Legal loopholes allow central bank to dodge accountability

The National Bank of Hungary is currently under intense public scrutiny for the way it used its foundations to handle public funds in a questionable fashion. As our review found, the letter of the law is in many ways helping the central bank to avoid being held accountable for clear misappropriation of public wealth.

The National Bank of Hungary (MNB) is the target media and political criticism these days, ever since the MNB sought government help to conceal how it handles its money, which is essentially the wealth of the nation. The legal status of any central bank within the European Union is a complicated issue. It is after all an institution of the given state, and the same state is also financially responsible for covering any losses that the MNB may accumulate. At the same time, it is also a basic concept that the central bank should be fully independent of the government and fiscal concerns, since it has to be able to make professional decisions without any outside interference. At the same time, the MNB is also a member of the European Central Bank, which thus has a say from the outside in Hungary’s matters, even though the country isn’t a member of the eurozone.

Atlatszo.hu has spent several days in court to finally achieve the publication of the central bank’s meeting records that show the creation of foundations at the heart of the ongoing debates coincided with an effort to spend more money. Shortly after former economy minister in the reigning Fidesz government Gyorgy Matolcsy was appointed MNB governor in 2013, a task force was set up to determine ways to assure a breakeven result for the central bank. Late the same year, it was clear that because of currency fluctuation, the MNB would generate a huge profit on its foreign currency reserves, there was a need to spend, and this led to eventually setting up the six Pallas Athene foundations.

The solution basically meant that an astronomical sum upwards of HUF 260 billion (EUR 830 million) of the MNB’s profits went to these foundations, with the declared intent of funding high-level educational efforts and projects.

It seems at this point that managing this project through foundations was mainly justified by the regulations about how such institutions have to disclose their finances. According to Hungarian regulations, a public foundation only has to disclose cornerstone figures regarding its operations, hence the ones created by the MNB would only have to provide main figures without any further oversight about how they manage the money.

The MNB dismissed any questions about the wealth that was transferred to the foundations saying the money is now managed by another autonomous entity that is acting independently of the central bank that created it. They maintained this position despite the fact that a number of senior MNB officials also hold positions in the foundations, so the overlap was even formally obvious.

The MNB and the government then went further in their efforts to conceal the foundation finances. A bill by the Fidesz party would have legally stated that even though the MNB presides over the public wealth, once money is transferred to foundation, said money “loses its essence as public finance”.

This move led to a widespread media outrage and lawsuits ensued, including the Constitutional Court, which quickly abolished the government drive. The foundations have since been held to release their detailed finances, their contracts, and this has led to another chapter in the story.

The question now is whether the contracts and commissions signed by the foundations were even legal in the first place. There was no public procurement, no open procedure. The letter of the law is helping the MNB in this respect. Since the issue is related to foundations, they are not required to tender how they spend their money, unless the funds come directly from the state or the European Union. And despite the MNB’s strong involvement, it didn’t provide funds for distribution, merely a founding subsidy, technically, this is a different category.

In summation there is no conceptual ground on which the foundations could rightfully claim they are exempt from scrutiny when they are spending money that comes form the MNB, which in turn manages the public wealthú. The fact that there was even a notion that was full-heartedly supported by the government majority in parliament is a clear indication that some loopholes are meant to stay open.

Original article in Hungarian