Hungarian National Bank foundation investigated for malfeasance

The foundation of the Hungarian National Bank (MNB) is being investigated for malfeasance, the response of the National Police Headquarters sent to 444 has confirmed. The investigation was launched after the State Audit Office (Állami Számvevőszék – ÁSZ) filed a complaint on suspicion of several criminal offences related to the management of foundations linked to the Hungarian National Bank (MNB), according to the reports posted on the ÁSZ website last Wednesday.

Why does the MNB have foundations? – one might wonder, and rightfully so

György Matolcsy took office as Governor of the Hungarian National Bank on 4 March 2013, and a year and ten days later the MNB transferred HUF 266,4 billion (at the current exchange rate approximately EUR 650 million) of its assets to the Pallas Athéné Domus Meriti (PADME) Foundation it had established shortly before. (PADME was originally made up of a total of six foundations which were later merged into one) The foundation’s website described its main goals as follows:

“The main objective of the Pallas Athéné Domus Meriti Foundation is to create value, including in the areas of intellectual capital – education, research, support for innovative businesses – and the renovation of historic buildings. The Foundation is to conduct its work transparently, professionally and efficiently.”

In spite of this, since these funds came from the central bank's profits, the independent press and opposition politicians rightly began to wonder what these assets – which according to all legal interpretations were public funds – were being spent on, but the MNB refused to answer questions on the subject.

The government did everything it could to ensure that the spendings of the MNB foundations did not become public. Some government politicians even argued that once these funds were transferred to the foundations, they “can no longer be characterized as public funds”, but this was not well received. In 2015, an opposition politician tried to obtain information on the foundations’ spendings by means of a public interest information request, but PADME refused to comply. Eventually, after some legal wrangling, the foundations were forced to issue a list of their spendings.

Not surprisingly, the list included the funding of relatives’ business deals, money paid for publishing books written by board members of some of the foundations, expensive events, exotic study trips, property purchases, renovations, and so on. These revelations, however, did not have any consequences at the time, and although the ÁSZ audited the activities of the foundations in 2018, it found no irregularities at the time.

Although significant, the spendings revealed in 2015 are miniscule compared to the amount that was spent afterwards and because of which the current investigation was launched. When establishing PADME, the former governor of the MNB, Matolcsy and his team also established a company named Optima Investment Ltd and tasked it with managing the assets of said foundation. The company controlled assets worth around HUF 500 billion, (1,25 billion EUR at the current exchange rate) and the ÁSZ has now found that their investments were made through an "essentially opaque structure that made it almost impossible to appraise the actual value of the assets".

So if the MNB’s transferred assets amounted to HUF 266,4 billion, where did the remaining HUF 300 billion or so come from?

As the ÁSZ reports state, the whereabouts of the nearly HUF 130 billion of the Kecskemét-based Neumann János University Foundation (NJU) and the EUR 170 million (nearly HUF 70 billion) loan PADME took from MBH Bank (more on this below) are also being investigated.

Like most other higher education institutions in Hungary, the NJU underwent a “model change” in recent years. This meant that in 2020, its maintainer became a public trust foundation, which exercises both the ownership and the maintenance rights of the institution. The Neumann János University Foundation was established with a capital of HUF 600 million, but received an additional HUF 44.4 billion from the state in June 2020 for infrastructure development, as well as a further HUF 100 billion in 2021 for other developments and for the purpose of "carrying out the "foundation's objectives". In addition to this, the state also covered the costs of the foundation's operations in the subsequent years.

In other words, the university's foundation suddenly found itself with almost HUF 150 billion in assets, a vast proportion of which was invested, rather than spent on developing the university. But instead of investing the money in several different instruments, they put it all into bonds of Optima Investment Ltd, the company managing the assets of the MNB’s PADME foundation.

The ÁSZ report on the university concluded that while being fully aware of the risks involved, the Foundation of the Neumann János University invested the public funds entrusted to it into the corporate bonds of Optima Investment Ltd, which was a violation of its own rules as well as the legal requirements, and also involved personal conflicts of interest, negligence, a disregard for independent expert opinions and the basic rules of good management, all of which resulted in substantial financial losses for the institution.

MBH, the bank that was there, but then it wasn’t

As mentioned above, the EUR 170 million loan given to PADME by MBH Bank is also being examined. The financial institution is partly owned by the Hungarian state, and partly by Lőrinc Mészáros, a close friend of Prime Minister Viktor Orbán.

Interestingly enough, when the investigative journalism centre Direkt36 first wrote about the case in mid-March based on a leaked draft of the ÁSZ reports, the version they had seen, specifically named MBH as the one that provided a loan for PADME.

When the State Audit Office published its reports two days later, the final version left out the name of this important player in the story. While the report published by the ÁSZ does mention the 170 million euros, the name of the bank providing the loan is no longer given: the amount is repeatedly referred to as a "short-term bank loan" and "bank loan", and MBH, which is present on the stock exchange, is simply referred to as "the bank providing the loan", and in some attached documents, its name has been blotted out.

Questionable connections, a fear of going public

According to the reports, the MNB foundation had invested the huge assets entrusted to them poorly, with most of the funds going into foreign real estate companies linked to the business circles close to Ádám Matolcsy, the son of the recently departed central bank governor György Matolcsy.

A good illustration of the severity of the problem is that according to the ÁSZ reports, PADME had asked the State Audit Office not to make their findings public with the following reasoning:

“Due to the implications of the findings related to the MNB contained in the draft report, its publication could have a serious impact on Hungary's international standing and intergovernmental relations, and could also harm Hungary's national security interests, with particular regard to the risk of a breach of confidence in the safeguarding of the country's law and order."

Nothing but words of praise from the Prime Minister

Before Mihály Varga took over from Matolcsy at the helm of the National Bank earlier this month, Prime Minister Viktor Orbán only had words of praise for the departing governor:

"Matolcsy will remain a key figure of Hungarian economic thought". He also described him as “an outstanding Central Bank Governor and economist, for whose work we remain grateful”.

Was Viktor Orbán not aware of what was happening at the MNB foundation? It is unlikely, given that half of the Hungarian economic community has been voicing their concerns about these things for a long time.

It remains to be seen whether there will be any criminal consequences to this case – the fact that the State Audit Office has thoroughly investigated the facts is certainly encouraging. At the same time, it is possible that the extent to which those who have caused this enormous damage (primarily to the budget, since the MNB's losses can be balanced by funds from the budget) without approval from the centre of authority will be held accountable may in the end be determined by the logic of politics. After all, a big scandal on the right roughly a year before the next elections is probably the last thing Viktor Orbán wants. As a result, above a certain level, some of these actors may even get away with everything so as to avoid a political scandal that could potentially backfire on the government and Fidesz.