State Audit Office files criminal complaint over central bank foundations' management

A comprehensive investigation by the State Audit Office of Hungary has revealed serious management and transparency problems in the operation of the Pallas Athéné Foundations established by the National Bank of Hungary (MNB). The foundations were set up in 2014 under the leadership of György Matolcsy, now former central bank Governor, and have been criticised for their non-transparent use of public funds practically since their creation. The ÁSZ report confirmed these concerns, highlighting excessive risk-taking, irregular financial decisions and the possibility of manipulation of financial statements.

As Portfolio already reported, the MNB financed the foundations from its own capital, mainly by investing HUF 260 billion from exchange rate gains on the central bank's forint-euro exchange rate, the origin of which is problematic because the central bank benefited from the weakening of the forint, while this created a heavy foreign currency debt burden for the population.

Key findings of the ÁSZ

The MNB created six Pallas Athéné foundations in 2014 with HUF 266.4 billion, which merged in 2019 under the name Pallas Athéné Domus Meriti Foundation.

The foundations established Optima Investment Ltd. (or more precisely its legal predecessor Pallas Athéné Domus Optima Ltd.) in 2015 to manage the assets and support the preparation of investment decisions. The mission of OPTIMA Investment Ltd. is "to invest the assets of the Foundation in a safe solution that achieves a high return."

In addition to the bond issued by the Pallas Athéné Domus Meriti Foundation (HUF 279.1 billion), OPTIMA Investment Ltd. has raised additional funds to finance its investments, including bonds issued by the Neumann János University Foundation (NJE Foundation) (HUF 127.5 billion) and a bank loan (EUR 170 million).

As a result of the fundraising,

OPTIMA Investment Ltd. was responsible for managing nearly HUF 500 billion in assets, a significant portion of which (HUF 407 billion) came from public funds.

However, the management of assets and investments was carried out "through an essentially opaque corporate and investment structure (Optima Group) of companies and private equity funds owned directly or indirectly by the group, which makes it almost impossible to assess the real assets." According to the report,

many billions of forints of this money went to the friends of former central bank governor György Matolcsy's son, Ádám Matolcsy.

Contrary to its founding objectives, the OPTIMA Group, through the intervention of private equity funds, has created a highly complex network of companies across several countries and at the entrepreneurial level, for which the ÁSZ has not identified any rational economic justification.

Optima issued bonds worth HUF 255.8 billion in 2021, HUF 278.5 billion in 2022 and HUF 279.1 billion in 2023, which together accounted for the bulk of the Foundation’s assets in each year, but as they were booked at a higher amount than the market value, this alone could have caused losses of up to HUF 150 billion for the Foundation.

The MNB's Board of Directors began to exercise the founder's control in a meaningful way after the SAO's invitation, when in the spring of 2024 it asked the Foundation's Supervisory Board to conduct an extraordinary investigation and inform the founder.

By the beginning of this year, the Foundation was in a serious liquidity situation, "the severity of which is indicated by the letter of the Supervisory Board of the Foundation dated 18 January 2025, addressed to the Governor of the MNB, in which the Chairman of the Supervisory Board assessed that the solvency of the Foundation and its ability to achieve its objectives were in imminent danger".

Now into the details...

Initially, the central bank created several foundations, but in 2020 the current operational framework began to take shape, with Optima Investment Fund Management Ltd. becoming the trustee of the foundations, reducing the number of original participants.

The ÁSZ has waded through the original complex web to conduct a full investigation of their asset management, concluding in the report just published that

the foundations' management did not ensure transparent and efficient use of public funds.

According to the ÁSZ, the risky investment policies of the organisations have led to losses of tens of billions of forints in the fund's assets, which was confirmed by the internal investigations of the new trustees appointed by the MNB in January 2025 - at least some of the problems now identified by the ÁSZ.

The report concludes that the management of public funds was not sufficiently transparent and that in several cases asset management practices were unfounded or irregular. The supervisory measures ordered by the MNB and the changes in the Board of Trustees suggest that the management of the Foundation's assets may be subject to stricter controls in the future.

Therefore, the ÁSZ, on the basis of the facts revealed during the audit, has established suspicions of several criminal offences and has therefore filed a complaint with the prosecutor's office under Article 30 (1) of the ÁSZ Act.

Long chains, heavy losses?

Foundation assets were managed through "unduly complex company structures", which made it impossible to trace the funds' movements. This is illustrated by the organisational chart attached to the study:

The confusing situation was finally simplified by the MNB, leaving only the Pallas Athéné Domus Meriti Foundation and its wholly owned Optima Investment Ltd. The foundations set up the predecessor of Optima in 2015 to manage their assets, support their management, legal and accounting activities, and maintain and develop their properties. The audit also covered the companies owned by the trustee during the period audited, which were directly or indirectly owned by the MNB.

But transparency has not really improved: a large number of private funds have been incorporated into the organisation, resulting in an even more closed management.

According to the report, the asset management practices of the foundations and companies set up by the MNB were in reality based on the creation of investment funds from the foundation capital, which were transferred to various fund managers. These were owned directly or indirectly by the central bank, so that the decision-making and control processes took place within a closed circle. A significant proportion of the funds, in particular private equity funds, were incorporated into networks of companies whose structure and actual ownership were not transparent.

As a result, the movement and use of financial instruments fell outside the supervision of the central bank, although they continued to be considered public money, the ÁSZ concluded.

The report points out that the investment structure that interposed private equity funds allowed some of the assets to flow into assets where public accountability was not ensured - essentially to private individuals and private companies. The Pallas Athénée foundations and the investment funds they set up moved significant sums of money into private equity funds whose operating rules were not always in line with the foundations' investment policies. The ÁSZ criticises, according to the document, that these were essentially hidden financial channels through which higher risk business transactions other than the investment purposes of the foundations' assets could be carried out.

The investigation revealed that in the financial structure managed by the MNB, funds and investments operated through multiple ownership chains.

For example, Optima Investment Ltd. and the private equity funds it managed had, in several cases, acquired ownership stakes in companies whose ultimate beneficiaries could not be clearly identified.

According to the ÁSZ, some of the public funds were thus invested in foreign or domestic real estate and equity transactions that were significantly riskier than the conservative investment principles declared by the MNB, while the monitoring of the resulting returns and changes in wealth was not made publicly available.

Serious value impairment, poor reporting among the errors found

One of the most important of the ÁSZ's findings is that the successor to the original foundations, Pallas Athéné Domus Meriti, is showing serious losses, which the published accounts - which the ÁSZ found to contain inaccurate figures - did not show.

The main asset of the Foundation was the OPTIMA 2040/A bond, which amounted to HUF 255.8 billion in 2021, HUF 278.5 billion in 2022 and HUF 279.1 billion in 2023, with almost all of the total assets concentrated in this investment. However, the ÁSZ found that the valuation of the bond did not comply with the Accounting Act and that it was carried in the books at an amount higher than its fair market value.

As a result, the foundations would have had to recognise an impairment of up to HUF 150 billion.

According to the report, the purchase of shares in the Polish real estate company GTC S.A., which Optima sought, was also highly objectionable. The trustees were given just 4.5 hours to study a proposal for a deal worth tens of billions of forints, and paid a 31% premium over the market price, some HUF 60 billion. The economic risks of the purchase were not taken into account, and the deal yielded just 2% instead of the expected 11% return.

At the foundation's main investment vehicle, Optima Investment Ltd., the profit after tax was HUF 116 million in 2021, increasing to HUF 385 million in 2022 and HUF 4,253 million in 2023. Dividends of HUF 3.2 billion were paid in 2021, of which HUF 3.1 billion was charged to the profit reserve. In 2022, the full HUF 385 million profit was paid out as a dividend, and in 2023 HUF 500 million.

Ferida Ltd., which is part of the foundation, also made significant losses: it made a loss of HUF 655 million in 2021, HUF 276 million in 2022 and HUF 1.5 billion in 2023.

Dividend income from investments fell far short of expectations: the asset management company paid HUF 385 million in dividends in 2021, but in 2022 and 2023 the amount was only HUF 500 and 780 million respectively, and several subsidiaries paid no dividends at all.

According to the ÁSZ's report, the financial situation of Optima Investment Ltd. is critical and the company's insolvency became imminent as early as 2024.

In January 2024, the Neumann János University Foundation attempted to reclaim the value of the bonds it had subscribed for, but the company was unable to meet the demand. The report concluded that the group's assets were illiquid and that existing investments could only be sold at a significant loss. The trustee's management acknowledged in March 2024 that it would be unable to meet its upcoming payment obligations.

It is also noteworthy that the State Audit Office of Hungary has also filed a complaint against the Neumann János University Foundation for its irregular operation.

Problems were plentiful elsewhere too

The report also specifically addressed the transparency of the grant and subsidy programmes managed by the MNB. The ÁSZ found that, although the objectives of the domestic grant and tender programmes advertised by the foundation were in line with the Foundation's objectives, the award and use of grants were not sufficiently transparent. The foundation did not comply with its legal obligations to publish information after receiving and evaluating applications.

It also failed to publish the accounts of grants submitted and accepted, which the Court considers to have undermined the transparency of the implementation of the programmes.

In relation to real estate investments, the ÁSZ found that the activities of MNB Real Estate Kft., owned by the MNB, and other real estate investment companies with indirect interests were irregular in several respects. For example, in two cases, Optimum-Omega Real Estate Investment Ltd. concluded contracts before the founding decision in the Burg Hotel investment, which was contrary to the provisions of the Founding Act. In the case of the Buda Palota real estate investment and the BOKK investment, the contracting of the audited items was in line with the founding decisions, but in the case of the Optimum-Gamma Real Estate Investment Ltd. investments, the documentation of public procurement and other procurement procedures was incomplete in several cases, the audit found.

In relation to the investments of Optimum-Gamma Real Estate Investment Ltd., the ÁSZ highlighted that the decisions of the founders were not always followed during the implementation of the investment, and the lack of internal regulation in the case of real estate developments increased the risks. One of the main problems was the lack of independence between the companies carrying out the investments and the bodies controlling them, which called into question the transparency and market-based nature of the contracts.

The State Audit Office's investigation also highlighted that the Ministry of Finance withdrew the audit reports of the foundations and Optima Investment Ltd. for 2021-2023 in 2024 due to the unreliability of their financial statements.

According to the ÁSZ, the auditors did not carry out adequate checks and the reports did not contain true and fair view of the valuation of the Foundation's investments.

Serious irregularities, but outcome still in doubt

The report concluded that the management and investment system managed by the MNB did not fully ensure the efficient and transparent use of public funds. In particular, the ÁSZ criticised the lack of transparency of investments made through private equity funds, shortcomings in accounting reports, excessive risk-taking and the lack of regulation of certain real estate investments. The report also pointed out that the entities supervised by the MNB did not always comply with the required reporting and disclosure obligations, which hampered the verifiability of financial processes.

The ÁSZ also criticises the decision-making of the foundation's Board of Trustees: decisions were regularly taken by electronic means without a meeting being held, and the proposals often did not include sufficient financial and risk analysis. In 2021, there was no meeting of the Board of Trustees at all, in 2022 there were two, while in 2023 there were only four face-to-face meetings.

Although the State Audit Office of Hungary has filed a complaint with the prosecutor's office, it is not yet known what steps the prosecution has taken or will take.

Cover photo: The main entrance of the headquarters of the Pallas Athena Domus Animae Foundation (PADA) and several other foundations at 2 Döbrentei street, 1st district of Budapest. Source: MTI Fotó/László Róka