(U) HUNGARY: MONEY LAUNDERING LAWS (C-TN8-02815)

C O N F I D E N T I A L BUDAPEST 000045

SIPDIS

DEPT FOR EUR/CE, EB, AND INR/I

E.O. 12958: DECL: 01/15/2013
TAGS: PINR EFIN HU
SUBJECT: (U) HUNGARY: MONEY LAUNDERING LAWS (C-TN8-02815)

REF: A. SECSTATE 583

B. BUDAPEST 42

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. (U) On January 14, Econoff met with Ministry of Finance
Department of Income Taxes Director General Edit Lucz on a
number of issues, and inquired about the tax law change
described ref A.


2. (U) The law in question was passed on December 1 as part
of the 2008 tax law changes, and is known as Law 81 on
Business and Dividend Taxes. The law is intended to help the
struggling Hungarian government securities market, which in
recent months has fallen victim to investor risk aversion and
deleveraging by non-resident investors (ref b),by creating
incentives to purchase government securities. It has already
entered into force.


3. (U) The primary incentive under the law is that it
provides a tax discount on dividends to investors who
purchase Hungarian government securities during a certain
period of time, as long as they hold them for at least two
years.


4. (SBU) The other incentive relates to the treatment of the
money used for the purchase of the government securities.
Director General Lucz strongly disagreed with the
characterization by the author of the HVG article that the
law "would turn the state itself into a vehicle for money
laundering." The article asserts that according to the law,
the Hungarian tax authority "would not investigate, and nor
would anybody initiate a criminal investigation" regarding
these funds. According to DG Lucz, this statement is
referring to provisions in the law that indicate that the tax
authority will treat these funds as "money that has already
been taxed" and that the "tax office cannot make further
investigations or claims" regarding the taxability of the
funds used for this investment. According to Lucz, it
creates a "presumption of post-tax income."


5. (SBU) Lucz maintains that this does not mean Hungarian law
enforcement authorities are prevented from initiating
criminal investigations, and noted that there are several
safeguards included in the law to ensure that it cannot be
used as a vehicle for money laundering. She noted that the
law explicitly proscribes the use of funds originating from
criminal activity, and that no funds can be used that
originate from Andorra, Monaco, or Liechtenstein, countries
with whom Hungary has no information sharing arrangement.
She pointed out that investors must sign a statement that
they are complying with these requirements, and noted that
these provisions are subject to investigation by Hungarian
law enforcement authorities (including the tax office). She
also noted that nothing in the law exempts financial service
providers who handle these transactions from their STR filing
requirements, nor is the Hungarian FIU prevented in any way
from conducting its investigations.

6 (SBU) Although this law originated from the Parliament's
economic committee and not the Finance Ministry, Lucz noted
that it was reviewed by the Justice Ministry, and that they
were satisfied it meets Hungary's OECD and EU obligations.
Lucz also noted that this is a temporary measure that will
only be in place for 2008-09.


7. (C) Comment. The promise not to investigate the
taxability of funds reflects both lax bureaucratic process
and hard economic times as the GoH attempts to stabilize the
market for government securities (septel). Post does not
believe, however, that the law automatically provides an
avenue to legitimize illicit funds. The law does not
preclude Hungarian authorities from investigating whether
funds used were derived from criminal sources, it does not
absolve financial intermediaries from their STR filing
requirements, and it does not prevent the FIU from initiating
investigations or criminal proceedings. Bad journalism has
also played a part by mischaracterizing the law. That said,
the press coverage does remind us of an important fact:
having laws on the books is not enough - governments must be
willing to enforce them. As Hungary continues to bring its
anti-money laundering regime up to international standards,
it becomes increasingly important to ensure that these laws
are aggressively enforced. End comment.
Foley