This post is based on the first Hungarian corruption case investigated by a non-Hungarian, non-EU institution, the U.S. Department of Justice. It strongly indicates systemic government corruption at the highest level, going as far as the prime minister’s office.
Thanks to a Wall Street Journal article that appeared in August 2018, we learned about the investigation into “potential bribery and corruption related to software sales in Hungary” by Microsoft Hungary, an affiliate of the software giant, Microsoft. The investigation was being carried out under the U.S. Foreign Corrupt Practices Act, a law that prohibits businesses from paying bribes to officials in corrupt governments in order to conduct business in those countries.
The journalists at The Wall Street Journal ascertained that about $30 million worth of software was sold through intermediaries to the Hungarian government at very high discounts, which were not passed on to the government agencies but most likely landed in the bank accounts of the middlemen, the Hungarian employees of Microsoft, and corrupt government officials.
As we know from the released document that summarizes the charges against Microsoft, the criminal activities of Microsoft employees in Budapest and the intermediaries who sold Microsoft software to government agencies began in 2013, perhaps even earlier. According to a 2017 article that appeared in 24.hu, the Orbán administration, between 2010 and 2012, was outright antagonistic toward multinational companies, including Microsoft. But in 2012 Prime Minister Viktor Orbán met B. Kevin Turner, chief operating officer of Microsoft. After that, brisk business was carried out between the software giant and the Orbán government.
The document released by DOJ cites only two examples to demonstrate how the illicit government-Microsoft cooperation worked. The first is a case from February 2013 and the second from February 2014. But we must assume that many similar cases occurred between 2013 and the end of 2015, when authorities were alerted. In late 2015 and early 2016 Microsoft fired four employees of Microsoft in Budapest, including the managing director of the office, whose tenure had seen a remarkable growth in Microsoft Hungary’s sales numbers. Microsoft also stopped doing business with several government-approved middlemen.
The document doesn’t name names or specify the business entities that acted as intermediaries. We don’t know from the document which government agencies were the purchasers. Those familiar with the case, however, can identify these characters with relative ease. We know the names of the four people who had to leave the company in 2016 as well as the four firms that served as intermediaries between the government agencies and Microsoft. On the basis of the dates provided by the DOJ document, Ákos Hadházy, the politician who has been tracking down corruption for years, has already identified the two government agencies that appear in the DOJ document as Agency 1 and Agency 2. One of them is ORFK, the national police captaincy. But the list of “customers” is practically endless, including the Hungarian Post Office, the Ministry of Defense, and the Office of Taxation.
How did the scheme work? The Hungarian employees of Microsoft Hungary, including Executive 1 (István Papp), falsely reported to Microsoft headquarters in Redmond, Washington that large discounts from the company’s estimated retail prices for government contracts were necessary in order to conclude the deals with the Hungarian government agencies. The problem was that these savings were not passed along in full to the customers.
The document’s first example begins with a February 28, 2013 e-mail from Agency 1 to Employee 1 requesting a price quote for the purchase of 4,400 desktop licenses for Microsoft software. Negotiations went on for months until May 2, when the employee asked for a 44% discount from the Microsoft Business Desk for the deal with Agency 1. All discounts have to be approved by the Business Desk. The claim was that the agency would commit to closing the deal in June, rather than October, if the firm reduced the price to fall within Agency 1’s €2 million budget. Executive 1 came to the support of the deal, stating that “I was involved in this deal and, given the budget available and partner pre-sales efforts, it is vital we get the 44% discount approved.” The Desk rejected the deal, noting, among other things, that the estimated re-seller margin seemed high.
After the rejection, the three Microsoft employees must have explained to their clients that 44% will not do, and therefore they lowered the discount to 22.55%. The Business Desk approved the revised deal. Just when Agency 1 and the Budapest crew had settled on €2.36 million, Manager 1 returned to the Business Desk with the following story: “We just had a meeting with the customer and we have to give an additional 4-5% discount from the price in order to fit the achievable budget.” The discount would eventually be 24.55% and the net price €2,540,283. This deal was finally signed between the Budapest office and the re-seller. As the document states: “the inflated margin was used to fund improper payments under the FCPA.”
The second case was even more impressive because the deal was for about 10,000 desktop licenses for Agency 2. Employee 1 knew ahead of time the size of the budget available for the purchase, approximately €3.76 million, which came from EU funding. This time Manager 1 and Employee 1 requested from the Business Desk approval to sell various types of software at 25-30% discounts. Their justification for the discounts were competition, end customer price sensitivity, and the possibility of securing related service contracts. Although Employee 1 knew that Hungary had ample money to pay for the licenses without any discount, the Desk approved the asked-for discount. And then, a few months later, came another e-mail saying that “the problem is that another 5% would be needed, Image may be NSFW.
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the idea of our Greats Image may be NSFW.
Clik here to view.” A few days went by. And then another e-mail was fired off, saying that “we are still working to close on the [Agency 2] deal …. We are focusing on the financial aspects and collected all the necessary approvals in the Government up to the Prime Minister.” The Desk again approved the arrangement. The amount of money that got lost somewhere between Microsoft Hungary and Agency 2 was calculated to be approximately €1.56 million.
Naturally, the corrupt employees of Microsoft Hungary didn’t do all this for nothing. The companies that served as intermediaries likely received larger margins than they were entitled to. Finally, some government officials had to be part of the scheme.
How much did Orbán know about the criminal connection between the government agencies, Microsoft Hungary, and those four or five firms that were authorized to serve as middlemen between the government agencies and Microsoft Hungary? The Wall Street Journal reported that when Kevin Turner met Viktor Orbán, the Hungarian prime minister “brought with him a group of small company owners.” Thus, the scheme of using these smaller companies, close to the government, was most likely his idea in the first place. In return, according to Portfolio, Microsoft promised further investments in the country. I assume he was also promised large discounts as an enticement.
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Orbán Viktor and B. Kevin Turner in November 2012
It is a great embarrassment for Viktor Orbán that his name appears in an investigation conducted by the U.S. Department of Justice, implicating him in a criminal activity. The release of the document might mean that the Hungarian prosecutors, who once already refused to investigate, will reluctantly ask for further information from the United States. At least this is what they said. Also, since at least one of the cases described in the DOJ document involved EU money, OLAF became interested in the details. In addition to Orbán, his son-in-law’s name has cropped up in the Hungarian media in the last few months in connection with the Microsoft case.
Orbán, whose political fortunes in Europe are shaky, now has to fend off an ugly corruption case.