Vol 2, No 1
10 January 2000
C S A R D A S:
A Law Unto Themselves? White Collar Crime, the Police and Corruption in Hungary, Part One
Editor's Note: Owing to its length this article has been divided into three parts.
The term "white-collar crime" conjures up images of demure, bespectacled accountants cooking the books, private individuals cheating on their tax returns, or perhaps yuppies in the banking world transferring millions from one bank account to another via their computer screens on behalf of their anonymous paymasters; in short, a wide variety of offences ranging from the banal to the glamorous, from those perpetrated by ordinary citizens to those meticulously stage-managed by sinister crime syndicates.
In July of last year, the Hungarian government announced its intention to establish a central co-ordination unit to combat organised crime. The unit's mandate would be to compile, exchange and disseminate information vital to ensuring the effectiveness of the planned crackdown on Mafia-style activities in the country. It would be comprised of representatives of the police force, the Customs and Excise Board and the Crime-Fighting Directorate of APEH (Adó- és Pénzügyi Ellenőrzési Hivatal), the Fiscal and Monetary Monitoring Office. This represented official recognition of the fact that white collar crime has become a growth industry in Hungary, both in terms of the sheer number of offences committed and of the amounts involved [for this and the following section, see Magyar Nemzet, 17 July 1999].
Chapter 17 of the Criminal Statute sets out a list of 41 categories of white-collar crime, although there are many more that are regularly committed with a view to illicit gain. Amongst those which are specifically mentioned, the following may be found: credit fraud, carrying out foreign trade operations without a proper licence, breach of commercial secrecy, computer fraud, money laundering, counterfeiting and tax and social security fraud. Bribery features under a different heading, that of crimes against property.
According to József Bencze, policing director within the VPOP, the Customs and Excise Board's National Headquarters (Vám- és Pénzügyőrség Országos Parancsnokság), although many crimes clearly require a certain degree of organisation in the sense that more than one person is involved in committing them, this does not necessarily imply that they are the products of organised crime. The motive of the latter is material gain, naked profit; the actual deed is preceded by planning, with a division of labour in the plan's implementation following a strictly defined hierarchy. Further typical hallmarks of organised crime are the existence of territorial divisions between organisations or gangs and protection extended by the organisations to those of their members who have been arrested, including supporting their families.
Since the collapse of Communism and the triumphal entry of the Capitalist alternative, many of the loopholes and flaws of legislation that opened up untold opportunities for the ingenious criminal have been successfully dealt with. It is hardly surprising that, for some at least, the new "get rich quick" ideal should have proven too tempting to resist, particularly given that the sheer volume of money released into the economy seemed limitless compared with the belt-tightening, self-abnegating days of Communism. In the early days of heady investment, the relatively lax monitoring meant that those who engaged in shady dealings were not running a huge risk of being caught.
Perhaps the most common manifestations of white-collar crime were the smuggling of goods and tax fraud in the import-export sector. Excise duties on oil, cigarettes and alcohol were so high that crime seemed to pay. Trading in these commodities took place without any pretence of being in possession of the requisite licence. Operators did not document the origin of the petroleum products, cigarettes or spirits in their consignments and certainly did not pay tax on them. There were flagrant abuses carried out by unlicensed companies selling massive quantities of fuel oil without the Hungarian Inland Revenue ever laying hands on a penny of what was due to it, either by way of excise duties on the oil or by way of sales tax. Not that this was the worst abuse: some companies purchased goods subject to excise duties without paying the tax on them (as permitted under the licences they had been awarded) and then proceeded to utilise them in the manufacture of products (likewise subject to taxation) other than those mentioned in their licences, omitting to pay the taxes due. For example, such companies would legitimately buy up alcohol tax-free only to use it in for unauthorised purposes, making alcoholic drinks from it instead of sticking to the terms of the original licence.
The most lucrative (and popular) illegal activity of this type was a classic case of exploiting the weaknesses of inadequate legislation. For years, fortunes running into hundreds of millions of forints were made in the oil sector. It is alleged that even high-ranking state officials and politicians feathered their nests in this way [see Magyar Nemzet, 12 October 1999 for this and the following section], although only the occasional small fry have ever been brought to justice, in spite of the best efforts of the VPOP. The total estimated value of the oil and oil derivatives involved is in excess of HUF 70 billion. Of the 900 cases investigated, 43 were in Békés County, 171 in Szabolcs, 138 in Bács-Kiskun, 84 in Csongrád, 51 in Pest County and 46 in Komárom.
At the beginning of the 1990s, the Hungarian market was liberalised, and state intervention was anathema. The market economy was in its infancy: as József Bencze accurately stated, Hungarians were on a learning curve, getting to know the ropes in a situation where the complete absence of regulation in certain sectors was matched by rampant over-regulation in others. The state's task was made complicated by conflicting expectations. On the one hand, economic operators wanted to the government to keep its distance, whilst on the other they wanted it to create the parameters for a smoothly functioning market as well as to guarantee its security. This could not be achieved in a legal vacuum. In 1994, therefore, the law on the police force, its powers and duties came into being, followed closely by the equivalent for the customs service in 1995 and the law on consumer protection in 1996.
Different interpretations of the new rules meant that economic crimes were not treated identically by courts throughout the country. This was exacerbated by a lack of staff qualified to pass appropriate sentences on the perpetrators of white-collar crime. Cases tried in the city court were ruled on in appeal proceedings in the county courts. No case law existed with guidelines or precedents from the Supreme Court, which meant that litigation was allowed to drag on over years, with some cases that first came to court in the beginning of the 1990s still pending even today.
In order to boost its revenues, the state gradually raised the taxes payable on products from the early 1990s onwards. The numbers of tax evaders grew out of all proportion to the increase. On 1 August 1992, a system of delayed payment of customs duties was introduced, and this acted as the catalyst for the abuses in the oil sector. The main element of this system was that importers were not obliged to pay customs duties in full at the time of customs clearance, but had a fifteen day period at their disposal in which to effect payment, in keeping with current practice elsewhere in Europe. The obvious flaw was compounded by a failure to adopt rules on monitoring and enforcement. Only the bare minimum of conditions were stipulated. Due to the lack of a system of registration, it was impossible to access information concerning applicants for licences or to ascertain whether they had actually paid any of the customs duties or not. Regardless of whether this may be attributed to naivety, lack of experience in legislating in a market economy (in my opinion the most likely option), misplaced generosity or sheer incompetence, the shortcomings of the system were clearly asking for trouble, although it is all too easy to comment smugly on the errors of the past with the benefit of hindsight.
Abuses occurred almost immediately. Forged cheques were proffered as "proof" of payment, fictitious companies successfully requested deferral of payment before disappearing into thin air together with the products on which they had paid no tax. The response was fairly swift: on 5 October 1993, a ministerial decree prescribed that deferred payments could henceforth only be applied for by companies with a seat of operations and a business address. Unfortunately, this decree was withdrawn in March 1994, thereby restoring the original situation.
In the same year, the law on goods subject to duties extended the powers of customs officers, although they still had to work under severe limitations. This meant in practice that it remained legal for companies without sufficient means or financial backing to import petroleum products and there was nothing that the VPOP could do to stop it. Companies with registered capital of a paltry 100,000 forints were perfectly entitled to import petroleum products worth 100 million forints. The notorious activity of olajszőkítés had its heyday then. Olajszőkítés (literally oil bleaching) is the term used for the chemical removal (using sulphuric acid) of the red colouring added to fuel/heating oil to distinguish it from other types of oil, allowing it to be passed off (and sold as) as diesel oil. The rationale behind this was pure greed: fuel oil was not subject to taxation.
Small businesses specialising in olajszőkítés proliferated. Checks were carried out at filling stations and at locations where it was presumed that oil was transferred prior to being shipped further for bleaching, all in vain. Some individuals became overnight billionaires because of the huge demand on the home market for the bleached oil (which, incidentally, irreparably damaged the engines forced to run on it). In fact, it was only in 1995, when the price of diesel oil and that of fuel/heating oil were raised to the same level that olajszőkítés lost its appeal both for producer and customer.
At the same time, the government tightened up the rules on deferred payment of customs duties. Exporters of petroleum products had to have the proper credentials, in other words, they had to have a certificate from a professional association. Rules are made to be broken, as the old adage would have it, and the solution hit upon by the criminal element was as simple as it was effective: they set up their own professional associations. Nevertheless, the introduction of licences for products subject to duties and compulsory taxation of fuel imports led to a two-thirds drop in the import of taxable petroleum products.
If bleaching were to prove unrewarding, then other oil products not subject to duties would have to do instead. Machine oil, oil for use with tools and additives designed to prevent diesel oil from freezing in winter were the favoured substitutes. In the case of lubricating oils, imports quickly exceeded the yearly demand eight to ten times over.
The turning point for oil-related crimes came in 1996 with the entry into force of the new customs law. The rules pertaining to deferred payment became even more stringent: only companies with a hefty bank guarantee behind them were permitted to trade in products subject to excise duties. The import and subsequent sale of non-regulation fuel oil continued to be a thorn in the side of the customs authorities, however, due to the existence of a rule which exempted this product from consumption tax when imported for a clearly defined end usage (for example use in power stations). On countless occasions, the hardened professionals kept one step ahead of the hapless customs authorities by designating non-existent final users as their customers and obtaining import permits from the relevant ministry. By the time the authorities cottoned on to the scam, the "entrepreneurs" concerned had earned billions by selling on the fuel oil to vehicle owners at a major profit.
In 1997, the market was further regulated by means of a new law stating that only regulated products could be traded in. No sooner had the legislators closed off that avenue to white collar offenders than the former oil-bleachers turned their hand to blackening a fresh product instead. The latest dodge was to import an extra light, virtually unidentifiable substance that resembled fuel oil, naturally not subject to tax. Since it could only be bought and sold with its original black colour, it had to be blackened. This time, however, the customs authorities were quicker on the uptake, and yet more rules were introduced, according to which a product could only be imported if it remained black in colour after having been diluted ten times!
Finally, in 1998, a definitive stop was put to the activities of oil-bleachers, blackeners and tycoons with the entry into force of the new law on products subject to excise duties. The provisions establish that all petroleum products and derivatives shall have duties levied on them, with the exception of non-regulated fuel oils. In order to prevent the kind of abuses catalogued above, this latter category of product was made subject to a so-called environment protection product tax, fixed at a similar level to the duties payable on the other products. To accompany this, rigorous clauses on monitoring were adopted. As soon as the products arrive at the frontier, samples are taken and specialised customs offices staffed by experts are responsible for the clearance of the products. One of the major changes is that both the seller and the purchaser are obliged to attend the customs inspections. Mobile customs laboratories have been set up, and a specially developed registration system enables customs officials to track the products to which the law applies. Since the autumn of 1996, the day to day efforts of customs officials have been supplemented by the operations of the "customs commando", the Central Patrolling Commando, a unit empowered to examine consignments anywhere in the country.
Towards the end of last year, events centering on the county of Békés brought the attention of the entire country to this branch of criminal activity once again. The complex tale which unfolds contains all the ingredients of a gripping detective novel: plot twists, intrigue, corruption and a series of mysterious deaths. Once again, the police force was hauled over the coals, its reputation sustaining further damage. Although the truth of the allegations reproduced below has still not yet been established beyond all reasonable doubt, the picture painted of an unholy alliance between crooked lawyers, police officers and the dubious business dealings of a small elite is vivid and far from unique in the recent history of my country.
Part Two: Sinister events in the town of Szeghalom.
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