFT related supervisory activities, including assisting other PSZAF departments with on-site inspections. Hungary's Financial Intelligence Unit (FIU) is the National Bureau of Investigation's (NBI) Anti-Money Laundering Department (Pénzmosás Elleni Alosztály, or ORFK). The ORFK was originally a unit under the Hungarian National Police (HNP). However, the 2008 U.S. DoS report states that the ORFK has seen a major organizational overhaul in 2007, when it was moved from the HNP to the Hungarian Customs and Finance Guard (Vám- és Pénzügyõrség, or HCFG). The report notes that "although the ORFK still exists and receives STR [suspicious transaction report] data, its future operational capacity under the Hungarian Customs Authority remains unclear." Due to this change, the ORFK has reduced information exchange with foreign counterparts, and the Egmont Group has temporarily suspended information sharing with the ORFK, pending further clarification of the status quo. The 2008 U.S. DoS report states that the ORFK is the national center for receiving and analyzing STRs as well as other money laundering and terrorist financing reporting.

The legal framework for AML/CFT in Hungary got a boost with the passage of the 2007 AML/CTF Act. The Act brings Hungary into compliance with the United Nations (UN) Vienna and Palermo Conventions by broadening the scope of the money laundering offence. The 2005 U.S. DoS report mentions that the anti-money laundering regime in Hungary dates back to 1994, when the first AML Act was enacted. It criminalized money laundering related to all crimes punishable by imprisonment. The 2003 re-codification of the 1994 Act expanded the scope of the law to cover more professions and businesses. Additionally, Article 261 of the 1978 Hungarian Criminal Code (HCC) criminalizes terrorist acts. Per the 2005 U.S. DoS report, Section 303 of the HCC was amended in 2002 "to criminalize as punishable offenses the laundering of one's own proceeds, laundering through negligence, and conspiracy to commit money laundering." A 2003 modification of the HCC criminalizes terrorism and all forms of terrorist financing. A 2007 amendment of the HCC contains provisions that punish individual funding of terrorist acts. The 1998 Act on Criminal Procedures has provisions on terrorist asset forfeiture.

The 2008 U.S. DoS report observes that Hungary is an attractive money-laundering destination for criminal organizations in Russia and Ukraine through criminal activities such as illicit narcotics trafficking, prostitution, trafficking in persons, and organized crime. Real estate fraud and the copying or theft of bank cards is another prevalent economic and financial crime. The report adds that, in 2007, the ORFK received 9,475 STRs, opened 40 cases, and confiscated 971,681,352 Forints (Hungarian currency, HUF). Hungary is a member of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a FATF-style regional body in Europe. Hungary is also a party to the 1999 UN International Convention for the Suppression of the Financing of Terrorism (Terrorism Convention); the 2000 UN Convention against Transnational Organized Crime (Palermo Convention); the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention); and the 2003 UN Convention against Corruption.

The Principles

1. Legal Systems and Related Institutional Measures

CP

The 2005 IMF ROSC notes that Hungary was largely compliant with R 1 relating to the money-laundering offence and fully compliant with R 2 on mental element and corporate liability. The less than full compliance with R 1 was because the scope of the offence was not fully consistent with the Vienna and Palermo Conventions. Also, the money-laundering enforcement regime did not appear effective with a relatively low number of prosecutions and convictions. The 2008 U.S. DoS report notes that Hungary further strengthened its AML/CFT regime in 2007, when it enacted the 2007 AML/CTF Act. This Act transposes the third EU money laundering directive into Hungarian law. It also, per the report, "establishes the legislative framework for the prevention and combat of terrorist financing and complies with international AML standards and requirements." The new Act brings Hungary into compliance with the Vienna and Palermo Conventions of the UN by broadening the scope of the offence to include transfer of proceeds of crime through a non-banking or non-financial transaction. The 2005 U.S. DoS report mentions that the AML regime in Hungary dates back to 1994, when the first AML Act was enacted. It criminalized money laundering related to all crimes punishable by imprisonment. The 2003 re-codification of the 1994 Act expanded the scope of the law to cover more professions and businesses. Additionally, Section 303 of the HCC was amended in 2002 "to criminalize as punishable offenses the laundering of one's own proceeds, laundering through negligence, and conspiracy to commit money laundering."

As the 2005 ROSC indicated, Hungary was partially compliant with SR II regarding criminalization of terrorist financing. This was because criminalization of the financing of individual terrorists was not provided for in the law. However a 2007 amendment of the HCC contains provisions that punish individual funding of terrorist acts, according to the 2008 U.S. DoS report. The amendment provides that "any person sponsoring activities of a terrorist or a terrorist group by providing material assets or any other support faces two to ten years imprisonment." This amendment removes the weakness in the legal framework noted by the 2005 ROSC. Per the same report, Article 261 of the 1978 HCC criminalizes terrorist acts. A 2003 modification of the HCC criminalizes terrorism and all forms of terrorist financing. As for SR III relating to freezing of TF related funds, the 2005 ROSC assessed Hungary as only partially complaint, noting that there were no generally applicable provisions in place to enable immediate freezing of funds identified as terrorist assets. The 1998 Act on Criminal Procedures, per the 2008 U.S. DoS report, has provisions on "immediate seizure, sequestration, and precautionary measures against terrorist assets."

Per the 2005 ROSC, Hungary is largely compliant with R 3 on confiscation and provisional measures. The weakness was mainly noted in limited enforcement as evident from very low number and amount of seizures and confiscations. The 2008 U.S. DoS report observes that the HCC has provisions on asset forfeiture. Assets subject to forfeiture include "assets used to commit crimes, pose a danger to public safety, or derive from criminal activity." All property acquired during the time when the owner was involved with a criminal organization can be confiscated, unless the owner proves that the acquisition was legal. Suspect assets are first frozen by the police or the FIU and then by the relevant banks are informed within 24 hours if they plan to continue the investigation. Forfeitures and seizure of assets are determined by the courts. The forfeiture system also has a provision to release the suspect assets to the owner, on approval by the FIU, on the basis of financial need, such as health or sustenance-related expense.

As noted by the 2005 ROSC, Hungary is largely compliant with R 26 relating to the FIU; fully compliant with R 30 relating to its resources, training, and integrity; and largely compliant with R 32 regarding statistics keeping. The ROSC observes that the FIU does not handle terrorist-financing reporting and the obliged entities are not obliged to file STRs on terrorist financing to the FIU. Further, statistics on investigations, prosecutions, and convictions are inconsistent, and so are the statistics on seizures and confiscations. Hungary's FIU is the ORFK, which is part of the NBI. The 2008 U.S. DoS report states that the ORFK is the national center for receiving and analyzing STRs and other AML/CFT reporting. The ORFK disseminates such reports to law enforcement authorities and is authorized to investigate money-laundering cases, since it also functions as a law enforcement body. Act No. XIX of 1998 on the Hungarian Criminal Procedure was amended in 2008. The amendment transferred the authority to investigate money laundering and terrorist financing crimes and non-compliance with the AML/CTF Act from the HNP to the HCFG. Per the 2008 U.S. DoS report, the ORFK saw a major organizational overhaul in 2007, when it was moved from the HNP to the HCFG. The report notes that "although the ORFK still... receives STR data, its future operational capacity under the Hungarian Customs Authority remains unclear." Due to this change, the ORFK has reduced information exchange with foreign counterparts, and the Egmont Group has temporarily suspended information sharing with the ORFK, pending further clarification. The 2005 ROSC observes that Hungary is largely compliant with R 27 on law enforcement authorities and fully compliant with R 28 on their powers. The report found that the pertinent authorities placed inadequate focus on potential money-laundering offenses. This was evident from the fact that there were relatively few prosecutions and convictions for the offence. The 2005 ROSC recommends that the HCFG be made more competent in investigating financial crimes, law enforcement gain more practical experience in money-laundering investigations and prosecutions, more focus be placed on investigating potential offences, and closer coordination be facilitated between law enforcement authorities in money-laundering investigations.

As noted by the 2005 ROSC, Hungary is partially compliant with SR IX on cross-border declaration and disclosure. This was because there were no provisions in the law to stop or restrain cash couriers or to seize assets suspected of money laundering or terrorist financing. The U.S. DoS report informs that EU Regulation No. 1889/2005 relating to controls of cash entering and leaving the EU addresses the FATF SR IX on cross border declaration and disclosure, and cash couriers. Under the regulation, all movements of cash equal to or more than €10,000 must be declared. The Hungarian Act No. XLVIII of 2007 is based on the above EU regulation and requires custom officials to record the declared information as well as data pertaining to investigations on the declaration, if any. If the information suggests money laundering or terrorist financing, the HCFG is obliged to forward an STR to the ORFK.

2. Preventive Measures - Financial Institutions

CP

According to the 2005 IMF ROSC, Hungary was largely compliant with R 5 relating to customer due diligence (CDD) and R 6 relating to politically exposed persons, and fully compliant with R 7 relating to correspondent banking, R 8 relating to new technologies and non face-to-face business, and R 9 relating to third parties and introducers. The main shortcomings related to gaps in identification of beneficial owners and the lack of the requirement that senior management approval be sought for continuing relationship with a business customer who becomes a politically exposed person. Per 2008 U.S. DoS report, the 2007 AML/CTF Act has expanded the scope of legislation to cover financial services, investment services, insurance industry, commodity exchange services, and postal money orders and transfers. The Act clarifies customer and beneficial-ownership identification measures. It introduces a risk-sensitive approach to CDD, with more detailed CDD rules, including simplified and enhanced CDD measures on the basis of low-risk or high risk customers and business relationships. The Act follows the third EU money laundering directive in defining "politically exposed persons" and exempting financial activity conducted on an occasional or very limited basis. The Act also implements EU Regulation No. 1781/2006 of 2006 on originator information accompanying transfers of funds. Hungarian law also prohibits anonymous savings booklets under Act No. CXX of 2001. Bearer shares are required to be converted to identifiable shares, shares are now subject to transparency requirements, and all owners and beneficiaries require compulsory registration. Anonymous account holders require written police approval to access their accounts.

As noted by the 2005 ROSC, Hungary was fully compliant with R 10 on record keeping and SR VII on wire transfer rules. Hungary was also assessed fully compliant with R 4 relating to financial institution secrecy and confidentiality; R 11 relating to monitoring of unusual transactions; and R 21 pertaining to special attention for higher risk countries. As for R 13 relating to STRs, Hungary was found to be partially compliant and the IMF recommended that the country improve the quality of its STRs and expand it to cover of both terrorist financing and attempted transactions. Hungary was also assessed as non-compliant with SR IV relating to STRs on terrorist financing, since the obliged entities were not required to file terrorist-financing related STRs. According to the 2008 U.S. DoS report, in 2007, the AML/CFT Act was passed requiring all obliged institutions submit STRs related to money laundering or terrorist financing to the ORFK. The Act lays down the information disclosure obligation of institutions, and stipulates that statistics on STRs be maintained to help evaluate the effectiveness of the AML/CFT regime in the country. Internal control procedures, training, and internal communication within reporting institutions are also covered in the AML/CTF Act. Act XXVII of 2007 that amended the HCC introduces revised criminal penalties for non-reporting, because strict penalties in the former regime had led to over-filing of low-quality STRs. Under the amendment, intentional non-reporting is punishable by a maximum two-year imprisonment rather than the previous three years; whereas unintentional non-reporting is no longer a criminal offense. Per the 2005 ROSC, Hungary was fully compliant with R 14 pertaining to protection and no-tipping off, and R 19 relating to other forms of reporting. Hungary was assessed largely compliant with R 25 on guidelines and feedback but the deficiencies did not pertain to the financial institutions.

The 2005 ROSC found Hungary fully compliant with R 15 relating to internal controls, compliance, and audit as well as R 22 relating to foreign branches and subsidiaries. R 18 pertaining to shell banks was also fully adhered to by Hungary. However, in the broad category of the supervisory and oversight system, although Hungary was assessed as fully compliant in relation to R 29 and R 30 on supervisors and their resources, training, and integrity, R 17 relating to sanctions, R 23 relating to regulation, supervision and monitoring and R 32 relating to statistics were only largely complied with by Hungary. The HCC did not impose imprisonment for intentional and negligent non-reporting of STRs. Also, statistics on investigations and prosecutions were found to be inconsistent. As the 2008 U.S. DoS report observes, the PSZAF supervises all financial services providers for their AML/CFT compliance, with the exception of cash processors, which are supervised by the National Bank of Hungary (Magyar Nemzeti Bank, or MNB). The PSZAF expanded its organization to create a new division -- the Financial Forensic Division -- to handle money laundering and other financial crimes in 2006. The new division coordinates AML/CFT related supervisory activities, including assisting other PSZAF departments with on-site inspections. In 2007, the staff resources of this division were increased. The PSZAF also established a standing AML/CTF working group, with representation from financial institutions and their associations. The 2005 IMF ROSC informs that Recommendation No. 1/2004 of the PSZAF details AML requirements and guidance for financial institutions. This recommendation is regularly updated and revised to incorporate international developments, such as revision to the FATF recommendations and the CDD paper by the Basel Committee. The PSZAF conducts fit and proper testing of the owners, shareholders, senior management and other stakeholders during the licensing process and also conducts offsite monitoring and on-site inspections to ensure ongoing AML/CFT compliance by all financial institutions and review the effectiveness of their internal controls policies and practices, and imposes administrative sanctions to rectify identified deficiencies.

As the 2005 ROSC observes, Hungary is fully compliant with the AML/CFT requirements for money/value transfer services (SR VI). Per the 2008 U.S. DoS report, only banks or their authorized agents are allowed to operate currency exchange booths. These exchange houses are under "double supervision" since they are supervised by both the banks' own internal control systems as well as by the PSZAF. The AML/CTF Act contains thresholds for reporting requirements of the exchange enterprises, under which transactions, whether single or multiple-consecutive, equal to or more than 500,000 Forints require the identification of the customer. Any suspicious transaction involving any amount requires the filing of STRs. The U.S. DoS report adds that the 1996 Act on Credit Institutions prohibits the use of indigenous alternative remittance systems that partly or fully bypass the mainstream financial institutions. Further, EU Regulation No. 1781/2006, which came into force on January 1, 2007, contains stipulations on originator information accompanying transfers of funds, and Hungary has implemented the requirements in the AML/CFT Act.

3. Preventive Measures - Designated non-Financial Business and Professions

EN

The 2005 IMF ROSC found that Hungary was partially compliant with R 12 on CDD and record keeping obligations for Designated Non-Financial Business and Professions (DNFBP) and R 16 on STR by the DNFBPs. Per the ROSC, the DNFBPs in Hungary were subject to the same CDD, record-keeping, and STR requirements as the financial institutions. However, the gaps pertained mainly to identification of beneficial ownership and provisions for politically exposed persons. DNFBPs were not obliged to file STRs related to terrorist financing. In addition, the supervisors were advised to improve their guidance and outreach on STR to the DNFBPs so as to enhance both the quality and quantity of the STRs. As for R 24 on the regulation, supervision, and monitoring of DNFBPs and R 25 on guidelines and feedback, the ROSC noted that Hungary was only largely compliant, because the supervisor was understaffed to monitor DNFBPs that did not fall under state or professional supervision and there was no guidance provided to the DNFBPs on CFT. As for R 20 on other Non-Financial Business and Professions (NFBPs) and secure transaction techniques, Hungary was assessed fully compliant by the ROSC. According to the 2008 U.S. DoS report, the 2007 AML/CTF Act has expanded the scope of legislation to cover the following professions: real estate agents, auditors, accountants, tax advisors, casinos, jewelers, lawyers, and notaries. The Act clarifies customer and beneficial-ownership identification measures. It introduces a risk-sensitive approach to CDD, with more detailed CDD rules, including simplified and enhanced CDD measures on the basis of low-risk or high risk customers and business relationships. The Act follows the third EU money laundering directive in defining "politically exposed persons." The report further notes that all obliged institutions are required to submit STRS related to money laundering or terrorist financing to the ORFK under the AML/CTF Act, which lays down the information disclosure obligation of institutions, and stipulates that statistics on STRs be maintained to help evaluate the effectiveness of the AML/CFT regime in the country. Internal control procedures, training, and internal communication within reporting institutions are also dwelt on in the AML/CTF Act.

Per the 2008 U.S. DoS report, the ORFK supervises most DNFBPs, including real estate agents, accountants and tax advisors. Casinos are supervised by the Hungarian Tax and Financial Control Administration. For certain professions, self-regulatory organizations conduct the supervisory role: the Hungarian Bar Association with respect to lawyers, the Hungarian Association of Notaries Public with respect to notaries, and the Chamber of Hungarian Auditors and Auditing Activities with respect to auditors. The Hungarian Trade Licensing Office is in charge of supervising natural and legal persons trading in goods and allowing cash payments above the amount of 3.6 million Forints. The 2008 U.S. DoS report further notes that the 1996 Act on Credit Institutions prohibits offshore financial centers, including casinos. Hungary also does not allow the operation of free-trade zones.

4. Legal Person and Arrangements & Non-Profit Organizations

ID

According to the 2005 IMF ROSC, Hungary was fully compliant with R 33 on legal persons. R 34 relating to legal arrangements was deemed inapplicable in the Hungarian context. However, Hungary was only partially complaint with SR VIII relating to non-profit organizations (NPO). As the ROSC observes "the Hungarian authorities have not yet undertaken a review of the vulnerabilities of their NPO sector" (p. 10); however, the country has drafted the Second National Action Plan of the Interministerial Task Force on Counterterrorism, which spells out plans of such review. The review would cover an FATF concern on whether public fundraising is adequately regulated by Hungarian law. NPO oversight is still framed by laws and jurisdictions that predate the establishment of the NPO sector, and therefore may not comprehensively address the size and complexity of the sector and its concomitant supervisory requirements. There is little updated information on whether the 2007 AML/CTF Act has provisions on this sector.

5. National and International Co-operation

EN

According to the 2005 IMF ROSC, Hungary was fully compliant with R 31 on national cooperation and largely compliant with R 32 on statistics. Per the 2008 U.S. DoS report, the ORFK has seen major organizational overhaul in 2007, when it was moved from the HNP to the HCFG. Due to this change, the ORFK has reduced information exchange with foreign counterparts. The Egmont Group, of which the ORFK is a member, has temporarily suspended information sharing with the ORFK, pending further clarification of the status quo. The 2005 ROSC found Hungary partially compliant with R 35 and SR I on UN Conventions and instruments. This was because although Hungary was a party to the UN Terrorism Convention, the country's legal framework and implementation was not consistent with the requirements of the Convention or the UN Security Council Special Resolutions. Also, the Palermo Convention had not yet been ratified and implemented and the scope of the money-laundering offense was not fully consistent with the Vienna Convention. However, according to the 2008 U.S DoS report, the 2007 AML/CFT Act brings Hungary into compliance with the Vienna and Palermo Conventions of the UN by broadening the scope of the ML offence. Hungary is a party to the 2000 Palermo Convention, the 1988 Vienna Convention, and the 2003 UN Convention against Corruption. Hungary is also a member of MONEYVAL, a FATF-style regional body in Europe.

Per the 2005 ROSC, Hungary was fully compliant with all FATF Recommendations related to mutual legal assistance (MLA), viz., R 36, R 37, R 38, and SR V, except R 32 because there are no detailed or adequate statistics on MLA. The 2008 U.S. DoS report states that Hungary and the United States have a Mutual Legal Assistance Treaty. They also have a mutual information-sharing arrangement that is non-binding and is "designed to enable U.S. and Hungarian law enforcement to work more closely to fight organized crime and illicit transnational activities." Hungary also has bilateral agreements on cooperation in the areas of combating terrorism, drug trafficking, and organized crime with 41 other countries. The 2005 ROSC found Hungary fully compliant with 37 on extradition, R 39 on dual criminality, and SR V on international cooperation. For other forms of international cooperation, too, Hungary was assessed fully compliant.