Kleptocracy Banned: The Hungarian Tax Authority Scandal

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Trying to close the case: Six Hungarian citizens were banned from entering the U.S. because they were benefiting from corruption

The Hungarian tax authority scandal is complicated and mysterious. One thing is clear, however: Fidesz came into conflict with the Obama administration – which took more effective action than the European Union against a corrupt and Russia-oriented government.

On 16 October, the government-linked daily newspaper Napi Gazdaság reported that six Hungarian citizens had been banned from entering the United States in response to an investigation of American companies by Hungary’s National Tax and Customs Administration (NAV). There were also rumours about involvement on the part of Ildikó Vida, the head of the tax authority, which later proved to be correct.

The following day, André Goodfriend, the Chargé d’Affairs of the U.S. Embassy in Hungary, stated that the actions had nothing to do with the tax authority’s investigations. In fact, the Embassy had no information about any kind of inspection targeting American companies; the six Hungarian citizens were banned from entering the U.S. because they were benefiting from corruption, Goodfriend said. According to press reports, government officials had tried to bribe American companies, such as agribusiness corporation Bunge, to commission overpriced analyses from Századvég, a consulting firm close to Fidesz, and in exchange the tax authority would launch investigations against their competitors. Some of the corporations chose to report these overtures, which could have been the moment when the whole story broke.

The U.S. government responded by invoking Proclamation 7750, an executive order granting the State Department the power to ban corrupt individuals from entering the country. The practice is not commonly used against the citizens of an allied nation; prior to the tax authority scandal, Proclamation 7750 was mostly invoked to deny entry to African dictators and South American drug barons.

Contradictory statements

After the eruption of the scandal, the governing party Fidesz began to make use of a communication trick. Government officials demanded information from U.S. authorities, knowing that the U.S. Secretary of State is required by law to keep secret all information concerning withdrawn visas. For more than two weeks, the Hungarian government denied having any information about the matter. Prime Minister Viktor Orbán, Minister of Foreign Affairs and Trade Péter Szijjártó, Minister of Prime Minister’s Office János Lázár and Minister of National Economy Mihály Varga all stated that they did not know the names of the Hungarians who had been banned from entering the U.S.

The falsehood of these statements became clear on 5 November. In an interview, Ildikó Vida said that she was on the U.S. travel ban list and confirmed that she had reported the ban to one of her supervisors in the Hungarian government. This could have been either the Minister of Foreign Affairs or her employer, the Minister of National Economy. Either way, the Hungarian government was aware of the names on the U.S. travel ban list, despite weeks of official assertions to the contrary.

The Orbán government would like to frame the case as an open political attack by the U.S. against Hungary – revenge by the Americans for Fidesz’s refusal to serve Western interests. In its communications, the Fidesz government identifies itself with the whole nation. As former right-wing Prime Minister Péter Boross said recently: “The entire nation is being attacked when the current government is under attack.” The contradiction in this statement is quite clear: Transparency and the detection of corruption issues are very much in the interest of the Hungarian people. Conversely, the fight against corruption is considered by right-wing politicians and journalists to be an attack on the Hungarian government and on the sovereignty of the Hungarian nation.

On Putin’s side

In the last four and a half years, the Orbán government has had numerous conflicts with the European Union and even with the United States. According to the governing party, Western countries are trying to overthrow the Orbán government in order to defend the interests of multinational companies. Thus far, however, the main issues behind these conflicts have been political rather than economic. Neither the European Union nor the United States have been pleased with the dismantling of liberal democracy in Hungary.

The United States entry ban case is even more complicated. First of all, the interests of multinational companies could actually be involved, albeit not in the manner claimed by the Hungarian government. If officials did in fact try to bribe U.S. companies, the actions by the American authorities are natural and legitimate. Second, during the last four years the Hungarian government has created an advanced kleptocracy where the appropriation of public funds is not even concealed. Examples include the tobacco scandal, where licences to operate state tobacco shops were allocated to family members and associates of Fidesz officials, and the rise of Közgép, a government-linked construction company that won more than HUF 30 billion in public procurement tenders in the first half of 2013 alone. And these are only the tip of the iceberg.

Third, the Hungarian government has taken major steps towards Putin’s Russia in recent months. Former German Foreign Minister Joschka Fischer described Orbán as “the only Putinist governing in the European Union”. A “New York Times” article accused Orbán of “pulling Hungary to Putin” – and these statements are well founded. Russian state-owned company Rosatom is to build two new blocks at Hungary’s Paks Nuclear Power Plant. The final cost of the investment is estimated at around 15 billion Euros. The Hungarian parliament recently passed a bill that would allow the construction of Putin’s South Stream pipeline in defiance of agreements between the European Union and Hungary. And Prime Minister Viktor Orbán is building an “illiberal state” which he compared to the Russian, Chinese, Turkish and Singaporean models in his famous speech in Băile Tuşnad. These three factors could have led to the American decision to abandon their indulgent posture towards corruption in the Hungarian government.

A little Kremlinology

NAV head Ildikó Vida has been a close associate of Lajos Simicska, a former Fidesz financial director who is currently the most powerful oligarch (and probably also the wealthiest man) in Hungary. Simicska and Prime Minister Orbán recently had a falling out, ending a close friendship that dated from their obligatory military service in the late 1980s. There has been much speculation about the reasons behind this conflict, but the existence of power struggles cannot be denied. Ildikó Vida’s confession could be one chapter in this war.

As the results of the three elections in 2014 showed, there is no considerable opposition in Hungary yet. But this does not mean there are no disagreements in the country. So far, Fidesz has handled these conflicts within the party, but the power struggle between Simicska and Orbán is taking place in the media – a new phenomenon. The published corruption issues and scandals could erode support for Fidesz, although Simicska would never support opposition parties: His goal is to maintain his power while Fidesz remains the governing party.

Possible consequences

The forceful actions by the U.S. government clearly surprised the leaders of Fidesz, who had become accustomed to indefinite criticism from the European Union. In addition, the tax authority scandal broke at an inopportune time for Fidesz. The interview with Ildikó Vida was published just one week after demonstrations against a proposed internet tax, which the governing party had to withdraw. These demonstrations were unique: There had never before been a protest against the Orbán government where non-opposition voters turned out in large numbers. The unquestionable public support for Fidesz has been shaken in recent weeks. But Prime Minister Orbán need not worry – the next parliamentary elections will be in 2018, and as yet there is no party in the country that could form a strong opposition.

But the conflict with the United States and the European Union could be dangerous for Orbán nonetheless. Hungary’s economy largely depends on EU money – 98 percent of investments are funded by the EU. And the United States, as the tax authority scandal showed, is willing to take very effective actions against a corrupt and Russia-oriented government.

Despite Speaker of the National Assembly László Kövér’s remarks about Hungary leaving the EU, the country is not yet a member of any kind of Russian alliance or association. It is also conceivable that Hungary is more useful to Putin as a member of the European Union and NATO than as an “independent” state. This is why Orbán could soon find himself in a no man’s land – without support from either the EU and NATO or Putin’s Russia.

George Washington once wrote that “[i]t is at all times more easy to make enemies than friends”. It seems that Prime Minister Orbán has considered this quote merely an advice, and not as a warning.

Cooperation: Evan Mellander