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In a sunny villa with a view to the sea on a tiny island in the Southern Caribbean, clerks of an intriguing company are doing their job. They open accounts for offshore companies, bargain with other banks, and if they come across a problem, they contact the Budapest office thousands of miles away. The Hungarian capital is where the owner of the company called Loyal Bank, a well-known Hungarian businessman, lives, and that is where the top decision makers of the bank also resided for years, as it became known from leaked documents known as the Panama Papers.

Otto Hujber, the owner of Loyal Bank, was one of the most influential businessmen in the 90s in Hungary when he was also acting as the chairman of the then ruling socialist party’s business division. His luck faded in the 2000s. The last time he appeared in the news was when a scammer sold him copper instead of gold as credit protection in 2015.

There had been reports in the Hungarian press linking Hujber to the offshore bank, but the the Panama Papers confirm with documents that he is the owner of the bank. Moreover, the emails, financial reports, documents give an unprecedented insight to the daily operations of this Hungarian-owned offshore bank. The documents reveal, for example, that Loyal Bank had nearly sixty thousand customers a few years ago, among them approximately 2300 Hungarians, many Russians and Japanese. In 2012 Loyal Bank made a profit of 5 million dollars.

Hujber confirmed to Direkt36 that he is the owner of Loyal Bank. He claimed that he reports his revenues from the activities of the bank to the Hungarian authorities, and pays his taxes accordingly. “Though I belive this is private information, I paid taxes after my income of 85 thousand euros from Loyal Bank,” Hujber told us.

The documents also shed light on the controversial due diligence process of Loyal Bank. A memo of a meeting between the representatives of Loyal Bank and a Panamanian law firm suggests that Loyal Bank did not require companies opening bank accounts to reveal their beneficial owners. Governments and international organizations have been fighting for years to end this practice, and current rules require banks not only to collect data on beneficial owners but also to share them with the authorities. Loyal Bank denied that it is possible to open a bank account with them without revealing the beneficial owners, and said that Mossack Fonseca must have misinterpreted the words of their representative in the memo.

In two European countries financial authorities issued warnings against Loyal Bank, accusing the bank of unauthorised financial activities. Loyal Bank unraveled itself in both cases, and the warnings were withdrawn. The Hungarian financial authorities were aware of at least one of the warnings but it is not completely clear if the authorities acted upon it and checked the bank’s activites in Hungary. The current CEO of Loyal Bank, Linda Bullock claims that there were such check-ups and the authorities found that everything was fine. The Hungarian National Bank, which is tasked with supervising commercial banks, has not confirmed that these inspections took place.

The Panama Papers, internal documents from Mossack Fonseca, a Panama law firm, were obtained by the German newspaper Süddeutsche Zeitung and more than 370 journalists from 76 countries worked on it in a yearlong investigation by the International Consortium of Investigative Journalists. From Hungary, Direkt36 was the only journalism organisation participating in the project. We have already reported on offshore connections of political figures and some of Hungary’s wealthiest people.

A businessman close to the party

Loyal Bank was registered on Saint Vincent and the Grenadines in 1997, with 2 million dollar in capital, significantly higher than the minimum capital requirement of 100 thousand dollar at the time. Still, it was far below the requirements for Hungarian banks. In Hungary, banks had to have at least 7 million dollar capital.

Hujber confirmed to Direkt36 that he founded the bank and did not seek capital from others.

In 2002, HVG, a weekly magazine, published a story about about Loyal Bank, exposing that it was owned then by a Liechtenstein family foundation called Ost-West Stiftung. The foundation’s board of trustees included Otto Hujber, his wife and a men named István Schneider, but only Hujber had the right to sign.

In the 1990s Hujber was one of the most well-known and most influential businessmen in Hungary. He never joined any party, but he was the chairman of the Hungarian Socialist Party’s (MSZP) business division. He was also a key figure in the decade’s important business opportunity, dismantling Russia’s debt to Hungary. Companies purchased the debt but some of them, including Hujber’s firms, failed to pay the agreed price to the Hungarian state, causing loss that has never been recovered. One of Hujber’s companies had owed almost 3.3 million dollars to the state before it was liquidated a few years ago.

Owners in the shadow

“Global reach, local touch” – this is how Loyal Bank advertises its services but this intangible, rotund slogan hardly reflects the bank’s very practical advantages. The Tax Justice Network, an international team of researchers focusing on tax evasion, wrote in a paper that offshore banks are often chosen by wealthy individuals because they are less exposed to economic and political turmoil, and in case of the latter, authorities will not be able to freeze the assets on offshore accounts. Most likely they would not even find it.

Loyal Bank has other additional advantages. On the one hand, according to the documents found in the Panama Papers, customers could open bank accounts without having to travel to Saint Vincent. On the other hand, a memo from a 2010 meeting between Stephen Kostyal, the former chairman of the bank, and a representative of Mossack Fonseca, suggests that customers did not have to reveal their beneficial owners to open a bank account.

According to the memo, Kostyal said that “they only need the notarised passport copies of each director/shareholder/account signatory, address proof and one bank reference letter (this document can be replaced by 3 months update bank statement or a professional reference letter in case the client has difficulty to provide the bank reference letter).”

In case of offshore companies, however, the names of directors and shareholders reveal little about the identity of the real shareholders known as beneficial owners. In most cases, directors and shareholders are nominated and provided by the offshore provider registering the company. The only way to be sure that a company is not using its newly opened bank account for money laundering, tax evasion or other financial crimes is to check who the beneficial owner of the company is. The memo suggests, however, that Loyal Bank did not require such information about its clients.

We asked Kostyal about his meeting with the Mossack Fonseca representatives and he said he remembers meeting with them, but could not recall the details.

“We can only assume that Mossack Fonseca misinterpreted the memo received from our former Chairman of Loyal Bank. Having been the Head of Compliance for over twelve years I can confirm that disclosure of a beneficial owner or ultimate beneficial owner is a strict precondition of any account or banking relationship with Loyal Bank Limited,” wrote Linda Bullock, the current CEO of the bank when we asked about the due diligence practices of the bank.

In an email, Bullock explained to Direkt36 that it’s impossible to open a bank account at Loyal Bank without disclosing the identity of the beneficial owner. She claimed that the bank has very strict “Know Your Customer” rules, based on the anti-money laundering policies of the EU and OECD, and the local regulation in Saint Vincent. Saint Vincent is the member of several international tax information networks, and provides information on offshore companies registered in its territory to authorities in order to prevent tax evasion, added Bullock.

The years of expansion

One year after it’s foundation in 1997, Loyal Bank opened its representative office in Budapest. In the mid-2000s, the bank wanted to open a representative office in Panama City to enhance the expansion of the bank. Mossack Fonseca was helping Loyal Bank with the process, and it was around this time that ties between the bank and one of the world’s largest offshore provider became closer.

A representative of the bank traveled to Panama to have meetings concerning the representative office. According to the leaked documents, he didn’t make a good impression on the officials of the bank authority in Panama.

“An officer of the Panama bank authority met the representative of Loyal Bank to discuss the possibility of opening an office in Panama. According to Castillo, the representative of the bank acted rather informally and was not very professional. He didn’t even give a business card to Castillo so he can’t remember his name,” wrote a Mossack Fonseca employee in an email to a colleague. The Panama office was never opened, because, according to Loyal Bank the process took too long and it was not worthy.

This however did not mean the end of the relationship between Mossack Fonseca and Loyal Bank. The offshore provider opened several offshore companies connected to Loyal Bank, and often recommended the services of Loyal Bank to customers seeking to open offshore companies and accompanying bank accounts. Among others, Mossack Fonseca recommended Loyal Bank for example to Pawel Piskorski, the former mayor of Warsaw. It is not clear from the documents whether he finally chose Loyal.

Japanese, Russian, Czech

The bank founded in the tiny island of Saint Vincent grew rapidly. In the first six years they collected 10 thousand customers and by 2012 they had almost 60 thousand. Compared to big national or international commercial banks this is not big number, but considering the Loyal Bank has only two offices in the world with around 30 employees it appears to be impressive.

The revenues of the bank also grew dynamically, but it was only in 2006 that the bank made profit, and it was the first year the owner took out dividends, although it is not clear from the documents how much.

The leaked documents also contain a report that Loyal Bank prepared for the banking superintendent of Panama. According to this report, the customer base of the bank is mixed. 30 percent of the customers are from offshore tax havens and the second biggest group is from Japan. In 2012, 15 percent of the customers were Japanese. The company values these customers, there is even a Japanese speaking customer officer in the Budapest office.

Besides Japan, Russia is another important market for the bank. In 2012 only 5 percent of the customers were from Russia but records suggest that the bank makes considerable efforts to attract more customers from the region. Hujber’s passport copies revealed that he traveled regularly to Russia on business visa in the past years.

There were also some controversial companies among Loyal Bank’s customers. Waberia consulting, a Florida-based offshore provider with Czech background opened accounts for their customers at Loyal Bank. Waberia was in the headlines in the Czech Republic when the Panama Papers story broke because the company opened offshore companies for a former Czech prosecutor. GMT Invest, a Russian investment company blacklisted by the French financial authorities was also a customer of Loyal Bank. They even made an advertisement for the bank’s credit card service on their YouTube channel.

Loyal Bank said when we asked them about GMT Invest that they can’t say anything about their customers because of business secrecy.

Bright Future

The leaked documents suggest that Loyal Bank was in its prime a few years ago. According to a 2012 financial report audited by KPMG the bank made around 4.5 million dollar in profit. “We often joke that the future is so bright that we need to wear sunglasses!” Loyal Bank wrote in a report from the same year. One year later, the bank had serious problems, customers could not access their money, and by 2015, the bank lost almost half of its customers.

“It was really easy to open an account, but it was really hard to use it. They kept changing the correspondent banks, and for almost one year, I couldn’t access my money,” a former customer of Loyal Bank told Direkt36. “I couldn’t transfer money to or from my account, and the customer service kept saying that they will solve the problem soon, but I canceled my account before it happened,” said the source who asked for anonymity because of the sensitive subject.

He was not alone with his bad experience. There are many negative comments about Loyal Bank on internet forums and blogs about the offshore world. The customer figures also appeared to reflect this as the number of clients decreased by almost 30 thousand by 2015.

The bank claims, however, that the decrease had nothing to do with the problems mentioned above. “The Bank took the business decision to review its client base in line with the new business strategy and direction that was decided upon. This change in its business profile resulted in the Bank ending certain contracts(?),” explained the current CEO.

Meanwhile Loyal Bank faced different problems. Financial authorities in Slovakia and Gibraltar issued warnings against the bank because they seemed to be providing banking services without authorisation. The warnings were later retracted, as Loyal Bank clarified the situation, as the authorities wrote to Direkt36.

Even though the financial authority of Gibraltar recalled the warning, it is still available in the database of the Hungarian National Bank (MNB) as a valid warning. Nevertheless, MNB has not done any inspections at the Hungarian representative office after they received the warning. “MNB may examine whether a person or a company is involved in unauthorised financial activities as a part of its market surveillance activity. In the previous years the bank has not received any notifications indicating that Loyal Bank is involved in unauthorised financial activities in Hungary,” the central bank told Direkt36. Linda Bullock, CEO of Loyal Bank claims, however, that they have documents to prove the audits done by the Hungarian authorities.

Loyal Bank is trying to avoid similar conflicts with authorities. On their webpage they explain in a popup window that information on the site does not constitute an offer, especially not in countries where such offers would be illegal. At the bottom of the window there is a special note to people from the UK stating that financial authorities of the country have not yet registered the bank.

The bank has to follow strict rules in Hungary as well. As a representative office they cannot be involved in any financial activities – for example they cannot collect deposits – , they can only serve as an intermediary between the customers and the Caribbean headquarters. We approached István Mindák, the head of the Budapest office, but he said he is not authorised to talk with the media.

Trust services

The leaked documents suggest that Hujber was not particularly active in Loyal Bank’s dealings with Mossack Fonseca. It was mostly the bank’s marketing manager who exchanged regular emails with the law firm, but in 2015 Hujber himself offered a business cooperation to the Panamanian company

Hujber’s plan was to extend the bank’s activities to offer trust services, and he wished to cooperate with Mossack Fonseca. “We are looking for versatile trust solutions that can be designed for the specific needs of the offshore bank clientele including asset protection and tax planning needs of our clients, and satisfy all legal and regulatory requirements,” wrote Hujber. “Currently, we have more than 32,000 clients from all over the world, from whom 4,000-5,000 could be interested in such services,” he added.

Mossack Fonseca was ready to start an even closer cooperation with Loyal Bank, however, the leaked emails do not reveal whether the cooperation started. And although Hujber never revealed himself as the owner of the bank in the emails, but it was not necessary. His official email address contained the word “bowner”, an obvious reference to the term “beneficial owner”.

For information on companies, we used the databases of Ceginfo and Opten.

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