SIFMANet Budapest Report

In September 2024, the Centre for Finance and Security at RUSI convened a roundtable discussion with public and private sector representatives from Hungary to discuss the state of sanctions implementation and enforcement in the country. The roundtable was organised with the support of the Budapest-based think tank Equilibrium Institute. Participants included the Ministry of Foreign Affairs and Trade, the Hungarian Financial Intelligence Unit and the Customs Unit of the National Tax and Customs Administration, the Hungarian National Bank, the Government Office of the Capital City Budapest, professional associations, companies, law firms and financial institutions.

The event was part of RUSI’s work to understand and highlight key challenges for sanctions implementation through its Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet), funded by the National Endowment for Democracy. This conference report represents the findings gathered during the Budapest engagement. None of the discussions from the event are attributable.

The Legal and Institutional Sanctions Framework in Hungary

Throughout the workshop, participants highlighted the fact that the current sanctions implementation landscape in Hungary is decentralised, involving multiple authorities, including the Ministry of Foreign Affairs and Trade, the National Tax and Customs Administration’s FIU and Customs Unit, the National Bank and the BFKH, along with other relevant agencies. Below follows a description of the relevant national competent authorities as described by participants.

The Ministry of Foreign Affairs and Trade only established its Sanctions Department in March 2024. The Sanctions Department engages in policymaking in European Council working groups, develops expert opinions on sanctions proposals, coordinates implementation with the competent authorities, and participates in sanctions enforcement and export authorisation procedures. The department can also veto the decisions of the BFKH on the export of dual-use goods and military technology. Furthermore, it can issue opinions on the decisions of the BFKH regarding the provision of services, and the import of goods generating significant revenues for Russia, among other decisions. The department also provides opinions on large-scale government projects and bilateral protocols, and can offer, on request, opinions for companies on sanctions implementation issues.

The responsibility for implementing targeted financial sanctions primarily rests with the FIU, which is part of the National Tax and Customs Administration. As a result of the need to heighten Hungary’s sanctions response following Russia’s full-scale invasion of Ukraine in February 2022, the FIU underwent a significant reorganisation to enhance its operational capabilities. This restructuring has allowed the FIU to gain practical experience in sanctions enforcement, a process that had been somewhat limited prior to this period. The volume of transactions screened for sanctions purposes by the FIU increased following the invasion, and its sanctions responsibilities expanded. Since August 2024, the FIU has been responsible for screening any transfer of funds exceeding €100,000 out of the EU by any entity of which more than 40% is owned by Russia-linked entities or persons.

The institutional framework for sanctions enforcement in Hungary requires FIs and companies to report any transactions or assets suspected of violating sanctions directly to the FIU. The FIU is tasked with analysing these reports and determining whether any violations have occurred. If a potential violation is identified, the matter is escalated to the court, which holds the authority to freeze the assets or block the transactions in question. This dual role of the FIU – as both an administrative and a police unit – has increased its prominence within the sanctions implementation landscape. However, despite the improvements in reporting mechanisms and operational frameworks, the FIU acknowledges the need for a clearer demarcation between its traditional financial intelligence functions and its new responsibilities concerning sanctions implementation. To facilitate information exchange regarding sanctions cases, the FIU utilises FIU. net to ensure that international stakeholders can access relevant data efficiently.

The Hungarian National Bank plays a critical role in the prudential supervision of FIs, ensuring that they maintain capital adequacy and liquidity. The National Bank had to adapt its operational protocols to account for the impact of sanctions on FIs, integrating sanctions compliance into its anti-money laundering and counterterrorist financing (AML/CTF) supervisory framework. The sanctions-related responsibilities have intensified the bank’s Anti-Money Laundering Supervision Department’s cooperation with the bank’s Regulatory Department, the relevant Hungarian authorities, and professional associations.

The BFKH’s Department of Trade, Defence Industry, Export Control and Precious Metal Assay is responsible for licensing dual-use and military goods, as well as the implementation of certain sectoral sanctions. These include sanctions related to investments in the Russian energy sector, the re-export of fuel to Russia, the export of luxury goods and the provision of services, among others. The BFKH is also responsible for implementing certain financial sanctions, such as the prohibitions on transactions with the Central Bank of Russia and on accepting bank deposits over €100,000. Through its participation in the COARM and Dual-Use Goods working parties of the European Council, the BFKH is also integrated into the policy aspect of sanctions in Brussels. While taking on additional sanctions responsibilities since February 2022, the BFKH still operates with the same resources as before the full-scale invasion, putting it under increased pressure.

The Hungarian Customs Unit, part of the National Tax and Customs Administration, is charged with overseeing import–export activities related to Russia. Given the high volumes of trade with countries regarded as circumvention hubs, the increased burden on customs officials, coupled with limited resources, has hampered effective enforcement. Currently, only a few staff members are dedicated to sanctions-related oversight within the Customs Unit, and they are reliant on information from the European Commission due to their limited capacity for independent intelligence production.

Several other authorities are responsible for implementing sectoral and targeted sanctions: the Aviation Supervisory Authority Department of the Ministry of Construction and Transport implements bans on private and charter flights; the National Media and Infocommunications Authority is responsible for media bans; and the National Directorate-General for Aliens Policing implements entry bans.

For a complete understanding of the sanctions framework in Hungary, it is important to highlight that Hungary has been granted several exemptions in EU sanctions packages. Together with Slovakia and Czechia, the country has a temporary exemption from the prohibition of imports of crude oil by pipeline; the Rosatom-led Paks II nuclear power plant’s construction was also granted exemption; and the import of certain, otherwise sanctioned, goods remains authorised for the maintenance of Russian metro cars in Budapest.

Sanctions Compliance in the Hungarian Private Sector

Russia’s full-scale invasion of Ukraine prompted a political debate in Hungary, marked by a critical governmental narrative on sanctions and their financial and economic impact on the country. Participants at the roundtable described the collapse of Sberbank Europe AG due to asset freezes under the initial sanctions packages as a key example. This case reverberated through the banking sector, leading to considerable deposit outflows and heightened sensitivity among FIs regarding liquidity and capital management.

In the wake of the sanctions imposed after the invasion, FIs in Hungary faced an urgent need to adapt to new requirements. Representatives from the Hungarian financial sector noted that although they had previous experience with sanctions stemming from Russia’s initial invasion of Eastern Ukraine and annexation of Crimea in 2014 – primarily focusing on name-/entity screening – the heightened and more complex restrictive measures on Russia necessitated more rigorous and manual work. FIs must now screen transactions comprehensively and assess whether the goods or end users involved are subject to sanctions, rather than simply screening for name matches. The absence of automated tools for monitoring financial flows related to sanctions violations poses significant challenges for Hungarian banks. While some tools, such as Swift’s Compliance Analytics, assist in analysing changes in financial flows that might be indicative of sanctions evasion activity, they often fall short of providing the depth of analysis required for transactions with high risks, and cannot provide the granular insights necessary for effective compliance. As it stands, compliance teams must often screen transactions manually on a case-by-case basis, which includes evaluating complex scenarios such as the export of aluminium wires to Russia or the import of salmon from the country.

To better safeguard against non-compliance, participants from the financial sector argue that rather than simply rejecting transactions, FIs should adopt a US-style approach that allows for the blocking of funds within FIs until sufficient documentation confirming the lawfulness of transactions is provided. This shift would ensure that, while banks are still held accountable for compliance, additional pressure would be placed on corporates to bolster their sanctions awareness, as they would lose access to funds submitted for processing that are not properly documented. Enhanced technological capabilities in monitoring and reporting on sanctions-related activities are therefore needed to ease the burden of manual review processes.

Private sector representatives also highlighted the compliance challenges posed by the current fragmented sanctions reporting landscape in Hungary, involving multiple authorities and duplicating reporting lines. This creates confusion and inefficiencies. Banks in Hungary can self-report compliance failings to the FIU, but they also have obligations to report to the Hungarian National Bank. This dual reporting structure underscores the need for a clearer, more integrated approach to sanctions enforcement.

In the corporate sector, firms that have longstanding practices in managing export controls for dual-use goods are well prepared to follow sanctions regulations. However, the broader corporate sector remains ill-equipped to handle the complexities introduced by recent sanctions. SMEs find it especially challenging to navigate sanctions compliance.

Last, legislators and regulatory bodies in Hungary appear to have struggled to coordinate their efforts, particularly given the complexity of sanctions legislation. Existing interdepartmental collaboration has proven challenging, complicating compliance for businesses and FIs. A centralised sanctions authority could streamline processes and facilitate better communication among stakeholders.

Interpretation of EU Sanctions Regulations

Interpreting EU sanctions regulations has proven to be a challenge for Hungarian businesses and authorities alike. Participants at the roundtable discussed how the complexity of EU sanctions regulations – characterised by frequent updates and inaccessible language – creates a significant burden for compliance teams, which must navigate a constantly shifting landscape. The rapid pace of change means that organisations often lack the time and resources needed to allow them to adapt their compliance frameworks.

In this context, private sector participants expressed concerns regarding the interpretation of EU sanctions law, perceiving it as not clear enough. They agreed that language used in these regulations often lacks clarity and coherence, making it difficult for key stakeholders in both the public and private sectors (such as customs officials and FIs) to implement them effectively. Beyond the lack of clarity, rapid modifications to sanctions regulations also pose a challenge. Corporate sector participants noted that a change in the rules can create immediate barriers for goods in transit.

Furthermore, the inconsistent application of sanctions across different EU member states complicates compliance, as varying interpretations can lead to confusion and misalignment. The expectation of uniform application of EU regulations is often undermined by practical realities on the ground. For example, a participant noted that there have been instances of Hungarian export licences not being accepted by EU member states at the eastern border. The agreement between the customs authorities of Estonia, Latvia, Lithuania, Finland and Poland since May 2024 on the uniform implementation of trade sanctions sought to enhance regional coordination, but it has also reportedly led to a redirection of trade flows through Hungary, which is not currently party to this agreement. Due to the redirection of trade flows, the Hungarian Customs Unit’s workload, which includes managing flows at the external borders of the EU with Serbia and Ukraine, has increased, according to participants.

To navigate interpretation, some private sector participants have attempted to draw parallels between EU regulations and the more straightforward frameworks of US sanctions. One participant noted that they visit the FAQs page on the website of the US Department of the Treasury’s Office of Foreign Assets Control and use analogues to interpret EU sanctions packages. Participants highlighted that the sanctions advisories published by the US were much clearer and more accessible than EU FAQs, which do not serve as sufficient guidance and have on occasion been contradicted in rulings by the European Court of Justice. Indeed, private sector participants noted that becoming acquainted with US sanctions is rising among the priorities of EU businesses as the potential for US secondary sanctions increases. This heightened scrutiny has forced FIs to reassess their risk profiles and enhance their compliance mechanisms, particularly for contracts involving non-EU entities.

Participants highlighted that a critical need has emerged for the European Commission to issue much clearer interpretative notices similar to those from US regulatory bodies. The current approach to introducing FAQs lacks legal standing and their phrasing still often fails to provide the clarity necessary for effective compliance. Clear, consistent guidelines from the Commission would help mitigate these challenges.

Awareness-Raising of Compliance Obligations in Hungary

In an environment where compliance obligations are often viewed as ambiguous, FIs and businesses must have a clear understanding of the start and end points of their due diligence responsibilities. Overcompliance has become a prevalent strategy for mitigating risk, whereby institutions screen every transaction meticulously and often reject them when they remain unconvinced of their legitimacy. However, this approach can lead to operational inefficiencies and increased costs. To mitigate this, participants discussed the need to enhance industry’s understanding of compliance obligations, and some of the actions already being taken to improve awareness.

The government and various industry associations in Hungary have made efforts to raise awareness, but resources for education on compliance are often scarce. The BFKH has organised export control forums and participates in webinars, while the Ministry of Foreign Affairs and Trade engages in events dedicated to raising awareness about sanctions compliance. However, the authorities’ efforts need more support from the private sector, as few industry associations are involved. More associations could contribute to awareness-raising efforts.

The National Bank’s AML/CTF department aims to contribute to these efforts and sends out a daily newsletter to supervised entities on relevant legislative changes and responds to questions. Participants welcomed this support, and pointed out that the volume of emails received from the National Bank is so high that recipients’ systems occasionally mark them as spam.

Furthermore, according to one participant, the National Bank’s successful awareness-raising campaign on online fraud, CyberShield, could offer a template for a campaign on sanctions violations risks. The campaign is supported by the Ministry of Justice and the Ministry of National Economy, as well as several other authorities, such as the police and the Hungarian Banking Association, the main advocacy group for FIs. Beyond raising customers’ awareness of online fraud, the campaign aims to foster the exchange of information and best practices between FIs, law enforcement and other authorities.

Another challenge highlighted by participants as facing compliance professionals in Hungary is the limited access to information about enforcement actions and case studies that could inform best practices. In the US, open communication about sanctions violations offers valuable learning opportunities for FIs and businesses. Conversely, the lack of similar transparency in the EU is a missed opportunity to showcase valuable lessons to the business community, and hinders the ability to learn from others’ mistakes.

In addition to awareness-raising on implementation, strengthened strategic communications are also necessary to highlight the aim of sanctions. Some private sector representatives raised the question of compensation for loss of business income due to sanctions, which underlines the need to further explain the importance of burden-sharing in the efforts to limit the Russian military complex’s access to funding and materials in its war of aggression on Ukraine.

Recommendations

• Consult industry stakeholders: To enhance the efficacy of sanctions enforcement, national policymakers in Hungary and the European Commission should engage further with industry stakeholders before, during and after issuing sanctions. Participants noted that the Ministry of Foreign Affairs and Trade consults strategic industries, and the Commission also takes a consultative approach. However, further fostering of public–private collaboration throughout all stages of sanctions policymaking would ensure that the applicability and potential consequences of sanctions are thoroughly assessed. This would also help minimise unintended consequences for businesses, and support their implementation efforts to achieve the effect policymakers are seeking.

• Increase clarity and transparency in regulations: Regulations should be formulated in a way that eliminates ambiguity and provides clear directives to stakeholders. While strategic ambiguity creates a sense of unease that might bolster overcompliance, clarity will foster more precise compliance that minimises the potential for misunderstandings that can then lead to inadvertent violations and unintended effects.

• Centralise competences and simplify processes: The involvement of numerous authorities in Hungary requires a high degree of coordination that is often difficult to manage effectively. Fragmentation creates uncertainty and leads to a duplication of effort for the private sector. Centralising domestic sanctions competences into a single agency would mitigate these challenges and facilitate implementation.

• Enhance sanctions expertise: The level of understanding of sanctions regulations and obligations remains low, particularly among non-financial corporates. Awareness-raising initiatives should be prioritised and strengthened, by both the public and private sectors. Existing campaigns such as the Hungarian National Bank’s CyberShield programme on fraud could offer a template for wider awareness-raising efforts on sanctions. Furthermore, participants called for a central source of information on sanctions, such as a sanctions hotline.

• Invest in IT and data tools: Investing in improved IT systems and data analytics tools within customs and regulatory authorities would boost effective sanctions enforcement. This investment would enable better tracking and analysis of financial flows, as well as improved engagement with the private sector, thereby enhancing compliance capabilities across the board.

• Harmonise sanctions implementation: Hungarian customs authorities highlighted the challenge of managing an increased flow of goods through the country, linked to the enhanced customs cooperation between the Baltic countries, Finland and Poland. Hungary could benefit from joining this agreement, as it would help to prevent making the country attractive for the rerouting of trade flows. This challenge further underscores the need for the EU to work towards better alignment and harmonisation of sanctions implementation across member states.

SIFMANet has repeatedly observed similar challenges across the 14 EU member states it has visited so far, and regularly shares recommendations with policymakers in Brussels to support the improved implementation of sanctions against Russia. These recommendations amplify the suggestions gathered from the public and private sectors, including in Hungary. Yet despite the clear and widespread understanding of these challenges, they persist. As we approach the third anniversary of Russia’s illegal invasion of Ukraine, the EU must redouble its efforts to ensure that governments and the private sector take all necessary steps to restrict the resourcing and funding of Russia’s war of aggression.

Gonzalo Saiz is a Research Fellow in the Centre for Finance and Security research team at RUSI.

Balázs Gyimesi is the Communications Manager of RUSI Europe in Brussels.