How Hungary’s Central Banker Funneled Funds to Friends, Family

  • Charities endowed with $1 billion buy villas, art, junkets
  • ‘This goes beyond your usual allegation of crony capitalism’

Gyorgy Matolcsy is rewriting the rules for central banking inside the European Union to include family and friends.

Since being tapped to run the National Bank of Hungary by Prime Minister Viktor Orban three years ago, the former economy czar has funneled the equivalent of almost $1 billion to six foundations he set up over the objections of his supervisory board and to the irritation of EU officials. 

Gyorgy Matolcsy
Gyorgy Matolcsy
Photographer: Akos Stiller/Bloomberg

Matolcsy said the money, about enough to cover the NATO member’s defense budget, was no longer public and Orban fought to keep its flows secret. But the Constitutional Court handed their opponents a rare victory, ordering the release of records detailing scores of transactions that benefited people close to Matolcsy and other allies of Orban instead of the bank or the Treasury. 

The web of patronage they disclosed has stunned many Hungarians who’ve largely embraced the move by Orban, a fan of Vladimir Putin, toward what he’s called an “illiberal state.” Even seasoned trackers of corruption in the former Soviet Bloc say they’re startled by the audacity the documents reveal.

“There’s literally a paper trail linking the central bank to questionable payments to individuals related to its chief,” said Otilia Dhand, a political risk analyst at Teneo Intelligence in Brussels. “Even by eastern European standards, this goes beyond your usual allegation of crony capitalism.”

QuickTake Corruption

Trail’s End

The trail starts at the bank’s headquarters on Liberty Square in Budapest, next to the U.S. embassy. Flush with an unprecedented gain of about $1.8 billion in 2014 and not obliged to pay dividends to the government, Matolcsy set about seeding the foundations he created to promote financial literacy in this formerly communist country. 

For the next two years, before the March 31 court ruling, Matolcsy, 60, and the other trustees shielded how they invested and spent this money from the public. They awarded scholarships, but they also bought luxury properties, masterpieces and funded books by and about Matolcsy, the documents show.

One link in this network ends at a villa in an elite neighborhood overlooking the Danube. Here sits a once-tiny lender that few had ever heard of until the disclosures revealed it to be a recent addition to the business empire of Matolcsy’s cousin, Tamas Szemerey, 63, who has no known history in banking.

NHB Novekedesi Hitel Bank Zrt., according to the documents, received at least $90 million from just two of the six endowments in 2014 alone, including $72 million from the one overseen by Matolcsy, helping the bank quadruple its deposit base. Last year, NHB funded the acquisition of a furniture factory by a company owned by Matolcsy’s son without disclosing the terms.

Much of NHB’s money comes from the biggest of the foundations, Pada, where Matolcsy heads the board of trustees. Pada’s director is married to Matolcsy’s cousin and fellow trustees include the deputy of Matolcsy’s wife, who’s the mayor of a resort town on Lake Balaton, where the central bank owns property.

Matolcsy declined an interview request. He’s repeatedly denied any wrongdoing, calling criticism from the opposition a “scandalous” political attack. Orban, 52, has vowed to stand by him until “heaven and Earth collide.”

The Prosecutor’s Office, which has rejected calls to probe the central bank for possible misappropriation, agreed last week to look at alleged violations of procurement rules at the foundations, though it said the investigation wouldn’t be criminal. Hungary’s top prosecutor is the husband of the central bank’s human resources chief, who is also a foundation trustee, a paid position.

‘Institutional Nonsense’

“What’s going on is institutional nonsense,” said Jozsef Peter Martin, who runs the local office of Transparency International. “It’s about compensating people close to the government and the central bank leadership.”

In January, before details of the money flows were divulged, the Berlin-based watchdog downgraded the country of 10 million more than any other EU member in its annual Corruption Perceptions Index, saying graft under Orban had become “centralized” and “systematically pursued.”

Orban, who won supermajorities in 2010 and 2014, has made increasing the state’s role in the economy the cornerstone of his rule, a shift he’s called as profound as the one from communism to democracy. He’s installed Fidesz party loyalists to key oversight posts while seizing control over $11 billion of private pensions and ordering officials to buy back assets from utilities to banks.

“Checks and balances are a U.S. invention that for some reason of intellectual mediocrity Europe decided to adopt,” Orban told Bloomberg in 2014, after the U.S. barred entry to the head of his tax service on corruption grounds.

Bullets, Guns

Matolcsy, who helped design Orban’s policies as economy minister from 2010 to 2013, shares this philosophy. In 2014, when the central bank booked record gains by keeping the forint weak while helping lenders convert toxic mortgages based in Swiss francs, he said it could spend profit “as it pleases.”

Even before the court ruling, the central bank, which is tasked with fighting inflation and regulating the financial industry, had come under fire for buying fine art and other items unrelated to its mandate. In February, the bank bought 200,000 bullets and 112 handguns for its own security force, in part to better guard its expanding portfolio of physical assets, according to a statement posted on parliament’s website.

The foundations have said their task is to fund economic research and promote alternatives to “neoliberal” ideas. Their purchases have included numerous copies of a collection of essays Matolcsy wrote as minister and of a book by his former chief of staff on his “victorious battle” against creditors.

Csaba Lentner, a trustee of one of the foundations and a former nationalist lawmaker, went further this month, saying the ultimate goal of the project is to keep Orban in power for as long as possible by indoctrinating young voters with the government’s principles.

Elections, Ideology

“The 2018 elections will hinge on how much our ideas, our ideology, our economic and social thinking will be accepted,” Lentner told Echo TV on May 13. “This is a battle and Matolcsy is one of the protagonists.”

The educational grants being awarded and schools being planned reflect these aims. But none of the philanthropies would say how buying villas and funding junkets to Africa to study libraries and elections, as the disclosures show, fit the directive to promote financial literacy.

Other outlays revealed in the court-ordered releases include a combined $20,000 a month for an economic report from NHB’s parent company, owned by Matolcsy’s cousin and sent to each of the six foundations. The central bank buys a copy, too, even though it employs legions of researchers, so the cousin gets paid seven times -- a necessity, Matolcsy told Magyar Nemzet newspaper, “to protect copyrights.” The cousin, Szemerey, declined to comment.

Matolcsy has responded to the outcry by pledging to send about $177 million to the Treasury, less than the endowments of three of the foundations. Orban, for his part, included a provision in his 2017 budget bill that would allow more state companies to keep their finances secret.

‘Cash Box’

For EU officials, though, another concern is how Pada, which had $218 million under management in April, and its sister organizations invest their funds. Pada’s charter gives Matolcsy and another, undisclosed, trustee the right to decide where to make deposits and whether to buy or sell securities, including Hungarian government debt.

The EU Treaty prohibits central banks from the “direct purchase” of public instruments within the bloc and the European Central Bank said last month it was concerned about Hungary’s foundations.

Officials in Frankfurt should be alarmed -- and so should all of Hungary, according to Peter Akos Bod, an economics professor at Corvinus University in Budapest who served as the bank’s second governor after communism.

“This has nothing to do with monetary policy, it’s more like a family cash box,” said Bod, who ran the bank from 1991 to 1994. “It’s the caricature of a ‘patriotic economic policy’ and it has a simple name: nepotism.”

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