Hungary Confronts the Bankers of the Underworld

Article excerpt

Hungary has introduced landmark legislation against the thriving financial institutions of the criminal underworld. The experiment, variously described by the lawmakers and law enforcers of the region as brilliant, obvious and potentially effective, came into effect on October 15.

It has outlawed money lending practised beyond a carefully constructed regulatory framework. This should deprive organized crime of its hold on many thousands of small businesses which have been hitherto abused for money laundering operations with impunity. Hungary's neighbours throughout East Central Europe, whose police forces as well as financial and judicial institutions are undergoing radical reforms as the region painfully adapts to West European standards, are watching with enormous interest.

For very sound economic reasons, the legitimate banks of the formerly communist-dominated countries of Europe have failed for the time being to meet the needs of small enterprises for start-up loans. This has created a business opportunity eagerly exploited by Hungary's Mafia.

But Hungary, which is the most advanced among its neighbours in the regional transition towards a market economy, now feels ready to clear its financial markets from organized loan sharks. Its success could help the entire region in the fight against financial crime.

'It is easier to rob a local bank than to persuade its manager to raise a loan for a new business,' observes Laszlo Arva, an adviser of the Hungarian Privatization Research Institute, in a noted recent essay published in the authoritative daily financial newspaper Vilaggazdasag.

Even when a legitimate bank loan is available, the requirement for high collateral places it beyond the reach of most entrepreneurs. By contrast, 'organized crime demands a more easily insurable and more readily collectable deposit,' Arva notes, 'It is the life of the borrower.'

In the absence of adequate credit facilities provided by the banks, organized crime is believed to have gained an up to 25 per cent share in the financing of the country's small and medium-sized businesses, effectively turning such enterprises into operations for laundering tainted cash. That proportion is probably much higher in other countries of the region.

The Mafia has also learned to fill many other needs neglected by the fledgling democratic institutions of the region. Entrepreneurs are turning to organized crime for help in many areas - for example, collecting debts or protecting property - at a huge long-term cost to society.

'It is possible for someone's house to be sold out form under him because of the shortcomings of the land registry system,' Arva explains, 'and it may take years of legal wrangling before the overburdened judiciary system can sort out a property conflict. Is it surprising then that many aggrieved parties ignore the courts and look to the Mafia for justice?'

Clearly, the Mafia is profiting from the transition process by temporarily assuming the role of the state which has been reduced in many key areas to be replaced by the emerging institutions of democratic society. When they mature to fulfil their functions properly, these institutions may indeed leave little room for organized crime.

For the moment, however, criminal organizations are increasingly investing in the transition economies, observes the economist Douglas I. Keh in an important recent study. His analysis - Drug Money in the Changing World: Economic Reform and Criminal Finance, published by the United Nations International Drug Control programme - will be considered very carefully by the law enforcement agencies of East Central Europe as they follow the success of the Hungarian experiment. Keh considers the attraction of tainted cash to the region in terms of the profit opportunities created by the reduced lending volumes available from the legitimate financial sector. This leaves liquidity-strapped companies with only three options: to apply for government support, to trim business operations as well as profitability, or to seek credit from criminals. …