In Hungary, private equity funds have become a vehicle to hide wealth and to channel public money into private pockets. This has been facilitated by a deficient regulatory environment that fails to ensure the transparency of how these funds operate, including information on the vast amounts of public money they receive – according to a fresh study published today by Transparency International (TI) Hungary. Entitled Regulatory loophole serving illicit financial flows, the study finds that Hungary’s anti-money laundering law breaches European Union standards by failing to mandate the registration of beneficial ownership information for private equity funds. Due to this shortcoming, the European Commission in July started an infringement procedure against Hungary.
Hungary has been a safe haven for the owners of locally registered private equity funds: in 2023, their names were removed from the official register of beneficial owners of Hungarian companies and organisations. The move followed the publication of an investigative article in the Hungarian media that looked into the entangled ownership structure of some of the striving private equity funds, using information from the registry. Today, no comprehensive information is available on the beneficial owners of private equity funds, not even for Hungarian public authorities. In 2024, the opacity further increased by banning public access to the complete ownership data platform managed by the Hungarian Tax Authority.
Hungary’s anti-money laundering legislation lacks provisions for private equity funds. TI Hungary signalled this loophole to the European Commission’s Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), which confirmed in its response that Hungary has the obligation to hold accurate and complete beneficial ownership information for private equity funds in its national register. Therefore, in July 2024, the Commission started an infringement procedure against Hungary for the incomplete transposition into the Hungarian legal system of the bloc’s anti-money laundering rules. In addition, the EU’s recently updated anti-money laundering rules, which Hungary will have to adopt by 2026, include new provisions with regards the identification of beneficial owners.
Being able to conceal the identity of beneficial owners of private equity funds entails serious money laundering risks. In its Rule of Law report on Hungary published in July 2023, the European Commission highlighted this risk and recommended that Hungary should increase the transparency of private equity funds. The Commission argued that such funds “play a role in hiding ill-gotten gains.”
TI Hungary’s study finds that capital investments of obscure origin may constrain market competition, especially if public money is involved. This inherent risk is increased by the fact that public investments into private equity funds have become a key instrument in stimulating the Hungarian economy. Through the state-funded Crisis and Tourism Capital Programmes, which were launched during the Covid-19 pandemic, the Hungarian Development Bank (MFB) has invested public money worth 400 billion forints into newly established private equity funds, of which 175 billion forints went to fund management companies linked to István Tiborcz, the son-in-law of Prime Minister Viktor Orbán.
At the same time, state-funded capital investments are characterised by lack of transparency, with tailor-made regulations bending the investment rules in favour of government cronies and helping to hide their identity. Companies acquired by private equity funds often also enjoy other forms of state support, such as winning public procurement tenders or getting state aid. Thus, private equity funds are not only used to conceal the final owners, but also to divert public money, while both their operation and the modalities of state-funded capital investments remain opaque.
TI Hungary has made recommendations to improve the transparency of private equity funds. These include: the National Bank of Hungary publishing detailed aggregate data on private equity funds, keeping a complete record of their beneficial owners in the database of the Hungarian Tax Authority and in line with relevant EU rules, and regularly checking and improving the quality, timeliness and completeness of the data. Furthermore, in line with the recommendations of the Court of the European Union, we recommend giving the media and civil society organisations access to information in the beneficial owners’ registry. The study also makes recommendations to increase the transparency of state-funded capital investments, for example by disclosing adequate information on the selection of beneficiaries of capital investments, as well as on their main activities and track records in the relevant fields, as public money is not a private matter.
