Fight corruption by uncovering prohibited contribution to parties

2018-01-12 12:54:00   |   Author: Dr. Czinder Enikő

The State Audit Office of Hungary (SAO) carries out the audit on the financial management of political parties every two years within the framework of which it evaluates the compliance with the provisions of the Act on Political Parties on the accounting of contributions and donations. The SAO closed seven additional scheduled audits of Hungarian parties this week. In its reports the SAO concluded that all parties accepted prohibited non-cash contributions in the 2015–2016 period in addition to numerous irregularities uncovered in the bookkeeping and financial management of the parties concerned. On the basis of the Act on Political Parties, if a political party has accepted a prohibited non-cash contribution – such as using a service at a price considerably lower than the market price applied in a given period –, its value shall be established by the State Audit Office.

What are the risks of providing prohibited contributions to political parties?


Under the Fundamental Law of Hungary, political parties may be formed and may operate freely on the basis of the right to association, as well as parties participate in the formation and expression of the will of the voters. The operation and financial management of parties is regulated by the Act on Political Parties adopted in 1989, which has been amended and tightened numerous times in recent decades. The Act on Political Parties specifies in detail the funds and resources that may be used legitimately by political parties in their financial management (e.g. funding from the central budget, membership fees, other contributions). In this respect, a highly important amendment entered into force on 1 January 2014, tightening the provisions on the so-called prohibited contributions.


If a party accepts prohibited contributions, the transparency of its financial management is not ensured and democratic political competition becomes compromised as the party gains access to a – primarily financial – benefit that is not available to other parties. In addition, prohibited contributions may give rise to corruption threats, which means that the principle set out in the Fundamental Law on the expression of the will of the voters through political parties may become jeopardised: there is a risk that, in exchange for the prohibited contributions, the party concerned will represent the interests of those providing the donations rather than the interests of its constituents.

 

 

Effective from 1 January 2012, the new Fundamental Law of Hungary and its first cardinal act, the Act on the SAO, laid down new foundations for public sector auditing and permanently brought an end to the era of audits without consequences in Hungary. Since 1990, Hungarian party and campaign financing, as well as the related SAO audits have drawn (international) criticism on numerous occasions. Taking these observations – as well as the previous audit experiences of the SAO – as a starting point, the Hungarian National Assembly adopted a new law in 2013 on the electoral procedure and on the transparency of campaign costs, and also tightened several provisions of the Act on Political Parties, specifying clear audit tasks for the State Audit Office compared to the previous possibilities.


The justification of the amendment of the Act on Political Parties (effective from 1 January 2014) also stressed the need to prevent donors providing prohibited contributions from subsequently wielding influence on the legislative or the executive branch of Government through political parties and their representatives. Moreover, the justification referred to the fact that international anti-corruption agencies and watchdog organisations (e.g. the Venice Commission, Council of Europe’s anti-corruption body (GRECO) Transparency International) also found that the deficiencies of party and campaign financing in Hungary called for the strengthening of anti-corruption measures. Regarding the renewed Hungarian practice, the Council of Europe’s anti-corruption body, the Group of States against Corruption (GRECO), also formulated a positive opinion in its report on Hungary, concluding that “the State Audit Office of Hungary has made impressive progress in the field of auditing campaign funds and parties”.


Tightened regulations on prohibited contributions from 2014


Prior to the amendment of the Act on Political Parties effective from 1 January 2014, parties were permitted to accept asset contributions virtually ‘from anyone’, including legal entities, business organisations without legal personality or private individuals. However, as a result of the amendment, from 1 January 2014 it is prohibited to accept asset contributions from legal entities, business organisations without legal personality or natural persons with no Hungarian citizenship.

 

 

If a legality audit by the SAO uncovers that a party has accepted prohibited asset (cash and non-cash) contributions, the party must pay the value of the contributions into the central budget within fifteen days when called on to do so by the SAO. In case of late payment, the outstanding amounts are to be collected in a way similar to taxes. Moreover, the amount of the funds accepted will be deducted from the subsidies and grants provided to the given party from the central budget. The value of prohibited non-cash contributions is determined by the SAO in accordance with the relevant legal regulations.

 

Legality audit of the financial management of parties


When auditing political parties, the SAO’s primary goal is to enforce the requirements of transparency, accountability and the regular management of public funds. Pursuant to its statutory mandate, since 1990 the SAO has been regularly auditing the financial management of parties and party foundations receiving regular state subsidies from the central budget, while also evaluating compliance with the prevailing legal provisions. The SAO’s legality audits are based on a published methodology, which is updated in accordance with the adopted legal amendments and changes in international methodology standards.


The SAO audits political parties according to a schedule aligned with the political transition of 1990 and with the commencement of the provision of budgetary support to individual parties, and this schedule can be tracked and monitored by all parties. Accordingly, in the second half of 2017 the SAO started the audit of parties that were last audited in respect of the 2013–2014 period. Since 2010, the SAO has audited the financial management of parties in 26 cases and that of party foundations in 20 instances, which means that in this period it conducted at least three audits at all Hungarian political organisations that receive funding from the central budget. In doing so, the State Audit Office fully complied with its legal obligations. The SAO evaluates the financial management of each individual party according to the same legal provisions and procedural rules.

 

 

During the audits, the SAO evaluates whether the financial statements disclosed by the parties are in compliance with legal regulations, and whether in the course of bookkeeping and financial management the parties adhered to the relevant legal and internal requirements. The audits also examine whether the parties have properly accounted for and utilised funds for their operation, in particular, the subsidies and grants from the central budget, as well as donations and funding from other sources.


How does the SAO determine the value of prohibited contributions?


On the basis of the amendment of the Act on Political Parties effective from 1 January 2014, the SAO renewed the methodology relevant to auditing parties, in the course of which it consulted with the MPs responsible for the financial management of the individual parliamentary parties. The SAO’s audits cover the asset contributions received by political parties, the evaluation thereof and the treatment of prohibited non-cash contributions. For services rendered by legal entities, the SAO determines the value of prohibited non-cash asset contributions using the comparable independent price verification method.


The SAO adjusts the price for the period of the actual use of the service with the official inflation rate published by the Hungarian Central Statistical Office (HCSO); moreover, when determining the price it also factors in the discounts uniformly received by all market players. If the SAO concludes that the market price applied in the given period is identical with the price invoiced to the party or that there was no substantial deviation between the two, the SAO accepts the consideration. If the price paid by the party is lower, the difference will be deemed non-cash contribution from prohibited sources.


The SAO solely determines the value of prohibited contributions


According to the Act on Political Parties, if the asset contribution provided to the party was not a financial contribution, the party is required to ensure its valuation (the definition of its value) in all cases. If the party fails to comply with this obligation, the value of the prohibited non-cash contribution will be determined by the SAO. If the SAO’s audit uncovers that the party has accepted prohibited asset (cash and non-cash) contributions, the party is required to pay the value thereof into the central budget within fifteen days when called on to do so by the SAO.

 

 

In respect of parties and party foundations, the rules on the collection of prohibited contributions are regulated by a separate legal regulation, which imposes an obligation to take measures upon the Hungarian State Treasury. The regulation obliges the Hungarian State Treasury to disburse a reduced amount of funds from the central budget calculated in accordance with the provisions of the relevant Act or Government Decree and, should the payment deadline defined in relevant Act or Government Decree lapse, to contact the national tax authority in order to cater the collection of the given amount in a manner similar to the collection of taxes. It should be emphasised that the SAO is not an administrative body and its statutory mandate is limited to the factual determination of prohibited contributions used by the parties. All other matters fall into the competence of the Hungarian State Treasury as the competent administrative agency.


The State Audit Office of Hungary conducts its audits on the basis of strict professional standards, in a transparent and unbiased manner, independent of all other organisations, within the framework of the rule of law. The SAO has no political affiliations, is not involved and does not take part in political struggles and does not consider political aspects as part of its audit activities.

 


State Audit Office of Hungary