Force majeure and MAC/MAE clauses during the period of Covid-19 in Hungary

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author: dr. Balázs József FERENCZY

  1. What force majeure means?

Force majeure (in the Hungarian legal language: “vis maior”) is a legal institution dating back to Roman law, and “means a force or event that human weakness cannot resist.”[1] The legal literature includes both overwhelming natural forces, such as earthquakes, floods, shipwrecks, other natural disasters, and certain human/social movements, such as wars, revolutions, or other extraordinary social events of extreme force. According to Roman law, “no one is generally liable for force majeure”[2], unless (i) it has been undertaken by someone in a contract (such as in the case of ancient “insurances”, like the pecunia traiectitia or the lex Rhodia de iactu mercium), or, for example, (ii) if the person was liable for (i.e. it was attributable to him) that the asset has been affected by force majeure.

Force majeure – although it has classical roots and a fairly widespread contractual practice – does not have a normative basis in the current Hungarian legal system. This legal institution can be deduced indirectly from certain provisions of the Civil Code and their explanations (cf. the system of exemption from contractual liability according to § 6: 142 of the Civil Code),[3] and in practice, the exact meaning and content thereof are set forth by the parties in their contractual clauses and in the judgments developed by case law.

  1. Can the current epidemiological situation be considered as force majeure and can we invoke it in our contractual relations?

In our contractual relations force majeure may be invoked mainly in cases where the parties have made the vis major cases, and among them the epidemiological situation, part of their contractual agreement. These clauses are most often included in medium- and long-term contractual schemes (e.g. construction and installation contracts, credit line contracts), but it is important to note that the contract must be examined each time (i) to find out if it contains any additional force majeure clause, on the one hand, and if this exist (ii) what is the exact content thereof, on the other hand. These provisions usually provide a clear indication of the contractual obligations the parties are liable to meet in the event of force majeure (e.g. the obligation to notify in writing on the occurrence of force majeure event and the nature thereof), the duration of such a situation (the parties generally allow the application of force majeure event for a transitional period) and what should and/or can be done after this transitional period (withdrawal or termination if the force majeure situation does not cease during the transitional period or resumption of contractual obligations).

The provisions on the payment moratorium set forth in the Government Decree Nr. 47/2020 (III. 18.) on the immediate measures necessary to mitigate the impact of the coronavirus pandemic on the national economy, as well as in the Government Decree Nr. 62/2020. (III. 24.) on the execution of the former one (hereinafter collectively referred to as the “Government Decree”) in Hungary, for example, contain an exemption from the fulfilment of contractual obligations for the debtors of credit, loan and financial leasing contracts disbursed on a commercial basis, which, in fact, prevented the risk of mass insolvency resulting from the epidemiological situation and, therefore, the risk of mass litigation procedures, which was likely to place a heavy burden on the economy as a whole and on the judicial sector, too.

Force majeure may also be applied even without a contractual clause, for example, if the party relying on it can properly prove that he was unable to meet a contractual obligation specifically due to the epidemiological situation or for a reason directly attributable to the epidemiological situation, he did not foresee the occurrence of this event, neither could he be expected to assess/foresee it in advance. In this respect, for example, an important and decisive issue may be the date of conclusion of the contract as well as to what extent and in what manner the given business was affected by the possible shutdown of foreign suppliers around this date, for example.

  1. In which cases could difficulties arise in relation to force majeure event?

Despite the above, there are many systems of contractual relations where reference to force majeure event is likely to cause difficulties, such as, for example, lease contracts for retail units and shops. As our colleague, Mátyás Rada explained in his previous article “since force majeure in lease contracts usually means events beyond the control of the parties that damage or destroy the building or part of it rendering the leased property unavailable or unusable (such as fire, flood, or even war events), a new interpretation of ‘un-usability (unavailability)’ may emerge in the context of a coronavirus pandemic.”

  1. Is there causing of damage in case of force majeure?

If the defaulting party properly alleges and proves that he was unable to meet his obligation due to force majeure event, therefore his conduct or his omission resulted from a cause beyond his control, he can be relieved of his liability for breach of contract and thus for causing damages.

It is important to note that, on the basis of a regulation developed for this purpose[4], a so-called certification of force majeure can be required from the Hungarian Chamber of Commerce and Industry (HCCI) in respect of non-performance of an obligation (or obligations) specified in a particular contract, which is an institution rather foreign from the until now existing Hungarian legal practice. At the same time, HCCI underlines in its abovementioned regulations that “The concept of “force majeure” has not been defined neither by Hungarian law, nor by EU legislation and judicial practice. The purpose of the Chamber’s certification of force majeure is to avoid possible lawsuits, to promote civilized economic co-operation between enterprises, to simplify the proof in lawsuits that may still be initiated, and to reduce the duration of lawsuits.”

A major question of judicial practice following the coronavirus epidemic is the direction in which the case-law related to force majeure will be further developed, based on a simultaneous examination of the above elements, in a forward-looking manner.

  1. What does MAC/MAE clause mean?

If the contract cannot be terminated due to force majeure, the contracting partner may have to seek other clause(s)/legal grounds for terminating the contract.

As impact of the Anglo-Saxon legal system and international model contracts, the use of the so-called MAC/MAE (that is to say: Material Adverse Change/Material Adverse Effect) clauses is widespread also in Hungarian contractual practice, that can typically be found in credit and loan agreements and in the documentation of M&A transactions. The main source of the MAC clauses – similarly to force majeure – are the provisions mutually agreed upon by the parties in the contract. The legal background for this legal institution does not currently exist in the Hungarian legal system.

For example, in a loan agreement standardized by the LMA, any fact, event, or circumstance, or a series thereof, shall be considered as material adverse effect that has occurred to the borrower which, according to the creditor’s reasonable opinion, have or may have a material adverse effect on

(a) the economic (financial or other) situation of the borrower;

(b) the management and business of the borrower;

(c) the ability of the borrower to meet any obligation under the financing agreement or the collateral contract securing thereof; or

(d) the legality, binding force, validity, enforceability, ranking of any transaction document to which the borrower is a party.

A MAC/MAE’s

  • lack (as expected by the creditor) may, for example, serve as a precondition for the financing party to meet its financing obligation under the credit facility agreement; or
  • occurrence (unauthorized by the creditor) may, for example, result in the breach of the borrower’s obligation undertaken in respect to the lack of MAC/MAE, which may lead to an event for breach of contract; or
  • occurrence/existence (not permitted by the creditor) may also result directly (sui generis) in an event for breach of contract.
  1. When can we speak about the occurrence of a “material adverse effect” under the MAC clause?

In this matter – in lack of Hungarian judicial practice and legal provisions – it is worth relying on the results of Anglo-Saxon legal development. According to them, a material adverse effect, for example,[5]:

  • must continue existing for long-term: the change cannot be only temporary, it must be for long-term and permanent in terms of the company’s ability to generate revenue (“over a commercially reasonable period, measured not in months but years.”);[6]
  • must be quantitatively significant: a waiver based on the MAC clause could be successfully invoked, for example, in the case of a 50% reduction of two consecutive quarterly revenues,[7], in another case the court considered a reduction of 64% of the quarterly revenue to be a close case,[8] while a decrease of 86% of EBITDA was considered as an undoubtedly significant and substantive change („short-term hiccup should not suffice”);[9]
  • externalities affecting the whole industry concerned, given that they affect all participants of that industry, do not normally fall within the scope of the MAC clauses. If a material adverse effect affects the given contracting party only, regardless of the industry concerned, the termination on the basis of the MAC clause may provide an appropriate basis thereof; however, if the effects affect the whole industry in the same way, the contract cannot normally be withdrawn under a MAC clause.

The above only sets the framework for Anglo-Saxon case law (drawn with rather inaccurate lines) and does not mean that minor revenue losses cannot lead to a decision respecting MAC/MAE clauses (with special regard to the existence of other important circumstances), nor they mean that even in the case of a higher loss of revenue, the court could not decide against the application of the MAC/MAE clause. However, it can be stated in general, the courts interpret the MAC/MAE rather strictly and narrowly. They usually exclude the applicability of the MAC/MAE clauses in the event of, for example, war, natural disasters or force majeure, placing the systemic risks on buyers/creditors, essentially. As the pandemic became global, the Covid-19 epidemic also began to appear in MAC clauses as a specific circumstance being an explicit exemption from the causes of withdrawal[10] (a substantially similar trend was observed after the events of 11 September 2001, when the terrorist attack was included among the events of force majeure). However, it is important to underline that specific circumstances referred to in the MAC/MAE clause (including the Covid-19 epidemic, too) can only constitute an exemption if they affect the given industry or activity, including all market participants, in general. If the impact on a given company is (significantly) more severe than on the industry in average (“except to the extent that the target was disproportionality impacted compared to other industry participants”), the systemic risk thesis may be overturned and the application of the MAC/MAE clause against the target company/borrower may legally be founded, taking into account all the factors of the case.

  1. Can the current epidemiological situation justify withdrawal from the contract or refusal to financing by reference to the MAC/MAE clause?

In each case, extensive and thorough contractual interpretation is needed in order to determine whether the epidemiological situation caused by the Covid-19 virus and the resulting economic and legal circumstances fall within the scope of the MAC/MAE clauses set out in the contracts. In our view and in the light of past experience, it can be said in general that the MAC/MAE clauses relate specifically to the individual financial, economic or legal situation of the debtor/contracting partner. The fact that both the world economy and the Hungarian economy have to face a global epidemiological situation as a result of the Covid-19 virus does not in itself provide a sufficient legal basis for the contracting party to exercise its right to terminate the contract under the MAC/MAE clause.[11] Nevertheless, special consideration in the risk analysis should be given to the possible disproportionate impact on a given company caused by the current situation referred to above.

  1. Are there other contractual rules under which a credit institution may, for example, consider terminating a loan agreement?

As we explained in one of our previous articles, the payment moratorium (at least, concerning Hungary) only grants, temporarily and not permanently, exemptions from the rules of the loan agreements related to the repayment of capital and interest. This is a very important, but by no means a single set of borrower obligations. In addition to capital and interest repayment rules, loan agreements commonly used in the legal practice impose obligations on borrowers to comply with certain financial ratios (DSCR, LTV), to provide financial information on an ongoing basis, or to maintain collateral value (listing only the most important ones). Borrowers are obliged to fully comply with these obligations, even during the payment moratorium set out in the Government Decree and the existence of the force majeure situation. Should any of these obligations be breached, these may allow the credit institution to consider the termination of the relevant contract, which is not in the borrower’s interest during the moratorium period, either.

  1. What is the solution?

In the current situation, both (legal) force majeure (Government Decree on the declaration of an emergency and its execution) and the MAC/MAE clauses can provide an appropriate basis for the contracting parties to negotiate and resolve disputed issues reassuringly and for long term. It is clear that in this way parties are primarily facilitating to relaunch the various sectors of the economy after the emergency will cease, which already seems to be a huge, but mutual task, trying and testing people and the market.

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[1] History and Institutions of Roman Law (András Földi and Gábor Hamza), Institute for Educational Research and Development, Budapest 2015. Brósz-Pólay: Roman Law, Textbook Publisher, 1974, p. 351 .: “cui humana infirmitas resistere non potest” – D.44.7 .1.4. – Gaius.

[2] D. 50.17.23. – Ulpianus, 1.

[3] Section 6:142. of the Hungarian Civil Code

[4] https://mkik.hu/vis-maior-igazolas-kiallitasa

[5] https://corpgov.law.harvard.edu/2020/04/04/covid-19-as-a-material-adverse-effect-mac-under-ma-and-financing-agreements/

[6] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[7] Raskin v. Birmingham Steel (Del. Ch. 1990)

[8] IBP Shareholders Litig. (Del. Ch. 2001)

[9] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[10] Morgan Stanley-E*TRADE merger agreement: https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-morgan-stanley-e-trade-merger-excludes-coronavirus

[11] https://www.ashurst.com/en/news-and-insights/legal-updates/is-coronavirus-covid-19-a-material-adverse-change/

Kapolyi Law firm is among the best Hungarian law firms in 2020 according to Chambers and Partners and The Legal 500 legal guides

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We are honoured to have been top ranked among the best Hungarian law firms in the 2020 edition of The Legal500 EMEA and Chambers and Partners legal guides.

The meetings of governing bodies of legal entities during the Coronavirus pandemic

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author: dr. Adrienn MILD

Based on Parliament’s authorisation, the Government enacted Decree 102/2020. (IV.10.) on diverging provisions concerning the operation of partnerships and capital companies during the state of emergency (hereinafter: “Decree”). The decree was issued on 11 April 2020 and will remain in effect until the state of emergency ceases according to government Decree 40/2020 (III. 11.).

The Decree set forth special provisions for the operation of legal entities’ corporate bodies (e.g.: members’ meeting, general meeting, board of directors, supervisory committee, etc.) during the emergency period. It is important to note that the Decree’s provisions apply for deadlines already expired before the Decree’s enactment, but after the declaration of the emergency. It also applies to persons whose mandate, appointment or elected office expired after the declaration of the emergency but before the enactment of the Decree and no other person has been appointed or elected to replace them.

This piece summarises provisions on legal entities regulated by the Civil Code. Special provisions for publicly listed companies (plc.) were summarised in our earlier article.

Meetings of a corporation’s governing bodies (members’ meeting, general meeting, etc.) may not be held by attendance in person (this applies to a meeting already convened by the time when the Decree was enacted). If possible, members may attend meetings through electronic communication devices or make a decision without holding a meeting – unless this does not violate any laws and it is initiated by the management -. According to the Decree this is permitted even if the legal entity’s articles of association (hereinafter “Articles of Association”) do not contain any provision for the processes and conditions of decision-making without holding a meeting.

If the Articles of Association contain provisions for holding a meeting through electronic communication devices and for decision-making without holding a meeting, those provisions prevail. If not, the management is entitled to establish them, but certain rules for warranties must be observed:

  • Members must be informed about the agenda, and the proposals for resolutions must also be disclosed to them,
  • In case of attendance the meeting through electronic communication devices, the devices and IT applications must be specified, as well as the means of the process of identification (unless the management of the legal entity personally knows the members or their representatives),
  • In the event of decision-making without holding a meeting: (a) at least 15 days must be allowed for the member to vote. The vote is valid only if it clearly identifies the member (name, address/seat, the name of its representative – in the case of an organization -), the indication of the draft resolution to vote on, its serial number and the vote cast; (b) the decision-making process shall be considered effective if at least as many votes are sent to the management as the number of members with voting right required to attend for a quorum if the meeting was in fact held in session; (c) the management shall determine the outcome of the voting within three days following the last day of the deadline set forth for voting, or, if the votes of all members are received previously, within three days from the day when the last vote is received, and shall convey the results in writing to the members within an additional three days; (d) the member may not propose to convene the governing’s body meeting or to hold it by electronic means; (e) subject to compliance with prescribed formalities, a member may cast its vote through e-mail, too.

The designated executive officer of the legal entity is to chair the meeting of the governing body and record its minutes, indicating the circumstances of the meeting and the personal details of the members participating by electronic means. The minutes shall be signed by the chairman of the meeting and no attendance list is required.

A member of the supervisory board and the permanent auditor may participate in the meeting of the governing body the same way as the members of the legal entity (essentially by electronic means).

If it is not possible for members to participate in the meeting through electronic communication devices or to make a decision without holding a meeting, the management decides on the approval of the annual report, dividends as well as issues belonging to the competence of the governing bodies and necessary to maintain the legal entity’s lawful operation and the management of the emergency situation, as well as on urgent matters unless the majority objects to the proposal. However, the management (i) may not amend the Articles of Association unless required by law; (ii) may not dissolve the company without a legal successor; (iii) may not decide on the transformation, merger or division of the legal entity, nor may it decide on ongoing issues related to transformation, merger or division that belong to the competence of the governing body; (iv) may not decide to reduce the registered capital of limited liability companies and private companies limited by shares; (v) may decide on additional payments or other capital injections only with the prior written consent of the parties obliged to provide them.

In case of limited liability companies and private companies limited by shares, if the convening of the members’/general meeting and the reduction of the share/registered capital is mandatory according to the Civil Code, those companies are obliged to decide on the necessary measures on members’/general meeting to be convened no later than on the 90th days after the cessation of the emergency.

The decisions of the management are considered as a decision of the governing body (meaning that these decisions must be published and submitted to the court of registration) and are enforceable. The management must make every effort to inform members about these decisions. The management is liable for its decisions to the legal entity on the basis of the rules on liability for a breach of contract. The audit of the annual report may be carried out on the basis of the decision of the management, however, the management may only decide on the annual report if it has previously been approved by the supervisory board, in case it operates.

The decision of the management made on the basis of the above rules shall be placed on the agenda of the extraordinary meeting of the governing body to be convened to be convened no later than on the 90th days after the cessation of the emergency. However, if the decision is amended or repealed by the governing body, it does not affect the rights and obligations arising from previous decisions of the management.

The corporate bodies of the legal entity (executive board, supervisory board, audit committee, or further corporate bodies established by law or the Articles of Association) may hold meetings through electronic communication devices, or through other electronic devices which permit the identification of attendees. Alternatively, corporate bodies may conduct written consultations, and make decisions in writing. In lack of relevant, approved procedures for the above, the rules and processes of the meeting and decision-making are determined by the chairman of the body which must be communicated to members involved. Written consultations and decision-making may also take place through electronic messages (i.e.: through e-mail).

A further temporary rule is that shall the term of the appointment of a member in the above corporate body or the appointment of the permanent auditor expire during the emergency period (even if their appointment expired after the announcement of the emergency, but before the publication of the Decree and no other person has been appointed to replace them), their mandate will remain effective until the 90th day after the cessation of the emergency period and they are obliged to continue to perform their duties. Exceptions arise if the appointment of said person ceases due to death, recall, restriction of his legal incapacity or upon the occurrence of an event which provides grounds for exclusion or a conflict of interest.

If during the period of the emergency the number of members in the abovementioned bodies decreases below the number set forth by law or the Articles of Association, or if a member is unable to act due to the coronavirus pandemic, the remaining members are entitled to pass resolutions. In this case, the rules on the quorum of the said body shall be determined by the number of members available to decide. Even in this case, resolutions must be passed by simple majority; however, even one member is entitled to pass resolutions if all the other members of the relevant corporate body are unavailable.

Dr. Balázs Ferenczy’s Interview on the Repayment Moratorium on Klubrádió

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Kapolyi Law Firm’s Head of Banking and Finance Department, dr. Balázs Ferenczy was invited to Klubrádió’s ‘Vállalkozók Klubja’, where the show’s host, Iván Kárpáti, interviewed him on how the repayment moratorium affects the credit market participants. You can listen to the full interview in Hungarian on klubradio.hu.

https://www.klubradio.hu/archivum/vallalkozok-klubja-2020-aprilis-06-hetfo-1430-9803

Credit Card and Current Account Debts in Light of the Loan Repayment Moratorium

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The moratorium on loan repayments introduced as a result of the coronavirus pandemic essentially ‘reversed’ regulations on payment obligations arising from credit and loan agreements. With regards to the moratorium, the question of how the payment of debts from credit cards and overdraft facilities are affected arises. These credit products are revolving (i.e.: they do not have maturity date) and unsecured (i.e.: there is no mortgage collateral behind), however, the government decree on the repayment moratorium lays down provisions for credit facilities with a maturity date only. The issue was examined by Kapolyi Law Firm’s experts.

According to the Hungarian National Bank’s (MNB) interpretation published last week, the repayment moratorium enacted by the government also applies to credits with no maturity dates, such as credit card and overdraft facility products, provided that the credit amount was drawn down by the 18th of March 2020. Pursuant to the general rule of the repayment moratorium, debtors of these facilities can defer repayments until the 31st of December 2020, too. But what does this mean for loans withdrawn after the 18th of March 2020 under the same agreements?

  • If the customer drawdown loan after the 18th of March 2020under these products, neither the capital nor the interest debts are covered by the repayment moratorium, resulting in, that these amounts must be repaid to the bank under the original terms set out in the applicable facility agreement (in other words, in these  cases the loan functions as it usually does);
  • the same applies to loans drown dawn before the 18th of March 2020, if they are repaid (at least partially) by the customer to his credit account after the 18th of March 2020. The repaid amount in those cases becomes withdrawable again, but it is no longer covered by the repayment moratorium. They are to be repaid to the creditor according to the original provisions of the relevant contract.

It is important to underline that for purchases made with a credit card during the moratorium, interest-free repayment is only available if the amount of the closing balance is repaid to the credit account by the preferential repayment deadline specified in the relevant contract. If the debt is repaid later, the higher interest amount specified in the relevant contract will be charged by the bank instead of the reduced interest rate.

The repayment moratorium is applicable for all credit and loan agreements by the force of the law, automatically. However, its use is not mandatory, therefore customers, opting to repay debts from credit cards and overdraft facilities during the moratorium should notify their creditors accordingly. It is important that the debtor is aware of how his/her/its bank – for credit card and/or overdraft facility products – expects him/her/it to inform of their intention to repay (in the most general case it is not necessary to make a separate declaration, for amounts appearing on credit accounts are automatically used to repay loans).

When the repayment moratorium expires, unpaid capital, interest and fees become due pursuant to the original rules of the credit facility agreements. According to MNB, the timeframe for debtors to repay the relevant amount to the creditor must be based on a mutual agreement between the parties. Although for credit card and current accounts products the outstanding obligations usually relatively low, MNB expects – in harmony with the legislator’s objectives – that payment for products without maturity dates, instead of bullet, should take place in equal portions divided over a twelve-month period (in line with the banking sector’s proposal), in order to avoid repayment obligations becoming disproportionate burden to debtors.

Concerning unpaid interest during the moratorium, it is important to emphasise that for credit card and overdraft facility products, alike in case of non-recurring debts, no additional interest can be charged either, i.e.: no compound interest can accrue if the customer pays his/her/its debt to the creditor within the agreed timeframe and instalments. If the customer fails to meet its interest payment obligations within the deadline set for a date falling after the moratorium’s final deadline (which is 31st of December, 2020, as of today), interest may be charged on these amounts too.

Furthermore, with regards to the APR ceiling of 39.9% for unsecured consumer loans prior to enactment of the repayment moratorium, the APR following to that date may not exceed the central bank’ base rate by 5 percentage points, which could prove sensitive to the market. In the short run, this may lead to a decrease in the number of unsecured retail consumer credit products.

The Hungarian Parliament adopted a law extending the extraordinary legal order

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The Hungarian Parliament adopted the Act XII of 2020 („Coronavirus Act”) on March 30, which extends the extraordinary power of the Hungarian Government for the duration of state of danger (declared almost two weeks ago). The Act retains the right and authorization for the Government to govern by way of government decrees, furthermore, during the state of danger the Government may suspend the application of certain laws, derogate from the provisions of laws and take other extraordinary measures.

In the event of a natural or industrial disaster endangering lives and property, the Fundamental Law of Hungary enables the Government to introduce emergency measures and govern by way of government decrees for a period of 15 days.

Government decrees issued during this extraordinary and special „constitutional situation” may remain in force after the expiration of the 15 days long term only if the Parliament has given its authorization to the Government to maintain and extend the effect of these decrees.

By adopting the Coronavirus Act the Parliament has given to the Government the above authorization.

The Government may only exercise this extraordinary power to prevent, mitigate and eliminate the pandemic and its detrimental effects and in accordance with the principle of proportionality, however, the question remains as to what role the Parliament will have in legislation in the coming weeks and months.

The Coronavirus Act requires the Government to report to the Parliament on a regular basis and to inform the President of the Parliament and the faction leaders in case the Parliament does not hold a meeting.

The Parliament may revoke the above authorization at any time.

The Act temporarily eliminates the possibility of initiating national and local referendums and the holding of interim elections, it postpones the already scheduled polls and elections for the duration of state of danger, furthermore, the decisions on the dissolution of municipal councils enter into force only following the end of this period.

The Act amends the Criminal Code and adds a new criminal offense thereto. According to the amendment, any person who commits the following activities is punishable for obstructing the efforts to combat the pandemic:

  • violating various measures against the pandemic;
  • scaremongering at the scene of public danger or in connection with public danger, which activity can cause disturbance or unrest in a large group of people and prevent or obstruct the effectiveness of the efforts to combat the pandemic.

The Act enters into force as of March 31.

New Money-Laundering Prevention Policy Templates are Available from The National Bank of Hungary

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Due to changes in the Prevention and Combating of Money Laundering and Terrorist Financing Act earlier this year, the policy templates and guidelines have changed

The National Bank of Hungary (MNB) updated its Money Laundering and Terrorist Financing Prevention Policy Templates and its Guidelines, designed to assist companies under the effect of the Act on Money Laundering (primarily those operating in the money and capital markets) with legal compliance.

Major amendments to the Act on Money Laundering (Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing) entered into force on the 10th of January 2020. Most notably, they extend the scope of the Act to new services and providers of services:

  • a provider of exchange services between virtual and legal currencies and virtual currency exchange services;
  • depositary wallet providers;
  • a service provider dealing in or selling cultural goods (art, antiques) in respect of transactions or series of transactions the value of which is equal to or greater than HUF 3,000,000;
  • service providers engaged in the storage or trading of cultural goods (art, antiques) in free ports or those acting as intermediaries in free ports for transactions or series of transactions the value of which is equal to or greater than HUF 3,000,000; and
  • registered office service providers.

The Act also applies to a service provider – irrespective of where its headquarter is registered – which offers its services through a permanent business establishment in Hungary – which includes a branch – directly with the services specified in the Act on Money Laundering.

With respect to services, in case of the commercial leasing of real estate, only rental fees exceeding HUF 500,000 per transaction are subject to the law. Similarly, in the case of a brokerage service provided by a real estate agent, the extension applies only to the commercial mediation of the transfer of ownership of real property. The obligations of investment fund managers to prevent money laundering are extended with regards to their activities as defined in the Investment Services Act (Act CXXXVIII of 2007 on Investment Firms and Commodity Dealers, and on the Regulations Governing their Activities). The law imposes provisions on the amount of money exchanged in foreign exchange offices: transactions with a value of HUF 100,000 or more for one client within one week, are now subject to the law.

The rules on customer due diligence changed significantly. New regulations demand service providers to classify customers based on risk assessment, expand the line of customers subject to more stringent due diligence procedures with politically exposed persons and tighten the rules of procedure. Service providers with high risk, third-country clients with strategic deficiencies must comply with new standards in terms of customer identification (the most important of which is the establishment of business relationships, the execution of a transaction order subject to management approval under internal regulations). A new chapter – Special Customer Due Diligence – was added to the legislation, primarily concerning credit institutions, financial service providers and electronic money issuers. The limits of transaction orders set by laws changed. Service providers are required to perform due diligence when executing a transaction order in excess of HUF 4,500,000, the merchant must perform due diligence when a transaction exceeding HUF 3,000,000 is performed using cash, and due diligence must be conducted on any currency exchange amounting to at least HUF 300,000. The scope of the documents which may certify the source of money or property has been defined in the regulations.

Further changes to the law will take effect on October 1 and December 1, 2020, including the so-called provisions on changes in the level of risk, new reporting obligations on beneficial owners (to be filed in a central registry), and reporting obligations on bank accounts and safes.

Policy Templates

In line with its previous practices, MNB prepared sample model policies for trust service providers, and supports the compliance of service providers subject to the Act on Money Laundering with the help of the internal regulations. The most recent policy templates were published on the website on the 30th of March 2020: https://www.mnb.hu/felugyelet/szabalyozas/penzmosas-ellen/szabalyzatok-segedletek

Internal policies are required to comply with the new requirements by April 9, 2020, in line with the Act on Money Laundering, regardless of the date of publishing of regulatory samples.

Assignment of a Legal Adviser

For service providers who only recently became affected by new laws, or who do not have sufficient resources to ensure compliance with the law, it is strongly recommended that they consider utilising the services of legal advisers.

  • Kapolyi Law Firm, the preeminent Hungarian capital markets law firm, with over two decades of expertise, fully supports the development of internal policies and the adaptation of existing policies the to new requirements.
  • Kapolyi Law Firm has extensive experience in drafting internal policies to comply with laws on the prevention of money laundering and terrorist financing.

If you have further questions about money laundering and terrorist financing prevention, please do not hesitate to contact one of our experts.

Coronavirus Guidelines for exporting and importing firms

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Kapolyi Law Firm, in cooperation with Austrian, Croatian, Slovenian, German and Italian law firms, had a look at the our Governments’ economic measures which dealing with the assessment of economic difficulties and related state assistance. During the preparation of this document, we paid special attention to measures in the sector of freight transport, so after a summary of general economic actions taken in each country, we have summarized the provisions on the field of freight.

The above mentioned information material deals with the measures of the Hungary, Austria, Croatia, Slovenia, German and Italian Governments with regard to the epidemiological situation: Coronavirus Guidelines for exporting and importing firms

If you have any questions regarding this documentation, please do not hesitate to contact us!

Employer’s Data Protection Challenges During the Coronavirus Pandemic

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In our previous newsletter, we examined the most important labour law provisions, which became especially relevant due to the spread of the coronavirus. We would like to remind you, that in today’s extraordinary circumstances, employers must not only consider labour laws, but also comply with data protection regulations. This newsletter summarises the most imperative risks, and proposes measures to be taken, which are approved by the Hungarian National Authority for Data Protection and Freedom of Information (NAIH).

  1. Risks and Challenges

The European General Data Protection Regulation (GDPR) set strict conditions for data processing, and equipped national authorities with effective tools to enforce its provisions. As a result, enterprises must invest a significant amount of resources in order to ensure compliance with data protection provisions. The world of business perceives the strictness of the GDPR as an unnecessary burden. This is especially true for SMEs and those enterprises whose main area of activity bears no relationship with processing personal data, or those who only conduct data processing peripherally. Therefore, one may believe that the new data protection regulations needlessly hinder the implementation of the employer’s health and safety measures.

Luckily, this is not the case. During the drafting of the GDPR, European lawmakers considered risks such as an epidemic, which means that the GDPR does not hinder or prevent epidemic measures from being implemented (Section 46 of the Preamble of the Regulation explicitly describes this). However, this does not mean that by referring to extraordinary circumstances employers are allowed to collect and process any kind of data. The Regulation continues to severely sanction data processing which may not be considered as purposeful or justifiable, and also prohibits the employer from going beyond its role, utilising tools which only national authorities are permitted use.

A situation such as this requires the employer to process a wider range of data on employees than it usually does. In order to ensure uninterrupted communication and the upkeeping of regular operation, it becomes inevitable for the employer to collect and process personal phone numbers, e-mail addresses and other online contact details. Furthermore, depending on a given economic activity, it may become necessary to process several other kinds of personal data.

With regards to the above, our general advice is to ask for the assistance of a data protection expert when designing new workflows to be implemented. We recommend this in order to satisfy the principle of privacy by design, and through this to ensure compliance with further data protection principles. It is not recommended to appoint administrative staff or middle management to implement measures. It is a better choice to construct uniform, regulated workflows with the aid of an expert.

With regards to data protection, a further challenge stems from the recently popular decision of employers directing employees to work remotely. It is often the case that employees are forced to use their own devices for work – to a certain extent – instead of relying on the employer’s IT infrastructure. Such measures may pose severe data protection risks. In several processes, a greater data protection risk is one which may have an effect on the data processing’s legality. For instance, in case of data processing based on legitimate interest, the test for balancing interests may bear different results under a lower data protection level.

  1. Healthcare and Travel-related Data Processing

Recently, employers widely began to implement measures, which involve the processing of personal data concerning health. We would like to emphasise that personal data concerning health is classified as a special category under the GDPR. The processing of such data has strict conditions and boundaries. The data protection risk in this case is significantly greater, than when processing different categories of data.

It is not lawful for employers to conduct medical checks by themselves, or to request healthcare documentation from their employees. Conducting mandatory body-temperature tests, issuing compulsory health-related questionnaires, demanding data on medical history in any way, and other similar measures all count as an unlawful data processing, which the employers may not conduct. According to NAIH, an exception to this rule may only be granted on an individual basis for certain jobs that are considered to be highly susceptible to illness. Even in this case, several data protection provisions are to be complied with, and a healthcare expert must also be involved.

The processing of health-related data is not forbidden. The GDPR prescribes several legal grounds, based upon which the processing of special categories of data is permitted. It is important to mention that prior to beginning the processing of such data, it is essential to examine the necessary conditions for it. It is common practice that an employer orders an employee to fill out a declaration of consent and believes that the data processing is therefore legitimate. This will most likely result in an invalid declaration and illegitimate data processing, even if the data in question does not fall under a special category of data. We therefore recommend this practice to avoided.

A significant proportion of employers with larger workforces have recently ordered their employees to compulsorily fill out questionnaires with regards to whether the employee or any other person entering the premises of the workplace has recently visited a country affected by COVID-19 or whether they have symptoms of the coronavirus. These questionnaires may only be legitimate, if prior to their introduction, the employer has conducted the test for balancing interests, and is satisfied that the measure is necessary and is proportionately beneficial when considering the measure’s negative effects on the employees’ rights. As discussed above, questions may not inquire about medical history, and the processing of data collected through the questionnaire must be regulated.

A further question arises with regards to the legality of an employee’s ‘whistleblowing’ concerning another employee’s symptoms. Accepting these reports is not illegal. Based on the principles of Labour Law (duty of cooperation, good faith, fairness), employees are entitled to and obliged to submit a report to the employer regarding health risks they are aware of in the workplace. However, we believe that the process of submitting a report should be regulated in a way which complies with data protection principles, and does not result in the stigmatization and/or discrimination of employees who are perceived to be ill.

  1. Recommended Measures

Generally, we recommend that personal data should only be processed, if it is absolutely necessary. If there is an alternative, then that should be the preferred choice. Furthermore, when processing sensitive data, it is recommended to strive for a high level of compliance with the principle of transparency, and to and to provide clear information on all measures taken.

Recently, European data protection authorities began to publish their recommendations with regards to data protection questions related to the coronavirus epidemic. The interpretation of regulations varies greatly between different authorities. It is often the case that certain legal bases are legitimate in one Member State, but are not applicable in another and a number of Member States’ authorities declared that employers have limited means to conduct data processing. Concurrently, multiple authorities explicitly stated that the GDPR does not restrict entities in such situations. As such, we recommend multinational enterprises not to rely on the guidance and/or internal regulations issued by their corporate group or parent company. Hungarian corporations must comply with NAIH’s guidelines.

On a final note, we would like to direct your attention to NAIH’s recommendations for the measures to be taken by employers, which we summarised below:

NAIH recommends the development of a so-called pandemic or business continuity action plan. This plan this does not exclusively concern itself with data protection issues, but are drafted with consideration of the relevant data protection risks. Detailed informative prospectuses created for employees as a part of the plan don’t limit themselves to data protection issues only. Instead, they are to provide information regarding the coronavirus and guidance on how to deal with the risk of infection. In similar situations, NAIH considers it necessary for the plan to include provisions on the reorganisation of business and business travel, including the regulation of remote working. Additionally, NAIH considers it important that the action plan includes a notice for employees to immediately report any suspected infection and to consult the occupational physician or a general practitioner.

Just like with preparing the necessary labour law documentations, responding to our clients’ data protection inquiries is a top priority for us. We will do everything in our power to help you comply with regulations as soon as possible!

If we may be of assistance to you with regards to any of the above, please don’t hesitate to contact us!