## Detailed Assessment ## Source details **Canonical URL:** [Detailed Assessment](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05348.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05348.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05348.pdf.json) --- ### I. Preface - Assessment basis: - Forty Recommendations 2003 and Eight Special Recommendations on Terrorist Financing 2001 of the Financial Action Task Force (FATF). - AML/CFT Methodology 2004. - Special Recommendation IX of October 2004 concerning cash couriers included using the updated Methodology for the Special Recommendation IX of February 2005. - Mission timing and participation: - On-site mission: February 21 to March 4, 2005. - Assessment team: Mr. Kiyotaka Sasaki (MFD), Mr. Paul Ashin (MFD), Mr. Giuseppe Lombardo (LEG), Mr. Dirk Merckx (Public Prosecutor of Belgium); MONEYVAL assessor Mr. Herbert Zammit LaFerla joined on February 21–22, 2005. - Scope of work: - Review of laws, regulations, guidelines, institutional framework, regulatory and supervisory systems, and implementation/effectiveness for financial institutions and DNFBPs. - Meetings with officials and private sector representatives; list set out in Annex 1. ### II. Executive Summary — Key Findings and Context - Situation of Money Laundering (ML) and Financing of Terrorism (FT) - Reported prosecutions for money laundering in last four years: seven. - Predominant predicate offenses cited: fraud, misappropriation, illegitimate financial service activity. - Assessment observation: expectation that ML prosecutions should be higher given predicate crime presence. - Terrorism: few terrorist-related cases encountered; those present related to domestic terrorism (e.g., hostage-taking), not international terrorism in the strict sense. - Financial sector and DNFBPs (as of September 2004) - Financial sector composition: - 32 banks, 5 specialized credit institutions, 178 cooperatives, 199 financial enterprises, 18 investment enterprises, 24 investment funds, 65 insurance companies, 168 pension/health related funds. - Supervision: - All supervised by the Hungarian Financial Supervisory Authority (HFSA). - HFSA established April 1, 2000; lacks power to issue legally-binding rules/regulations; issues guidelines, recommendations, model rules and can invoke sanctions; plays important role with NBH in drafting legally-binding Decrees issued by the Ministry of Finance (MOF). - DNFBPs: - Supervision groups: Casinos (Hungarian Gaming Board, HGB); lawyers/notaries/auditors (professional bodies/chambers); other businesses/professions (accountants, real estate agents, high-value goods dealers, etc.) directly by the Financial Intelligence Unit (FIU). - DNFBP count: approximately 50,000 individuals and businesses. - Chamber sizes: Notaries 304 members; Auditors 5,900; Lawyers 9,000. - Casinos and gaming: - Six casinos had net gaming income of HUF 10.1 billion (US$46 million) in 2004; net gaming income of all 20,000 gaming houses: HUF 70 billion (US$318 million). - Nonprofit organizations (NPOs) - Approximately 49,000 NPOs. - Total receipts in 2003: over HUF 731 billion (US$3.26 billion). - Sector characteristics: relatively high level of state support and relatively low level of private donations. ### III. Legal Systems and Related Institutional Measures — Key Gaps and Recommendations - Legislative progress: - Revised AML Act of 2003 replaced 2001 revision of 1994 Act; legislative framework extended to nonfinancial businesses and professions. - Money laundering offense (Arts. 303 and 303/A HCC): - Scope limitations: ML limited to use within “business activities” and/or financial or bank transactions to conceal origin; may not cover transfers by non-banking/non-financial means, concealment/disguise outside business activity, or use of proceeds outside business activity. - Definition of “item” in Art. 303 not explicitly repeated in Art. 303/A; authorities attribute to a drafting error. - Extraterritoriality: Art. 3 and Art. 4 HCC apply subject to dual criminality and conditions described. - Penalties: - Art. 303: imprisonment not to exceed five years; in serious circumstances imprisonment between two to eight years. - Art. 303/A: imprisonment not to exceed two years; in serious circumstances imprisonment not exceeding three years. - Observed effectiveness: during last 4 years there were 7 prosecutions for ML which have led to 2 convictions. - Recommendation: enlarge scope of the ML offence to cover all circumstances set forth by the Vienna and Palermo conventions; harmonize Art. 303 and 303A so same definition of “item” applies. - Financing of Terrorism (Art. 261 HCC): - Primary FT provision criminalizes terrorist acts and provision of material assets for commission of these acts by a terrorist group. - Gap: Art. 261 subsection 5 criminalizes provision/collection of funds for terrorist groups but excludes financing or assistance provided to individual terrorists (definition of “terrorist group” requires three or more persons). - Compliance assessment: SR.II — Partially compliant. - Recommendation: criminalize financing of terrorist acts which are not committed or intended to be committed by a terrorist group (i.e., financing individual terrorists). - STRs, FT reporting and freezing powers: - No legal obligation to report transactions based on suspicion that funds may be relevant to terrorism; AML Act lacks provision to suspend transactions based on suspicions of FT. - Hungarian Customs and Finance Guard (HCFG) not under reporting obligation regarding suspicious cross-border movements of valuables related to FT; appear to lack right to freeze such assets. - No domestic legislation implementing UNSCRs 1267 and 1373; EC Regulations 881/2002 and 2580/2001 are self-executing but gaps remain in freezing nonbanking/financial assets. - Recommendations: - Establish legal basis to report STRs related to FT; impose supervisory oversight for FT reporting; authorize immediate freezing of terrorism-related assets. - Strengthen HCFG powers and sanctions; implement domestic legal basis for UNSCRs where necessary. - Institutional responsibilities: - MoF: regulatory framework for ML main responsibility. - MoFA: monitoring compliance with counterterrorism resolutions/regulations and coordinating implementation of EU and UNSC sanctions. - FIU (NPHQ): receipt/analysis/coordination of STRs; supervises DNFBPs without state or professional supervision (accountants, tax advisors, real estate agents, dealers in precious stones/metals). - Anti-Money Laundering Interministerial Committee (established 2001) and Interministerial Working Group Against Terrorism (Government Resolution 2112/2004) exist. ### IV. Preventive Measures — Financial Institutions - AML Act mandates: - Customer due diligence (CDD), record keeping, STR reporting, internal controls. - HFSA Recommendation No.1/2004 provides detailed requirements and guidance; HFSA reviews/updates Recommendation. - HFSA issued model rules and reviewed/approved internal AML procedures/regulations of all financial institutions. - HFSA enforces compliance via off-site monitoring, on-site inspections, and administrative sanctions. - Beneficial ownership: - Weakness: when a client acts on behalf of another, service providers only required to collect limited information on beneficial owner (Section 6(2) vs Section 5(1)); assessment: data collected on beneficial owners materially less than on direct clients without justification. - Recommendation: require full information for identification of beneficial owners via AML Act and HFSA supervisory rules. - Anonymous deposits: - Amendment of Law-Decree No.II of 1989 phased out anonymous savings deposits; re-identification required by March 31, 2004 with transaction refusals after April 1, 2004 for non-reidentified customers. - Transformation outcomes reported: more than 95 percent of previous anonymous deposits (in terms of value) transformed to registered; number of anonymous deposits declined from 5.2 million accounts in January 2002 to 2.4 million accounts in February 2005 (decline by 54 percent); average value fell from HUF 86 thousand to HUF 6 thousand. - CDD and wire transfers: - Occasions for CDD include establishment of business relationship, occasional transactions over HUF 2 million, any suspicion of ML. - Cross-border wire transfers: Section 5(8) requires transfers be accompanied by originator name, address and account number; NBH Decree No 9/2001 requires name, address and bank account number on payment orders and permits receiving banks to refuse orders without these. - PEPs and correspondent banking: - Recommendation No.1/2004 requires enhanced attention to PEPs and senior management involvement for account establishment; no explicit requirement for senior management approval when a customer subsequently becomes a PEP. - HFSA updated Recommendation No.1/2004 in April 2005 to add detailed correspondent banking requirements. - Internal controls and MLRO: - Section 11(3) AML Act requires internal procedures/regulations approved by HFSA; Model rules and Recommendation No.1/2004 set MLRO, training, internal audit, screening and reporting expectations. - MLRO has unlimited access to CDD and transaction records and is responsible for forwarding STRs to FIU; financial institutions must notify FIU of MLRO appointment within 5 days. - Supervision and sanctions: - HFSA approved more than 2000 internal procedures/regulations; conducts on-site inspections at least every two years; HFSA staffing around 540 supervising 689 firms (September 2004). - Administrative sanctions available: warning, fines, license withdrawal/restriction, dismissal requests, disciplinary action; HFSA actions in 2003–2004 include resolutions to insurance companies and banks, fines, withdrawal of licenses for bureau de change. - Criminal sanction for failure to report: HCC Section 303/B — intentional failure felony up to three years; negligent failure misdemeanor up to two years or other penalties; assessment: criminalization of negligent nonreporting may have produced defensive reporting and low STR quality. ### V. Suspicious Transaction Reporting (STRs) and the FIU - STR volumes and reporting breakdown (2001–2004) - Total STRs received: - 2001: 1,628 - 2002: 6,271 - 2003: 12,364 - 2004: 14,120 - Financial institutions: 1,512 / 5,032 / 10,764 / 12,170 - Cooperative (savings) banks: 48 / 876 / 905 / 1,167 - Accountants: - / - / 2 / 7 / 174 (source lists multiple dashes; accountants reported 174 in 2004) - Notaries: 1 / 0 / 51 / 35 - Casinos: 0 / 1 / 1 / - - Bureaux des changes: 13 / 169 / 369 / 456 - Insurance companies: 2 / 53 / 41 / 83 - Securities companies: n.a. / 28 / 66 / 86 - Pawnbrokers: - / - / - / 4 / 17 (as listed) - Customs and Finance Guards: 5 / 3 / 6 / - - Note: FIU received 1,186 identification forms + 18 other requests from the Customs and Finance Guard above STRs in 2004. - STR quality and outcomes: - FIU reports many STRs are low-quality “defensive reporting”; typical STRs lack analysis beyond transaction data. - 14,120 STRs in 2004 resulted in only 20 cases turned into investigations; apparently no prosecution started out of an investigation arising from an STR. - FIU staffing and IT: - ML Department: 42 posts (19 sworn officers, 16 civil servants, 7 public employees), 36 filled (as of Feb 2005). - IT limitations noted: current IT unable to sort reports by domestic/foreign, cross-border, total money value; enhanced software planned for 2005 to receive electronic STRs and enable link analysis. - FIU functions and remit: - FIU placed within National Police Headquarters (NPHQ); FIU is member of Egmont Group since 1998. - FIU responsibilities: receive STRs, conduct preliminary analysis, coordinate investigations, supervise DNFBPs without state/professional supervision. - FIU not legally responsible for CFT matters (CFT handled by separate Counter Terrorism and Extremism Department); no legal provision requiring SPs to report suspicions of FT to FIU. - Recommendation: place responsibility for CFT matters with FIU; establish clear obligation to report STRs related to FT; consider moving supervision of DNFBPs outside police-based FIU; continue FIU software upgrade and improve STR analysis and statistics. - FATF compliance (FIU-related) - R.26 — Largely Compliant (observed weakness: CFT not covered by the FIU; no legal obligation to report to FIU STRs related to FT) - R.30 — Compliant - R.32 — Compliant ### VI. Confiscation, Freezing, Seizing, Custody and Forfeiture - Pre-investigative administrative freezing: - Under Section 1 of Act XV of 2003 service providers may suspend execution of suspicious transactions and immediately notify the FIU-NPHQ; FIU must notify service provider in writing within 24 hours or the administrative freeze is lifted. - Investigative/seizure and sequestration (Criminal Procedure Code provisions) - Seizure (Sections 151–158 HCPC): objects as means of evidence or subject to confiscation; competent authorities: investigative authorities and prosecutor; seizure implies physical taking and deposit. - Sequestration (Section 159 HCPC): suspension of disposal rights (e.g., bank accounts, transfer of property rights); court order required for sequestration of real estate; sequestration may be ordered if property not in possession of defendant; protections include termination where cause ceases, investigation ends, time limitation expires, or proceedings conclude without forfeiture. - Precautionary measures (Section 160 HCPC) to guarantee sequestration. - Confiscation and forfeiture: - Confiscation mechanism described in Section 77 HCC; confiscated assets become state property. - Section 77/B HCPC allows forfeiture of goods including financial gain/advantage resulting from criminal activities; in organized crime cases assets obtained during involvement subject to forfeiture until proven otherwise; burden of proving property legitimate falls on defendant (reversal of burden), provision not yet used. - Protections for bona fide third parties: good-faith acquisition may prevent forfeiture of property though related sum may be forfeited from defendant. - Civil forfeiture: - No system of civil forfeiture in Hungarian criminal procedure. - Identification/tracing: - No specific orders to identify and trace assets beyond normal criminal procedure powers. - Operational observations: - Very limited number and amount of seizures and confiscations reported; assessment recommends increasing seizures/confiscations, better linkage with investigations, and considering giving FIU statutory authority to freeze assets and suspend transactions. - Compliance with FATF Recommendation R.3: - R.3 — Largely Compliant (observed weakness: very limited number and amount of seizures and confiscations) - Freezing for terrorist financing (SR.III): - Freezing under criminal procedure is possible but court-ordered sequestration may be time-consuming. - EU regulations (implementing UNSCR 1267) operate, and Government Decree 306/2004 deals with unfreezing/exemptions. - Potential weakness: lack of general obligation for financial institutions to file STRs on suspicion of FT; Section 261 HCC requires reporting upon “reliable information” not mere suspicion. - FATF SR.III: Partially compliant (observed weakness: no generally applicable immediate action for freezing under Hungarian law) ### VII. Law Enforcement, Prosecution, Courts and Case Statistics - Law enforcement and FIU interface: - NPHQ investigates ML generally; money laundering department competence limited to cases where perpetrator of predicate and ML are different persons; self-laundering competence handled by department investigating predicate offence. - Police nationwide strength about 42,000; Customs and Finance Guard strength reported as 6,666. - Co-ordination centre for fighting organized crime (established Act CXXVI of 2000). - Prosecution and courts: - Prosecutor General heads Office of public prosecutor; total number of prosecutors about 2,500. - Only county courts have competence to deal with terrorism (Section 261 HCC) and intentional money laundering (Section 303 HCC). - Training and capacity: - Extensive training programs (US Treasury, FinCEN, Phare, U.S. DOJ/ILEA, national programs); specialized training for investigators and prosecutors. - Crime and ML statistics (investigations started / decisions to cease / suggestions to prosecute) 2001–2004 (selected): - Misuse of narcotic drugs: 4.198 / 872 / 1.925 - Unauthorized financial services: 315 / 131 / 132 - Money laundering: 25 / 7 / 7 - Fraud: 18.766 / 4.130 / 10.206 - Total economic crimes: 10.121 / 3.290 / 4.160 - Total crimes that became known: 206.468 / 85.168 / 64.697 - Prosecution outcomes: - Incoming files at prosecution office: about 650.000 per year. - Criminal cases brought before the courts: 108.474 in 2002; 105.406 in 2003. - Success rate of cases before court: 96.5 percent in 2002; 96.4 percent in 2003. - Data from January 2005 Questionnaire (prosecution office): 7 cases of prosecution related to money laundering; two judgments of conviction obtained; one acquittal. Sentences cited: one case fine and forfeiture of HUF 500.000; second case 1 year and 8 months imprisonment, 2 years ban from public affairs and a fine of HUF 200.00. - STR impact on investigations: - FIU reported that of approximately 15,000 STRs received in 2004: 20 open investigations launched; 9 covert investigations; a number of investigations handled by other police services than the Money laundering department. - Seizure and forfeiture operational figures: - Money laundering investigations results: 5 seizures made; 33 sequestrations; 1 forfeiture ordered. - Total amount of seizure reported: HUF 6 billion. - Hungarian progress report 2003: in two different ML cases the equivalent of EUR 5 million was frozen. - Terrorism-related cases and freezing: - Authorities report two convictions linked to sending/receiving funds related to internationally listed Islamic funds by foreigners residing in Hungary: one sentence 1 year and 5 months imprisonment; second case 5 years for each defendant. - 2005 Questionnaire reports: 16 investigations of terrorism between 2002 and 2004; 5 indictments and 2 convictions (noting inconsistencies in statistics). - Asset freezing in terrorism cases: one case where EUR 450.000 was seized but released afterwards as case was dropped. - Assessment: - Observed weakness: insufficient focus on potential ML offenses and relatively low number of prosecutions and convictions; statistics inconsistent across stages. ### VIII. DNFBPs — Implementation, Supervision and STRs - Coverage: - DNFBP obligations: CDD, record-keeping, STR requirements; beneficial ownership CDD deficiency applies to DNFBPs as in financial institutions. - High-value goods dealers: required to record cash transactions above HUF 2 million (US$11,000). - Operational weaknesses and supervision: - Relatively few DNFBPs have filed STRs; possible cause: novelty of AML/CFT issues in DNFBP sectors. - Full incorporation of DNFBPs requires active outreach, training, awareness-raising by authorities, and work with professional organizations. - Strength of supervision varies: - Casinos: under most vigorous supervision (HGB) — six casinos licensed to operate live games; HGB conducted 26 specialized AML/CFT on-site examinations since new AML law; casinos covered by AML law. - Professional Chambers (lawyers, notaries, auditors): aware of responsibilities, have disseminated materials; oversight has not resulted in sanctions. - DNFBPs without state/professional supervision (accountants, real estate agents, dealers in precious stones/metals): supervised by FIU; FIU conducted 254 inspections as of Feb 2005 and found 21 cases of violation. - DNFBP STR statistics: - STR filings by DNFBPs: 2001: 1; 2002: 7; 2003: 65; 2004: 211 (most in 2004 from accountants and notaries); lawyers, real estate agents and precious goods dealers filed none to date (at time of assessment). - Internal controls and training: - DNFBPs required to establish internal AML/CFT rules based on models; businesses with more than 10 employees must have a compliance officer and conduct training. - Compliance with FATF Recommendations for DNFBPs: - R.12 — Partially Compliant (beneficial owner identification deficiency) - R.16 — Partially Compliant (low STR numbers from some DNFBPs, no FT or attempted ML reporting requirements) - R.17 — Compliant - R.24 — Largely Compliant (supervision of DNFBPs without state/professional supervision understaffed) - R.25 — Largely Compliant (no guidance on CFT for DNFBPs) ### IX. Legal Persons, Arrangements, Nonprofit Organizations (NPOs) and Beneficial Ownership - Company registration and legal persons: - Acts: Act IV of 1959 Civil Code; Act CXLV of 1997 on Company Register; registration constitutive; Company Registers held by Company Courts. - Article 12 mandatory data for entities includes registration number, name, registered office, deed of foundation, principal activity, subscribed capital breakdown, names/addresses of persons with representation power, and all bank accounts. - Legal arrangements: mission informed legal arrangements other than legal persons do not exist in Hungary; representative offices of foreign trusts could be registered as “direct commercial representative office(s)”. - Beneficial ownership access: - Company registration system is computerized and publicly accessible; courts rely on AML identification requirements via lawyers/notaries preparing foundation deeds. - Recommendation: strengthen beneficial owner identification process in AML legislation to ensure full information on legal and natural persons is taken. - FATF R.33 compliance: Compliant. - Nonprofit organizations (SR.VIII): - Authorities have not undertaken a review of vulnerabilities of the NPO sector; draft of Second National Action Plan reportedly contains plans for such a review. - Registered NPOs: over 49,000; NPO finances in 2003: reported income HUF 731 billion (US$3.26 billion). Income sources: state payments/tax refunds 41 percent (HUF 302 billion/US$1.35 billion); membership fees and income 28.8 percent (HUF 210 billion/US$940 million); secondary business activities 15 percent (HUF 110 billion/US$493 million); donations 13 percent (HUF 95 billion/US$424 million). - “1 percent” of income tax designation amounted to 0.9 percent of NPO revenues (HUF 6.6 billion/US$30 million). - NPO supervision: registration with County or Metropolitan Court; annual reports published but not in central registry; prosecutors supervise about 1,000 NPOs annually. - SR.VIII — Partially Compliant (recommendation: conduct NPO sector review; strengthen legal basis for supervision and oversight over fundraising). ### X. International Cooperation, Conventions and UNSCRs - Conventions and UN Special Resolutions: - Vienna Convention: signed August 22, 1989; ratified November 15, 1996. - Palermo Convention: signed December 12, 2000; not yet ratified. - FT Convention: signed November 30, 2001; ratified October 14, 2002. - Assessment: definitions of ML (Arts. 303/303A) and FT gaps mean partial consistency with Vienna and FT Convention; R.35 — Partially Compliant. - Recommendation: ratify and fully implement Palermo Convention; fully implement Vienna and UN Convention on FT; provide domestic legislation implementing UNSCRs 1267 and 1373. - Mutual legal assistance and extradition: - Primary laws: Act XXXVIII of 1996 on international legal assistance in criminal matters; Act CXXX of 2003 on EU cooperation in criminal matters. - Extradition: rules in Act XXXVIII of 1996 and Act CXXX of 2003 (European arrest warrant regime); for Annex I offences including terrorism (Section 261) and money laundering (Sections 303/303/B) surrender without dual criminality for listed offences; statistics on extradition not provided. - Asset sharing: no provisions in Hungarian law; Ministry of Justice awaits EU framework decision; asset sharing possible case-by-case. - Other cooperation: - Hungary concluded cooperation agreement with Europol in 2001 and became full member on September 1, 2004. - NEBEK (International law enforcement cooperation centre) located within NPHQ provides 24-hour service; staff 83 (69 employed due to restrictions); handled 51,631 messages in 2002 and 46,350 in 2003. - FATF Special Recommendations compliance highlights: - SR.IV (FT STR reporting) — Non-compliant (no legal obligation for reporting STRs related to FT). - SR.IX (Cash couriers) — Partially compliant (no authority to stop/restrain or seize on suspicion of ML/FT in all circumstances). - SR.III (Freezing for FT) — Partially compliant. ### XI. Cash Couriers (SR.IX) — Description and Issues - Declaration requirement (Article 7 AML law): - Any person crossing Hungarian frontier carrying cash, traveler's checks, international money orders, transferable securities or money market instruments worth HUF 1 million or more must declare in writing to customs. - Enforcement and sanctions: - HCFG enforces declarations; sanctions for failure/false declaration: administrative fine of HUF 50.000 (appr. US$250); assessment: sanction not effective/dissuasive and HCFG lacks powers to seize/freeze valuables on suspicion of ML/FT. - Operational data (2003/2004): - 2003: 1,443 in-bound reports; 1,146 out-bound reports; 1,196 transit cases; 24 cases detected of failure to declare. - 2004: 925 in-bound reports; 410 out-bound reports; 506 transit cases; 24 cases of failure to report (22 referring to shipment/mailing detected at Budapest airport). - HCFG powers/limitations: - HCFG empowered under Article 36 CPC for various investigations but not specifically for ML or FT; cannot freeze/seize valuables subject to declaration on suspicion of ML/FT; can ask for origin documentation but not stop/retain valuables if declaration and supporting documents are in order. - HCFG reporting: Customs and Finance Guards STRs: 5 (2001), 3 (2002), 6 (2003); subsequent agreement with FIU limited STRs to effective ML suspicion; in 2004 HCFG submitted 364 STRs to FIU. - Recommendations for SR.IX: - Apply identification, record keeping and reporting requirements to FT. - Give HCFG authority to stop/restrain cash to ascertain ML/FT evidence. - Increase sanctions to be effective and dissuasive. - Allow immediate seizure where cash relates to ML/FT. ### XII. Recommended Action Plan — Key Priorities (selected/high-level) - Criminalization/legal reform: - Enlarge the scope of ML to conform to Vienna and Palermo Conventions. - Harmonize Art. 303 and 303A definitions (esp. “item”). - Create a separate provision for FT covering financing of individual terrorists. - Confiscation/freezing: - Consider giving FIU statutory authority to freeze assets and creating administrative freezing windows (reasonable period prior to criminal investigation). - Increase number and amounts of seizures/confiscations; better link seizure/confiscation to investigations. - FT freezing and STRs: - Create legal authority for financial institutions and FIU/Police/Prosecutor to freeze assets on suspicion of FT. - Establish clear legal basis for reporting STRs related to FT and ensure supervisory oversight. - Provide procedures for de-listing and un-freezing for UNSCR-based measures. - FIU capacity and DNFBP supervision: - Place CFT responsibility with FIU; consider supervisory function over DNFBPs outside police-based FIU. - Upgrade FIU IT and analysis; require electronic STRs; improve STR quality and statistics linking to predicate offences. - Increase outreach, training and supervision resources for DNFBPs, especially those not supervised by professional bodies. - Law enforcement/prosecution practice: - Strengthen HCFG AML/CFT competences; emphasize financial aspects of investigations. - Focus organized crime investigations more on ML offenses and seize criminal profits aggressively. - Review criminal penalties for negligent non-reporting (Section 303/B HCC) to reduce defensive reporting and improve STR quality. - NPO sector: - Conduct a comprehensive review of NPO vulnerabilities; strengthen transparency and supervision; improve oversight of fundraising. ### XIII. General information on Hungary (selected facts) - Location: East-Central Europe (bordering Austria, Slovakia, Ukraine, Romania, Serbia, Croatia, and Slovenia). - Land area: 93,030 square km. - Population: 10,300,000. - Capital: Budapest (2 million inhabitants). - Currency: Hungarian Forint (HUF). - Transition milestones: first multiparty elections in 1990; joined NATO in 1999 and the EU in 2004. - Form of government: Republic (parliamentary democracy). - Head of state: Ferenc MÁDL (since August 4, 2000). - Head of government: Prime Minister Ferenc GYURCSÁNY (since September 29, 2004). - National Assembly: unicameral Országgyűles, 386 seats; members serve four-year terms. - Legal system: Civil Law; Constitution dated August 18, 1949 with revisions; Hungary joined the EU on May 1, 2004. - Cash usage: ratio of average cash in circulation in 2004 is about 7 percent compared to the GDP on current prices (according to the NBH). *Source: IMF staff assessment contained in document _cr05348 (2005).* ### 1. Detailed Assessment ................................................................................................. ### 1. Detailed Assessment ### I. Preface - Assessment basis: - Forty Recommendations 2003 and Eight Special Recommendations on Terrorist Financing 2001 of the Financial Action Task Force (FATF). - AML/CFT Methodology 2004. - Special Recommendation IX of October 2004 concerning cash couriers was included using the updated Methodology for the Special Recommendation IX of February 2005. - Mission timing and participation: - On-site mission: February 21 to March 4, 2005. - Assessment team: Mr. Kiyotaka Sasaki (MFD), Mr. Paul Ashin (MFD), Mr. Giuseppe Lombardo (LEG), Mr. Dirk Merckx (Public Prosecutor of Belgium); MONEYVAL assessor Mr. Herbert Zammit LaFerla joined on February 21–22, 2005. - Scope of work: - Review of laws, regulations, guidelines, institutional framework, regulatory and supervisory systems, and implementation/effectiveness for financial institutions and DNFBPs. - Meetings with officials and private sector representatives; list set out in Annex 1. ### II. Executive Summary — Key Findings and Context A. General Situation of Money Laundering and Financing of Terrorism - Prosecutions and criminal activity: - Reported prosecutions for money laundering in last four years: seven. - Predominant predicate offenses cited: fraud, misappropriation, illegitimate financial service activity. - International and domestic reports indicate presence of other profit-making crimes (e.g., drug-related offenses) and organized crime families. - Assessment observation: expectation that ML prosecutions should be higher given predicate crime presence. - Terrorism: - Few terrorist-related cases encountered; those present related to domestic terrorism (e.g., hostage-taking, other serious offences endangering public order), not international terrorism in the strict sense. Overview of Financial Sector and DNFBPs - Financial sector composition (as of September 2004): - 32 banks, 5 specialized credit institutions, 178 cooperatives, 199 financial enterprises, 18 investment enterprises, 24 investment funds, 65 insurance companies, 168 pension/health related funds. - All supervised by the Hungarian Financial Supervisory Authority (HFSA). - Money transfer services and currency exchange activities licensed and supervised by HFSA. - HFSA: - Established April 1, 2000 as single supervisor of the financial sector. - Lacks power to issue legally-binding rules/regulations; can issue guidelines, recommendations, model rules and invoke sanctions. - Plays important role with National Bank of Hungary (NBH) in drafting legally-binding Decrees issued by the Ministry of Finance (MOF). - DNFBP supervision groups: - Casinos supervised by Hungarian Gaming Board (HGB). - Lawyers, notaries, auditors supervised by professional bodies/chambers. - Other businesses/professions (accountants, real estate agents, high-value goods dealers, etc.) directly by the Financial Intelligence Unit (FIU). - DNFBP count: approximately 50,000 individuals and businesses. - Chamber sizes: Notaries 304 members; Auditors 5,900; Lawyers 9,000. - Casinos: six casinos had net gaming income of HUF 10.1 billion (US$50 million). - Nonprofit organizations (NPOs): - Approximately 49,000 NPOs. - Total receipts in 2003: over HUF 731 billion (US$3.26 billion). - Sector characteristics: relatively high level of state support and relatively low level of private donations. B. Legal Systems and Related Institutional Measures - Legislative progress: - Revised AML Act of 2003 replaced 2001 revision of 1994 Act; legislative framework extended to nonfinancial businesses and professions. - Key legal and institutional gaps identified: - ML offense scope: - Covers self-laundering and using proceeds in the perpetrator’s business activity or bank/financial transaction. - Recommendation: enlarge scope to cover all circumstances set forth by the Vienna and Palermo conventions. - Financing of Terrorism (FT) provisions: - FT provisions are complex and defined in relation to financing of terrorist groups. - Financing of individual terrorists is covered only through ancillary offenses. - Recommendation: revise criminal provision to cover all conduct constituting terrorist financing as per the UN International Convention for the Suppression of the Financing of Terrorism. - Suspicious Transaction Reporting (STR) and FT: - No legal obligation to report transactions based on suspicion that funds may be relevant to terrorism. - AML Act lacks provision to suspend transactions based on suspicions of FT (as opposed to ML). - Recommendation: establish legal basis to report STs related to FT; impose supervisory oversight for FT reporting; authorize immediate freezing of terrorism-related assets. - Customs and cross-border movements: - Hungarian Customs and Finance Guard (HCFG) not under reporting obligation regarding suspicious cross-border movements of valuables related to FT; appear to lack right to freeze such assets. - No domestic legislation implementing UNSCRs 1267 and 1373; EC Regulations 881/2002 and 2580/2001 are self-executing but gaps remain in freezing nonbanking/financial assets. - Recommendation: strengthen HCFG powers and sanctions; implement domestic legal basis for UNSCRs where necessary. - STR system and FIU concerns: - Current STR system produces high volume of relatively low-quality STRs from financial institutions and negligible STRs from DNFBPs. - Over-reporting possibly linked to criminal liability for both willful and negligent nonreporting under the Hungarian Criminal Code (HCC) Section 303/B. - FIU at National Police Headquarters (NPHQ) burdened by over-reporting; may lack staffing to perform core functions and supervisory role for DNFBPs. - Recommendation: review STR system; consider more proportionate penalties for criminal nonreporting (especially negligence); consider alternative institutional framework for supervising SPs rather than a police-based FIU; give FIU clear competence in CFT with repository and analysis functions for FT-related STRs. - Enforcement and prosecution: - Pre-investigative and criminal procedure provisions provide modern investigative techniques. - Despite training for judiciary and police, few convictions in ML and FT. - Possible causes: complex ML rules, limited notion of “financial transaction,” complex FT rules; inadequate attention to link between profit-making predicate offenses (organized crime) and ML. - Recommendation: authorities should increase focus on attacking criminal profits through ML prosecutions, seizing/confiscating assets, and using intelligence on organized crime. C. Preventive Measures — Financial Institutions - AML Act mandates comprehensive preventive measures: - Customer due diligence (CDD), record keeping, suspicious transaction reporting, internal controls. - HFSA Recommendation No.1/2004 provides detailed requirements and guidance; HFSA reviews/updates Recommendation to cover international standards and Basel CDD paper. - HFSA issued model rules and reviewed/approved internal AML procedures/regulations of all financial institutions. - HFSA enforces compliance via off-site monitoring, on-site inspections, and administrative sanctions. - Fitness and propriety: - Sector-specific legislation (Act on Credit Institutions and Financial Enterprises; Act on Insurance Institutions and the Insurance Business; Capital Market Act) includes measures preventing criminals and associates from holding ownership/control of financial institutions. - HFSA reviews fitness and propriety of owners, shareholders, stakeholders, senior management during licensing and ongoing supervision. - Beneficial ownership: - Weakness: treatment of beneficial owners. - Under AML Act and most model rules, when a client acts on behalf of another, the service provider only has to collect a limited amount of information on the beneficial owner. - Assessment: significant difference between data collected on direct clients vs. third-party introductions requires better justification. - STR quality and criminal liability: - Section 303/B of HCC applied to negligent nonreporting appears to have led to “defensive reporting.” - Statistics: 14,120 STRs received in 2004; only 20 cases turned into investigations; no prosecution started out of an investigation arising from an STR. - Recommendation: review criminal penalties (terms of imprisonment) for negligent nonreporting; take measures to improve quality of STRs. D. Preventive Measures — Designated Non-Financial Businesses and Professions (DNFBPs) - DNFBP obligations: - Subject to CDD, record-keeping, and STR requirements. - Beneficial ownership CDD deficiency identified in financial institutions also applies to DNFBPs. - High-value goods dealers: - Required to record cash transactions above a HUF 2 million threshold (US$11,000). - Internal controls and supervision: - Each DNFBP must establish internal AML/CFT rules based on models circulated by supervisory authority. - Businesses with more than 10 employees must have a compliance officer and conduct training. - Supervisory bodies obliged to conduct on-site checks for compliance. - PEPs and jurisdictions of concern: - DNFBPs have not been uniformly alerted to enhanced due diligence requirements for politically exposed persons (PEPs) and jurisdictions of concern. *IMF Assessment Team, Detailed Assessment (based on on-site mission February 21 to March 4, 2005) — Hungary* ### 29. A more operational weakness in the Hungarian DNFBP AML/CFT regime is that ### 29. A more operational weakness in the Hungarian DNFBP AML/CFT regime is that ### DNFBP operational weaknesses and supervision - Relatively few DNFBPs have filed any STRs. - Possible cause: relative novelty of AML/CFT issues in DNFBP sectors compared to financial institutions. - Fully incorporating DNFBPs into the AML/CFT system will require: - Active outreach, - Training, - Awareness-raising activities by the authorities, - Working where possible with professional organizations and supervisory bodies. - Strength of supervision varies across DNFBPs: - Casinos: under the most vigorous and consistent supervision. - Professional Chambers: aware of responsibilities, have disseminated materials to members, claim to check on compliance (oversight has not resulted in any sanctions). ### Legal persons, arrangements, and Non-Profit Organizations (NPOs) - Hungarian authorities have not undertaken a review of vulnerabilities of the NPO sector. - Draft of Second National Action Plan of the Interministerial Task Force on Counterterrorism reportedly contains plans for such a review. - Until a review is completed, Hungary cannot be considered compliant with SR VIII. - An aspect of the review could be whether the act of raising funds from the public is adequately regulated under current Hungarian law (FATF best practice paper concern with “raising and distributing funds (Paragraph 3)”). - Current NPO oversight: - Relies largely on a prosecutorial authority that predates the NPO sector in Hungary and may not be adequate for the current size of the sector. ### National and international cooperation, counterterrorism implementation - Government structures: - Interministerial Committee on Anti-Money Laundering established in 2001. - Interministerial Working Group Against Terrorism under the Minister of Interior to implement EU policy and meet related international obligations. - National Action Plan against terrorism adopted; most significant unmet goals include: - Ratifying the Palermo Convention, - Improving exchange of intelligence and cooperation among international police forces, - Adopting domestic legislation to allow freezing of intangible, real, and tangible assets of suspected terrorists, - Amending existing provision pertaining to the freezing of financial assets. - Implementation gaps for UN Convention on FT and UNSCRs 1267, 1269, 1333, and 1390: - EU regulations regarding CFT would be immediately applicable as an EU member state, but domestic legislation is needed to impose sanctions for violation of EU CFT obligations. - Issues concerning freezing of real goods (practical implementation of freezing obligation in EU regulations) are not covered by domestic legislation. - Besides Government Decree 306/2004 (dealing with unfreezing), there is no other domestic legislation implementing UNSCR 1267 nor UNSCR 1373. - Recommendation: Hungary should ratify the Palermo convention and adopt domestic legislation to implement UNSCR 1267 and 1373. ### General information on Hungary (selected facts) - Location: East-Central Europe (bordering Austria, Slovakia, Ukraine, Romania, Serbia, Croatia, and Slovenia). - Land area: 93,030 square km. - Population: 10,300,000. - Capital: Budapest (2 million inhabitants). - Currency: Hungarian Forint (HUF). - Transition to market economy: first multiparty elections in 1990; joined NATO in 1999 and the EU in 2004. - Form of government: Republic (parliamentary democracy). - Head of state (elected by the National Assembly for a five-year term): Ferenc MÁDL (since August 4, 2000). - Head of government (elected by the National Assembly on recommendation of head of state): Prime Minister Ferenc GYURCSÁNY (since September 29, 2004). - National Assembly: unicameral Országgyűles, 386 seats; members serve four-year terms. - Legal system: Civil Law; Constitution dated August 18, 1949 (effective August 20, 1949) with revisions including April 19, 1972; revision October 18, 1989; 1997 amendment; amended in 2004 for EU membership. - Hungary joined the EU on May 1, 2004. - Cash usage: ratio of average cash in circulation in 2004 is about 7 percent compared to the GDP on current prices (according to the NBH). ### General situation of money laundering and financing of terrorism - Reported prosecutions for money laundering: seven prosecutions in the last four years. - Predominant predicate offenses reported: fraud, misappropriation, and illegitimate financial service activity. - Other profit-making crimes (e.g., drug-related offenses) and presence of organized crime families are indicated by criminal statistics and international reports; it would seem reasonable to expect more money-laundering prosecutions based on such crimes. - Terrorist-related cases: few encountered; those encountered were not related to international terrorism in the strict sense, but to domestic terrorism broadly (including hostage-taking or other serious offenses endangering public order). ### Overview of the financial sector and DNFBPs (as of September 2004) - Financial system composition: - 32 banks, - 5 specialized credit institutions, - 178 cooperatives, - 199 financial enterprises, - 18 investment enterprises, - 24 investment funds, - 65 insurance companies, - 168 pension/health related funds. - Supervision: all supervised by the HFSA. - Financial system characterized by foreign ownership; majority of financial institutions are subsidiaries of major foreign financial groups. - Banks hold 69 percent of financial system assets. - Licensing and regulation highlights: - Banks, specialized credit institutions, cooperatives and financial enterprises licensed by HFSA under Act CXII of 1996 on Credit Institutions and Financial Enterprises (Banking Act). - Money transfer services defined as financial services and required to be licensed by HFSA. - Currency exchange activities defined as activities auxiliary to financial services and can only be performed under HFSA licensed banks or their contracted agents. - Cash processing activities defined as services auxiliary to financial services, subject to license and supervision by the NBH. - HFSA established April 1, 2000 as single supervisor (merger of previous sectoral supervisors). - Ministry of Finance (MoF) responsible for legal framework governing financial sector under government oversight. - HFSA cannot issue legally-binding rules and regulations but can issue guidelines, recommendations, and model rules and can invoke sanctions. - HFSA plays an important role along with NBH in drafting legally-binding decrees issued by MoF. - HFSA has full autonomy in granting and withdrawing licenses for nonbanking financial institutions; for commercial banks HFSA needs NBH’s consent for granting a license, and the NBH and MoF for withdrawing a license. - HFSA given operational and budgetary independence by law. - Main indicators of financial sectors in September of 2004 (as presented) - Total number of firms: 689 - Total assets: 30.733 billion HUF - Credit institutions: 215 firms; Total assets 15.017 billion HUF; Clients assets managed by firms 11.850 billion HUF; Total intermediated assets 26.868 billion HUF - Banks: 32 firms; Total assets 13.582 billion HUF; Clients assets managed by firms 11.850 billion HUF; Total intermediated assets 25.432 billion HUF - Specialized credit institutions: 5 firms; Total assets 1.435 billion HUF; Total intermediated assets 1.435 billion HUF - Cooperatives: 178 firms; Total assets 994 billion HUF; Total intermediated assets 994 billion HUF - of which saving cooperatives: 173 firms; Total assets 980 billion HUF - of which credit cooperatives: 5 firms; Total assets 14 billion HUF - Financial enterprises: 199 firms; Total assets 1.479 billion HUF; Total intermediated assets 1.479 billion HUF - Investment enterprises: 18 firms; Total assets 758 billion HUF; Total intermediated assets 758 billion HUF - Investment funds: 24 firms; Total assets 870 billion HUF; Total intermediated assets 870 billion HUF - Insurance companies: 65 firms; Reserves 978 billion HUF; Total intermediated assets 978 billion HUF - Funds: 168 firms; Total assets 1.259 billion HUF; Total intermediated assets 1.259 billion HUF - private pension funds: 18 firms; Total assets 759 billion HUF - voluntary pension funds: 77 firms; Total assets 481 billion HUF - voluntary health funds: 42 firms; Total assets 17 billion HUF - income replacement funds: 31 firms; Total assets 2 billion HUF - Source: HFSA ### Casinos and gaming - Six Hungarian establishments considered to be casinos: - Owned by the state, - Operated by private licensees, - Supervised by the Hungarian Gaming Board (HGB), - Only these six allowed to operate live games and are covered by the AML Law. - Law on Gambling recognizes two classes of “gaming houses” that can operate slot machines, electronic roulette, and other unstaffed games and are not subject to the provisions of the AML Law. - Number of gaming establishments: - 1500 gaming houses operate two or more games (some large enough to call themselves casinos). - 18,500 establishments with one or two low-stakes machines. - In 2004: - Net gaming income of the six casinos: HUF 10.1 billion (US$46 million). - Net gaming income of all 20,000 gaming houses: HUF 70 billion (US$318 million). - Payouts from both casinos and gaming houses are exclusively in cash; majority of nonstaffed games use coins or banknotes, reducing the practice of exchanging money for tokens in gaming houses. ### Dealers in precious metals and stones - 3,000 registered enterprises involved in the jewelry business. - Approximately 600 retail shops and 90 wholesalers. - Three biggest retail chains operate about 90 of the shops. - Two professional organizations in the jewelry business: - One unites the 30 largest (mainly retail/wholesale). - The other composed of 200 smaller enterprises, including producers. - Authorities report no diamond cutting or polishing industry in Hungary and very little importation of polished stones. ### Real-estate agents - Real estate transactions do not necessarily involve an agent; lawyer or notary must be involved at closing to ensure title registration. - Ministry of Justice (MoJ) preparing a Resolution to strengthen verification procedure by allowing lawyers and notaries access to the Ministry of Interior’s register of identity documents. - Real estate agents licensed through the Ministry of the Interior, which certifies third party companies that conduct training and licensing. - Over 20,000 licenses issued; estimated only 4,000 people currently operating. - Of those, 480 are members of a professional association that conducts enhanced training and requires re-training every five years. - Mortgages are playing an increasingly large role, but roughly two-thirds of the 375,000 annual transactions are estimated to be in cash. ### Lawyers, notaries, accountants, auditors, tax advisors - Lawyers: - Approximately 9,000 lawyers in Hungary. - Organized into 20 regional Chambers of Attorneys; capped by a National Chamber. - National Chamber reports approximately 65 percent of members are solo practitioners; approximately 5 percent work in the 50 or so offices with more than 10 lawyers. - Notaries: - 304 notaries, organized into 5 regional chambers. - Notary acts as court official empowered to certify validity of key documents. - Accountants and auditors: - Approximately 40,000 registered accountants; under 1,000 are members of the Hungarian Association of Accountants. - An equal or larger number practice accounting but are not registered with the Ministry of Finance and cannot certify annual company reports. - 5,900 auditors, members of the Chamber of Auditors. - All financial institutions, publicly listed companies and other companies with an annual turnover of HUF 50 million or more required to have annual company reports audited. - Tax consultants and tax advisors: - Do not fall into FATF definition of DNFBPs but are covered by the AML Act independently; majority are also accountants. ### Nonprofit organizations (detailed statistics and oversight) - Registered NPOs: Over 49,000 (may include many inactive groups). - Important NPO forms for review: foundations and public-benefit NPOs (PBOs). - Act CLVI of 1997 established two categories of “public-benefit” NPO (“kozhasznu szervezet”): - Regular PBOs: entitled to tax relief; must report on public-benefit activities including annual financial reports. - “Priority” PBOs (“kiemelten kozhasznu szervezet”): perform functions explicitly assigned to state agencies or local governments; have greater tax benefits. - Estimated roughly 50 percent of NPOs register in one or another of these tax-privileged statuses. - Company registry law of 1997 recognizes “public benefit corporation (kozhasznu tarsashag)” which can solicit funds from the public and can also register as a PBO. - For donors to receive tax deduction, they must present a receipt specifying the money was spent by the PBO on appropriate public-benefit functions. - NPO finances in 2003: - Reported income: HUF 731 billion (US$3.26 billion in 2003 dollars). - Income sources: - State payments or tax refunds: 41 percent (HUF 302 billion/US$1.35 billion). - Membership fees and income from primary activities: 28.8 percent (HUF 210 billion/US$940 million). - Secondary business activities: 15 percent (HUF 110 billion/US$493 million). - Donations (foreign and domestic): 13 percent (HUF 95 billion/US$424 million). - “1 percent” of income tax designation: - Amounted to 0.9 percent of NPO revenues (HUF 6.6 billion/US$30 million). - Donations breakdown: - From abroad: HUF 30 billion (US$134 million). - From other NPOs: HUF 15 billion (US$67 million). - Hungarian corporate donations: HUF 37 billion (US$164 million). - Hungarian individual donations (direct and through directed income-tax donations): HUF 20 billion (US$89 million). - Summed Hungarian-source donation and membership-fee based income: HUF 89 billion (US$400 million) raised from Hungarian private-sector sources, excluding various forms of business-related income. - NPO supervision and reporting: - No unified supervision of NPOs. - All NPOs must register with County or Metropolitan Court and present declarations about nature of nonprofit activities. - Annual reports (including revenues, expenses, utilization of budgetary subsidies) must be published and available to the public but are not in any central registry. - State budget money allocated on contractual basis; financial control laws/regulations ensure funds spent on contracted activities. - Recipients of “1 percent” payments must report on spending and are responsible to tax authorities for false reporting. - Prosecutors within Civil/Administrative Division of each county prosecutors’ office: - Responsible for ensuring local NPOs operate in conformity with charters and declared public welfare functions. - Receive notification of all new applications and have 15 days to challenge an inappropriate registration. - Conduct ongoing supervision through targeted on-site examinations. - Supervision is based on general provisions of the 1972 law on Prosecutors, predating NPO establishment, and is far from comprehensive, reaching about 1,000 NPOs annually. ### Commercial laws and mechanisms governing legal persons and arrangements - General rules for company setup and operation: - Act IV of 1959 on the Civil Code. - Act CXLV of 1997 on the Register of Companies, Public Company Information and Court Registration Proceedings. - Act CXLV provides registration for 16 different types of entities (Article 13). - Main types of for-profit companies: - Corporation Limited by Shares; - Company with Limited liability; - Joint Enterprise; - General and Limited Partnerships. *Italic: Source: _cr05348 - 29. A more operational weakness in the Hungarian DNFBP AML/CFT regime is that* ### 57. Nonprofit companies may be established for serving public purposes and interests as ### _cr05348 - 57. Nonprofit companies may be established for serving public purposes and interests as ### Nonprofit companies and company registration - Nonprofit companies may be established for serving public purposes and interests as limited liability company with legal entity, associations and foundations. - Foundations may be formed for any long-term public interest, charitable, or religious purpose by charter of foundation, executed by founder(s). - Any legal entity, if required by the law, may be registered under the conditions prescribed by Act CXLV in the Company Register. - Company Registers are held and maintained by Company Courts which are organized within County Courts and by a Metropolitan Court. - Registration is not only declarative but also constitutive: the company comes into being not by the simple deed of foundations, but by the decision of Court ordering its incorporation. - According to Act CXLV 'Company' means an economic organization [Paragraph (c) of Section 685 of the Civil Code], or other economic entity which, unless otherwise provided for by law or government decree, is brought into existence when entered into the Register of Companies for the purpose of engaging in some business or trade operations. ### Offshore companies (historical notes) - Since 1994, Hungary offered offshore corporate services: registered international business companies owned by foreigners and conducting business activities outside the jurisdiction of Hungary could apply for a supplemental offshore registration, with attendant tax privileges. - The possibility to register as an offshore company has been terminated by December 21, 2002. - Six hundred eighty offshore companies submitted a tax declaration in 2003. - Offshore companies cannot carry out service activities in Hungary and financing outside the group is prohibited. - All offshore companies will have to cease operations by the end of 2005. ### AML/CFT strategies and priorities - No single policy paper or official program exists regarding AML/CFT strategies and priorities; the Anti-money Laundering Interministerial Committee regularly discusses and oversees the effectiveness of the current regime. - General approach driven by progress on the development of the Third EU Directive; authorities prefer to wait until the Third Directive enters into force before making changes, to avoid confusion and waste of staff resources. - Authorities have begun review of the current legal and institutional framework in light of the current draft of the Directive to prepare for compliance. - Priority: strengthen supervision of DNFBPs to improve compliance with the AML Act. - MoF plans special training sessions for DNFBP without state or professional supervision (accountants, real estate agents and dealers/traders in precious stones, articles and jewelry). - The FIU indicated education, awareness raising, and outreach as essential priorities. - Priority: improve effective implementation of the investigation phase of criminal procedures concerning money laundering and terrorist financing. - A Coordination Center for organized crime has been set up. - Exchange of data with the FIU allowed by Cabinet decision. - Judicial authorities emphasize building practical experience and bringing more cases before the courts; training programs have been organized for magistrates and police officers. - Priority: enhance FIU technical capacity and international cooperation. - Specialized software developed and under further improvement; intended to receive and process STRs in electronic format. - Full implementation of the FIU-net envisaged, but some technical issues need to be solved. - Priority: develop an effective regime for CFT, including legislative framework for freezing assets of terrorists not included in UNSC and EU lists. ### Institutional framework for combating ML and TF - MoF: main responsibility for regulatory framework concerning fight against ML. - MoFA: responsible for monitoring compliance with counter terrorism resolutions/regulations and coordinating implementation of EU and UNSC sanctions. - FIU (placed within the NPHQ): responsible for receipt, preliminary analysis, and coordination of investigations regarding suspicious transactions (STs) of ML reported by reporting persons (SPs); supervises DNFBPs without State or professional supervisor (accountants and tax advisors, real estate agents, dealers in precious stones and metals). - Other AML supervisory authorities: - HSFA for the financial sector. - Hungarian Gaming Board (HGB) for casinos. - Chamber of Attorneys (Bar Association) for lawyers. - Chamber of Notaries for Notaries. - Chamber of Auditors for Auditors. - Investigation competence: - NPHQ investigates ML generally. - If ML is committed by persons with legal immunity based on public legal status or certain court/prosecutor/other officials, investigation falls to the Prosecutorial Office for Criminal Investigation. - HCFG: vested with AML functions regarding cross border transportation of currency and other financial instruments exceeding HUF 1 million (approximately EUR 4,000); identification, record keeping, and STR requirements under the AML Act. - Anti-Money Laundering Interministerial Committee established by Government Resolution No. 2298/2001. (X.19.) Korm.; initial representatives: MoJ, MoF, NBH, HFSA, HGB, MoI, NPHQ, MoFA, political undersecretary responsible for the civilian national security services. Later joined by GPO, National Judicial Council, APEH, Government Control Office, National Security Bureau, Banking Association. - CFT institutional arrangements: - Government Resolution 2112/2004 adopted a National Action Plan against terrorism and set up an Interministerial Working Group Against Terrorism under the Minister of Interior to implement EU policy and related international obligations. - A new action plan for 2005 is expected to be adopted by the Government. - Competence to investigate FT lies with the Police and the Prosecution. - National Security Office (Act No. CXXV of 1995) has general competence to detect and ward off concealed endeavors threatening economic and financial security and plays a role in the fight against terrorism. ### Approach concerning risk - AML Act 2003 covers all financial sectors supervised by the HFSA, including money transfer and money exchange services. - AML Act 2003 expanded AML obligations to DNFBP: lawyers, auditors, tax accountants and advisors, real estate agents, casino, dealers in precious metals and jewelry, following the Second EU Directive on Money Laundering. - Authorities do not allow service providers to adopt a risk-based approach to CDD requirements under AML legislation, except: - HUF 2 million (US$11,000) threshold for occasional transaction CDD represents an implicit risk-based prioritization. - AML Act allows exemption of CDD for certain insurance transactions and for customers which are financial institutions under HFSA supervision, or financial institutions in non-EU countries with equivalent AML regime, as permitted by the FATF Recommendations. - Authorities stated they need more experience implementing the current AML regime under the AML Act 2003 before addressing risk-related changes. - HFSA has adopted a risk-based approach for overall supervision: reviews effectiveness of AML/CFT internal control at financial institutions, taking into account size and nature of risks of individual institutions. - Supervision of DNFBPs is not explicitly risk based: - FIU conducts on-site inspections of randomly-selected SPs without state or professional supervision. - Prosecutorial inspections of NPOs are conducted according to a work-plan based on sectors where problems have been previously identified. ### Progress since last IMF/WB assessment or mutual evaluation - Last IMF assessment of Hungarian AML/CFT system occurred during FSAP follow-up in late 2001. - MONEYVAL conducted a Mutual Evaluation of Hungary in December 2001, published in December 2002. Both assessments preceded revision of the FATF 40 Recommendations and did not address CFT issues. - Three critical changes noted: - In June 2002, FATF removed Hungary from its list of Non-Cooperative Countries and Territories (NCCT). - On February 23, 2003, Hungarian Parliament adopted Act XV on the Preventing and Impeding of Money Laundering (AML Act 2003), which entered into force on June 16, *Source: _cr05348 - 57. Nonprofit companies may be established for serving public purposes and interests as* ### 2003. In May 2004, Hungary became a member of the EU, which created an obligation to ### _cr05348 - 2003. In May 2004, Hungary became a member of the EU, which created an obligation to ### Legal framework and institutional context - Hungary became a member of the EU in May 2004, creating an obligation to implement the provisions of the EU Second Money Laundering Directive and making EU regulations directly applicable in Hungary. - EU membership involved Hungary in deliberations on future EU AML/CFT policy. ### Criminalization of Money Laundering (R.1 & R.2) — description and analysis - Primary ML provisions: Art. 303 (established by article 23 of Act IX of 1994 and then amended by article 60 of Act CXXI of 2001) and Art. 303/A (established by article 61 of Act CXXI of 2001) of the HCC. - Scope: HCC follows a very extensive “all crime approach” covering all criminal activities punishable by imprisonment; offences punishable exclusively by fines or non-custodial penalties are excluded. - Recent statistics: during the last 4 years there were 7 prosecutions for ML which have lead to 2 convictions. - Art. 303 definition of ML: “Any person who uses items obtained by the commission of criminal activities punishable by imprisonment in his business activities and/or performs any financial or bank transaction in connection with the item in order to conceal its true origin.” - Art. 303/A (negligent ML by third parties) applies where: “Any person who uses an item obtained from criminal activities committed by others a) in his business activities, and/or b) performs any financial or bank transaction in connection with the item, and is negligently unaware of the true origin of the item” - Limitations relative to Vienna and Palermo Conventions: - The definitions in Arts. 303 and 303/A limit ML to use within “business activities” and/or performing financial or bank transactions to conceal origin. - Transfers to a third party through non-banking or non-financial transactions, concealment or disguise outside business activity, or use of proceeds outside business activity may not be covered by Arts. 303/303A. - Art. 244 (misdemeanor for cooperation in securing advantage resulting from crime) is too restrictive and too lenient (punishment up to one year) to fill gaps. - Definition of “item”: Art. 303, sec. 5 describes “item” as covering “instruments embodying rights to some financial means and dematerialized securities, that allow access to the value stored in such instrument in itself to the bearer, or to the holder of the securities account in respect of dematerialized securities.” This definition is not explicitly repeated in Art. 303/A; authorities attribute this to a drafting error and indicate Art. 303’s definition can be applied to Art. 303/A cases. - Predicate offence requirement: No need for a conviction for the predicate offence to prosecute ML; reference to “criminal activities punishable by imprisonment” allows prosecution even if predicate perpetrator cannot be punished (e.g., deceased or mentally unfit), but prosecution must demonstrate proceeds are connected to a specific predicate offence. - Mens rea: Hungarian courts infer knowledge from objective factual circumstances. - Extraterritoriality: No provision specifically addressing predicate offences committed abroad; nevertheless: - Art. 3 HCC: Hungarian law applicable to acts committed by Hungarian citizens abroad if crimes under Hungarian law. - Art. 4 HCC: Hungarian law applicable to non-Hungarian citizens abroad if acts are criminal under Hungarian law and punishable under the law of the place of perpetration (dual criminality). - Penalties: - Art. 303: felony punishable by imprisonment not to exceed five years; in serious circumstances imprisonment between two to eight years. - Art. 303/A: misdemeanor punishable by imprisonment not to exceed two years, work in community service or a fine; in serious circumstances imprisonment not exceeding three years. - Ancillary offences: - Article 16 General Part of HCC: attempts punishable for all crimes; general rule that punishment for attempt is same as for completed offence, with possible mitigation per Article 17. - Art. 303, sec. 3: misdemeanor for collaboration in ML. - Article 21: accomplices (abbettor/accessory) punishable with same penalty as perpetrator; level of responsibility determined by courts. - Liability of legal persons: - Act CIV of 2001 on Measures Applicable to Legal Persons under Criminal Law (entered into force on the date of accession to the EU, i.e., on the 1st of May 2004) provides sanctions against legal persons: winding up the legal entity; limiting the activity of the legal entity; imposing of a fine. - Applicability conditions: criminal act as defined by the HCC that was aimed at or resulted in gaining a financial advantage for the legal entity, committed by management or, in same conditions, by members/employees if the act could have been prevented by management; also applicable if management was aware of financial gain. - Observations on effectiveness: - Number of final convictions for ML (2) is extremely low; potential contributing factors: introduction of self-laundering as crime only in 2003; limited scope of ML offence; need to prove predicate offence. - These factors might negatively affect system efficiency. ### Criminalization of Terrorist Financing (SR.II) — description and analysis - Primary FT provision: Art. 261 of the CC, as amended by article 15 of Act II of 2003, criminalizes terrorist acts and provision of material assets for commission of these acts by a terrorist group. - Art. 261, subsections 1 and 2: felony punishable by imprisonment from ten years to fifteen years or life imprisonment for: - any person who commits a crime with violence against a person, or a crime that endangers the public or involves the use of a firearm – as stipulated in subsection 9 – in order to: - a) force a government agency, another state or an international body into doing, not doing or enduring something, - b) intimidate the people, - c) change or disturb the constitutional, economic or social order of another state, or to disturb the operation of an international organization, - any person who seizes considerable assets or property and makes demands to government agencies or non-governmental organizations in exchange for refraining from harming or injuring said assets and property or for returning them. - Subsection 9, par. a lists qualifying offences (e.g., homicide [Subsections (1) and (2) of Section 166], battery [Subsections (1)-(5) of Section 170], kidnapping (Section 175/A), robbery (Section 321), criminal misuse of explosives (Section 263), crimes against computer systems and computer data (Section 300/C), etc.). - Provision/collection of assets: Subsection 5 of Art. 261 creates a felony punishable by imprisonment from five years to fifteen years for: - “any person who invites, offers for, undertakes its perpetration, or agrees on the joint commission of any of the offences defined under subsections (1) and (2) in a terrorist group, or any person who in order to facilitate the commission of it, provides any of the means necessary or helpful in such activities, or provides or raises funds to finance the activities, or support the terrorist group in any other form.” - Gap relative to International Convention for the Suppression of the Financing of Terrorism: - Art. 261, subsection 5 criminalizes provision/collection of funds and other means to support a terrorist group but excludes financing or assistance provided to individual terrorists. - Definition of “terrorist group” (subsection 9, par. b): “group consisting of three or more persons operating in accord for an extended period of time, whose aim is to commit the crimes defined in subsections (1) and (2)”; raising funds or support directed to one or two individuals would not be punishable under subsection 5. - No autonomous criminalization of financing individual terrorists except via “preparation” or complicity. - Preparation provision: Article 18 CC subsection 1 provides that preparation (providing conditions or facilitating perpetration) is punishable where law orders; Art. 261, subsection 4 states: “Any person engaged in preparation for any of the offences defined under subsections (1) and (2) is guilty of a felony and shall be punished by five to ten years’ imprisonment.” - Practical application: - Authorities suggest financing/supporting an individual terrorist can be covered under the general principle of “preparation,” though no judicial case corroborating this interpretation was presented to the Team. - If funds are provided to an individual terrorist and the terrorist act takes place, providers would be punishable as accomplices. - Compliance assessment: - SR.II: Partially compliant — There is no autonomous criminalization for FT of individual terrorists. - Recommendation: - The financing of terrorist acts which are not committed or intended to be committed by a terrorist group should be criminalized. ### Confiscation, freezing and seizing of proceeds of crime (R.3) — description and analysis - I. Pre-investigative stage - Under Section 1 of Act XV of 2003 on the prevention of money laundering, a financial service provider with any suspicion of money laundering may suspend execution of suspicious transactions and immediately notify the FIU-NPHQ. - The transaction can be completed if the FIU does not notify the service provider in writing within 24 hours concerning its actions taken in accordance with the Criminal procedure code. - This creates an administrative freezing window of 24 hours initiated by the private-sector service provider; if the FIU responds within 24 hours it takes on investigating authority powers under the Criminal procedure code and a criminal investigation must be started; if it does not respond the administrative freeze is lifted. - II. Investigative stage - Provisional measures on freezing and seizing assets are governed by the Criminal Procedure Code (Act XXIX of 1998 on criminal proceedings) once a criminal investigation is launched. - Seizure (Sections 151 – 158 HCPC): - Ordered if objects to be seized either constitute means of evidence or may be subject to confiscation or forfeiture. - Authorities competent to order seizure: investigative authorities (basically the police) and the public prosecutor. - Objects subject to seizure: property, computer systems and media containing data recorded by such systems. - The term "property", linked to confiscation and forfeiture referral, implies a very general notion that can include objects that replaced the original objects of the crime, such as proceeds invested after initial laundering. - The investigative authorities can execute seizures; seizure implies physical taking and deprives owner of disposal rights; seized property shall be deposited unless other safe-keeping arrangements justified. - Deposited property examples: large amounts of money in bank accounts, securities or shares in financial institutions for proper management and to ensure greatest effect of confiscation or forfeiture for the government. - Termination of seizure: investigative authorities, prosecutor or court can end seizure if no longer interest for evidentiary purposes; seizure automatically ends when criminal investigation ends or period of investigation expires; prosecutor may end a court-ordered seizure prior to filing an indictment. - Upon termination, property returned to appropriate private person (owner/custodian, defendant, other claimant); if none identifiable, court can transfer seized property to the state, though claims may be made later. - Section 157 HCPC: property normally to be returned to the defendant may be retained to ensure coverage for a fine, forfeiture of property or costs of criminal proceedings. - Criminal code provisions cover effective execution of seizure, providing forced measures and penalties (Sections 158.3 and 161 HCPC). ### Recommendations and compliance summary (selected) - Money laundering: - Enlarge the scope of the ML offence so that it covers all the circumstances set forth by the Vienna and Palermo Convention. - Harmonize Art. 303 and 303A so that the same definition of “item” will be applicable to both provisions. - FATF compliance notes: - R.1: Largely compliant — ML scope is not fully consistent with Vienna and Palermo Convention; relatively low number of prosecutions and convictions. - R.2: Compliant. - SR.II: Partially compliant — There is no autonomous criminalization for FT of individual terrorists. *IMF staff assessment contained in document _cr05348 (2003).* ### 2. Custody ### 2. Custody ### Custody - Police or the prosecutor, in cases where these authorities are not entitled to seize, can take property into custody if immediate action is required (Section 151.6). - "The seizing order must hereafter be obtained as soon as possible." ### Sequestration - Applicable where physical dispossession is not possible, e.g., freezing of bank accounts or blocking the transfer of property rights on real estate (Section 159 HCPC). - For real estate, Section 159.6 provides explicitly that the seizure of a real estate shall be executed according to the rules of sequestration. - Sequestration implies the suspension of the right of disposal over the sequestered objects and is considered more intrusive than seizure, therefore a court order is necessary. - Section 159 (2) HCPC allows sequestration of a part of the property, or even the defendant’s entire property, to cover possible forfeiture if reasonable grounds exist to suspect that execution of a forfeiture order would be frustrated. - The text of Section 159 does not explicitly mention the entire "assets" of the defendant, but this seems to be included in the general notion of "property". - Sequestration may be ordered if the property or asset is not in the possession of the defendant. - Protections for ownership rights include ending sequestration if: - the cause for it has ceased to exist, - the investigation has been ended, - the time limitation has expired, or - the proceedings have been concluded without a decision granting forfeiture. - Sequestration can be seen as a freezing measure. ### Precautionary measures - Precautionary measures can be taken to effectively guarantee the sequestration order (Section 160 HCPC). - Aim to prevent the defendant or any other party from exercising a right of disposal over: - movable or real property, - securities representing property rights, - funds managed by a financial institution under a contract, or - due share or ownership interest in a business organization. - Applicable if probable cause exists to justify sequestration and the defendant, or any other party, attempts or can reasonably be believed to attempt to conceal the property specified above, or to transfer, alienate, or encumber the rights of disposal thereover. - Because precautionary measures require swift action, competence is given to the investigative authorities and the prosecutor. - Following the precautionary measure, a sequestration order shall be filed. ### Confiscation - Confiscation mechanism is described in Section 77 of the HCC. - Confiscation is mandatory for: - actually used or intended to be used as an instrument for the commission of a criminal act - the possession of which is dangerous or illegal - which are created by way of a criminal act - for which the criminal act was committed - In the first and last cases above, confiscation cannot be ordered if the object is not owned by the perpetrator, unless: - the owner was aware of the perpetration of the criminal act, or - confiscation is prescribed mandatory by international convention. - Confiscation shall not be ordered if it is included in a forfeiture of assets. - Confiscated assets become state property. ### Forfeiture - Section 77/B of the HCPC allows for the forfeiture of goods. - Note from General Prosecutor's Office discussions: "confiscation" and "forfeiture" are actually the same word in Hungarian; the difference seems to be mainly in the objects. - Objects that can be forfeited include: - any financial gain or advantage resulting from criminal activities obtained by the offender in the course of or in connection with a criminal act - any financial gain or advantage obtained by an offender in connection with crimes committed in affiliation with organized crime - any financial gain or advantage that was used to replace the financial gain or advantage obtained by the offender in the course of or in connection with a criminal act - any property that was supplied or intended to be used to finance the means used for the commission of a crime - any property embodying the subject of financial gain - Any financial gain or advantage resulting from criminal activities, obtained by the offender in the course of or in connection with a criminal act, shall also be forfeited if it served the enrichment of another natural or legal person. - The provision that the property embodying the subject of financial gain can also be forfeited was introduced to clarify that the proceeds of an unlawful advantage should be subject to forfeit, i.e., in the case of active briber. - In the case of organized crime (any financial gain or advantage obtained by an offender in connection with crimes committed in affiliation with organized crime as defined in S. 137.8 HCC), all assets obtained by the perpetrator during his involvement in organized crime shall be subject to forfeiture until proven otherwise. - The burden of proving that the property is legitimate falls on the defendant, effectively introducing a reversal of the burden of proof in Hungarian criminal procedure; the provision has not yet been used and the Supreme Court stated it was a very new rule, the scope of which is not yet clear. - Section 77/B HCC affords protection to third parties operating in good faith: - If property that would otherwise be subject to forfeiture is obtained in good faith and for a normal price, it cannot be forfeited. - This does not exclude forfeiture of a determined sum of money, related to the value of the property, vis-à-vis the defendant, instead of forfeiture of the property itself which can remain in the hands of the third party. - A third party can only invoke good faith if the transaction can be considered normal; if the prosecutor can prove the property was not obtained in a bona fide manner and under normal economic circumstances, the property can be forfeited. - Forfeiture of a determined sum is possible if the property is no longer accessible or if it cannot, or only with unreasonable difficulties, be distinguished from other assets. - Forfeited assets shall become property of the state. - The notion of “assets” includes any profits, intangible assets, claims of any monetary value and any financial gain or advantage. ### Civil forfeiture/confiscation and forfeiture as measures - There is no system of civil forfeiture in the Hungarian criminal procedure. ### Third party rights - Several mechanisms exist to protect the rights of bona fide third parties. - Victim position: - The victim is considered the party whose right or lawful interest has been violated or jeopardized by the criminal offence and is entitled to file for legal remedy (Section 51 HCPC). - Section 55 HCPC: - Anyone whose right or lawful interest may be directly affected by the decision made in the course of criminal proceedings may make objections. - In proceedings involving a criminal offense subject to confiscation or forfeiture of property, other interested parties whose property may be confiscated or forfeited shall enjoy similar rights as do victims. - If the court ordered confiscation or forfeiture of property, other interested parties may enforce their ownership claim by other legal means after the order has become final. - As a general rule, anyone affected by the decisions or measures taken by the police or the prosecutor may protest or object (Sections 195-196 HCPC). ### Identification/tracing of assets - There are no specific orders to identify and trace assets. - The normal provisions of the criminal procedure apply, granting the competent authorities all necessary powers (cf. R. 27 e.a.). *Source: _cr05348 - 2. Custody* ### 10. Forfeiture vs. contracts ### 10. Forfeiture vs. contracts ### Forfeiture effect on contracts and third parties - A judgment ordering forfeiture will render a contract and the ensuing property rights void, as it is executable and takes priority on all contractually established rights. - This applies as well to third parties not acting in good faith. ### Recommendations and comments (for forfeiture and freezing) - Consideration should be given to providing the FIU with statutory authorization to freeze assets and suspend transactions. - Consideration should be given to creating a system of administrative freezing, granting the FIU/Police/Prosecutor a reasonable period of time to check the facts of the case in detail, without immediately having to open a criminal investigation. - Much more consideration should be given to the taking away of the proceeds of crime. The number and amounts of seizures and confiscations should increase noticeably having regard to the high number of prosecutions for economic crime. - Operational practice should more consistently and systematically link seizure/confiscation with investigations. ### Compliance with FATF Recommendations (R.3) - R.3 — Largely Compliant - Observed weakness: Very limited number and amount of seizures and confiscations ### Freezing of funds used for terrorist financing (SR.III) — Description and analysis - The rules mentioned under Recommendation 3 equally apply to terrorist financing. - For offences (Sections 18-21 and 261 HCC), normal provisions of the criminal procedure are applicable (i.e., cash money or other financial valuables in physical form can be seized and bank accounts or property rights can be sequestered, if necessary preceded by a precautionary measure). - If financial means used for terrorist acts are directly related to the commission of the offence, they may be considered as an instrument used or intended to be used for the perpetration of the offence, in which case confiscation would be possible (for financing of terrorism). - For terrorism offences as such, financial means used to perpetrate that offence can be forfeited, as Section 77/B allows for the forfeiture of any property used to finance the means used for the perpetration of the offence (e.g., to buy weapons or explosives). - Distinction noted regarding UN Resolutions and lists: - Resolution 1267 is implemented through the EU-lists, providing mechanisms to freeze and procedures to un-list or de-freeze. - Resolution 1373 requires regulation for the freezing without delay of assets of persons committing or trying to commit terrorist offences; there is no specific Hungarian legislation specifically implementing Resolution 1373. - Applicable EU provisions requiring immediate freezing are in force, covering part of the problem. - The freezing possibility provided by Section 9 of the Act on prevention of ML does not seem applicable to terrorist financing. - Freezing of accounts can be seen as a sequestration measure according to Section 159 HCPC; a court order is necessary, notwithstanding precautionary measures (Section 160 HCPC). This procedure can be time-consuming. - Potential weakness: lack of general obligation for financial institutions to file STRs in case of suspicion of terrorist financing operations. The specific obligation based on Section 261 HCC requires reporting upon “reliable information” and not upon a mere suspicion — this may be too high a threshold. - Authorities maintained that freezing terrorist assets does not require special powers; mission opinion is that this view is not backed by legislative texts. - The preamble of the Act on prevention of money laundering is not sufficient legal ground to freeze assets in terrorist financing cases. - Authorities were not able to maintain a freeze in the one court case related to terrorist financing referred to by the authorities; interlocutors provided differing accounts (court rejection of legal ground vs. funds released for lack of evidence). - Bar Association expressed opinion that duty to report suspicion of terrorist financing would have to be based on Section 261 HCC (requiring “reliable information”), and not on the AML prevention act. Same opinion expressed in the Model rules for financial service providers. - Conclusion: legal basis for quick action on freezing assets related to terrorist financing is weak, risking a gap in structures to combat terrorist financing. - For measures ordered on the basis of EU-provisions, Government Decree 306/2004 allows granting exemptions at the request of the person concerned or ex officio. The National Police Headquarters is the deciding authority in first instance, with appeals going to the Ministry of Interior. - As far as protection of third parties is concerned, provisions explained under Recommendation 3 apply during the criminal investigation stage. ### Recommendations and comments (for terrorist financing / freezing) - Create legal authority for freezing possibilities for the financial institutions upon suspicion of terrorist financing. - Provide the FIU/Police/Prosecutor with an autonomous competence to freeze in cases of suspicious transactions possibly linked to FT. - Provide a sufficient period of freezing in order to do serious checks before having to start criminal investigations. - Provide clear procedures for de-listing and un-freezing also for the UNSCR. ### Compliance with FATF Special Recommendation III (SR.III) - SR.III — Partially compliant - Observed weakness: No generally applicable immediate action for freezing is possible under Hungarian law ### The Financial Intelligence Unit and its functions (R.26, R.30 & R.32) — Description and analysis - The AML law designates the NPHQ as the competent institution to receive reports of “any data, facts or circumstances indicating ML” (article 2, sect. 1 par. d), pursuant to Act XXIV of 1994 that had placed the FIU functions of receiving, analyzing and disseminating the STRs received by the SPs within the NPHQ. - The NPHQ as an FIU has been a member of the Egmont Group since 1998. - Following a reorganization of the NPHQ of July 2004 the FIU is currently placed in the ML Department, within the Economic Crime Division of the National Bureau of Investigations. - FIU functions are set forth in: - “Internal Regulation no. 17 of June 1st of the Chief Commissioner on the Police Measures Related to the Prevention and Impeding of Money Laundering” - “Internal Regulation no. 5 of June 16th 2004 of the General Director for Criminal Investigation of the National Police”. - According to these rules the FIU is solely responsible for AML issues and not for CFT. Authorities indicated that CFT issues would be dealt by the Counter Terrorism and Extremism Department, within another Division of the National Bureau of Investigation. - There appears to be no legal provision in the Hungarian legislative framework requiring SPs to report transactions suspected to be aimed at FT. The matter will be discussed in more detail with respect to SR IV. - The ML Department is formed of 3 units: - one in charge of receiving the STRs and conducting searching/screening tasks on the reports received; - another in charge of open and secret investigations; - a third recently established to carry out supervisory functions assigned by the AML act over the SPs that have no State or professional supervision. - The FIU carries out its activities with sufficient operational independence and conducts specialized activities in relationship with other Police units: - receives (on hard copy) the STRs related to ML from the SPs; - processes requests of suspension of transactions in the circumstances set forth in article 9 (“where there is any suspicion of money laundering and if prompt action by the police is deemed appropriate to examine certain corresponding information, data or circumstance”); - conducts analysis of STRs carrying out “screening-searching activities” (searching criminal record database and other databases such as the Companies Register; requesting additional information from the service provider that filed the report and, since 2005, from any other service provider subject to the AML law; requests to other public institutions; requesting checks by regional and local Police; requesting information to foreign counterparts). - If further fact-finding is deemed necessary, the FIU may request “secret information gathering” to be carried out by the territorial competent Police branch. - Where suspicion of ML is confirmed by preliminary screening and covert information gathering, an open investigation/criminal procedure will be started according to CPC provisions. - Competence notes: - ML conducted by third parties not part of the predicate offence: competence with the ML Department. - Self-laundering: competence of the department investigating the predicate offence. - “Internal Regulation no. 5 of June 16th 2004” assigns the ML Department responsibility to coordinate all secret information gathering activities and the criminal proceedings initiated. - In compliance with article 10, section 2 of AML law, the FIU may use information received from SPs solely for purposes of the fight against money laundering. Data obtained under AML law cannot be used during detection and investigation of other criminal acts; such data shall be obtained according to appropriate rules. - Information held by the FIU is stored in a secure computerized database accessible only to FIU staff. - The AML department is also responsible for AML/CFT supervision over SPs without State or professional supervision, including: - real estate agents or brokers; - accountants and tax advisors; - dealers of precious metals, precious stones, articles, ornaments and jewelry made of precious metals and/or stones; - dealers of cultural assets and works of art; - any person selling the abovementioned items at auctions or on consignment. - The FIU must approve internal regulations adopted by the SPs pursuant to the AML law and carries out on-site inspections. - As of February 2005 the AML Department carried out 254 inspections (148 in Budapest and 106 in other regions), and found 21 cases of violation of AML requirements. - Since the 1st of January 2005 the NPHQ have the responsibility to approve any request of conversion of the remaining anonymous account into personal ones. - According to article 11 the agencies exercising state and professional supervision over SPs should provide—in cooperation with the NPHQ and in agreement with the Ministry of Finance—guidelines and models to the SPs for drawing up internal Regulations (including rules for detecting ST of ML, handling and protecting data obtained through identification procedures, and procedures for reporting STRs). - Staffing and resources: - After the re-organization of the 1st of July 2004 the ML Department has now 42 posts (19 sworn officers, 16 civil servants, 7 public employees), of which 36 have been filled. - Staff educational background: 18 out of 19 officers have degrees. - Staff participated in various training initiatives, including abroad; FIU benefited from an institutional building and training project financed by the EC. - Department is conveniently housed and IT equipment and workstations widely available. - IT and reporting limitations: - “The IT infrastructure of the FIU is at present unable to sort reports and provide data on them to tell which of the reports relate to foreign or domestic transactions, to electronic or manual transactions, to tell which transactions were cross-border or domestic transactions. Also, the system cannot query the total money value of the transactions reported, or the money value of transactions sorted according to various criteria”. - Authorities informed the mission that in 2005 an enhanced software programme will be installed allowing the FIU to receive STRs in an electronic format and enabling links, interconnections, and statistics preparation. - FIU does not publicly release periodic reports, but statistics on STRs are produced. ### Statistics on STRs received and processed by the FIU (2001–2004) - Total STRs received and processed by FIU: - 2001: 1,628 - 2002: 6,271 - 2003: 12,364 - 2004: 14,120 - Breakdown by reporting category (numbers correspond to 2001 / 2002 / 2003 / 2004 where provided): - Financial institutions: 1,512 / 5,032 / 10,764 / 12,170 - Cooperative (savings) banks: 48 / 876 / 905 / 1,167 - Accountants: - / - / 2 / 7 / 174 - Notaries: 1 / 0 / 51 / 35 - Casinos: 0 / 1 / 1 / - - Bureaux des changes: 13 / 169 / 369 / 456 - Insurance companies: 2 / 53 / 41 / 83 - Securities companies: n.a. / 28 / 66 / 86 - Post: (no 2001 value) / 7 / 15 / 3 - Individuals: - / 5 / 13 / - - Brand dealers: 42 / 36 / 86 / - - Tax consultants: - / - / 2 / 1 / 1 - Auditors: - / - / 2 / 5 / 1 - Pawnbrokers: - / - / - / 4 / 17 - State Treasury: - / 4 / 3 / 13 - Customs and Finance Guards: 5 / 3 / 6 / - - HFSA: 1 / 4 / 5 / - - Others: 4 / 75 / 88 / - - Note: FIU received 1186 identification forms + 18 other requests from the Customs and Finance Guard above STRs in 2004. - Typical money laundering typologies reported: - Transferring money to companies in return for false invoices drawn for fictitious services. - Depositing large amounts of cash in banks declaring that money is coming from currency exchange activities, then drawing them out in a different currency. - Depositing small amounts of cash which are not falling under the rules of reporting. - Exchange of information with foreign FIUs: - Permitted directly by art.8/A of the AML law. - FIU indicated a limited number of Memoranda of Understanding in place since law allows exchange directly. - Statistics of legal assistance requests: - Requests made by the FIU: 2001: 2; 2004: 103 - Requests received by FIU from foreign counterparts: 2001: 23; 2004: 76 ### Recommendations and comments (for the FIU and STRs) - Place responsibility for CFT matters with the FIU; establish a clear obligation to report to FIU STRs related to FT. - Consideration should be given to: - Given the Police nature of the FIU and number of staff, placing the supervisory function over DNFBPs outside the FIU. - The FIU continuing to upgrade its software. - The analysis of STRs by the FIU identifying as much as possible underlying predicate offences. - Having the statistics of STRs compiled by the FIU provided in greater detail and containing references to predicate offence where possible. ### Compliance with FATF Recommendations (FIU-related) - R.26 — Largely Compliant - Observed weakness: CFT is not covered by the FIU; no legal obligation to report to FIU STRs related to FT - R.30 — Compliant - R.32 — Compliant *Source: _cr05348 - 10. Forfeiture vs. contracts* ### 1. Procedural issues ### 1. Procedural issues ### I. The pre-investigative stage - The police exercise the general powers of an investigating authority (Section 1 Act XXXIV of 1994 on the Police). - Police powers prior to criminal investigation: - Stop and question persons, and search them and their belongings to ensure public order and prevent and detect offences (Sections 29 and following). - Request information from the tax authorities with the permission of the prosecutor (Section 79 HCPC). - Covert intelligence gathering before a criminal investigation may be conducted for preventing, investigating or stopping a criminal act, locating and capturing offenders, obtaining evidence or protecting participants in proceedings (Sections 63 and following). - Measures may be taken against natural persons and legal entities and shall not be disclosed to them. - Distinction: - Operations not subject to a court order: employ informants, establish/maintain cover organizations (“front stores”), observe persons/premises, use undercover-agents (permission of the prosecutor required for infiltration/purchases). - Operations subject to court order (serious criminal acts): secret search of a private home, observation in a private home using technical devices, access to mail, telecommunications, e-mail and computers. - Police may make agreements with offenders to terminate investigations in exchange for information; the prosecutor may overrule such decisions (General Prosecutor’s Office confirmation). - Under prosecutor authorization, police can request information from tax authority, telecommunications service providers and institutions handling bank/securities/treasurer’s or business secrets for offences punishable with at least two years. Emergency measure: data may be requested without prosecutor’s permission if delay would cause serious harm and case is connected with drug trafficking, terrorism, money laundering or organized crime. Prosecutor’s permission shall be asked while filing the request (Section 68). ### II. The criminal investigation #### 1. General rules of criminal investigation and procedure - a) General principles - Criminal proceedings begin with an investigation to inquire into the offence, identify the offender and locate and secure means of evidence (Section 164 HCPC). - Proceedings may only be initiated upon suspicion of a criminal offence and only against the person reasonably suspected (Section 6 HCPC). - Immediate investigative action is possible when needed to ensure evidence, prevent flight or for other high priority reasons (Section 170 HCPC). - b) The investigation - Investigative authority typically the police; Customs and Finance Guards may launch investigations for smuggling, tax fraud or fraud involving customs and excises (Section 36.2 HCPC). - Police conduct investigations independently if offence detected by its services, complaint filed, or offence came to its knowledge (Section 35 HCPC); prosecutor supervises compliance, may amend/repeal police decisions, order termination, or take over the investigation. - Prosecutor can order an investigation, assign investigative authority, conduct his own investigation, instruct investigative authorities, and has special prosecutorial investigative units. - c) Decision on the investigation - Prosecutor may dispense with further investigation; prosecutor and in certain cases police can suspend investigation (Sections 187-188 HCPC). - Prosecutor can terminate investigation if no criminal offence established or insufficient charges (Sections 190-191 HCPC). - Upon sufficient grounds to prosecute, prosecutor may file an indictment (Sections 216 and following HCPC). - d) Complaints - Anyone may file a complaint concerning a criminal offence; failure to file when obligatory constitutes an offence (e.g., Section 261.5 HCC). - Members of authority and official persons obliged to file complaints within their competence. Complaints made to police or prosecutor (Sections 171-172 HCPC). #### 2. Evidence - Evidence defined as facts relevant to application of criminal law and procedure; objective is thorough and complete elucidation of true facts (Section 75 HCPC). - Means of evidence (Section 76 HCPC): testimony of witnesses, expert opinion, physical evidence, documents, pleadings of the defendant. - Documents and physical evidence produced or obtained by authorities may be utilized. Physical evidence includes all things suitable for proving facts, including documents. Documents include all evidence prepared and suitable for proving that a fact or data is true (Sections 115-116 HCPC). - Evidence must be traced, gathered, secured and used in compliance with criminal procedure; prosecutor and court freely weigh evidence and establish conclusions based on belief formed (Sections 76-78 HCPC). #### 3. Documents - Retention obligations: - Act XV of 2003 on prevention and combating of money laundering: service providers must retain data and documents related to obligations under this act for ten years (Section 10). - Act C of 2000 on accounting: retention of annual reports and registers for minimum ten years; accounting documents for (in)direct support of bookkeeping records must be kept for minimum eight years. Provisions apply to non-profit organizations (Act CLVI of 1997). #### 4. Data - After beginning a criminal investigation police may collect data to establish existence and location of means of evidence; may use law enforcement databases, request documents/data/information from any third party, request investigations from heads of government/public bodies/business organizations/foundations, inspect scenes and employ advisors (Section 178 HCPC). - Police, prosecutor and court may contact central/local government authorities, agencies, public organizations and business organizations to request data/documents. Encrypted data must be restored to original form. Non-compliance may lead to disciplinary penalty and forced measures (Section 71 HCPC). #### 5. Subpoenas - Police, prosecutor and court can serve subpoenas on persons whose presence is statutory or permitted. Summoned person is obliged to appear and may be requested to bring documentation or evidence (Section 67 HCPC). #### 6. Body search - Body search may be ordered by police or prosecutor if reasonably believed the person possesses means of evidence or property subject to confiscation or forfeiture, or to find such means or property. #### 7. Search warrants - Search warrants may be issued to search houses, vehicles, computer systems or other computer media containing data when reasonable cause exists to apprehend person, uncover traces of an offence, find means of evidence or locate property subject to confiscation and seizure. - Search may be ordered by prosecutor or court, and by police unless prosecutor decides otherwise. Warrant should indicate means of evidence or property intended to be found. #### 8. Search and inspections - Police, prosecutor or court may order a search for an object with unknown location if it may be seized by law or has been ordered seized or sequestrated (Section 73.7 HCPC). - If examination or observation is required to prove facts, prosecutor or court may order such measures (Section 119 HCPC). #### 9. Physical coercive measures and custody - Bench warrants may be issued restricting personal freedom; person can be arrested and brought before competent service (Section 162 HCPC). - Custody of maximum 72 hours may be ordered upon reasonable suspicion of an offence subject to imprisonment, provided probable cause exists to believe pre-trial detention will follow. Custody can be ordered by investigating authority, prosecutor or court. If ordered by police, prosecutor must be notified within twenty-four hours. Custody can be prolonged by pre-trial detention ordered by the court (Sections 126, 127 and 131 HCPC). #### 10. Witnesses - Anyone summoned as a witness shall be obliged to give testimony unless an exemption applies (Section 79 HCPC). Exemptions include self-incrimination or secrecy obligations if no authorization permits disclosure (Sections 8-82 HCPC). - Section 82.4: no one may refuse to testify as a witness against whom investigation or proceedings were terminated by the court under Section 332.1.e HCPC if response would be self-incriminating for offences ceased to be indictable for reasons in, i.a., Section 303.4 HCC. - Witnesses illegitimately refusing to testify despite warning face disciplinary penalty (Section 93 HCPC). - Special witness protection: if witness life directly jeopardized, may be heard at court before trial (Section 87 HCPC). Physical protection measures available (Sections 95-98/A HCPC). #### 11. Special investigative techniques - Covert data gathering during investigation is distinct from pre-investigative covert intelligence gathering; used to establish identity, locate suspect and find evidence, and allowed when other means would likely fail or be unreasonably difficult (Section 202 HCPC). - Covert data gathering allowed upon suspicion of offences that: - have been committed intentionally and punishable by five years or more - are related to trans-boundary crime - have been committed in a repeated or organized manner - are related to narcotics - are related to counterfeiting of money or securities - If investigation conducted by prosecutor covert data gathering is not limited to the above list (Sections 200-201 HCPC). - Police may use covert investigators during investigation subject to prosecutor permission. - Judicial permit required (motion filed by prosecutor to court) to keep a home under surveillance, learn contents of letters/mail/communications and learn data transmitted or stored in a computer system (Section 203 HCPC). - Gathering can take place for ninety days, extendable for a further ninety days (Section 203 HCPC). - If judicial permission would jeopardize operation, prosecutor may authorize covert data gathering for seventy-two hours (Section 203 HCPC). - Organizations forwarding/processing/managing communications services, mail or computer data are obliged to provide conditions and cooperate (Section 204 HCPC). - Results of covert data/intelligence gathering may only be used in other criminal proceedings if conditions also apply and purpose corresponds to original objective (Section 206 HCPC). #### 12. Disciplinary penalties - Disciplinary penalties may range from 1.000 to HUF 200.000, or in serious or repeated cases up to HUF 500.000. Decision falls within competence of prosecutor or court. Penalties can be imposed in relation to subpoenas, witnesses and seizure (Section 161 HCPC). #### 13. Secrecy provisions - Prosecutor or police, with consent of prosecutor, may request information from tax authorities, communication service providers, and organizations managing bank/securities/fund/business secrets; disclosure cannot be refused (Section 178/A HCPC). - Various acts stipulate secrecy obligations do not apply in respect of investigating authorities, prosecutor or court acting within criminal procedures (examples: Act CXII of 1996 on credit institutions and financial enterprises; Act LX of 2003 on insurance institutions and the insurance business; Act CXI of 1996 on securities offerings, investment services and the stock exchange; Act XCII of 2003 on rules of taxation). For pre-investigative stage, Acts CXI and CXII of 1996 contain more restrictive provisions: requests must only be answered if offences relate to drug trafficking, terrorism, arms trafficking, money laundering and organized crime. - No offence of breach of business, bank or securities secrecy if transmission of information is regulated by law or prescribed in the Act on the prevention of money laundering (Sections 300/B and 300/D HCC). ### 2. Designated law enforcement authorities #### 1. The police and the Customs and Finance Guards - Police structure: - Central unit with national competence: National Police Headquarters (NPHQ). Regional units are chief departments subordinate to NPHQ. Local units are departments subordinate to chief departments (Section 3). - Police nationwide strength of about 42.000. - Within NPHQ: Criminal investigation department (C.I.D.) general directorate including an intelligence division, a crime analysis department, the international law enforcement cooperation centre and the national bureau of investigation. - National Bureau of Investigation comprises: organized crime division (with a criminal organizations department), economic crime division (with an economic crime department and the money laundering department), a CID division (with a transnational crimes department and a counter-terrorism department) and a financial crime investigation division. - Personnel estimates (authorities’ figures): - Economic crimes division total about 92, divided as follows: economic crimes department 38, anti-corruption department 20, money laundering department 43 (on paper, 36 in practice). - Financial crimes division about 300 personnel, including personnel at the county level. - Criminal organizations department about 20-30 staff. - Jurisdictional notes: - Money laundering department of NBI has exclusive competence where perpetrator of predicate offence and money laundering offence are different persons or entities. In self-laundering cases county police units handle investigations. - Financial crimes division handles tax fraud cases; economic crime division handles other economic offences; transnational crimes department handles various cases especially if perpetrator is Hungarian. - Money laundering department provides assistance to local levels, limited by staffing. - Customs and Finance Guard strength reported as 6, 666. - Act CXXVI of 2000 created a Co-ordination centre for fighting organized crime (independent central office for supporting/coordinating law enforcement; supplies statistical data and analysis). A Cabinet decision of 2002 authorized exchange of data between the FIU and the Centre; Hungarian Progress Report 2003 – Questionnaire indicates such exchange has taken place. Requested further information on the Centre was not provided to the assessment team. - Detecting terrorist acts (Section 261 HCC) is competence of the police if report submitted to it or the fact became known to the police (Section 69). *Source: _cr05348 - 1. Procedural issues* ### 2. The public prosecution office ### 2. The public prosecution office ### Mandate and institutional structure - According to Chapter XI of Act XX of 1949 containing the Constitution, the Prosecutor General heads the Office of the public prosecutor. - Functions of the prosecution service: - ensures the rights of persons and organizations; - prosecutes any act violating the security of the country; - exercises the rights specified in the law relating to investigations; - represents the prosecution in court proceedings; - responsible for the supervision of the legality of penal measures; - ensures that everybody complies with the law (Section 51). - Appointment and independence: - The Prosecutor General is elected by Parliament (reference to Constitutional Court decision 03/2004 of February 17, 2004 about parliamentary questioning and independence). - Other public prosecutors are appointed by the Prosecutor General (Sections 52-53). - Organizational levels: - General Prosecutor’s Office (head); - regional appellate prosecutors; - county prosecutors; - local prosecutors. - Within the General Prosecutor’s Office: - a Deputy Prosecutor General is responsible for the criminal law division. - That division includes, among others, a department for supervision of investigations and a department for special cases. - The Department for special cases was set up on July 1, 2001 and supervises economic crimes, including money laundering. - By decision of the General Prosecutor certain cases (e.g., terrorist cases) can be closely watched and monitored by this department. - County prosecution offices have: - an office for criminal investigations; - a division for supervising investigations; - a division for court proceedings. - Total number of prosecutors: about 2,500. ### Courts competence - Only the county courts have competence to deal with: - terrorism (Section 261 HCC); - money laundering (Section 303 HCC) offences (Section 16 HCPC). - Rationale: local courts were excluded to centralize these crimes in county courts to create more expertise. - Note: centralization applies only to intentional money laundering; negligent laundering can be dealt with at local level. ### Training of prosecutors, investigators, and judges - Training received by Hungarian officials includes: - training of prosecutors by US Treasury staff; - development of a training CD for judges; - a FinCen course for the FIU; - a series of Phare-sponsored seminars; - an extensive AML training for prosecutors and judges in the Hungarian prosecutor’s training centre; - training for prosecutors by the U.S. DOJ and ILEA; - training of designated investigators at each county police headquarters in financial background investigations. - Investigators in the money laundering department: - are specialized; - most graduated from a police college with emphasis on economic crime and money laundering; - several staff are lawyers; some have more than one degree in economics, banking or related subjects. - Training arrangements: - Department sessions include county level investigators, the Border Guards, and the Customs and Finance Guard. - Information on money laundering legislation is available on the intranet website of the Supreme Court (documentation provided but not yet translated). - Yearly training plan: special priority given to EU-priority areas, including money laundering and economic crime. - A state-organized university training on economic crime: a 3 year course (one day/week) leading to the degree of “legal expert on economic crime”; about 30 percent of the prosecutors have obtained this degree. - The General Prosecutor supports and funds this program; program documents requested but not yet received. ### International co-operative actions and investigatory coordination - In case of competing competencies between investigative authorities, the responsible authority is designated by the prosecutor. - Investigating authorities may set up joint task forces (Section 37 HCPC). - Pursuant to international treaties, members of foreign investigative authorities are allowed to attend investigatory actions (Section 184 HCPC). ### Reviews of techniques and FIU feedback - Suspicion indicators for money laundering are explained in documents of financial service providers (e.g., sample regulations of the Chamber of Hungarian auditors). - FIU feedback practices: - Until June 2004, the FIU sent specific feedback about STRs received. - Since then, only general letters to financial institutions are sent. - FIU provides training sessions with emphasis on “training the trainer” to avoid conflicts where investigators later investigate institutions they trained. - Customs and Finance Guard (HCFG) plans to further elaborate risk assessment profiles, focusing on cross-border cash-transfer surveillance. ### Statistics — General crime and ML-related data - Crime statistics provided (investigations started / decisions to cease / suggestions to prosecute) for years 2001–04 by category: - Trafficking in human beings 14 / 56 / 68 - Acts of terrorism 10 / 6 / 4 - Participation on criminal organization 4 / 0 / 4 - Misuse of narcotic drugs 4.198 / 872 / 1.925 - Unauthorized financial services 315 / 131 /132 - Unauthorized investment services 10 / 4 / 4 - Money laundering 25 / 7 / 7 - Tax and social security fraud 1.732 / 421 / 2.198 - Smuggling 20 / 2 / 16 - Embezzlement 5.242 / 2.243 / 2.254 - Fraud 18.766 / 4.130 / 10.206 - Fraudulent breach of trust 606 / 275 / 169 - Total economic crimes 10.121 / 3.290 / 4.160 - Total crimes against property 131.219 / 62.747 / 31.666 - Total crimes that became known 206.468 / 85.168 / 64.697 - Hungarian Progress Report 2003 mentions: - annual figure of 300-350.000 crimes against property and economic crimes; - totaling a loss of HUF 100-150 billion (EUR 0,37 – 0,50 billion). - Note: these figures seem to include complaints immediately dropped; number of investigations in other statistics is much lower. - Procedures under the Police Act (2002 to November 2004): - Criminal investigations on charges of money laundering: 3, 12 and 17. - Criminal investigations on charges of money laundering in a case referred by other police units: 10, 3, 2. - Information gathering operations: 12, 9, 11. - Information gathering operations pursuant to reports from other police units: 50, 22, 38. ### Suspicious Transaction Reports (STRs) - Evolution of STR submissions: - 2001 1.628 - 2002 6.271 - 2003 12.364 - 2004 14.120 - STRs filed by bureaux de change: 13, 169, 369 and 456, respectively. - STRs originating from the customs: 5, 3, 6 and 0. - FIU reporting on STR impact: - According to authorities’ Questionnaire, STRs had not triggered a single overt police investigation (as of Questionnaire). - Money laundering investigations were conducted based on denunciations or covert intelligence gathering. - FIU reported to the team that of approximately 15.000 STRs received in 2004: - 20 open investigations launched; - 9 covert investigations; - a number of investigations handled by other police services than the Money laundering department. ### Prosecution statistics and outcomes - Incoming files at the prosecution office: about 650.000 per year (steady since 2001, slight rise in 2003). - Trends since 1994: - Number of criminal cases rose to about 145 percent in 2003 (base 1994 = 100 percent). - Number of prosecutors rose to about 128 percent (since 1994). - Criminal cases brought before the courts: - 108.474 in 2002; - 105.406 in 2003. - Success rate of cases brought before court: - 96.5 percent in 2002; - 96.4 percent in 2003. - Economic crimes total about 15.000, rising every year since 2000; tax and social insurance fraud cases follow this trend. - Data from January 2005 Questionnaire (prosecution office): - 7 cases of prosecution related to money laundering; - Two judgments of conviction obtained; - One acquittal. - Predicate offences: fraud, misappropriation and illegitimate financial service activities. - Sentences: - In one case the sentence was a fine and forfeiture of HUF 500.000. - In the second case the sentence was 1 year and 8 months of imprisonment, 2 years ban from public affairs and a fine of HUF 200.00. - Supreme Court meeting notes: - Conviction on money laundering charges obtained against 10 persons, all based on Section 303/B HCC (failure to report). - Against 5 persons charges were filed for Section 303, but they were acquitted due to lack of evidence. ### Predicate offences and laundering typologies - Questionnaire states predicate offences are "typically" crimes against property and financial/economic crime: fraud, embezzlement, tax and social security fraud and fraudulent breach of trust. - Typical laundering methods described: - transferring money to companies in return for false invoices; - depositing large amounts of cash in banks declaring origin from currency exchange; - depositing small amounts of cash not falling under reporting rules. - Questionnaire observations: - No specific information is available about crime groups involved; reasonable to pay special attention to money exchange services. - Small number of cases insufficient to draw conclusions about ML patterns; few cases impede build-up of know-how and experience. ### Seizure, sequestration, and forfeiture - Money laundering investigations results: - 5 seizures made; - 33 sequestrations; - 1 forfeiture ordered. - Total amount of seizure: HUF 6 billion. - Hungarian progress report 2003: in two different money laundering cases the equivalent of EUR 5 million was frozen. ### Terrorism-related cases and freezing - Authorities report two convictions linked to sending/receiving funds related to internationally listed Islamic funds by foreigners residing in Hungary: - one case: 1 year and 5 months imprisonment; - second case: 5 years for each defendant. - 2005 Questionnaire reports: - 16 investigations of terrorism between 2002 and 2004; - resulting in 5 indictments and 2 convictions; the rest terminated or suspended. - Note: inconsistency with crime statistics which show only 8 investigations launched between 2002 and 2004. - Another paragraph states during the last 4 years only 2 offences registered in relation to terrorism (likely referring to the two convictions). - Asset freezing in terrorism cases: - In one terrorist case 450.000 EUR was seized, but released afterwards as the case was dropped. - Banking Association indicated there might have been two cases of asset freezing related to terrorist financing (no further details). - FIU reported no cases of freezing as a result of the EU-lists up to the assessment; suspension of transactions as a result of other lists occurred but details not obtained. - After the assessment team visit, 2 STRs related to terrorist financing were received. - Financial Supervisory Authority reported one case of freezing with funds released afterwards for lack of evidence. ### Interpretation and quality of statistics - Different statistics are difficult to match and link across stages; hard to follow ML cases from beginning to end. - Unclear if figures on seizure and forfeiture are accurately held and updated. - Questionnaire answers contain inconsistencies; statistical material requires careful handling and interpretation. ### Recommendations and comments (selected) - Strengthen HCFG competences in AML/CFT, placing more emphasis on the financial angle of investigations. - Investigations on organized crime should focus more on potential ML offences and be more closely coordinated with ML investigations. - Law enforcement officials must gain more practical experience in ML investigation and prosecution through a more generalized and aggressive prosecution policy. - A more innovative and daring use of existing tools is necessary. ### Compliance with FATF Recommendations (selected) - R.27 — Largely Compliant - Insufficient focus on potential ML offenses and relatively low number of prosecutions and convictions - R.28 — Compliant - R.30 — Compliant - R.32 — Largely Compliant - Statistics for investigations and prosecutions are inconsistent. Figures for seizures and confiscations are not accurate. ### Cash couriers (SR.IX) — description, analysis and recommendations - Declaration requirement (Article 7 of the AML law): - Any person crossing the frontier of Hungary carrying cash in HUF or any other currency, traveler's checks, international money order, transferable securities or money market instruments worth HUF 1 million (appr. US$5,500) or more must declare in writing to customs. - Declaration must indicate amount and currency type, or issuer, serial number and face value of securities/money market instruments where applicable, and identification details per Paragraph a) of Subsection (1) of article 5. - Unclear whether bearer shares are captured (law and form reference “transferable securities”). - Enforcement authority: HCFG (total staff 6,666); HCFG reorganized pursuant to Act XIX of 2004. - Sanctions: - Failure or false declaration punished with administrative fine of HUF 50.000 (appr. US$250). - The report considers this sanction not effective or dissuasive and notes lack of power to seize/freeze valuables on suspicion of ML or FT. - Scope and procedures: - Declaration applies to physical transportation by natural person and to shipment/mailing; a specific HCFG Office checks shipment/mailing declarations. - 2003 statistics: 1443 in-bound reports, 1146 out-bound reports, 1196 transit cases, 24 cases detected of failure to declare. - 2004 statistics: 925 in-bound reports, 410 out-bound reports, 506 transit cases, 24 cases of failure to report (22 referring to shipment/mailing detected at Budapest airport). - When threshold met, relevant information transmitted to General Directorate of HCFG and stored in hard copy archive for 10 years; plans for establishing a computerized database. - Law on Data Protection: personal data can be stored only in cases of false/failure of declaration. - HCFG powers and limitations: - Article 36 of the CPC: HCFG empowered to conduct investigations and has law-enforcement powers for a series of crimes (smuggling, social security or tax fraud, drug related offences, forgery) but not specifically for ML or FT. - HCFG has no authority to freeze/seize valuables subject to declaration on suspicion of ML/FT, nor to restrain/stop currency to ascertain evidence of ML/FT. - HCFG can ask for origin documentation (e.g., bank statements) but cannot stop/retain valuables if declaration and supporting documents are in order. - In case of failure/false declaration, only available sanction is the administrative fine; police will be informed but seizure powers require a criminal investigation. - Under Art. 7, sect. 3 of the AML law HCFG must establish identity of any person crossing the border if there is suspicion of ML; no such obligation for suspicion of FT. - Section 4: HCFG must report any suspicion of ML detected in declaration tasks to the FIU and keep records for 10 years; no reference to FT in reporting or mandatory obligation. - HCFG reported no in-bound/out-bound transport cases suspected of FT at the time. - HCFG STR reporting statistics (questionnaire breakdown): - Customs and Finance Guards: 5 (2001), 3 (2002), 6 (2003). - Authorities indicated that until 2004 they reported all declarations to FIU; subsequent agreement with FIU limited STRs to cases of effective ML suspicion — hence pre-2004 numbers are deceptively low. - In 2004 HCFG submitted 364 STRs to the FIU. - HCFG responsibilities also include control of precious metals and stones and cooperation agreements with all neighboring countries except Romania. - Recommendations for SR.IX: - Identification, record keeping and reporting requirements should apply also in the case of FT. - HCFG should be given authority to stop/restrain cash to ascertain whether evidence may be found for ML/FT. - Sanctions should be more effective and dissuasive. - Immediate seizure should be available in the case of cash related to ML/FT. - Compliance with FATF Special Recommendation IX: - SR.IX — Partially compliant - No possibility to stop/restrain or seize in the case of ML/FT. *Source: _cr05348 - 2. The public prosecution office* ### 1. financial services or activities auxiliary to financial intermediation (i.e.; currency exchange activities, ### 1. financial services or activities auxiliary to financial intermediation (i.e.; currency exchange activities, ### Scope of covered services - Financial services or activities auxiliary to financial intermediation: currency exchange activities, clearing operations, money processing activities and financial broking on the interbank market. - Investment services, activities auxiliary to investment services or investment fund management services. - Insurance underwriting, insurance agency or insurance consulting services. - Commodity exchange services. - Postal financial intermediation services, postal money transfer, accepting and delivering domestic and international postal money orders. - Providing services of a voluntary mutual insurance fund. ### Exemptions from customer due diligence (CDD) in Section 3 (6)-(15) and 3/A of the AML Act - Insurance transactions: - Life insurance policies where the annual premium is no more than HUF 240,000, or a single premium of no more than HUF 600, 000 (Section 3(6)b). - Insurance policies for pension schemes if there is no surrender clause and the policy cannot be used as collateral and if they provide retirement benefits to employees where the contracting party of the insurance policy is the employer (Section 3(6)c). - Financial institutions in Hungary supervised by the Hungarian Financial Supervisory Authority (HFSA) (Section 3(12)). - Financial institutions registered in a country whose legal system is compatible with the Council Directive 91/308/EEC on AML (Section 3/A (3)). - These exemptions are stated as acceptable under the risk based concept adopted by Recommendation 5 and are noted to be specifically authorized in relevant FATF Recommendations and interpretative notes regarding simplified or reduced CDD measures. ### Key recommendation - Preserve full information and technical accuracy as presented in source. --- ### Customer due diligence, including enhanced or reduced measures (R.5 to 8) - Assessment section headings: Description and analysis, Recommendations and comments, Compliance with FATF Recommendations. #### R.5 — Anonymous deposits and re-identification - Legislative change: Amendment of Law-Decree No.II of 1989 on Saving Deposits in December 2001 requires all savings deposit accounts be registered with depositor’s and beneficiary’s given name and surname (maiden name), address, date and place of birth, nationality, mother’s maiden name, and number and type of identification documents (Section 1 of the Law-Decree). - Existing anonymous deposits had to be converted to registered forms at first presentation of the savings deposit book at banks. - Phasing out process of anonymous deposits (Section 15/A of the Law-Decree) set at three phases: - First phase (until June 30, 2002); only suspicious transformation from anonymous to registered deposits had to be reported to the FIU. - Second phase (after July 1, 2002 until Dec 31, 2004); deposit holders and/or beneficiary of the transformed deposits with HUF 2 million or more needed to be reported to the FIU. - Third phase (after January 1, 2005); the remaining non-identified anonymous deposits are frozen in a way that any transformation requires a written request of the holder/beneficiary and must be reported to the FIU for permission. The transaction may be executed only following the permission of the FIU. - Re-identification requirement under Section 3 of the AML Act and Section 16(9) together with Section 5(6): financial institutions required to reidentify all existing customers by March 31, 2004 in a way that customers appear in person or by representative; financial institutions must refuse transactions with customers after April 1, 2004 who are not reidentified by March 31, 2004. - Resulting prohibitions: financial institutions are not allowed to keep anonymous accounts or accounts in fictitious names or numbered accounts. - Transformation outcomes reported by authorities: - More than 95 percent of previous anonymous deposits (in terms of value) were transformed into registered one. - Number of anonymous deposits declined from 5.2 million accounts in January 2002 to 2.4 million accounts in February 2005, i.e., by 54 percent. - Average value of a remaining anonymous deposits diminished from HUF 86 thousand to HUF 6 thousand during the same period. - HFSA monitoring: - Receives quarterly data regarding transformation of anonymous deposits (number of accounts, amount etc) and monitors progress. - Reviews effectiveness of internal control for transformation through on-site inspections. #### Occasion for CDD (Section 3 of the AML Act) - Financial institutions must undertake CDD: 1. when establishing a business relationship with a customer; 2. carrying out an occasional transactions over HUF 2 million (around US$10,000); 3. in the event of noticing any data, facts or circumstances that may suggest money laundering and the identification according to the previous points has not been completed, including when financial institutions have doubts about the veracity of previous CDD. - Cross-border wire transfers: Section 5(8) requires transfers be accompanied by information on the name, address and the account number of originator. #### Required CDD measures - For natural persons: - Identify by name (additionally maiden name, previous name if applicable), mother’s name, place and date of birth, address, nationality, type and number of ID (Section 5(1)). - Acceptable documents: national identity cards, passports, address cards, student cards, and driver’s license. - For legal persons: - Require name, legal seat, principal activity, number of deed of foundation, procuration, and legal representative. - Representatives must produce their own IDs, the deed of foundation and the authenticated copy of the court registry entry (Section 4 and 5(1)). - For beneficial owner: - Customer required to provide a written statement whether acting in own name or on behalf of actual holder (Section 6). - If acting on behalf, statement must contain name and address of actual holder. - If doubt arises concerning identity of actual holder, financial institutions shall request reconfirmation. - Section 6(4): financial institutions required to take all reasonable and appropriate measures to establish identity of actual holder. - Identified weakness: Section 6(2) requires only name and address of beneficial owners, whereas direct customers require more detailed information under Section 5(1); this difference is noted as a legislative weakness without justification. - Capital Markets Act provisions: - For legal persons, securities offered to the public must be registered and no share can be transferred without clear paper trail. - Nominees have to be registered together with beneficial owner; stock ledger is available to authorities and interested parties. - New business relationships should not be established unless identity of beneficial owner is proven and well documented; beneficial owner to be identified by name and address. - Recommendation of the President of the HFSA No.1/2004: - Financial institutions are recommended to obtain information on the purpose and intended nature of business relationships. - Increased attention to certain customer categories: customers represented by a nominee, customers who change from one bank to another for same or similar services, customers represented by independent lawyers. - Provides guidance that financial institutions develop customer profile based on CDD and conduct on-going due diligence during whole business relationship. - Notification obligations: - Section 5(3): during life of business relation, customers shall notify financial institutions any change in data supplied for CDD or concerning the beneficiary owner within 5 business days of first noticing such change. - Section 5(4): financial institutions shall advise customers concerning their obligations to report changes. - CDD not required for certain customers/transactions (see separate section on “Risk of money laundering or terrorist financing”). - Section 3(4): whenever suspicion of money laundering emerges, CDD is required. #### Timing of verifications - Section 3: financial institutions must verify identity of customer and beneficial owner with documents when establishing a business relationship or conducting occasional transactions. - Exception: indemnity payment for beneficiaries of certain types of insurances where identification may follow establishment but must precede disbursement (Section 3(9)). #### Failure to satisfactorily complete CDD - Section 5(6): if CDD of customers and beneficial owner is not possible, financial institutions shall not enter into business relationship and shall refuse to carry out current transactions. - Recommendation No.1/2004: incomplete identification data provision is a reason for suspicion to be reported to the FIU. #### Existing customers - Reidentification requirement reiterated: all existing customers to be reidentified by March 31, 2004 in person or by representative; refuse transactions after April 1, 2004 for customers not reidentified. #### Internal procedures and supervisory oversight - Section 11(3) and (5): all financial institutions required to establish internal procedure/regulations for AML, including CDD, to be approved by HFSA. - Section 11(4): HFSA issued Model Rules for internal procedures/regulations; has approved more than 2000 internal procedures/regulations. - HFSA off-site monitoring receives annual data including number of internal audits for AML/CFT internal control, anonymous deposits transformed to registered, and number of beneficial owners. - HFSA reviews effectiveness of internal control for CDD through on-site inspections conducted at least every two years. - Private sector feedback: banks, securities firms, insurance association and some insurance companies indicated they established internal controls for CDD following AML Act, Recommendation No.1/2004 and HFSA Model Rules; HFSA has reviewed these controls via off-site and on-site inspections. ### R.6 — Politically exposed persons (PEPs) - Recommendation No.1/2004 requires enhanced attention to PEPs (no distinction between domestic and foreign PEPs) and that establishment of business relations with PEPs should be responsibility of a top manager. - No separate provision requiring senior management approval of continuing business relations when customers subsequently become PEPs. - Recommendation No.1/2004 requires financial institutions to demand clarification of source of funds for all customers and refers to PEPs as aspect to be monitored for possible suspicious transactions. - 2003 UN Convention against Corruption ratified in September 2004 by Decision of the Parliament 73/2004. ### R.7 — Correspondent banking - No requirement in AML Act on enhanced due diligence for cross-border correspondent banking relationships at time of visit. - Recommendation No.1/2004 had no reference to correspondent banking at time of on-site visit. - Practice notes: - Correspondent banking relationships traditionally approved by senior management; past Foreign Exchange Control regime required opening new correspondent bank accounts abroad with approval of National Bank of Hungary upon well-documented senior management request. - Payable-through accounts are not in use in Hungarian banks. - During re-identification period required by AML Act 2003, all correspondent banks of Hungarian banks had to re-identify themselves with provision of data and documents regarding owners, business lines, business practices requested by Hungarian partner banks. - HFSA update: in April 2005 HFSA updated Recommendation No.1/2004 to add detailed requirements for correspondent banking relationships based on CDD paper by Basel Committee. ### R.8 — New technologies and anonymity - Recommendation No.1/2004: financial institutions should pay special attention to risks inherent in new or developing technologies that favor anonymity and take actions to prevent their use in money laundering schemes; institutions should have adequate policies and procedures for managing risks related to business relations and transactions not requiring personal contact. - HFSA reviews effectiveness of internal control via off-site monitoring and on-site inspection, including policies and procedures and implementation. - Private sector feedback indicates internal controls established relating to these recommendations. ### Recommendations and comments (CDD and R.5–R.8) - Measures to require full information for identification of beneficial owners, for example by the AML Act and HFSA supervisory rules. - Explicit requirements recommended regarding approval by senior management of continuing business relations with persons becoming PEPs after establishment of a business relationship. ### Compliance with FATF Recommendations (as stated) - R.5: Largely Compliant — Information required for identification of beneficial owners are less than those for direct customers, without justifiable reasons. - R.6: Largely Compliant — Lack of explicit requirement regarding approval by senior management of continuing business relations with persons becoming PEPs after establishment of a business relationship. - R.7: Compliant - R.8: Compliant --- ### Third parties and introduced business (R.9) - It is not allowed for any financial institution or other third party to introduce business because Section 16(9) together with Section 5(6) require reidentification of all existing customers in person or through a representative by March 31, 2004 and verification of all information required by the AML Act. - Exception: Independent insurance brokers may introduce business to insurance companies: - Brokers are supervised by HFSA and must comply with all CDD measures. - Section 3(8) allows insurance companies to accept full identification data from brokers as credible. - Full copy of CDD data must be given to insurance company, while one copy remains at the broker. - Both must keep records for 10 years after business relationship has ended. - Compliance with FATF Recommendation R.9: Compliant --- ### Financial institution secrecy or confidentiality (R.4) - No obstacle for competent authorities to have access to information at financial institutions and to implement AML/CFT measures. - Banking sector provisions: - Section 51(2) of Act CXII of 1996 on Credit Institutions and Financial Enterprises (“Banking Act”) provides obligation to keep bank secrets shall not apply in respect of the HFSA, investigating authorities, and the public prosecutor’s office. - Section 52 of the Banking Act provides that banks shall satisfy written requests for investigating authorities, the national security service and the public prosecutor’s office without delay concerning its customer’s bank account and transactions if it is alleged that the bank account or the transactions is associated with [text ends in source]. --- *Italic: Source — content extracted from the provided IMF assessment PDF chapter.* ### 1. trafficking of narcotic drugs; ### _cr05348 - 1. trafficking of narcotic drugs; ### Legal powers and exceptions to confidentiality (banking, insurance, securities) - Banking sector - Under Section 146 of the Banking Act, the HFSA is empowered to conduct on-site inspections of banks, and is able to access to any data and information at banks. - Financial institutions must satisfy written requests from investigating authorities, the national security service and the public prosecutor’s office concerning customer accounts and transactions without delay if alleged to be associated with: - 1. trafficking of narcotic drugs; - 2. terrorism; - 3. illegal trafficking in arms; - 4. money laundering; or - 5. organized crime. (Sections cited: Section 52 of the Banking Act) - Insurance sector - Section 157(1) of the Act LX of 2003 on Insurance Institutions and the Insurance Business (“Insurance Act”) provides that the obligation to keep insurance secrets shall not apply to the HFSA, investigating authorities and the public prosecutor’s office. - Section 157(5) of the Insurance Act provides that insurance companies shall supply information to investigative authorities and to the national security service if there is any suspicion that an insurance transaction is associated with: - 1. drug trafficking; - 2. terrorism; - 3. illegal arms trafficking; or - 4. money laundering. - Under Section 170 of the Insurance Act, the HFSA is empowered to conduct on-site inspections of insurance companies, and is able to access to any data and information at insurance companies. - Securities sector - Section 370(2) of the Act CXX of 2001 on the Capital Market (“Capital Market Act”) provides that the requirement of confidentiality concerning securities secrets shall not apply to the HFSA, investigating authorities and the public prosecutor. - Section 372 of the Capital Market Act requires investment service providers, commodities brokers, investment fund managers, the exchange and clearing corporations to satisfy written requests of investigating authorities, the national security service and the public prosecutor’s office concerning any transaction or account alleged to be linked to: - 1. trafficking of narcotic drugs; - 2. terrorism; - 3. illegal trafficking in arms; - 4. money laundering; or - 5. organized crime. - Under Section 396 of the Capital Market Act, the HFSA is empowered to conduct on-site inspections of investment service providers, commodities brokers, investment fund managers, and the exchange and clearing corporations, and is able to access to any data and information these institutions. ### Criminal Procedure Code and inter-agency data access - If during the investigation it seems necessary to obtain information from the tax authorities, organizations providing communication services, as well as from organizations managing data classified as bank secret, securities secret, fund secret or business secret, the prosecutor or the police, with the consent of the prosecutor, may make such requests. - The supply of data cannot be refused (Section 178/A HCPC). - Different acts (for example, Act CXII of 1996 on Credit Institutions and Financial Enterprises, Act LX of 2003 on Insurance Institutions and the Insurance Business, Act CXI of 1996 on Securities Offerings, Investment Services and the Stock Exchange and Act XCII of 2003 on the Rules of Taxation) stipulate that secrecy obligations are not applicable in respect of investigating authorities, the prosecutor or the court acting within the scope of criminal procedures. - For the pre-investigative stage, Acts CXI and CXII of 1996 contain more restrictive provisions: requests for information must only be answered if the offences relate to drug trafficking, terrorism, arms trafficking, money laundering and organized crime. ### Record keeping and wire transfer rules (R.10 & SR.VII) - R.10 — Records of transactions and customer identification - Transaction records - Section 169(2) the Act C of 2000 on Accounting (“Accounting Act”) requires all the financial institutions to keep all transaction records for 8 years. - Section 13/B(6)f) of the Banking Act, Section 160(1) of the Insurance Act and Section 101/A(6)f) of the Capital Market Act require financial institutions to keep all transaction records for a minimum of 5 years. - Records of customer identification - Section 10(1) of the AML Act requires all the financial institutions to retain the data and documents obtained through the CDD process as well as copies of identification documents (such as ID cards and passports) for a minimum of 10 years after the business relationship has ended. - The Model Rules issued by the HFSA for banking, insurance and securities sectors include obligations to keep records of customer identification and their copies for a minimum of 10 years. - Cash transaction records - Section 10(4) of the AML Act requires all the financial institutions to keep records of all cash transactions of the equivalent of HUF 2 million or more (around US$10,000) including identification of the customers. - Access by authorities - Financial institutions are required to satisfy written requests from investigating authorities, the national security service and the public prosecutor’s office concerning customer accounts and transactions without delay if alleged association with crimes including trafficking of narcotic drugs, terrorism, illegal trafficking in arms and money laundering (Section 52 of the Banking Act, Section 157(5) of the Insurance Act, Section 372 of the Capital Market Act). - Supervision and internal controls - The HFSA has approved more than 2000 internal procedures/regulations for AML, including record keeping. - The HFSA receives, through off-site monitoring of financial institutions, data including the number of internal audits for AML/CFT internal control. - The HFSA reviews the effectiveness of internal control for AML, including record keeping, through on-site inspections of financial institutions that are conducted at least every two years. - Discussions with private banks, securities firms and the insurance association indicate internal controls for record keeping have been established in line with the AML Act and Model Rules, and these have been reviewed by the HFSA through off-site monitoring and on-site inspections. - SR.VII — Wire transfer originator information - Decree No 9/2001 of the National Bank of Hungary (NBH) on payment services and on the rule of cash processing services applies to payments within Hungary and to and from foreign countries. - Section 8(1) of the Decree requires that, on payment orders, there must be a clear indication of the name, address and bank account number of the originator and the beneficiary. - Section 8(2) of the Decree provides that receiving banks have the right to refuse any payment order without these information and may return to the ordering bank. - There is no de minimus threshold for these requirements. - Section 5(8) of the AML Act requires that the name, address and account number of the originating customer should be recorded in incoming cross-border wire transfers to financial institutions in Hungary. - Recommendation of the President of the HFSA No 1/2004 on the prevention and impeding of terrorism and money laundering: - Banks and other service providers should specify the data of originator in accordance with the requirements in Decree No9/2001 of the NBH. - Special attention to payments where originator information is not complete; receiving banks should request originating bank for specified information. - Oversight - The HFSA reviews banks’ compliance with Recommendation No1/2004 through on-site inspections. - The NBH reviews banks’ compliance with Decree No. 9/2001 through on-site inspections. - Domestic payment systems and message formats - Two systems: Interbank Clearing System (ICS) — operated by Giro, owned by commercial banks and the NBH — processes retail payments overnight and settlement in NBH’s accounting system; NBH operates the RTGS system for large-value payments (VIBER). - Payment form fields: one space for originator’s name and residence, one for beneficiary’s name and residence, and two spaces for their account number. - In the ICS system, there is not sufficient space in the field for address in the form. The problem of the separation of the name-residence space will be addressed in few years. - The NBH is actively taking part in the design of the renewal of ICS system, which will allow more space for information including address, most probably in line with SWIFT messaging standards. - For large value same day payments, the same format as MT 103 for the SWIFT is used and there are sufficient space for filling in name, address and account number. - Banks met during the assessment reported that name, address and account numbers are filled in all outgoing transfer messages, and that in case of insufficient information about originator in incoming transfer messages, they will request further information from originating banks and return the orders if complete information is not provided. ### Recommendations and compliance assessments - Ensure that, for the payment form in domestic ICS system, sufficient space for information on the originator (name, address and account number) should be allowed as planned. - Compliance with FATF Recommendations (assessments stated in source) - R.4: Compliant - R.10: Compliant - SR.VII: Compliant _Italic: IMF staff report content unit _cr05348 - 1. trafficking of narcotic drugs;_ ### Section 11(3) of the AML Act provides that all the financial institutions shall adopt internal ### _cr05348 - Section 11(3) of the AML Act provides that all the financial institutions shall adopt internal ### Internal procedures/regulations (Section 11(3) and related provisions) - Section 11(3) of the AML Act: all the financial institutions shall adopt internal procedures/regulations to be approved by the HFSA, which must contain: - guidelines to recognize information, facts, or circumstances that may suggest money laundering; - the procedure for carrying out the obligation to report suspicious transactions including internal control, information and data processing systems that facilitate such procedures. - Section 11(2) of the AML Act: financial institutions must provide training for employees to learn the legal provisions of ML, business relations and transactions that enable or constitute ML, and to be able to proceed properly in case ML is suspected. - Section 11(5) elements to be included in internal rules/regulations: 1. guidelines to recognize information, facts or circumstances that may suggest money laundering; 2. procedure for CDD; 3. procedure for identifying beneficial owners; 4. procedures for carrying out reporting obligations of suspicious transactions, including internal control, information and a data processing system that facilitate such procedure; 5. procedures and forms for reporting to FIU; 6. rules for training of employees; and 7. codes of procedures and conduct that are to be observed by the employees in direct contact with customers. ### HFSA Model rules, Recommendation No. 1/2004, and implementation - The HFSA issued Model rules for banks, insurance companies and securities firms to prepare internal procedures/regulations for AML; Model rules include internal control systems (manual or electronic) to screen suspicious transactions. - Model rules' screening criteria include: - unusual nature of economic relations; - frequency of transactions; - remittance to or from off-shore institutions; - international lists published by the HFSA, EU or other bodies including the NCCT list by the FATF. - The Recommendation of the President of the HFSA No 1/2004: - financial institutions should pay increased attention to all complex and unusually large transactions as well as all transactions of an unusual character, which do not have an easily explainable economic and obvious lawful objective; - the motives behind such transactions should be examined very thoroughly, the results must be stated in writing and made available for competent authorities and examiners. - HFSA approvals and oversight: - The HFSA has approved internal procedures/regulations established by all financial institutions and reviews effectiveness through off-site monitoring and on-site inspections. - The HFSA has approved more than 2000 internal procedures/regulations that are established by all financial institutions. - Financial institutions visited indicated they have established internal controls including development of software for computerized monitoring systems and frequently refer to the HFSA web-site and NCCT list. ### Recordkeeping and retention requirements - The Recommendation of the President of the HFSA No. 1/2004 requires findings of examinations to be stated in writing and made available for competent authorities and examiners, but does not explicitly require keeping records of the findings of screenings for at least five years. - Statutory recordkeeping: - financial institutions are required to keep records of all transactions for a minimum of 5 years (Section 13/B(6)f) of the Banking Act, Section 160(1) of the Insurance Act and Section 101/A(6)f) of the Capital Market Act); - Section 10(1) of the AML Act requires all the financial institutions to retain the documents relating to STRs for 10 years from the date when they were recorded. - Recommendation/comment from assessment team: - The authorities may consider requiring explicitly that financial institutions keep records of findings of screenings. ### Attention to NCCTs and lists - The HFSA has issued letters to financial institutions requesting attention to countries and territories listed as Non-Cooperative Countries and Territories (NCCT) by the FATF and posts the NCCT lists on the HFSA web-site. - Model rules and Recommendation No. 1/2004 call for special attention to transactions and clients in jurisdictions on international and NCCT lists. ### Suspicious transaction reports (STRs) and reporting framework (R.13, R.14, R.19, R.25, SR.IV) - Article 8 of the AML Act: - SPs have an obligation to report directly to the NPHQ “in the event of noticing any information, fact or circumstance that may suggest money laundering”. - There is no legal obligation in the AML Act for a SPs to make an STR in the case of suspicion of FT in the AML Act. - The obligation to report is not automatically triggered by large size or cash transactions exceeding designated thresholds. - The report must include identification details and a brief description of the data, facts or circumstances denoting the suspicion of money laundering. - Attempted transactions seem not to be subject to reporting. - Article 9 of the AML Law: - SPs may suspend a transaction where there is any suspicion of money laundering and where prompt action by the police is deemed necessary to verify data, facts, or circumstances; - SP must immediately notify the NPHQ; the transaction can be executed if the NPHQ does not notify the SP in writing (fax, letter) within 24 hours. - Article 7: HCFG will report any suspicion of ML detected with reference to declaration of in-bound/out-bound transportation of valuables exceeding HUF 1 million. - Article 8 in connection with article 1, section 1 par. n: obligation to report vested in “directors, managers and employees of the SPs and in any family members actively engaged in such business.” - SPs of a relevant dimension have the obligation to appoint a “liaison officer” who would “forward the reports received” to the NPHQ without delay. - Criminal sanctions: - HCC Art. 303/B criminalizes failure to report under the AML Law as a felony punishable by imprisonment not to exceed three years in case of intentional failure; and as a misdemeanor punishable by imprisonment not to exceed two years, work in community service or with a fine in case of negligent failure. - Since entry into force as of April the 1st 2002, the number of STRs reported to the FIU has been exponentially growing. - Total STRs: 2001: 1628; 2002: 6271; 2003: 12364; 2004: 14120. - Trend partly driven by a recent case where 15 cashiers of banks were arrested for failure to report under Art. 303/B. - Quality and outcomes of STRs: - The team reports low quality of many STRs; questionnaire states: “Typically, 90 percent of an STR consists of none other than data of a bank transaction, i.e., account number, amount of money transferred to the account and perhaps the title of the transfer, the details of the account holder or the account holder’s agent and the description of the data, facts or circumstances indicating money laundering.” - Out of 14120 STRs received in 2004 only 20 cases (as referred by the authorities) turned into investigations (questionnaire statistics for first 11 months of 2004 show 9 initiatives of investigations, out of which 5 turned into a request to prosecute). - Apparently no prosecution was ever started out of an investigation arising from an STR, as informed to the Team. - The criminalization of failure to report, especially in case of negligence, appears disproportionate and counterproductive, likely leading to “defensive reporting.” - R.14 (confidentiality and legal protection): - Article 8 (5) of AML Law: safe disclosure rules — exemption from violation of bank, securities, insurance, pension fund or business secrets or from violation of restrictions on disclosure of data or information for the individual who reports a ST to the FIU. - Article 8 (6): in case of bona fide reporting, the individual who filed an STR will not be held responsible if the content of the report would subsequently prove to be unfounded. - Section 15 (6) protects lawyers and notaries public: fulfillment of reporting obligation cannot be considered as a breach of confidentiality requirements. - Article 8 par. (4): individuals required to report or the liaison officer must not disclose information regarding the STR, its contents, or the identity of the person filing the report to any third person or organization (except investigative authorities) or the customer; confidentiality must be ensured. - R.19: - HCFG is planning to create a computerized database for all cross-border transportation of currencies and other financial instruments. - R.25: - Section 11 (4) of the AML Act: public bodies exercising state or professional supervision over the service provider have the power to issue — in cooperation with the NPHQ and with the approval of the Ministry of Finance — guidelines and model laws available to the service provider. - Guidelines have been issued for all SPs and provide guidance in detection of ML typologies and STs; Recommendation No. 1/2004 addresses CFT issues with typology examples. - FIU feedback to SPs: until June 2004 case-by-case feedback; since then FIU provides overall analytic information feedback highlighting lacks and deficiencies of STRs to improve SPs’ capacities to file STRs. - SR.IV (special recommendation on terrorist financing): - No legal obligation in the Hungarian legislative framework specifically to report a transaction on the basis of a suspicion that the funds involved may be aimed at FT. - The preamble of the AML Law references combating the flow of funds financing terrorism, but the Team considers this insufficient; lack of specific requirement to report suspicious transactions aimed at FT is identified as a gap. - Art. 261, section 8 of the HCC (criminalizing failure to report reliable information concerning plans for a terrorist act) is not considered adequate to cover simple suspicions of FT. - Recommendation No. 1/2004 calls SPs to monitor lists of organizations and persons related to terrorism and to report “whenever there is a suspicion of a financial transaction which supports terrorism” following procedures used for suspected ML; HFSA confirmed this provision is not enforceable and would not cover SPs not supervised by HFSA. ### Recommendations, compliance findings, and comments - Assessment recommendations and comments: - The authorities may consider requiring explicitly that financial institutions keep records of findings of screenings. - A clear legal basis for the obligation to report STs related to FT should be established. - Further measures are needed to improve SPs’ capabilities to detect STRs related to ML and FT, and to improve the quality of STRs (for example, by conducting trainings for the SPs). - Reporting STRs should be in electronic format. - Compliance with FATF Recommendations (as stated): - R.11: Compliant - R.21: Compliant - R.13: Partially compliant — Need to improve quality of STRs. No coverage of FT and attempted transactions. - R.14: Compliant - R.19: Compliant - R.25: Compliant - SR.IV: Non compliant — No legal obligation for reporting of STRs related to FT ### Internal controls, compliance, audit and MLRO requirements (R.15 & R.22) - HFSA Model rules and Recommendation No.1/2004 include internal control and compliance elements: - Model rules include: record keeping; CDD; rules for employees in direct contact with customers; reporting of suspicious transactions including form and contents to be included in STRs; appointment of designated person in charge of forwarding STRs to FIU; training of employees; internal audit for AML; screening systems of suspicious transactions including criteria; training at recruiting and regular training at least once a year. - Recommendation No.1/2004 includes: 1. appointment of designated person (money laundering reporting officer: MLRO) at management level, reporting the designation and relevant data on the MLRO to the FIU, and the task of the MLRO; 2. procedures for CDD (including enhanced due diligence for PEPs, introduced business and etc); 3. procedures for record keeping; 4. rules for dealing with wire transfer; 5. filtering system for suspicious transactions; 6. procedures for reporting to FIU; 7. responsibilities of employees; 8. Internal audit; 9. training (including regular training at least once a year, an examination for the results of training); and 10. reference to relevant national and international legislations and documents for AML. - MLRO / liaison officer requirements (Section 8(2) and model rules): - Financial institutions shall designate “liaison officer(s)” or money laundering reporting officer (MLRO) to forward STRs to the FIU and shall notify the FIU within 5 days of the appointment of the liaison officer the name and position. - Model rules and Recommendation No.1/2004 specify: 1. The MLRO should be at management level; 2. Financial institutions should inform the FIU of the appointment of the MLRO with information on the identity, position and telephone number of the MLRO; 3. The MLRO should organize a training for employees at least once a year and document the results of examination after the training; 4. The MLRO is responsible for forwarding reports to the FIU, keeping relevant records, and responding timely and accurately to requests from the Police. *Source: _cr05348 - Section 11(3) of the AML Act provides that all the financial institutions shall adopt internal* ### 5. The MLRO has unlimited access to data and information, including CDD and transaction records. ### 5. The MLRO has unlimited access to data and information, including CDD and transaction records. ### MLRO access and reporting - The MLRO has unlimited access to data and information, including CDD and transaction records. - The MLRO should regularly inform the management, internal audit and supervisory board of financial institutions on his activities. - All institutions met by the assessment team have internal procedures/regulations for AML approved by the HFSA and have designated persons (MLRO). - The MLRO provides regular (at least once a year) trainings on AML, sometimes inviting staff from the FIU and HFSA. ### Internal audit function for AML/CFT - Model rules of the HFSA and Recommendations by the President of the HFSA require: - regular (at least once a year) internal audit to review compliance with internal regulations on AML - internal audit should cover CDD, declaration of beneficial owner, review of STRs, review of filtering system for suspicious transactions, review of training and examinations and other relevant issues - internal audit reports to the supervisory board and management of financial institutions. - The HFSA receives the number of internal audits conducted on AML/CFT but does not receive copies of internal audit reports; it requests on-site inspections when needed. - The HFSA receives a “compliance report” from external auditors of financial institutions once a year (Section 136 of the Banking Act, Section 151 of the Insurance Act and Section 360 of the Capital Market Act). ### HFSA approvals, inspections, and implementation oversight - The HFSA has approved more than 2000 internal regulations/procedures of financial institutions. - The HFSA reviews the effectiveness of internal controls, including implementation of internal regulations/procedures and Recommendations by the HFSA, through on-site inspections. - For AML/CFT: - comprehensive on-site inspections are conducted at least once every two years, with targeted inspections for AML/CFT and follow up inspections to review the effectiveness of internal controls - on-site inspections spend 2-3 weeks with 20 inspectors on average - AML targeted inspections are conducted by 2-3 inspectors for a shorter period - the HFSA conducted inspections relating to AML/CFT internal controls for 274 institutions in 2003 and 241 institutions in 2004 - The HFSA’s approval of internal procedures/procedures is “pro-forma” against the Model Rules; effectiveness of implementation is reviewed through on-site inspections. HFSA may require modifications in its approval letters; such modifications also need HFSA approval. - The HFSA informed the assessment team that internal audits put focus on auditing of AML/CFT. ### Branches, subsidiaries, and overseas supervision (R.22) - Opening of branches and establishing subsidiaries in foreign countries are subject to approval by the HFSA under relevant laws, including Sections 14(1)i) and 32/A of the Banking Act. - In the approval process, the HFSA refers to foreign supervisors about the AML/CFT regime in that jurisdiction and does not allow opening branches or establishments in countries that do not comply with the FATF Recommendations or where complying with the Hungarian AML rules/procedures is prohibited. - At the time of the assessment there are no branches nor subsidiaries of Hungarian financial institutions except subsidiaries of Hungarian banks in Slovakia, Croatia, Romania, and Bulgaria. - In HFSA’s consolidated supervision, foreign branches of Hungarian financial institutions are supervised and examined by the HFSA, including their compliance with AML/CFT requirements in Hungary. - The HFSA has concluded MOUs with foreign supervisors and has conducted on-site examinations of overseas subsidiaries of Hungarian institutions, including review of their compliance with AML/CFT requirements in Hungary. - The HFSA on-site examiner manual includes provisions relating to review of AML/CFT, including AML/CFT compliance by overseas branches and subsidiaries of Hungarian institutions. - Recommendation/comment: - The authorities may consider introducing more explicit requirements to require financial institutions to ensure their foreign branches and subsidiaries observe AML/CFT measures in Hungary and inform the HFSA when they are unable to observe AML/CFT measures in foreign jurisdictions. - Compliance with FATF Recommendations: - R.15 Compliant - R.22 Compliant ### Shell banks and correspondent banking (R.18) - Under the Banking Act, establishment of banks is subject to licensing by the HFSA; the HFSA reviews the mind and management of applicants and does not allow shell banks. - Requirements for establishing a bank in Hungary (Section 17 of the Banking Act) include: - the deed of foundation which clearly defines the type and sphere of activities to be established; - proof of deposit of 50 percent of the subscribed capital defined in the Banking Act; - a description of drafts for organizational structure, system of management, decision making and control mechanisms as well as the bylaws; - for applicants domiciled abroad, a statement concerning the applicant’s agent for service of process (attorney or law firm registered in Hungary, or the applicant’s bank representative office in Hungary). - For foreign banks establishing branches in Hungary, Section 17/A(1) of the Banking Act requires: - the foreign bank’s instrument of constitution - the foreign bank’s certificate of incorporation issued within three months to date in proof of the bank being registered in the register - a copy of the authorization issued by the competent home country supervisory where the foreign bank is registered - a certificate from the competent home country supervisory that the main office directing the bank is in the country where it is registered - the audited and approved balance sheet and other relevant documents - a detailed description of the founder’s ownership structure and of circumstances under which the founder is considered to be affiliated to a group of persons in partnership - Section 17/A(2) requires the HFSA to establish that there is a valid and effective international cooperation agreement (such as MOU) with the home country supervision and that the applicant’s home country has legal regulations on AML that conform to Hungarian requirements. - Therefore, establishing shell banks or branches of foreign shell banks in Hungary is not allowed. - Correspondent banking relationships: - At the time of the on-site visit there was no explicit prohibition in Hungarian AML/CFT law on correspondent relationships with shell banks. - Immediately after the on-site visit in April 2005, the HFSA updated Recommendation No.1/2004 to add a detailed section on correspondent banking relationships: banks should only establish correspondent relationships with foreign banks that are effectively supervised and should refuse relationships with banks incorporated in jurisdictions in which they have no physical presence and which are unaffiliated with a regulated financial group (i.e., shell banks). Banks should ensure respondent banks have CDD standards and pay particular attention to respondent banks in jurisdictions with poor CDD standards or identified as NCCT. - Compliance with FATF Recommendations: - R.18 Compliant ### Sanctions and supervisory powers (R.17, R.23, R.29, R.30) - Criminal sanctions (Section 303/B of the Hungarian Criminal Code, Act IV of 1978) for non–performance of reporting obligation in connection with money laundering: - (1) Any person who fails to comply with the reporting obligation by the Act on the Prevention and Combating of Money Laundering is guilty of felony punishable by imprisonment not to exceed three years. - (2) Any person who negligently fails to comply with the reporting obligation referred to in Subsection (1) is guilty of misdemeanor punishable by imprisonment not to exceed two years, work in community service or a fine. - Authorities reported that in recent cases, 15 cashiers of banks were arrested for negligence of reporting. - Observed issue: the regime imposing terms of imprisonment for intentional and negligent non-reporting may be counter-productive and result in over-reporting; negligent non-reporting penalties may be disproportionate and reduce the quality of STRs. - Administrative sanctions (HFSA powers under sectoral laws): - warning; fines (against legal and natural persons); resolutions to request correction of deficiencies; withdrawing, restricting and suspending licenses; request of dismissal of executive officers and other members of management body; disciplinary action against employees; nomination of supervisory commissioner (Sections 150-156 of the Banking Act, Sections 196-198 of the Insurance Act, and Sections 399-400 of the Capital Market Act). - Sanctions taken by HFSA following AML/CFT inspections: - resolutions to 7 insurance companies - resolutions to 9 banks and fine for 1 bank - resolutions to 5 financial enterprises - resolutions and management letters to 6 investment firms - withdrawal of license of 2 bureau de change - HFSA published resolutions in the Financial Gazette and on the HFSA web-site. - R.23 supervisory framework: - Under Section 1(1) and Section 2(2) of the AML Act, the HFSA is designated responsible for supervision of financial institutions’ compliance with AML Act requirements. - Section 2(2) of the HFSA Act provides HFSA shall continually monitor compliance with legal and supervisory regulations governing financial institutions, with particular emphasis on ML. - The HFSA has issued Model Rules for each financial sector and Recommendation No.1/2004 on prevention and impeding of terrorism and money laundering; for CFT the Recommendation requires increased attention to terrorist lists and immediate reporting to competent investigation authorities in case of suspicion on FT. - Off-site monitoring: HFSA receives quarterly data, including anonymous deposits transformed into registered ones, STRs (number, amount of transactions and etc.), and number of beneficial owners and assets frozen based on UN/EU terrorists lists (number of accounts, amount of assets frozen). - Shortcoming: since there is no legal obligation of reporting STs based on suspicion of FT, HFSA’s supervisory oversight seems less robust for CFT than AML. - R.29 powers: - HFSA empowered to conduct on-site inspections and to request any records, data, information and documents (Section 146 of the Banking Act, Section 170 of the Insurance Act, and Section 396 of the Capital Market Act). - R.30 resourcing and staff: - The HFSA is staffed with around 540 staff, and is in charge of supervision of all financial institutions (689 in total in September 2004). - Section 11 of the FSA Act requires HFSA staff to maintain confidentiality regarding secrets, information, data, and facts obtained in the course of duties; obligation remains after termination of employment. - HFSA staff are required to have clean criminal records under the Code of Civil Servants; the internal rule has provisions on conflicts of interests. - A supervisory staff is responsible for supervision of 2-3 financial institutions on average both for off-site monitoring and on-site inspections. - HFSA staff are skilled and trained and participate in regular AML/CFT training both in- and out-of-country. - Recommendations and comments (from this section): - The authorities should review the effectiveness of the current regime of imposing terms of imprisonment for negligent non-reporting of suspicious transactions under Section 303/B of the HCC. - A clear legal basis for STR obligation relating to FT should be established to ensure effective supervisory oversight for CFT. - Compliance with FATF Recommendations (as reported): - R.17 Largely compliant - Note: The current regime of imposing terms of imprisonment for intentional and negligent non-reporting of suspicious transactions under Section 303/B of the HCC is not proportionate to the severity of non-reporting, especially in the case of negligent non-reporting. - R.23 Largely Compliant - Note: Supervisory oversight for CFT is less robust due to a lack of legal basis for the STR obligation relating to FT - R.29 Compliant - R.30 Compliant ### Financial institutions — market entry and fit and proper requirements (R.23) - Banks: - Section 11 of the Banking Act requires any person with qualifying participation (i.e., i) controls 10 percent or more of the capital, ii) has powers to appoint or remove 20 percent or more of the members of banks decision-making, management, supervisory and other bodies; or iii) has powers to exercise significant influence over the management of banks) must: - be independent of any influence which may endanger the bank’s sound, diligent and reliable operation; and - ensure transparency in business connections and ownership structure so as to allow the competent authority to exercise effective supervision over banks. - Section 37 of the Banking Act provides HFSA permission must be obtained before acquisition of qualifying participation. - Fit and properness for executive officers and supervisory board members: - Section 13(4) of the Banking Act: any person convicted for crimes cannot be appointed or elected to an executive officer; HFSA can check the register of convicted criminals and register of individuals indicted under criminal charges (Section 13(5)). - Section 44(4) provides no person having a criminal record can be elected or appointed as an executive officer. - Section 44(6) provides no person indicted by the public prosecutor or indicted abroad for a property or economic crime punishable under Hungarian law can be elected or appointed as an executive officer until conclusion of the criminal procedure. - HFSA shall reject an application for authorization for election or appointment of a person having a criminal record or who has been indicted (Section 44(3)). - Insurance companies: - Section 58 of the Insurance Act: foundation of insurance companies subject to HFSA license; application must include information on shareholders and persons with qualifying holding. - Section 111 of the Insurance Act: acquisition of interest in a joint-stock insurance company providing a qualifying holding requires prior HFSA permission; application must contain an official document proving no criminal record for natural persons issued within 3 months to date by competent authority of place of permanent residence. - Section 83(1) and (3) of the Insurance Act: election or appointment of executive officer subject to HFSA authorization; executive officer shall have no prior criminal records. - Section 83(5) and Section 84: no person indicted by the public prosecutor or abroad for a property or economic crime punishable under Hungarian law may be appointed as executive officer until conclusion of criminal procedure; similar fit and properness requirements apply to managing director. *Source: _cr05348 - 5. The MLRO has unlimited access to data and information, including CDD and transaction records.* ### Section 107 of the Capital Market Act provides that, the application for acquisition of a qualifying holding in an ### _cr05348 - Section 107 of the Capital Market Act provides that, the application for acquisition of a qualifying holding in an ### Licensing and criminal-record eligibility requirements - Section 107 of the Capital Market Act: application for acquisition of a qualifying holding in securities firms subject to HFSA authorization shall include information that the applicant, if a natural person, has no prior criminal record. - Section 97 of the Capital Market Act: investment service providers shall be managed by at least two officers with no prior criminal record. - Government Decree 297/2001(XII.27.) on Money Exchange Services: - Only banks and persons employed by banks under agency contract (“exchange agent”) may operate money exchange services. - Exchange agents must attach terms of service approved by banks and have a valid agency contract with banks when submitting license application to the HFSA (Section 3). - An official certificate of criminal history issued within 30 days to date for persons to be elected or appointed as an executive officer of exchange agents must be enclosed with the application (Section 5). - Under Section 12, the following persons cannot be elected or appointed as an executive officer of exchange agents: 1. any person who has a criminal record 2. any person who has been indicted by the public prosecutor or who has been indicted for a crime against property or an economic crime that is punishable under Hungarian law may not be employed as an executive officer until the conclusion of the criminal procedure; 3. any person who has been punished for a misdemeanor offense for any fraudulent violations of financial or accounting regulations. ### Money transfer, money exchange, and cash processing services — scope and supervision - Money transfer services: - Defined under Section 3(1) of the Banking Act as financial services requiring license from the HFSA. - Subject to the requirements under the AML Act and to supervision by the HFSA (Section 1(1) and (2) of the AML Act). - Money transfer services without HFSA license are illegal. The HFSA is not aware of such illegal money transfer services or underground banking; if noted, HFSA should report to the Police under the Criminal Procedures Code. - Money exchange services: - Defined under Section 3(2) of the Banking Act as activities auxiliary to financial services requiring HFSA license. - HFSA requests opinion of the National Police Headquarters prior to granting a license; the National Police Headquarters conveys its opinion from point of view of criminal and public safety concerns (Section 2 of the Government Decree). - Exchange agents must have internal regulation including AML provisions and keep regulations updated at all times (Section 18). - Internal control (audit) departments of banks with agency contracts must examine/audit once a year whether agents provide money exchange services in compliance with law and contracts; banks must notify HFSA without delay when agents violate law or breach contract (Section 26). - HFSA shall revoke license of exchange agents in cases where they: 1. are engaged in any unlawful activity; 2. do not comply with the legal provision on money exchange operations; 3. have repeatedly violated the legal provision on accounting, control and on the authorized activity and/or the regulations of the Commission (Section 7). - The HFSA conducts on-site inspections of exchange offices and revoked the licenses of 2 exchange agents in 2004. - Cash processing services: - Defined as auxiliary to financial services in Section 3(2)c) of the Banking Act; subject to a license as financial enterprise and supervision by the National Bank of Hungary (NBH) (Section 3(6) of the Banking Act). - Applications for licensing for cash processing services should include a certificate of no criminal record issued within 30 days to date for executive employees, for the manager in charge of cash processing operation and for all directly involved in cash processing activities; applications need to be reviewed by the NBH. - NBH issued Model Rules for cash processing services to establish AML internal procedures/regulations. - There are currently 6 companies engaged in cash processing services. - NBH has approved internal procedures/regulations and reviews implementation through annual on-site inspection; NBH organized seminars twice for the cash processing services companies where AML was a highlighted topic. ### Internal rules, Model Rules, and AML/CFT guidance (R.25) - Section 11(3) of the AML Act: every financial institution must prepare internal rules/regulations covering obligations in the Act, to be approved by the HFSA. - Section 11(5) of the AML Act requires internal rules/regulations to contain at least: 1. aspects to be taken into consideration when establishing data, facts or circumstances that might be indications of money laundering; 2. the internal procedures of customer identification; 3. the internal procedures of establishing the identity of the beneficial owner and the manner of making a declaration by customers to this effect; 4. the internal procedures of the reporting requirement, including the underlying internal control, communication and data processing systems; 5. procedures and format of reporting to the FIU, the form for the report; 6. provisions concerning the handling, recording and protection of data generated in connection with the identification or reporting; 7. provisions pertaining to the training and continuous further training of employees; 8. procedural and behavioral standards applicable in individual cases to employees in direct contact with customers; and 9. description of the crime of money laundering in the HCC and of the provisions of the AML Act, as well as of the secrecy provisions of the regulations applicable to the service provider. - Section 11(4): HFSA assists supervised financial institutions by publishing Guidelines and Model Rules; Model Rules prepared in co-operation with the FIU and in agreement with the Ministry of Finance. - Model Rules: - Describe ML and FT techniques, methods and typologies of unusual transactions. - Include additional measures, internal rules/procedures for record keeping, CDD procedures, rules for employees in direct contact with customers, procedures for screening suspicious transactions, procedures for reporting STRs including format and content, rules relating to designated persons to report to the FIU, rules for internal audit, provisions for training of employees and other issues required by Section 11(5). - Implementation and approvals: - HFSA has approved more than 2000 internal procedures/regulations prepared by financial institutions following the Model Regulations. - HFSA approval is “pro-forma” against the Model Rules and HFSA reviews implementation effectiveness via on-site inspections. - NBH has approved internal procedures/regulations of cash processing companies and reviews implementation through annual on-site inspection. - HFSA issued Recommendation of the President of the HFSA No.1/2004 on prevention and impeding of terrorism and money laundering, providing guidance on effective internal controls and CFT attention to lists of terrorists and terrorism organizations. ### Supervision, monitoring, inspections, and enforcement (R.23, R.29, R.32) - Legal designation and powers: - Under Section 1(1) and Section 2(2) of the AML Act, HFSA is designated as responsible for supervision of financial institutions’ compliance with AML Act requirements. - Section 2(2) of the FSA ACT (Act CXXIV of 1999 on government Control of Financial Institutions) provides HFSA shall continually monitor compliance with legal and supervisory regulations governing operations of financial institutions, with particular emphasis on ML. - HFSA empowered to control and oversee compliance, examine, analyze and evaluate prudent operations (Section 138 of the Banking Act, Section 169 of the Insurance Act, Section 378 of the Capital Market Act). - HFSA empowered to conduct on-site inspections and request any records, data, information and documents (Section 146 of the Banking Act, Section 170 of the Insurance Act, Section 396 of the Capital Market Act). - HFSA has power of administrative sanctions and has taken actions against non-compliance. - Off-site monitoring: - HFSA receives quarterly data from financial institutions, including: 1. number and amount of registered anonymous deposits; 2. STRs (number, full and average amount of transactions for STRs, full incoming/outgoing amount of transactions for STRs); 3. assets frozen (number of accounts and amount of money frozen); 4. number of internal audits among financial institutions relating to AML/CFT (internal audit reports are obtained during on-site inspections). - HFSA also receives “compliance report” from external auditors once a year covering findings related to compliance with relevant laws, regulations and HFSA resolutions and internal control (Section 136 of the Banking Act, Section 151 of the Insurance Act and Section 360 of the Capital Market Act). - With these data and compliance reports, HFSA establishes high risk areas for on-site inspection focus. - On-site inspections: - Types: i) comprehensive inspection, at least once every 2 years, including AML/CFT internal control review; ii) follow-up inspection; iii) targeted inspections, including AML/CFT focus. - HFSA has on-site inspection manual covering AML/CFT issues. - Typical duration and resourcing: on-site inspections spend 2-3 weeks with 20 inspectors on average; AML targeted inspections are conducted by 2-3 inspectors for shorter period. - HFSA conducted inspections focusing on AML/CFT for 274 institutions in 2003 and 241 institutions in 2004. - Enforcement outcomes and sanctions: - As a result of inspections, HFSA took the following sanctions: 1. resolutions to 7 insurance companies; 2. resolutions to 9 banks and fine for 1 bank; 3. resolutions to 5 financial enterprises; 4. resolutions and management letters to 6 investment firms; and 5. withdrawal of license of 2 bureau de change - HFSA published resolutions in the Financial Gazette and on the HFSA web-site. - Observations on CFT oversight: - There is no legal obligation of reporting STs based on suspicion of FT; HFSA’s supervisory oversight seems less robust for CFT than AML. *Source: _cr05348 - Section 107 of the Capital Market Act provides that, the application for acquisition of a qualifying holding in an* ### 5. number of beneficiary owners ### 5. number of beneficiary owners ### On-site inspections and interministerial oversight - HFSA maintained AML/CFT on-site inspection data: 274 in 2003 and 241 in 2004. - HFSA summarizes findings and lessons from on-site inspections; findings/lessons are discussed at the Interministerial Committee for AML. - The Interministerial Committee for AML, chaired by the Ministry of Finance, reviews effectiveness of the AML system on regular basis. - Interministerial Working Group for the fight against terrorism, chaired by the Ministry of Interior, established National Plan of Action on Combat Terrorism adopted by the Government in May 2004. Recommendations and comments - A clear legal basis for STR obligation relating to FT should be established to ensure effective supervisory oversight for CFT. Compliance with FATF Recommendations - R.23 Largely Compliant — Supervisory oversight for CFT is less robust due to a lack of legal basis for the STR obligation relating to FT - R.29 Compliant - R.32 Compliant ### Money or value transfer services (SR.VI) Description and analysis - Money transfer services: subject to license and supervision by the HFSA under Section 3 of the Banking Act, and subject to AML requirements under Section 1 of the AML Act. - Unlicensed money transfer services are illegal and subject to investigation by criminal/law enforcement authorities. - Postal money transfers supervised by HFSA; postal transfers are cash and walk-in customers only; subject to AML Act (Section 1(1)e)). - HFSA worked with Hungarian Post Limited to establish internal rules for AML (no Model Rules were issued). - Western Union services in Hungary are provided by InterCash, Hungary, licensed under Section 6(2) of the Banking Act; services provided through agents (including exchange offices) who are contracted agents with InterCash. - HFSA supervises InterCash via off-site monitoring and on-site inspections; agents must be notified to HFSA (no direct HFSA supervision). - InterCash must audit its agents under Section 19 of the Banking Act; HFSA reviews InterCash–agent contracts and InterCash’s right to review agents’ internal controls. Recommendations and comments - -- Compliance with FATF Recommendations - SR.VI Compliant ### Preventive measures — Designated Non-Financial Businesses and Professions (DNFBPs) Customer due diligence and record-keeping (R.12) Description and analysis - CDD requirements for DNFBPs are the same as for financial institutions (Articles 3–6 of the AML Act); issues concerning CDD for beneficial owners noted for financial institutions apply equally to DNFBPs. - Implementation differs by profession: - Casinos: must fully identify all customers at entry (Article 3, Section 5); no additional identification requirement on financial transactions above US$3000; “Gaming houses” have no CDD requirement; model regulation treats beneficial owner requirement as fulfilled if casino posts warning and treats non-declarant as gambling for themselves. - Dealers in precious stones and metals: subject to Ministry of Finance Directive 7005/2003 (PK8) PM; contractual business relations and transactions above threshold reportedly rare. - Real-estate agents: subject to Ministry of Finance Directive 7002/2003 (PK8) PM; agency relationships reportedly always contractual. - Lawyers and notaries: required to perform CDD for clients engaging services for: (i) purchase/sale of equity participations in a business entity or association, (ii) sale/purchase of real property, (iii) establishment, operation, or termination of a business entity or association; failure sanctioned by respective Chambers. Exemptions apply when indications of ML discovered in connection with providing defense in criminal proceedings or legal representation before a court and for certain “non-trial procedure” acts for notaries. Notary practice in transferring money/valuables to third parties may not consistently record identity of third party — Chamber of Notaries should review procedure. - Auditors: Chamber of Auditors sample regulations (approved 29 August 2003, modified 16 October 2004) require full CDD upon signing of auditing contract. - Accountants and tax advisors: Ministry of Finance Directives 7003/2003 (PK8) PM and 7004/2003 (PK8) PM require identification when entering contractual relationship or if detecting ML; no occasional transaction identification requirement. Recommendations and comments - Review notary rules and practices to ensure collection of full CDD information for any third party receiving money, valuables, or securities and review exemptions for “non-trial procedure.” - Strengthen DNFBP beneficial owner identification process in AML legislation to ensure full information on legal and natural persons is taken. Compliance with FATF Recommendations - R.12 Partially Compliant — Information required for the identification of beneficial owners are less than direct customers without justifiable reasons. Monitoring of transactions and relationships (R.12 & R.16) Description and analysis - Model rules and guidelines describe potentially suspicious transactions consistent with R.11; no specific enhancements for politically exposed persons (PEPs) required by law or model rules; no provision for enhanced or reduced CDD for DNFBPs. - DNFBPs required to keep records for ten years. - Law does not require special attention to transactions with countries not applying FATF recommendations; model rule for Auditors appended NCCT list current at issuance. - Casinos instructed to verify veracity of any “Certificate of Winnings” and to treat requests for false certificates as grounds for suspicion; Gaming Houses cannot issue such certificates. Recommendations and comments - Full FATF compliance would require enhanced due diligence for PEPs and wider, more systematic dissemination to DNFBPs of information about international compliance with FATF standards. Compliance with FATF Recommendations - R.12 Largely Compliant — Lack of provisions for PEPs. - R.16 Compliant Suspicious transaction reporting (R.16) Description and analysis - DNFBPs required to file STRs under Art. 8 of the AML Act, with noted weaknesses: no FT reporting requirement, no reporting of attempts. - STR filings by DNFBPs: 1 STR in 2001, 7 in 2002, 65 in 2003, and 211 in 2004. Most in 2004 came from accountants and notaries. Lawyers, real estate agents, and precious goods dealers filed none to date; casinos and auditors filed negligible numbers. - Lawyers and Notaries file STRs through their Chambers (possible delay); all other DNFBPs file directly to the FIU. - DNFBPs protected from liability for good-faith reports; criminal penalties apply for failure to report even through negligence; “tipping off” prohibited. - Lawyers only required to file STRs since AML Act entry into force on 16 June, 2003; Notaries have filed some STRs. - Accountants responsible for 174 of the 2004 reports. - FIU noted STR quality has improved; continued outreach, education, awareness-raising needed. Recommendations and comments - Increase quantity and quality of STR reporting from DNFBPs via systematic outreach and improved guidance, especially for DNFBPs not organized within SROs. - DNFBPs should be required to report suspicions of FT and to report attempts to launder money. Compliance with FATF Recommendations - R.16 Partially Compliant — Low numbers of STRs from DNFBPs, sub-optimal guidance on STRs for some DNFBPs, no FT or attempted ML reporting requirements. Internal controls, compliance & audit (R.16) Description and analysis - Chambers of Attorneys, Notaries, and Auditors circulated model rules; HGB circulated mandatory guidelines for casinos; Ministry of Finance issued model rules for DNFBPs without SROs. - NPHQ has received 21,000 internal rules from DNFBPs it supervises (mainly accountants and real estate agents); vast majority closely based on Ministry of Finance model rules and reported adequate. - All DNFBPs required to designate a compliance officer, maintain internal AML/CFT rules, and conduct staff training. - Training integrated into continuing education for accountants, auditors, notaries; real estate agents receive one-time Ministry of Interior courses and ongoing professional training; dealers in precious metals/stones with more than 10 employees conduct in-house training and keep records for inspection; casinos required to train staff and document training. Recommendations and comments - -- Compliance with FATF Recommendations - R.16 Compliant Regulation, supervision and monitoring (R.17, R.24–R.25) Description and analysis - AML/CFT supervision of DNFBPs categorized: - Casinos: supervised by HGB. - Lawyers, notaries, auditors: supervised by respective chambers. - Other professions (accountants, real estate agents, high-value goods dealers): supervised directly by the FIU (NPHQ). - None of the DNFBP model rules address CFT issues. - Casinos: HGB conducts oversight, checks internal rules and training, conducts spot checks of CID procedures, issued sanctions for failure to report and record-keeping failures; HGB conducted 26 specialized AML/CFT on-site examinations since passage of new AML law. - Licensing for gambling establishments: Article 2, Section 4 of Act XXXIV of 1991 restricts licenses where applicant or senior officer has relevant criminal record or certain offenses within specified time frames; relies on Certificate of Clean Police Record. - Pre-license tendering process managed by Ministry of Finance includes background checks; HGB not represented on the interagency body overseeing tenders. - Self-regulated DNFBPs: Chambers adapting adequately; model rules developed; AML/CFT infractions incorporated into sanctioning policy; on-site examinations conducted although no sanctions yet issued. - Non self-regulated DNFBPs: NPHQ reviews internal rules, conducts on-site inspections, reviews training; FIU conducted 197 random on-site inspections of DNFBPs during 2003, 92 of which were outside Budapest; 21 instances found deficiencies and issued mandatory corrective measures. - Authorities considering devolving on-site inspection function to local police authorities (risk of blurring policing and supervisory functions). - Professional chambers and casinos report interactive process with authorities on AML legislation and model rules; Notaries reported receiving specific and analytical feedback on STRs. Recommendations and comments - All sectors covered by sanctions, though effectiveness in some cases untested. - Review tendering process for gaming establishments to ensure protections against involvement of criminal associates are strong enough. - Increase resources available for supervision of non self-regulated DNFBPs. - Improve feedback to DNFBPs as part of awareness-raising and education efforts. - Issue guidance on CFT for DNFBPs. Compliance with FATF Recommendations - R.17 Compliant - R.24 Largely Compliant — Supervision of DNFBPs without state or professional supervision understaffed - R.25 Largely Compliant — No guidance on CFT for DNFBPs Other non-financial businesses and professions — Modern secure transaction techniques (R.20) Description and analysis - Hungarian legislation covers a wider range of high-value goods dealers than required under FATF; authorities participating in preparation of the 3rd EU AML Directive. - Largest Hungarian banknote in circulation is HUF 20,000 (approx US$110). - Authorities aware of cash role; mandated use of banking system and funds transfers for certain official transactions. - NBH formed working group on payments systems to develop measures to make financial institutions more accessible and attractive. Recommendations and comments - -- Compliance with FATF Recommendations - R.20 Compliant ### Legal Persons, Arrangements & Nonprofit Organizations — Access to beneficial ownership and control information Legal Persons — Access to beneficial ownership and control information (R.33) Description and analysis - General company rules: Act IV of 1959 (Civil Code) and Act CXLV of 1997 on Register of Companies, Public Company Information and Court Registration Proceedings. - Main types of for-profit companies: Corporation Limited by Shares (CLS), Company with Limited Liability (CLL), Joint Enterprise (JE), General and Limited Partnerships. - CLS: separate legal entity; private if shares not publicly issued; public if shares publicly issued; regular share certificates negotiable if stated capital fully paid; dematerialized shares must be “registered by name.” - CLL: liability limited to stated capital; ownership rights embodied in “business quota.” - JE: non-limited liability corporation; GP: association of ten or more individuals/entities not a separate legal entity with joint liability; LP: liability limited to amount invested. - Non-profit companies can be limited liability companies established for public purposes; Foundations formed by charter for long-term public, charitable, or religious purposes. - Company Registers held and maintained by Company Courts organized within County Courts and a Metropolitan Court (Court of Registration). - Registration is constitutive (company comes into being by Court decision ordering incorporation). - Registration system computerized and run by Company Registration Service of the Ministry of Justice; accessible to the public. - Act CXLV provides registration for 16 different types of entity (Art. 13). - Article 12 mandatory data for all entities includes: company's registration number; name and registered office; deed of foundation; principal activity; subscribed capital broken down by monetary and in-kind contributions; name/address/positions of persons vested with power of representation; all bank accounts and financial institutions keeping such accounts. - Article 13 sets specific data for each entity type, including names of members and owners. - For companies with legal personality, a bank certificate proving capital paid up is requested. - Court of Registration conducts formal control for completeness; for foreign owners, an authenticated copy of documentation sufficient; Court cannot directly inquire foreign counterparts. - Law of Capital Market (Act CXX of 2001) prohibited issuing bearer shares; some residual references to bearer shares remain in older provisions but reported ineffective. - Art. 13 (10) permits foreign company to register a “direct commercial representative office(s)” with required data: (a) name, type, file number and registered office of foreign company, (b) name and seat of court/authority where foreign company is registered, (c) name (corporate name) and home address (registered office) of foreign company’s executive officers and first and last day of their term in office. - Representative office cannot conduct business activities but may buy properties and establish business relationships (e.g., open a bank account). - Court of registry relies on AML identification requirements prescribed for lawyers and notaries involved in preparation of the deed of foundation for identifying beneficial owners. - Changes regarding registered entity must be reported to the Court; Article 30, section 2: “Any amendments involving the company's registered office (business premises, branch office) or its members (owners), executive officers, supervisory board members or its auditor shall take effect upon being registered in the company register retroactively as of the effective date of the change in question”. Recommendations and comments - -- Compliance with FATF Recommendations - R.33 Compliant Legal Arrangements — Access to beneficial ownership and control information (R.34) Description and analysis - Mission informed that legal arrangements, other than legal persons discussed under R.33, do not exist in Hungary. - Under article 13, section 10 of Act CXLV of 1997, a representative of a foreign trust could be registered as a “direct commercial representative office(s) of foreigners in Hungary”. Recommendations and comments - -- Compliance with FATF Recommendations - R.34 Not applicable Nonprofit organizations (SR.VIII) Description and analysis - Authorities have not yet undertaken a review of vulnerabilities of the NPO sector; draft of 2nd National Action Plan of the Interministerial Task Force on Counterterrorism reported to contain plans for such a review. - Registration requirements and on-going supervision of NPOs by dedicated staff at the Public Prosecutor’s office provide some protection, but registration process not so rigorous as to make misuse impossible. - Protections strongest for budgetary subsidies and reporting for “1 percent” funds (see p. 17) and specific tax receipt requirements for donors to PBOs. - General Prosecutor’s supervisory powers do not include access to bank records, limiting ability to trace financial flows through organizations. - No legal basis for stopping an unregistered NPO from soliciting funds from private citizens for certain purposes; no mechanism to control use of such funds. - Relatively low level of individual private donations to registered Hungarian NPOs suggests currently low-level risk, but NPO review should investigate. Recommendations and comments - Authorities need to conduct a review of the sector to be fully compliant with FATF recommendations; the review should: - look broadly at increasing transparency in the sector; - strengthen the legal basis for supervision; - strengthen oversight over NPO fundraising; - consult widely with the sector on improving transparency and reporting. Compliance with FATF Recommendations - SR.VIII Partially Compliant — Conduct necessary review; modernize oversight regime. ### National and international cooperation National cooperation and coordination (R.31) Description and analysis - Minister of Finance has main responsibility for forming regulatory framework concerning AML and national/international communication. - Interministerial Committee set up since 2001 by Government Resolution No. 2298/2001. (X.19.) Korm.; membership: Ministry of Justice, Ministry of Finance, NBH, HFSA, HGB, Interior Ministry, NPHQ, Ministry of Foreign Affairs, political undersecretary responsible for civilian national security services; subsequently added: Attorney General’s Office, National Judicial Council, APEH, Government Control Office, National Security Bureau, Banking Association. Initially chaired by Government Commissioner. - On 8 January 2002, Government appointed a Government Commissioner to coordinate actions against money laundering (Government Resolution No. 1003/2002. (I.21.) Korm.). Tasks included initiating/coordinating legislative amendments, making implementation recommendations, representing Hungary internationally. - Government Decree No. 2/2004. (I.5.) Korm. of 1 January 2004: Minister of Finance took over duties of Government Commissioner; Government Resolution No. 1003/2002. (I.21.) Korm. repealed. Minister of Finance chairs Anti-money laundering Interministerial Committee. - AML Interministerial Committee (not decision-making) discusses AML legislation and measures necessary to address international requirements such as FATF; met 16 times between June 2001 and February 2005. - Since October 2003, regular bi-weekly meetings between competent security and law enforcement agencies hosted by National Security Office (Anti-terror Co-ordination Committee) for information exchange and coordination; FIU contacts financial institutions and HFSA as necessary based on meeting outcomes. - Since April 2004, Interministerial Working Group set up by Government Resolution No. 2112/2004. (V.7.) Korm., chaired by Minister of Interior to identify legal/capacity obstacles for national implementation of EU policy on fight against terrorism; group includes all relevant ministries and agencies; established National Plan of Action to Combat Terrorism adopted by Government in May 2004; second National Plan of Action expected in 2005. Recommendations and comments - -- Compliance with FATF Recommendations - R.31 Compliant The Conventions and UN Special Resolutions (R.35 & SR.I) Description and analysis - Vienna Convention: signed August 22, 1989; ratified November 15, 1996. - Palermo Convention: signed December 12, 2000; not yet ratified. - FT Convention: signed November 30, 2001; ratified October 14, 2002. - Hungarian Parliament adopted Act L of 1998 for promulgation of Vienna Convention and Act LIX for promulgation of FT Convention. - Act XXXVIII of 1996 on international legal assistance in criminal matters applies in relation to both Conventions. - Hungary signed (November 6, 1997) and ratified (March 2, 2000) the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds from Crime. - Definitions of ML offence in Art. 303 and 303/B of HCC do not follow Vienna and Palermo Convention language/structure; both articles appear to limit ML offence scope to cases where perpetrator “uses items obtained by the commission of activities punishable by imprisonment in his business activities and/or performs any financial or bank transaction in connection with the item in order to conceal its true origin”, so intentional conversion or transfer, as well as concealment and disguise are not fully covered. - FT not criminalized as a separate offence for financing aimed at individual terrorists; HCC covers material elements of FT set forth under Article 2, paragraph 1 of FT Convention via ancillary/complicity/preparation provisions; FT applicable even where financed terrorist acts not committed or attempted (preparation under section 4 of article 261). - Government Resolution 2112/2004 adopted National Action Plan against terrorism and set up Interministerial Working Group Against Terrorism to implement EU policy and international obligations; significant unmet goals include ratifying Palermo Convention, improving intelligence exchange and international police cooperation, adopting domestic legislation to allow freezing of intangible, real and tangible assets of suspected terrorists, and amending existing provisions pertaining to freezing of financial assets. - Implementation issues for UN Convention on FT and UNSCRs 1267, 1269, 1333 and 1390: - Absence of legal obligation for SPs to report suspicions of FT impedes detection of FT and weakens possibility for forfeiture (see Article 8 of Convention). AML law does not provide FT reporting obligation nor provide, as with ML, possibility to suspend a transaction in circumstances set forth in Art. 9. - No domestic legislation implementing UNSCR 1267 nor UNSCR 1373. Authorities consider EU regulations directly applicable as EU member, but this does not fully address need for domestic legislation to determine sanctions and authority responsible to check compliance. - Major issues concerning freezing of real goods (practical implementation) not covered by domestic legislation. - Only one case reported to mission where assets belonging to persons or entities on UN 1267 Sanctions Committee consolidated list were identified. - Authorities encouraged to adopt domestic acts to comply fully with UNSCRs 1267 and 1373. Recommendations and comments - Ratify and fully implement the Palermo Convention. - Fully implement Vienna and UN Convention on FT. - Provide domestic legislation implementing the UN Resolutions. Compliance with FATF Recommendations - R.35 Partially Compliant — Palermo Convention not ratified and implemented; scope of the ML and FT is not fully consistent with Vienna and the UN Convention for FT - SR.I Partially compliant — Legal framework and implementation not consistent with the UN Convention on FT and with UNSCR *Source: _cr05348 - 5. number of beneficiary owners* ### 1. Mutual legal assistance: general rules ### 1. Mutual legal assistance: general rules ### Legal framework and forms of assistance - Three categories of rules govern mutual legal assistance: - Rules stipulated in different treaties. - General legislative rules in Act XXXVIII of 1996 on international legal assistance in criminal matters. - Rules in Act CXXX of 2003 on co-operation with the member states of the European Union in criminal matters. - The Act of 1996 on international legal assistance is the basic rule and applies unless otherwise stipulated by an international treaty. - Forms of mutual legal assistance include: - surrender or acceptance of criminal proceedings - surrender or acceptance of the execution of forfeiture of assets, confiscation or other measures of the same effect (added by Act CXXX of 2003) - procedural assistance - Legal assistance generally requires dual criminality (offence punishable under both Hungarian law and the law of the foreign State). - Tax offences as predicate offences for money laundering do not present an obstacle for legal assistance. - Legal assistance is not provided for political offenses; acts where criminal aspects outweigh political aspects are not political (premeditated murder always criminal). - Minister of Justice or the General Prosecutor may ask for a statement of reciprocity; absence of reciprocity does not automatically bar execution if these authorities and the Minister of Foreign Affairs agree. - Execution of legal assistance is done in accordance with the principles of the Criminal procedure code (Section 10) unless otherwise provided. - Criminal proceedings transferred by foreign authorities may be accepted if the offender is a Hungarian citizen or an immigrant living in Hungary; the General Prosecutor decides (Sections 43-44). - After a Court decision, the Minister of Justice shall inform the requesting State. - Requests normally sent through diplomatic channels; Minister of Justice and General Prosecutor may accept direct requests. ### Confiscation / forfeiture - Surrender or acceptance of the execution of forfeiture of assets or confiscation shall comply with obligations in international treaties; this exception allows execution even without reciprocity (Section 6.3). - Section 60/A: enforceable sentences of foreign courts related to execution of assets or confiscation shall be executed based on an international treaty and on receiving a request. - Minister of Justice is the receiving authority and forwards the request to the Metropolitan Court of Budapest. - Execution will not be accepted if a Hungarian court already passed a final judgment in the case underlying the foreign sentence (non bis in idem implication). - Metropolitan Court of Budapest examines recognition and execution of foreign judgments according to the Criminal code, Criminal procedure code, and applicable international treaties; recognition is possible but not automatic unless treaties oblige otherwise. - If foreign punishment or measure is not fully compatible with Hungarian law, the Court shall establish measures in accordance with Hungarian law to comply to the greatest possible extent. - Section 60/B refers to “punishments or measures,” allowing for a broad scope that may include civil forfeiture measures; interpretation required given Act of 1996 deals with criminal matters. - Criminal Code rules: - A foreign verdict has the same effect as a Hungarian verdict (Section 6 HCC) if: - the foreign court proceeded on the basis of charges filed by the Hungarian authorities or upon transfer of the criminal proceeding, or - the foreign court proceeded based on charges filed against the perpetrator for an act punishable by Hungarian law and by the law of the foreign state, and the proceeding abroad and the sentence or measure are in conformity with Hungarian law. - A foreign verdict shall not be recognized if it relates to a criminal act of political nature; premeditated homicide always regarded as criminal (Section 6 HCC). ### Procedural acts - Hungarian authorities shall provide procedural assistance upon request (Section 61). - Assistance can include: - investigative activities, searches for evidence, questioning of suspects and witnesses, hearing of experts, inspection of sites, searches, frisk searches, seizure, transit, documents and objects, service of documents, provision of personal data or criminal records (Section 61). - Official documents may be served within international legal assistance (Section 70.1.e HCPC). - Legal assistance can be executed without dual criminality if the requesting State guarantees reciprocity (Section 62). - Criminal procedure code rules normally apply (Section 10; principle repeated in Section 64). Other procedures may be employed at the request of the foreign State if not incompatible with Hungarian law. - Receiving authority for legal assistance requests is the General Prosecutor, who forwards requests to the prosecutor designated to execute the demand. - If court assistance is requested or required, the General Prosecutor forwards the request to the Minister of Justice, who forwards it to the territorially competent court (Section 70). - Foreign authorities shall be informed of decisions and, if needed, of reasons preventing approval. ### Asset sharing - No provisions in Hungarian law allow for asset sharing at this point. - Ministry of Justice awaits an EU framework decision. - Asset sharing would be possible on a case-by-case basis; no treaty necessary to provide mutual legal assistance. ### Statistics - Between 2001 and 2004, 13 rogatory letters were granted, none was denied. - Other requests made by foreign counterparts numbered 4 between 2001 and 2004. - The 2005 Questionnaire still mentions the Act XIX of 1994 on the promulgation of the European Convention on mutual assistance in criminal matters of 1959, not the 1996 Act, creating uncertainty whether other figures exist. - No specific statistics are kept to show in how many cases money laundering or terrorist financing was involved, nor amounts of asset freezing, seizure, confiscation or forfeiture. ### Terrorist financing - No exception provided for the application of the above rules to terrorist financing. - Terrorist financing is an offence under Hungarian law (Sections 18-21 and 261 HCC); normal mutual legal assistance principles apply. ### Recommendations and FATF compliance - Recommendations and comments: - More detailed and precise statistics must be kept to track ML/FT cases. - Consideration should be given to the adoption of asset sharing provisions. - Compliance with FATF Recommendations: - R.32: Largely compliant — In the mutual legal assistance statistics, no detailed statistics for ML/FT. - R.36: Compliant - R.37: Compliant - R.38: Compliant - SR.V: Compliant --- ### Extradition (R.32, 37 & 39, & SR.V) ### Legal framework and general rules - Extradition rules provided by international treaties, Act XXXVIII of 1996 on international legal assistance in criminal matters, and Act CXXX of 2003 on co-operation with EU member states. - 1996 Act applies unless treaties state otherwise (Section 3). Extradition is a form of assistance (Section 4). - Persons found in Hungary may be extradited for criminal proceedings if the offence is punishable under both Hungarian and foreign law by imprisonment of at least one year (Section 11). - Extradition may be refused for non bis in idem reasons (Section 12). - Extradition of Hungarian national citizens is generally not possible; allowed only if the person is also a citizen of the foreign State and has residence in that State (Section 13). - Extradition allowed only if the requesting State conducts no other criminal proceedings for which extradition was not granted and on condition the person will not be extradited to third States for the offense (Section 16). - If several States request extradition, decision considers location of the offence, citizenship, gravity of offences, and other elements. - Requests received by the Minister of Justice, forwarded to the Metropolitan Court of Budapest; appeals to appellate chamber possible but have no delaying effect (Section 18). - Court can order apprehension; police can take into custody and bring before Court; custody can last up to 72 hours (Section 19). - Arrest for extradition may not exceed six months, extendable one time by another six months. - When Court orders provisional arrest, person is informed that consenting to extradition means international treaties provisions shall not be applied; Minister of Justice can consent before official channels receive request. - Urgent cases: requesting State may ask for provisional arrest before submitting extradition demand; Interpol channeling possible; custody up to 72 hours and person brought before Court (Section 24). - Provisional arrest terminated if no extradition request received within forty days (Section 25). - Minister of Justice is the competent authority to decide on extradition matters (Section 26). - If extradition is refused, Minister forwards case to General Prosecutor for consideration of initiation of criminal proceedings in Hungary (Section 28). - Court may authorize transmission of property used in or acquired by the offence or replacing such property; transmission possible even if extradition not granted but does not affect ownership or other rights (Section 30). ### Extradition between EU Member States (Act CXXX of 2003) - Act CXXX of 2003 regulates extradition between EU member states; 1996 Act and Criminal procedure code apply unless otherwise stipulated. - Minister of Justice receives the European arrest warrant. - Following a European arrest warrant, person in Hungary may be arrested and surrendered for criminal proceedings or execution of a sentence in requesting state. - For offences listed in the Annex I to the 2003 Act, the requested person shall be surrendered without verifying dual criminality. Annex I contains terrorism (Section 261) and money laundering (Sections 303 and 303/B). - If punishment in issuing member state is less than three years maximum for Annex I offences, or for offences not in the list, dual criminality still applies. - For tax and customs offences, extradition shall not be refused because the tax or duty is not known in the Hungarian system. - Hungarian citizens will not be extradited for execution of sentences; Hungary can take over execution of the sentence. For criminal proceedings, nationals can be extradited, possibly with a condition to return after sentence for execution. - Execution of the European arrest warrant may be refused if it relates to offences committed in whole or in part on Hungarian territory. - In case of conflicts between requests, Eurojust advice may be sought. - Metropolitan Court acts as judicial authority; custody for 72 hours to bring person before Court. - Simplified proceedings if person consents to surrender and, if appropriate, to the specialty rule. - Provisional arrest possible for 40 days. - Court can take measures for seizure and handing over of property that may constitute evidence or was acquired by the requested person as a result of or related to the offence; does not affect ownership or other rights. - No statistics on the application of the European arrest warrant were provided. ### Terrorist financing - No exception for extradition rules regarding terrorist financing. - Terrorist financing is an offence under Hungarian law (Sections 18-21 and 261 HCC); normal mutual legal assistance and extradition principles apply. ### Recommendations and FATF compliance - Recommendation: Statistics on extradition should be established. - Compliance with FATF Recommendations: - R.32: Largely compliant — No detailed statistics available - R.37: Compliant - R.39: Compliant - SR.V: Compliant --- ### Other forms of international co-operation (R.32 & 40, & SR.V) ### International co-operation and liaison - Hungary concluded a co-operation agreement with Europol in 2001 and became a full member on September 1, 2004. - Hungary has co-operation agreements with 21 EU-member states and 22 other States, including the U.S., Bulgaria, Russia, Romania, the Ukraine, Croatia, Turkey, Bosnia-Herzegovina, Serbia-Montenegro and China. - Participates in working groups of regional initiatives like the Central European Initiative and the Wisigrad Cooperation. - Hungarian police maintains a network of liaison officers covering: - Nordic countries, the U.K., the Netherlands, Belgium, France, Germany, Austria, Spain, Italy, Poland, the Slovak Republic, Russia, the Ukraine, Romania, the U.S., Canada and Israel. - Many LO’s are in-country; some cover Hungary from stations abroad. - Hungarian police has LO’s at Europol, the BKA in Germany, the SECI Centre in Bucharest, in Moscow, Kiev and Ankara, and foresees posts at IP Lyon and for the Italian region. *Source: _cr05348 - 1. Mutual legal assistance: general rules* ### Section 2 of the Police Act 1994 stipulates that on the basis of international treaties and reciprocity, the Police ### _cr05348 - Section 2 of the Police Act 1994 stipulates that on the basis of international treaties and reciprocity, the Police ### International legal framework for police cooperation - Section 2 of the Police Act 1994: on the basis of international treaties and reciprocity, the Police shall cooperate with foreign and international law enforcement organizations and fight international crime. - Based on international treaties: - Hungarian police officers may exercise law enforcement powers abroad. - Foreign police officers may exercise law enforcement powers within Hungary. - The 2002 Act (Act LIV of 2002) on the international co-operation of the law enforcement bodies established the International law enforcement cooperation centre (NEBEK). - A directorate for international co-operation was created earlier by Act LIV of 1999 and set up in February 2000. - A draft to better coordinate the 1999 and 2002 legislations, which have some points of conflict, has been submitted to the Minister of the Interior. ### NEBEK structure, capacity and activity - NEBEK location and composition: - Located within the National Police Headquarters. - Includes bureaus: Europol desk, Interpol national central bureau, bilateral/EU cooperation desk. - A Sirene desk will be created due to accession to the Schengen treaty. - Staffing and hours: - Provides a 24 hour service. - Has a staff of 83, but due to financial restrictions only 69 are effectively employed. - Message and case handling: - The service handled 51.631 messages in 2002 (33.524 from abroad and 18.107 internal). - The service handled 46.350 messages in 2003 (31.196 from abroad and 15.154 internal). - The Europol liaison office handled since 2002 719 cases, involving 2.548 real operational information exchanges. - Case focus and crime breakdown (Europol-related activities): - Two third of the cases is focused on currency counterfeiting, drugs, illegal immigration and terrorist activities. - Money laundering represents 3 percent in this Europol-related activities. - Financial crimes represent 7 percent. - IT and timeliness: - A new IT system has been developed and is still being improved, so that in the future more detailed figures should be available. - The regulation states that the requests must be answered within 30 days, or faster if the foreign authorities request so. - Multi-agency role: - NEBEK is a central co-operation centre for the Police, Customs and Finance Guards and for the Border Guards. - Functional scope: - The Centre works on the strategic non-operational level. - For urgent matters and specific operational requirements, some services may have direct contacts with foreign counterparts while keeping the Centre informed; operational information need not always be divulged to the Centre. - Units allowed direct contacts include the National Bureau of Investigation and the Criminal Logistics Unit (handling undercover operations, surveillance and witness protection). - Other specialized units, such as the FIU and the counter-terrorism department, have their own secure channels. ### Operational cooperation modalities and data handling - The 2002 Act applies only on the basis of an international agreement that regulates forms of cooperation; the international agreement prevails if it differs from the Act. - Hungarian law enforcement agencies may cooperate with agencies of EU-states on the basis of common positions, framework decisions or other decisions based on the EU Treaty. - Forms of cooperation enabled by the Act (listed as in source): - direct exchange of information - controlled delivery - joint crime detection teams - informants - undercover operations - cross-border surveillance - hot pursuit - criminal intelligence gathering - witness protection - Exchange of information can include: - criminal records - vehicle number plates - identification of persons (such as identity and address) - documents (such as driving licenses) - identification of the subscriber of telecommunications - Procedural safeguards: - If under Hungarian law prosecutor approval is required, that approval must be obtained prior to execution of the request. - Data and information collected during covert intelligence investigations (pre-investigative stage) may be disclosed to international and foreign criminal investigation and judicial authorities on the basis of an international convention, treaty or agreement or, lacking that, on the basis of reciprocity if necessary for eliminating a serious and direct danger or preventing a serious criminal act, provided data handling conditions are met (Section 63.5 Police Act). - Personal data may only be processed to foreign authorities according to Hungarian legislation; data protection rules include Sections 71 and others of the Criminal procedure code, 76-91 of the Act on the Police and 38-52 of the Act on the national security services. - Section 87 Police Act: the police may disclose personal data to foreign criminal investigation and judicial authorities and international criminal organizations under an international commitment. - Under international commitment, the police may order that a marking is placed in the personal data of a suspect, during the search for that person, vehicle or object (Section 89). - Joint investigative teams: - According to NEBEK, no joint investigative teams in the Eurojust-interpretation (joint team working on one case) have been operational yet. - In the broader Europol-interpretation (different teams working closely together), some experience exists. ### Terrorist financing - No exception is provided in the described rules for application to terrorist financing. - Terrorist financing is an offence under Hungarian law (cf. Sections 18-21 and 261 HCC), and must be criminalized in FATF states; the normal mutual legal assistance principles apply. ### Exchange of information with foreign supervisors (HFSA) - Under Section 5 of the Act of HFSA, the HFSA is empowered to enter into cooperation agreements and exchange information with foreign supervisors. - HFSA may provide information to foreign supervisors for licensing evaluation, prudential supervision, and developing grounds for resolutions against financial institutions. - HFSA has concluded MOUs for information exchange with foreign supervisors; the MOUs normally cover all supervisory relevant issues including AML/CFT, though they do not normally specify AML/CFT issues. - HFSA has exchanged information on AML/CFT matters with foreign supervisors (example given: German financial supervisory authorities). ### Recommendations and compliance findings - Recommendation: More detailed and precise statistics must be kept to track ML/FT cases. - Compliance with FATF Recommendations (as listed): - R.32 — Largely Compliant; Statistics are not accurate - R.40 — Compliant - SR.V — Compliant ### FATF 40+9 Ratings — selected highlights (as presented) - Legal systems: - 1. ML offence — LC; The scope of money laundering is not fully consistent with the Vienna and Palermo Conventions. Relatively low number of prosecutions and convictions - 2. ML offence–mental element and corporate liability — C - 3. Confiscation and provisional measures — LC; Very limited number and amount of seizures and confiscations - Preventive measures: - 5. Customer due diligence — LC; Information required for the identification of beneficial owners are less than direct customers without justifiable reasons. - 6. Politically exposed persons — LC; A lack of explicit requirement regarding approval by senior management of continuing business relations with persons becoming PEPs after the establishment of a business relationship - 12. DNFBP–R.5, 6, 8-11 — PC; Information required for the identification of beneficial owners are less than direct customers without justifiable reasons. Lack of provisions for PEPs - 13. Suspicious transaction reporting — PC; Need to improve quality of STRs. Need to cover FT and attempted transactions. - 16. DNFBP–R.13-15 & 21 — PC; Need improved outreach and guidance on suspicious transaction reporting for all DNFBPs to improve quantity and quality of reporting. Need to cover FT and attempted transactions. - 23. Regulation, supervision and monitoring — LC; Supervisory oversight for CFT is less robust due to a lack of legal basis for the STR obligation relating to FT - 26. The FIU — LC; CFT is not covered by the FIU; no legal obligation to report to FIU STRs related to FT - 31. National co-operation — C - 32. Statistics — LC; Statistics for investigations and prosecutions are inconsistent. Figures for seizures and confiscations are not accurate. No detailed statistics related to mutual legal assistance. - International Cooperation: - 35. Conventions — PC; Palermo Convention not ratified and implemented; scope of the ML and FT is not fully consistent with Vienna and the UN Convention for FT - Special Recommendations: - SR.IV Suspicious transaction reporting — NC; No legal obligation for reporting STRs related to FT - SR.V International cooperation — C - SR.VIII Nonprofit organizations — PC; No review of the adequacy of relevant laws and regulations to prevent abuse of NPOs for FT - SR.IX Cash Couriers — PC; No possibility to stop/restrain or seize in the case of ML/FT ### Recommended Action Plan — key priorities (selected, in order of priority as listed) - Criminalization and legal reform: - Enlarge the scope of the ML offense to cover all circumstances set forth by the Vienna and Palermo Conventions. - Harmonize Article 303 and 303A so that the same definition of “item” will be formally applicable to both provisions. - Create a separate provision for FT, including financing terrorist acts not intended to be committed by a terrorist group. - Confiscation and freezing: - Consider providing the FIU with statutory authorization to freeze assets and suspend transactions. - Consider creating a system of administrative freezing, granting the FIU, Police and Prosecutor a reasonable period to check facts without immediately opening a criminal investigation. - Increase number and amounts of seizures and confiscations and more systematically link seizure/confiscation with investigations. - Freezing for terrorist financing: - Create legal authority for financial institutions to freeze upon suspicion of terrorist financing. - Provide the FIU, Police and Prosecutor with autonomous competence to freeze in cases of suspicious transactions possibly linked to FT. - Provide a sufficient period of freezing to do serious checks before starting criminal investigations. - Provide clear procedures for de-listing and un-freezing also for the UNSCR. - Financial Intelligence Unit and functions: - Place responsibility for CFT matters with the FIU and establish a clear obligation to report to FIU STRs related to FT. - Consider placing supervisory function over DNFBPs outside the FIU given the Police nature of the FIU and number of staff. - Continue upgrading FIU software. - Improve analysis of STRs to identify underlying predicate offences. - Have the FIU provide more detailed STR statistics with references to predicate offences where possible. - Law enforcement and prosecution: - Strengthen HCFG competences in AML/CFT and emphasize financial aspects of investigations. - Focus organized crime investigations more on potential ML offenses and coordinate closely with ML investigations. - Increase practical experience in ML investigation and prosecution through more aggressive prosecution policy and innovative use of existing tools. - Cash couriers: - Apply identification, record keeping and reporting requirements to FT. - Give HCFG authority to stop/restrain cash to ascertain ML/FT evidence. - Make sanctions more effective and dissuasive. - Allow immediate seizure for cash and valuables related to ML/FT. - Preventive measures for financial institutions: - Require full information for identification of beneficial owners (via AML Act and HFSA supervisory rules). - Require explicit senior management approval for continuing relationships when persons become PEPs after account establishment. - Ensure domestic ICS payment form allows sufficient space for originator information (name, address and account number). - Consider requiring financial institutions to keep records of findings of screenings. - Establish a clear legal basis for obligation to report suspicious transactions related to FT. - Improve financial institutions’ capabilities to detect STRs related to ML and FT; reporting should be in electronic format. - Introduce explicit requirements for foreign branches and subsidiaries to observe AML/CFT measures in Hungary and inform HFSA when unable to do so. - Review effectiveness of imprisonment regime under Section 303/B of the HCC for negligent non-reporting of suspicious transactions. - DNFBPs and nonfinancial professions: - Review notary rules to ensure full CDD for third parties receiving money, valuables, or securities. - Strengthen beneficial owner identification processes in AML legislation and directives. - Apply enhanced due diligence for PEPs and disseminate FATF compliance information to DNFBPs. - Increase quantity and quality of STR reporting from DNFBPs via systematic outreach and improved guidance. - Establish a clear legal basis for reporting STRs related to FT. - Review tendering process for Gaming establishments to prevent involvement of criminal associates. - Improve feedback to DNFBPs and issue guidance on CFT for DNFBPs. - Increase resources for supervision of non self-regulated DNFBPs. - Nonprofit organizations: - Conduct a review of the NPO sector to increase transparency, strengthen legal basis for supervision and oversight over NPO fundraising. - Consult widely with the sector on improving transparency and reporting. *Source: _cr05348 - Section 2 of the Police Act 1994 stipulates that on the basis of international treaties and reciprocity, the Police* ### 6. National and International ### 6. National and International Cooperation ### The Conventions and UN Special Resolutions (R.35 & SR.I) - Ratify and fully implement the Palermo Convention. - Fully implement Vienna and UN Convention on FT. - Provide for domestic legislation implementing the UN Resolutions. ### Mutual Legal Assistance (R.32, 36-38, SR.V) - More detailed and precise statistics must be kept to track ML/FT cases. - Consideration should be give to asset sharing provisions. ### Other Forms of Cooperation (R.32 & 40, & SR.V) - More detailed and precise statistics must be kept to track ML/FT cases. ### Authorities’ Response to the Assessment - The Hungarian Authorities thank the IMF/WB team and the expert of Moneyval for the assessment and were in broad agreement with its findings. - The Hungarian authorities consider that the main message of the 2005 AML/CFT assessment is that the overall AML situation in Hungary is favorable: “The Hungarian authorities have made significant progress in strengthening their AML regime in the four years since the last assessment... the legislative framework for AML is in place... Financial institutions’ compliance with the AML requirements is well-supervised and they are well aware of their obligations under the Act.” - The Hungarian authorities appreciate the recommendations made by the IMF/WB team and the expert of MONEYVAL and they are committed to consider seriously these recommendations in addressing deficiencies in the legislative framework. This will take place as soon as the final version of the EU’s new AML/CFT directive will be available for implementation, although they are ready to commence the work concerning the most important issues in the near future. - Clarifications and positions: - The authorities note that short comments in the report may be misleading as to the real level of compliance and awareness. Example on cash couriers: assessors state there is no possibility to stop/restrain or seize in the case of ML/FT; the authorities clarify: There is no possibility to stop/restrain or seize in the case of ML/FT, if there is no suspicion as regards the criminal origin of the assets carried by the cash courier. - The assessment regarding the legislative framework for CFT, especially the legal obligation to report FT suspicious transactions, differs considerably from that of the assessors. - As for implementation of the UNSCRs on CFT issues, relevant EU regulations on restrictive measures adapted the mentioned resolutions. These EU regulations are directly enforceable and applicable in Hungary being a member state of the EU since May 1, 2004. Thus, the general legislative framework is in place and there is a need to complete in details the related implementing measures. - Regarding suspicious transaction reporting: the Hungarian authorities are of the opinion the AML Act’s preamble gives the legal ground for the reporting STRs on data, facts and circumstances indicating terrorist financing. Although the preamble does not provide a solid legal basis, the reporting system is effective in practice and, e.g., the Recommendation No.1/2004 of the HFSA defines guidelines for the service providers. - Financial service providers have invested in FT screening software; reports on FT suspicion are regularly sent to the FIU and there were two cases in 2004 when due to suspicion of FT assets were frozen. - The constantly updated EU terrorist list is publicly available on the homepage of the Hungarian Financial Supervisory Authority (HFSA) and all financial service providers are daily updating their screening systems accordingly. - The HFSA approves all AML/CFT internal rules of the financial service providers; without a comprehensive reporting system including FT reporting there is no chance to obtain an approval that is an essential element of a license. All on-site inspections of the HFSA focus on this subject. - Despite these measures, the assessment summarily states: “No legal obligation for reporting STRs related to FT”. - The authorities argue that the existence and functioning of a well-functioning AML/CFT system accepted as such by the assessors should be taken into account when assessing if there was a legal basis for the establishment of the system. - Conclusion: The high level of compliance of the Hungarian AML/CFT system with the international standards indicates the commitment of Hungary to fight against money laundering and suppressing the financing of terrorism. The achievements of Hungary serve as a well-grounded basis for further development of the AML/CFT system in place. ### Annex I — Details of All Bodies Met on the On-Site Mission - Inter-Ministerial Committee on ML - Ministry of Finance - Ministry of Justice - Ministry of Interior - Ministry of Foreign Affairs - National Police Headquarters - General Prosecutor’s Office - Supreme Court - FIU (as part of National Police Headquarters) - Tax and Financial Control Administration - Hungarian Customs and Finance Guard - Court of Registry - National Bank of Hungary - HFSA - Hungarian Gaming Board - National Communication Agency - Hungarian Banking Association - Investment Association - Association of Hungarian Insurance Companies - Association of Chartered Accountants - Hungarian Bar Association - Chamber of Auditors - Chamber of Public Notaries - National Association of Hungarian Jewelers - Hungarian Real Estate Association - Nonprofit Information and Training Center Foundation - CIB Bank - Calyon Bank - ING Bank - Metrum Kft. External Auditor - Casino Varkert - IBISZ Money Exchange - Realszistema Securities Rt. ### Annex II — Copies of Key Laws, Regulations and Other Measures - Act XV of 2003 on the Prevention and Combating of Money Laundering - Act LXXXIII of 2001 on Combating Terrorism, on Tightening up the Provisions on the Impeding of ML and on the Ordering of Restrictive Measures - Act LIV of 2002 on International Cooperation of Law Enforcement Agencies - Section 303 of Act CXX of 1999 on the Criminal Code - Act XXXVIII of 1996 on International Mutual Legal Assistance in Criminal Matters - Act XXXIV of 1991 on the Organization of Gambling - Recommendation of the President of the HFSA No 1/2004 on the prevention and impeding terrorism and money laundering ### Annex III — List of All Law, Regulations and Other Material Received - Laws: (select examples preserved from source) - Act XV of 2003 on the Prevention and Combating of Money Laundering. - Act LX of 2003 on Insurance Institutions and Insurance Business. - Act CXXX of 2003 On the Co-operation with the Member States of the European Union in Criminal Matters. - Act CI of 2003 on the Post. - Act LIV of 2002 on International Cooperation of Law Enforcement Agencies. - Act CXX of 2001 on the Capital Market. - Act LVIII of 2001 on the National Bank of Hungary. - Act LXXXIII of 2001 on Combating Terrorism, on Tightening up the Provisions on the Impeding of ML and on the Ordering of Restrictive Measures. - Act CIV of 2001 on criminal liability of legal persons. - Act CXXI of 2001 on self-laundering and negligent ML. - Act C of 2000 on Accounting. - Act CXXIV of 1999 on Government Control of Financial Institutions (HFSA Act). - Act XI of 1998 on Attorneys at Law. - Act XIX of 1998 on Criminal Proceedings. - Act CXLIV of 1997 on Business Association. - Act CXLV of 1997 on the Registration of Companies, Public Company Information and Court Registration Proceedings Act CXII of 1996 on Credit Institutions and Financial Enterprises. - Act CXII of 1996 on Credit Institutions and Financial Enterprises. - Act CXI of 1996 on Securities Offerings, Investment Services and the Stock Exchange. - Act XXXVIII of 1996 on International Mutual Legal Assistance in Criminal Matters. - Act LXXXI of 1996 on Corporate and Tax and Dividend Tax. - Act CXXV of 1995 on the National Security Services of the Republic of Hungary. - Act XXXIV of 1994 on the Police. - Act XCVI of 1993 on Voluntary Mutual Insurance Funds. - Act XLI of 1991 on Notaries Public. - Act XXXIV of 1991 on the Organization of Gambling. - Criminal Procedure Code. - Act IV of 1978 on the Criminal Code. - Act IV of 1959 Civil Code; Section 29(1). 58(3), 62(2), 74/A(2). - Act IV of 1957 on the General Rules of Administrative Procedures. - Act XX of 1949, The Constitution of the Republic of Hungary. - Decrees/Guidelines/others: (select examples preserved from source) - Government Decree 306/2004 on the tasks of the authorities granting exemptions from the asset-related restrictive measures ordered by the European Union. - Government Resolution No 2112/2004. (V.7.) Korm (on creation of Interministerial Working Group on terrorism). - Government Decree No 2/2004 (I.5.) Korm (on the MOF’s chairmanship for the Interministerial Committee on AML). - Government Decree No 306/2004 (XI.13) (on certain administrative tasks related to exemption from restrictions imposed by the EU). - Government Resolution No2286/2002 of 26 September on Further measures to impede ML and FT. - Government Decree 232/2001 (XII. 10.) Korm. on Monetary Circulation, Financial Transaction Services and on Electronic Payment Instruments. - Government Decree 297/2001 (XII. 27.) on Money Exchange Services. - Government Resolution No 2298/2001. (X.19.) Korm (on creation of AML Interministerial Committee). - Government Decree 224/2000(XII. 19.) on taxation of non-profit organizations. - Law-Decree No. 2 of 1989 on Savings Deposits. - FIU and HFSA materials, model rules, guidelines, manuals, and other administrative directives are listed in the source. - Statistics requested or provided in materials: - Number of STRs with breakdown of reporting bodies, number passed to law enforcement for investigations, any information on STRs from lawyers. - Number of ML/FT investigations and prosecutions, with breakdown on those generated by STRs or not. - Number of orders for provisional measures and confiscations. - Number of on-site examinations of financial institutions by HFSA, with breakdown on categories of institutions, frequencies, those focused on AML/CFT. - Number of disbarments conducted in Hungary in the last 5 years, in general and for AML/CFT related offenses. - Number of DNFBPs that have sent in the name of their designated officer, with breakdown by type of DNFBP. - Amount of money raised from Hungarian sources by domestic or foreign NPOs, and amount sent abroad. - Number and percentage of Hungarian NPOs that have tax privileged status. - Reports listed in source: - Second round mutual evaluation report by PC-R-EV (Dec. 2002). - Progress report 1999-2000 on Hungary by PC-R-EV (May 2000). - Self-Assessment Questionnaire for the 25 NCCT Criteria (2002 and 2003). - Self-Assessment Questionnaire for the FATF Special Recommendations on CFT (2003). - FATF Second Review to identify NCCT (June 2001). - FATF Third Review to identify NCCT (June 2002). - FATF Fourth Review to identify NCCT (June 2003). *Source: _cr05348 - 6. National and International* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05348.pdf_