Budgetary fraud:
What does it mean, how does it manifest in practice, and what
are the penalties?
Securing a grant, meeting a tax return deadline or the unexpected arrival of an audit can cause headaches for many business owners. There are situations where a decision, whilst promising an immediate benefit, may lead to criminal liability in the long term.
Budgetary fraud is one of the most complex economic offences in Hungary: it simultaneously involves taxation, the use of public funds and accounting documentation. In this summary, we explain what the law defines as budget fraud, what penalties apply to it, and we also provide an insight into its most common form in practice: the world of fictitious invoices.
Table of Contents
What is budget fraud?
Budget fraud is a criminal offence regulated under Section 396 of Act C of 2012 on the Criminal Code (Btk.). Essentially, the offender causes financial loss to the budget: they fail to pay the amount due, claim tax deductions to which they are not entitled, make unlawful use of tax relief, or use public funds for purposes other than those approved.
The legal object of the offence is the protection of budgets, that is, the subsystems of public finances – including the central budget, local authority budgets, social security funds and ring-fenced state funds. It is important to note that, in addition to domestic budgets, this offence may also affect the European Union‘s budget, which poses a particularly significant risk in the context of EU funding applications.
The three basic types of budget fraud
The legislator divides budget fraud into three basic types, and within each of these regulates several types of criminal conduct.
1. ‘Genuine’ budget fraud – Section 396(1)
This is the most common form of budget fraud. It may occur in three main scenarios. The first of these is where the perpetrator, in relation to an obligation to make a payment into the budget or to funds derived from the budget:
- misleads someone, that is, through active conduct presents a falsehood as the truth; for example, if a business states a number of employees in a grant application that does not correspond to reality;
- keeps someone in error, that is, fails to provide the information necessary to dispel a previously established error, even though they had a legal obligation to do so; for example, when an authority makes a decision based on previously incorrect data and the perpetrator should have pointed out this error.
- The source of the legal obligation may be an employment relationship, a relationship under public administration law or a contract.
- makes a statement containing false information, or conceals the true facts.
- In practice, a statement is deemed to be false if its content does not reflect the actual situation, facts or data.
The second type of genuine budgetary fraud occurs when a budgetary benefit is claimed unlawfully, for example, through the unjustified claiming of tax or customs relief.
The third type occurs when funds from the budget are not spent for the approved purpose, but are used for a different purpose, thereby causing financial loss.
2. Excise duty fraud – Section 396(6)
This basic offence relates to a specific subject matter: it may be committed in respect of excise goods. The scope of excise goods is defined by Act LXVIII of 2016 on Excise Duties. Under the Act, excise goods include energy products, beer, still and sparkling wines, other still and sparkling fermented beverages, intermediate alcoholic products, as well as alcoholic products and tobacco products.
The offence is committed if a person, in the absence of the conditions laid down in the Act on Excise Duties or other legislation, or without an official licence, manufactures, acquires, holds, places on the market or trades in excise goods, thereby causing financial loss to the State budget.
3. Administrative budgetary fraud – Section 396(7)
Administrative budgetary fraud relates to documentation and accounting. The Act provides for the punishment of any person who:
- fails to fulfil, or fulfils only partially, their accounting, bookkeeping or reporting obligations in relation to funds derived from the budget;
- uses a document containing false information, or a forged or falsified document.
- The use of such a document may occur at any time when the perpetrator ‘comes into contact’ with the budgetary funds, for example when obtaining or repaying them.
Budgetary fraud in practice
In practice, we encounter several forms of budgetary fraud, for example when a successful grant application or other EU funding is not used in accordance with the purpose specified in the application. Furthermore, it sometimes happens that a business fails to issue a receipt in order to conceal its actual income. However, in practice, the most common form of budgetary fraud is the recording of fictitious invoices.
Acceptance of fictitious invoices
In business, it is not uncommon for entrepreneurs to issue fictitious invoices in order to reduce their actual costs. Such invoices are most commonly issued in relation to value added tax (VAT), as in cases specified by law the tax liability may be passed on to another party; however, in order to exercise this right (the right to deduct tax), it is essential to issue an invoice or other document intended to certify that the transaction has been completed. This also applies to the payment of VAT; thus, VAT is not paid by the seller of the goods or the provider of the service, but is passed on to the end user, that is, the consumer.
We may speak of fictitious invoices where an invoice evidencing the sale of a product or the provision of a service is not available, or where it does not meet the conditions laid down by law (Section 166(2) of Act C of 2000 on Accounting); for example, where its layout is not sufficiently clear, or where it is not reliable or authentic in terms of form or content.
According to the Supreme Court, the use of fictitious invoices can be divided into three categories:
1.
The economic event stated in the invoice did not take place; that is, the sale of the goods or the provision of the service did not occur. In this case, all parties to the invoice were aware that the economic event had not taken place; consequently, the authority does not investigate whether the recipient of the invoice may have been unaware of this fact.
2.
The economic event stated on the invoice did take place, i.e. the sale of the goods or the provision of the service did occur; however, the relationship between the parties named on the invoice cannot be substantiated, and therefore the economic event did not take place between them.
3.
The economic event set out in the invoice did take place; that is, the sale of the goods or the provision of the service did occur, and this took place between the parties named on the invoice. However, the authority conducting the criminal proceedings proves that the issuer of the invoice engaged in fraudulent conduct and that the recipient of the invoice was aware of this or ought to have been aware of it. Such fraudulent conduct may, for example, involve the issuer of the invoice engaging in conduct aimed at tax evasion or evading tax liability.
If any of the cases of fictitious invoices detailed above are established by the authorities handling criminal proceedings, the issuer of the invoice will be denied the right to claim a tax deduction, and will therefore be unable to pass on the VAT to the consumer.
What is the penalty for budget fraud?
When determining the severity of the penalty to be imposed, the court takes several factors into account: the manner in which the offence was committed, the degree of intent, the extent of the financial loss caused, the offender’s criminal record, and whether the offence was a one-off incident or was committed repeatedly over a longer period. When determining the sentence, the defendant’s confession, their cooperation with the authorities and their efforts to compensate for the damage are also taken into account; however, the severity of the sentence always depends on the circumstances of the particular case.
In standard cases of genuine budgetary fraud and excise duty fraud, the penalty is a maximum of three years’ imprisonment; however, this may vary depending on the extent of the financial loss and the manner in which the offence was committed.
The law provides for a prison sentence of between one and five years if the budget fraud has caused significant financial loss, or if the actual budget fraud was committed as part of a criminal organisation or on a commercial scale.
A person who causes a particularly large financial loss through budget fraud, or who commits budget fraud causing a significant financial loss as part of a criminal organisation or on a commercial scale, faces a prison sentence of between two and eight years.
The penalty is imprisonment for a term of between five and ten years if the offender causes a particularly significant financial loss through the offence; or if the budget fraud causing a particularly large financial loss was committed as part of a criminal organisation or on a commercial scale.
The concept of financial loss is defined by the Criminal Code: a loss of revenue resulting from a failure to fulfil an obligation to make a payment into the budget, as well as funds unlawfully drawn from the budget or used for purposes other than those intended. Based on the amount of the financial loss, expressed in forints, we can distinguish between several categories:
- significant financial loss: HUF 5,000,001 – HUF 50,000,000
- particularly large financial loss: HUF 50,000,001 – HUF 500,000,000
- particularly significant financial loss: over HUF 500,000,000.
When do we speak of a criminal conspiracy?
A criminal conspiracy exists where two or more persons commit criminal offences in an organised manner, or agree to do so, and attempt to commit at least one criminal offence, but no criminal organisation is formed.
A person commits commercial-scale budget fraud if they seek to make a regular profit by committing offences of the same or a similar nature.
The law provides for a maximum penalty of three years’ imprisonment for the offence of administrative budget fraud.
At the same time, the legislature provides for unlimited mitigation of the penalty for anyone who compensates the State for the financial loss caused to the budget before charges are brought. However, this provision does not apply if the offence was committed as part of a criminal conspiracy, by a criminal organisation, or by a repeat offender.
It is important to note that criminal liability does not preclude obligations to repay sums to the tax authorities or under grant schemes. The offender is often required to repay the sum wrongfully obtained, together with interest and surcharges, even if the criminal proceedings result in a different outcome.
How do proceedings for budget fraud unfold?
Cases involving budget fraud typically unfold in several stages, and several authorities may be involved in the process.
1.
Report or detection by the authorities: Proceedings are often initiated following an audit, a tax authority investigation, monitoring of a tender, or an internal report. Anyone may make a report, or the investigating authority may act on its own initiative.
2.
Investigation: The investigating authority, in tax matters, is often the investigative bodies of the National Tax and Customs Administration (NAV). The NAV primarily gathers evidence, which involves seizing documents, interviewing witnesses, appointing experts and analysing accounting documents. The suspect is questioned during the investigation, so legal representation is of paramount importance even at this stage.
3.
Charging and the court proceedings: If the investigation finds the suspicion to be well-founded, the prosecutor may bring charges. The court then decides on guilt and the sentence during a trial.
4.
Parallel tax authority and grant procedures: Alongside criminal proceedings, there is often a tax audit, a supplementary tax assessment or a recovery claim by the body granting the subsidy. These operate under different time limits and have different systems of legal redress; therefore, a coordinated legal defence is crucial.
What should you do if suspicion arises?
If you or your business are suspected of budget fraud, the first steps you take often determine the course of subsequent proceedings:
- Do not destroy or alter any documents! Even a well-intentioned correction may appear suspicious if it is not documented.
- Gather the relevant documents: contracts, invoices, tender documentation, bank statements and related correspondence.
- Do not make any hasty statements! If approached by the authorities, ask for time to consider the matter and consult your solicitor first.
- Review your internal processes. If the problem originated within the company, immediate action and documented corrective measures can reduce the risk.
- Be prepared to settle the claim. In certain cases, the law may regard the early reimbursement of financial losses as a mitigating factor; it is therefore worth exploring this option right from the start.
When should you consult a solicitor?
If there is a suspicion of budget fraud, or if an official audit, investigation, tax authority procedure or claim for repayment of grant funds has been initiated, early legal representation makes all the difference. Initial statements, the handling of documents and making the most of mitigating factors can all influence the outcome of the proceedings. As tax authority and criminal proceedings may run in parallel, it is advantageous to have the support of a specialist who is equally proficient in both areas.
Why choose Dr Gyula H. Kovács’s Law Firm?
Dr Gyula H. Kovács’s Law Firm, based in Budapest, specialises in criminal law and, within this field, provides effective defence in cases of economic offences that require specific economic expertise and competence. In cases of suspected budget fraud, as criminal proceedings and tax authority proceedings often run in parallel, the coordinated handling of both can have a decisive influence on the outcome of the case. The following services offered by the firm are most relevant in this context:
- Criminal defence from the moment of suspicion: acting as defence counsel immediately following the raising of suspicion.
- Representation in cases involving economic offences: tailored, effective defence at every stage of criminal proceedings.
- Representation in proceedings before the tax authorities: comprehensive representation in proceedings before the tax authorities, as well as in related judicial reviews and appeal proceedings.
- 24-hour availability for urgent criminal law matters: including outside normal working hours and at weekends.
- Language skills: Dr Gyula Kovács, Solicitor, is fluent in both English and French, including legal and economic terminology.
The Firm’s aim is to provide every client with personalised, clear and objective advice, so that they can make informed decisions.
How can we help?
We primarily assist our clients in budget fraud cases in the following ways:
Case review: reviewing the available documents, official enquiries and the facts of the case, and assessing the actual risks.
Developing a defence strategy: coordinating criminal and tax law considerations, and weighing up options for making statements and mitigating factors.
Representation before the authorities and throughout the proceedings: during the investigation phase, in court, and in proceedings before the tax authorities.
Ongoing updates: on the status of the case and the next steps, in plain language.
It is important to note that every case is unique, so we cannot promise a specific outcome. However, we undertake to assess your situation honestly and objectively based on the available information.
Why should you get in touch now?
When fraud is suspected, the earliest stage is often the most crucial. Statements made to the authorities, the handling of documents and the initial steps taken can influence the course of the proceedings even at a later stage. If you seek expert help now, you may have even greater room for manoeuvre and can avoid misunderstandings or irreversible mistakes.
Don’t wait for the problem to resolve itself: an initial consultation will help you see clearly what your options are.
Request a preliminary consultation – Write to us using the contact form or call us on +36 (20) 372 1313!
Dr. Gyula Kovács Attorney At Law
Frequently asked questions
Yes. The offence is punishable even if the offender causes a financial loss. The severity of the penalty is determined by the extent of the loss.
Under the Criminal Code, the penalty may be reduced without limitation if the offender compensates for the financial loss before charges are brought. Every case is unique, so it is only possible to comment meaningfully on the possibilities for mitigation once the specific facts of the case are known.
The limitation period for criminal liability depends on the most severe penalty that may be imposed; therefore, a specific time limit can only be determined on the basis of the classification of the offence. This issue should be examined on a case-by-case basis.
Yes. Criminal liability rests with the natural person who personally commits the offence; therefore, the company director, the finance director or the employee responsible for preparing the grant application may also be held liable if the elements of the offence are satisfied. The company’s legal personality does not, in itself, provide immunity.
The funding body may generally initiate recovery proceedings if the grant has been used unlawfully or in breach of contract. These proceedings may be independent of criminal liability, but the two cases may influence one another; it is therefore advisable to seek coordinated legal representation.
Tax fraud is one form of budget fraud. Budget fraud is a broader category that includes tax fraud, as well as grant fraud, excise duty fraud and administrative offences.
Yes. The basic offence is punishable even if the offender causes financial loss. The severity of the penalty is determined by the extent of the loss.
Under the Criminal Code, the penalty may be mitigated without limitation if the offender compensates for the financial loss before charges are brought. Every case is unique; therefore, a meaningful assessment of the possibilities for mitigation can only be made once the specific facts of the case are known.
The limitation period for criminal liability depends on the most severe penalty that may be imposed; therefore, a specific time limit can only be determined on the basis of the classification of the offence. This issue should be examined on a case-by-case basis.
Yes. Criminal liability rests with the natural person who personally commits the offence; therefore, the company director, the finance director or the employee preparing the grant application may also be held liable if the elements of the offence are met. The company’s legal personality does not, in itself, have an exculpatory effect.
The funding body may generally initiate recovery proceedings if the grant has been used unlawfully or in breach of contract. This procedure may be independent of criminal liability, but the two matters may influence one another; it is therefore advisable to seek coordinated legal representation.
The full text of Section 396 of the Criminal Code on budgetary fraud
Act C of 2012 on the Criminal Code – Section 396 (Budgetary fraud)
(1) Any person who a) misleads or keeps another person in error regarding an obligation to make a payment into the budget or funds derived from the budget, makes a false statement, or conceals the true facts, b) unlawfully claims a benefit relating to an obligation to make a payment into the budget, or c) uses funds from the budget for a purpose other than that for which they were approved, thereby causing financial loss to one or more budgets, shall be liable to imprisonment for a term not exceeding three years for a criminal offence.
(3) The penalty shall be imprisonment for a term of between one and five years if a) the budgetary fraud causes significant financial loss, or b) the budgetary fraud specified in paragraph (1) is committed as part of a criminal organisation or on a commercial scale.
(4) The penalty shall be imprisonment for a term of between two and eight years if a) the budgetary fraud causes a substantial financial loss, or b) the budgetary fraud causing a significant financial loss is committed as part of a criminal organisation or on a commercial scale.
(5) The penalty shall be imprisonment for a term of between five and ten years if a) the budgetary fraud causes a particularly significant financial loss, or b) the budgetary fraud causing a substantial financial loss is committed as part of a criminal organisation or on a commercial scale.
(6) Any person who, in the absence of the conditions laid down in the Act on Excise Duty and in legislation based on its authorisation, or without official authorisation, manufactures, acquires, possesses, places on the market or trades in excise goods, thereby causing financial loss to the budget, shall be liable to punishment in accordance with paragraphs (1) to (5).
(7) Any person who fails to comply, or complies only partially, with the prescribed accounting, book-keeping or reporting obligations in relation to funds derived from the budget, makes a false statement, or uses a document containing false information, a forgery or a falsified document, shall be liable to imprisonment for a term not exceeding three years for a criminal offence.
(8) The penalty may be mitigated without limitation for a person who compensates for the financial loss caused by the budgetary fraud defined in paragraphs (1) to (6) prior to the bringing of charges. This provision shall not apply if the offence is committed as part of a criminal conspiracy, within a criminal organisation, or by a habitual offender.
This information is of a general nature and does not constitute specific legal advice. The legal position in a specific case can only be assessed in the light of the facts of the case.