EconomyForeign Affairs
statebond-edited

Amid Great Controversy, A Last Minute Rush for Hungarian Residency Bonds

According to Hungarian newspaper Magyar Nemzet, there has been a huge increase in people attempting to obtain Residency Bonds from the Hungarian government since the government announced last month that intends to end the program at the end of this year.

The Residency Bond system is a program that allows wealthy foreigners to essentially purchase a permit of permanent residency from the government in exchange for a deposit of 300,000 euros, which is later returned to the new Hungarian resident.

And since the government announced its intention to end the program, Chinese companies that help process Residency Bond applications have been unable to keep up with the new flood of people who wish to take advantage of the program while they can, according the Magyar Nemzet’s sources. And while there were only 58 registered Residency Bonds issued in both September and October, the entire application process itself can easily take a month and a half, meaning that any increase in applicants will at the earliest only be reflected in December statistics.

Officially, the government claims that the reason that they are ending the Residency Bond Program is that, since Hungary’s credit rating has been upgraded by ratings agency Moody’s, the country no longer has an economic need for the program. Despite this claim, however, the fact is that the program has not actually brought economic benefit to Hungary, since the interest paid by the government on the bonds is actually higher than market rates.

magyar-utlevel-edited

And these interest rates, together with the way in which the bonds are administered, have helped turn the Residency Bond program into a source of political conflict and controversy (read our articles on political disputes over the program here, here, and here). Because private individuals cannot apply for a residency bond on their own; rather, the application must be processed through one of one of five companies that have been approved by the Hungarian Parliament’s Finance Committee; four of these companies are based in countries that are popular as off-shore tax havens such as the Cayman Islands and Cyprus, and thus it is next to impossible to know who exactly runs these firms. In addition, the interest earned on the Residency Bonds does not go to the individual who paid for the bond, but rather to the company that processed it. In addition, these companies tend to charge service fees ranging from 45-60,000 euros. As a result of this, since the start of the Residency Bond program these companies, which have processed 4033 bonds, have made more than 110 billion forint (roughly 355 million euros) off of the bond program. Since the companies keep both their service fee and the interest earned on the bond, these companies make around 90,000 euros on each bond they process.

It is most likely, then, that the government has chosen to end the program due to an outbreak of corruption scandals surrounding the program. For example, in September it was discovered that the government was advertising the bond program to “middle and upper class” Africans (read our article here). Likewise, in China companies have been advertising the bonds at half-cost (150,000 euros), in exchange for which the company keeps the entire 300,000 at the bond’s expiration. And in addition, there have been reports of the Residency Bond program being used by foreign criminals seeking residency in Hungary, as in the case of one Russian citizen who, despite his tax-fraud conviction in Russia, was able to gain a Residency Bond. This was due to the fact that his “official” residence was in St. Kitts and Nevis, and a loophole in the bond program allowed him to submit proof of no prior crimes in the Caribbean tax-haven, which conveniently omitted his conviction in Russia.

Another possible reason that the government is ending the program may be ending the Residency Bond scheme is that, quite simply, fewer and fewer people are applying. Since hitting a peak in 2014, applications have gone down every year since, with a 13% drop from its 2014 peak to 2015, and a further 23% drop in the program since last year. In addition to being politically toxic, it seems that the program isn’t performing as well as the government hoped, and for these reasons it is ending the program.

Interestingly, however, Hungarian officials from the ruling Fidesz-KDNP coalition still refuse to say exactly when they will end the program; all János Lázár head of the Prime Minister’s Office, would say was that the program ‘can be expected’ to end this year. This lack of specifics has led some to speculate that the government’s true goal in vaguely announcing the end of the Residency Bond program is to drive applications up among those who are hoping to take advantage of the program before its supposed termination. And if that was in fact their goal, it would seem that they have succeeded.

Via Magyar Nemzet

Image via origo.hu