## ch2 — Introduction (Chapter 2: Curbing Corruption)

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### Overview and framing
- Corruption defined as "the abuse of public office for private gain."
- Effects:
  - Distorts state activities; weakens tax collection and expenditure choices; reduces quality of public services and infrastructure; contributes to growing inequality and social and political instability.
  - Has a global dimension through bribery of foreign officials and use of opaque financial centers or secrecy jurisdictions to hide corrupt gains or evade taxes.
- IMF framing: draws on the IMF’s Framework for Enhanced IMF Engagement in Governance (IMF 2018) and focuses on fiscal institutions and practices policymakers can control.

### Measurement challenges and empirical patterns
- Measurement:
  - Most assessments rely on indirect measures (perceptions by experts, business surveys, or household/corporate experience surveys).
  - Chapter uses the Control of Corruption Index from the Worldwide Governance Indicators (available since 1996) using a version that strips out subcomponents explicitly related to fiscal institutions.
  - Control of Corruption Index range: –2.5 (high corruption) to 2.5 (low corruption).
- Empirical patterns:
  - Corruption is persistent; large improvements are rare and often follow major political change.
  - Perceptions of control of corruption are positively correlated with GDP per capita.
  - Reported numeric correlations: Panel 1 r = 0.91, p = 0.00; Panel 2 r = 0.65, p = 0.00.

### Three main goals of the chapter
- Explain how corrupt activities affect government decisions and operations (taxes, roads, schools, hospitals).
- Assess fiscal costs of corruption: leakages through lower tax revenues, overpayment for goods/services/projects, and distortions in spending priorities.
- Highlight core elements of an effective fiscal governance framework based on new data and country experiences.

### Typology of corruption covered
- Forms:
  - Administrative corruption (taking laws/regulations as given).
  - State capture (bribes to alter legislation or regulation).
  - Grand corruption (large-scale) versus petty corruption (small-scale).
- Examples of corrupt acts:
  - Payment of bribes to get public services or to evade taxes.
  - Embezzlement and public service fraud.
  - Nepotism or cronyism.
  - Influence peddling and conflicts of interest; kleptocracy as extreme state capture.

### Fiscal "hotspots" for corruption leakages
- Tax legislation: corrupt legislators granting exemptions and incentives for bribes.
- Revenue administration and tax collection: collusion and bribery enabling tax evasion.
- Treasury/financial management: theft from unmonitored accounts; embezzlement via weak controls.
- Budget choices and execution: project selection driven by bribes; procurement overpricing and low quality; "ghost" workers and pensioners.
- Extrabudgetary funds and public enterprises: weak controls and conflicts of interest.
- Natural resource production and SOEs: corrupt contract negotiation, weak oversight, risks in allocation of exploration rights and revenue collection.

---

### Fiscal costs — Revenue collection
- Cross-country revenue associations:
  - Advanced economies: top 25 percent in control of corruption collect 4½ percent of GDP more in revenues than lowest 25 percent.
  - Emerging market economies: gap is 2¾ percent of GDP.
  - Low-income countries: gap is 4 percent of GDP.
- Econometric result:
  - Improvement in Control of Corruption Index by one-third of a standard deviation (average improvement for countries that reduced corruption 1996–2017) associated with an increase of 1.2 percentage points in government revenues as a share of GDP.
  - If applied to all countries, implied increase in total tax revenues could be $1 trillion, or 1¼ percent of global GDP.
  - Gains would be larger after accounting for higher economic growth associated with lower corruption.
- Caveats:
  - Dominant causality likely from corruption to fiscal outcomes, but fiscal outcomes can affect corruption indicators.
  - Full disentanglement from broader institutional quality is not always feasible; results may reflect benefits of improved governance more generally.

### Revenue efficiency and correlations
- Revenue efficiency based on personal income tax efficiency and VAT c-efficiency; revenue data average of 2015–17 (excludes oil exporters); revenue efficiency average of 2013–16; Control of Corruption shows 2017 data.
- Reported correlations:
  - r = 0.22; p = 0.00 (revenue efficiency vs Control of Corruption Index, adjusted for GDP per capita).
  - r = 0.30; p = 0.00 (second reported correlation).

### Procurement, public investment, and direct fiscal losses
- Government purchase of goods and services: 13 percent of GDP among OECD countries.
- Procurement perceived as highest bribery risk.
- Empirical loss estimates:
  - Analysis in five sectors across eight EU countries: direct public loss from suspected corrupt procurement contracts varied between 7 and 43 percent of contract value (PwC 2013).
  - Some estimates suggest losses from corruption range between 10 and 30 percent of construction value (Matthews 2016).
  - Public-private partnerships present additional risks: complexity, confidentiality, frequent renegotiation with limited transparency.

### SOEs: corruption risks and performance impacts
- SOE corruption risk drivers: operation in corruption-prone sectors, weaker controls, conflicts of interest, undue political influence, mismanagement, lending to related entities, corruption of prudential authorities leading to fiscal costs.
- Empirical findings:
  - OECD survey: 42 percent of SOE respondents reported corrupt acts or irregular practices in past three years (OECD 2018a).
  - Evidence suggests 80 percent of foreign bribes go to SOE officials (OECD 2014).
  - Cross-country SOE data set: 1,446 firms in 38 countries (electricity, mining, transport, water; 2000–17) shows lower profitability and efficiency in high-corruption countries.

### Corruption and policy effectiveness: public investment and education
- Public investment efficiency:
  - Measured as ability to convert public investment spending into physical capital; inefficiency = distance to an efficiency frontier controlling for GDP per capita.
  - Public investment efficiency positively associated with control of corruption (r = 0.32; p = 0.00).
  - An emerging market economy in the top 25 percent of control of corruption wastes half as much as one in the bottom 25 percent.
  - Improving control of corruption by one standard deviation associated with fall in average efficiency gap from 34 to 20 percentage points.
- Education outcomes:
  - Quality of education (test scores) positively associated with control of corruption (r = 0.33; p = 0.00).
  - Mechanisms: corruption in hiring, teacher absenteeism, leakages in education grants linked to lower test scores and higher dropouts.
- Example: subsidies for research and innovation became more effective after an anticorruption campaign in China (Fang and others 2018).

---

### Fiscal governance framework and core components
- Success requires simultaneous improvements in several, mutually supporting institutions; prioritize higher-risk areas when capacity constrained but eventually expand to all core institutions.
- Key elements emphasized:
  - Overarching legal framework.
  - Professional civil service.
  - Digitalization (e-government).
  - Integrity of processes and organizational design.
  - Effective internal controls and internal audits.
  - Independent external oversight (SAIs, parliaments, civil society).
  - Fiscal transparency.
  - Enforcement (credible sanctions).

### Legal framework and information systems
- Needs:
  - Legal/regulatory framework defining accountability, transparency, and control for public resources (example: Australia’s Public Governance, Performance and Accountability Act of 2013).
  - Ex ante review of new laws ("corruption proofing") to minimize risks (examples: Albania, Lithuania, South Korea).
  - Professional civil service: transparent merit-based hiring and remuneration; codes of conduct; conflict-of-interest rules; mandatory asset declarations accessible to the public.
- Digitalization:
  - E-procurement, data access, and controls reduce human interaction and create audit trails.
  - Integrated financial management information systems core to control (example: France integrated budget and accounting processes in the 2010s).
  - New technologies bring cyber risks requiring mitigation.

### Integrity of processes and high-risk operations
- High-risk processes: bank transactions; interactions with third parties (revenue collection, procurement, SOE management); recurrent operations (wages, goods and services).
- Design mechanisms to limit discretion, create incentives for integrity, and include controls.

### Revenue administration and tax authorities
- Features promoting governance:
  - Processes reducing compliance costs and using risk-based approaches.
  - Operational independence; effective internal audit and anti-corruption units.
  - Digitalized and automated processes with automated internal controls and risk assessment.
  - Institutional integrity promotion (see online-only Annex 2.3).
- Examples:
  - Estonia’s Tax and Customs Board uses big data to create risk profiles and monitor high-risk transactions.
  - Tax and law enforcement cooperation is critical where tax crime and corruption intersect.

### Public procurement and public investment management
- Recommended practices:
  - Competitive, transparent procurement with fair complaint mechanisms; tightly regulate noncompetitive procedures and unsolicited proposals.
- Tools and initiatives:
  - Alert systems/"red flags": large tenders; lack of transparency; collusion; complaints; substantial post-award changes; shortened bidding windows.
  - Europe: EC procurement performance indicators include proportion of contracts with a single bidder and proportion negotiated without call for bids.
  - Growing adoption of e-procurement (example: Korea’s complete e-procurement cycle).
  - Investment oversight across planning, selection, implementation (example: Malaysia’s central coordination unit weekly reports).
  - South Africa’s 2011 competitive public-private partnership program for renewable energy lowered prices via transparent framework and dedicated PPP unit.

### Budget, treasury, payroll, and extra-budgetary funds
- Requirements:
  - Strong chain of control with segregation of duties throughout execution.
  - Comprehensive budget systems and centralized, legally authorized borrowing.
  - Avoid extra-budgetary funds due to weaker controls and misuse risk.
  - Digitalized payroll payments and monitoring to detect ghost workers.
  - Treasury single account to consolidate receipts and payments for monitoring and control.

### SOE governance
- Missing elements: many countries lack key corporate governance in law/practice; OECD guidelines provide standards.
- State-as-owner duties: regular performance monitoring; avoid political interference; manage conflicts of interest.
- Challenges: transparent selection of independent boards; integrate corporate governance in operations; ensure accountability through transparency.
- Evidence: Italian local utilities with politically connected boards show higher employment and worse performance (Menozzi, Urtiaga, Vannoni 2012).
- Transparency International guidance (2017) recommends specific procedures to reduce corruption risks.

### Resource-rich countries and sovereign wealth funds
- Need strong safeguards: economic rents create incentives for bribery and state capture.
- Critical needs:
  - High transparency and accountability in exploration and resource management.
  - Limit discretion; enable heavy scrutiny.
  - Strongly govern sovereign wealth funds; report regularly with externally audited statements; follow Santiago Principles.
- EITI progress: all 51-member EITI countries established plans for beneficial ownership disclosure by 2020.
- Figure context asset examples: Timor-Leste: 650; Kuwait: 479; Libya: 361 (asset values as percent of 2016 GDP shown in figure context).

---

### Institutional tools, monitoring, and enforcement
- Internal controls:
  - Based on risk assessments; documented; regularly assessed by internal and external auditors.
  - Public sector often has many formal controls with uneven efficiency.
  - Lessons from Sarbanes-Oxley Act of 2002 applied gradually in public sectors.
- Independent external oversight:
  - SAIs certify legal use of public resources; perform focused audits (example: India social audits since 2005).
  - Challenges: executive interference in SAI budgets (40 percent of 2014 survey of 177 SAIs reported such interference).
  - Many SAIs need capacity-building and political support.
- Transparency standards:
  - IMF Fiscal Transparency Code principles: timely, comprehensive fiscal reports; cover fiscal flows, assets/liabilities, contingent commitments; align with international standards.
  - Technology increases availability/timeliness (examples: Colombia, Costa Rica, Paraguay online platforms for investment project monitoring).
- Enforcement:
  - Mechanisms: tip-off boxes, confidential hotlines, whistleblower protections (OECD 2016).
  - Financial institutions required to report suspicious transactions; AML regimes focus on Politically Exposed Persons and beneficial ownership disclosure.
  - Sanctions: SAIs and ministries can impose administrative/disciplinary sanctions; criminal enforcement often via specialized units.
  - Balancing sanctions and public interest: zero-tolerance can suspend projects; alternative is to continue projects with safeguards while prosecuting corrupt actors (examples: Canada, EU).

### International cooperation and transnational issues
- Transnational corruption:
  - Multinational firms have paid bribes abroad (examples cited: Siemens paid more than $1.4 billion; Odebrecht paid bribes in at least 12 countries).
  - Opaque offshore financial centers estimated to hold about $7 trillion in hidden wealth (equivalent to 10 percent of world GDP) (Damgaard, Elkjaer, and Johannesen 2018).
- International standards and cooperation:
  - Anti-bribery laws modeled on the US Foreign Corrupt Practices Act; OECD Anti-Bribery Convention coordination.
  - Global standard on automatic exchange of information to fight tax evasion; stricter requirements for beneficial owner disclosure.
  - Enforcement and cross-border information flows remain uneven and slow.

---

### Country experiences and case studies (reform lessons)
- Georgia:
  - Pre-2003: regarded as highly corrupt; tax administration corruption decimated revenue.
  - Post-2003 anticorruption campaign: civil service reform; reduced regulations; business environment improvements; dismissals and arrests of corrupt officials.
  - Fiscal impact: Tax revenues rose from 12 percent of GDP in 2003 to 25 percent of GDP in 2008.
  - Institutional reforms: civil service cuts and wage increases, merit-based recruitment, mandatory asset declarations, PFM and transparency enhancements, tax code simplification, elimination of tax loopholes, e-procurement introduced in 2011.
- Rwanda:
  - Legal and institutional reforms over two decades: anticorruption laws, money laundering criminalization, codes of conduct, dismissals/prosecutions of high-ranking officials.
  - Revenue-to-GDP ratio rose by 6 percentage points.
  - Reforms: civil service changes, one-stop windows, e-procurement starting 2016, tax administration improvements.
- Chile:
  - Historically lower corruption relative to peers.
  - Institutional measures: long-standing Auditor General (since 1925); ChileCompra e-procurement (2003); Transparency Law (2009); law on public probity (2016).
- Estonia:
  - Post-independence reforms: open economy, judiciary and public administration reform, SOE privatization.
  - Digitalization: "99 percent of state services are now provided online."
  - Public Information Act (2000) boosted transparency and tax administration.
- Liberia:
  - Since 2006 donor-supported anticorruption program: strengthened General Auditing Commission independence, transparent budgeting, Liberia Anti-Corruption Commission, EITI compliance.

### Policy experiments and evidence on instruments
- Procurement and e-procurement:
  - Hungary: switching away from open auction to negotiated procedure increased corrupt rents; increased price of every dollar of public spending by "8 cents".
  - Italy: central procurement agency reduced waste; Bandiera, Prat, and Valletti (2009) estimate "20 percent" of waste due to corruption.
  - India and Indonesia: e-procurement increased competition and improved construction quality (Lewis-Faupel and others 2016).
- Digitalization and targeting benefits:
  - India: electronic social assistance platform produced a "17 percent" decline in spending with no decline in benefits.
  - Andhra Pradesh: smart ID cards reduced leakage by "41 percent" relative to control.
  - Indonesia: ID cards displaying copay led to a "26 percent" increase in actual received benefits in treated villages.
- Wages and performance incentives:
  - Cross-country evidence (90 countries): tentative positive association between higher wages and lower corruption; wages alone insufficient.
  - Pakistan: performance-based salaries for tax officials increased tax collection by "50 percent" but bribe requests increased by "30 percent" (Khan, Khwaja, Olken 2015).
  - Complementary monitoring and sanctions needed to make wage increases effective.
- Audits, monitoring, and sanctions:
  - Audits can decrease public purchase costs (Di Tella and Schargrodsky 2003).
  - Performance monitoring improves public sector worker performance (Banerjee and others 2012).
  - Brazil: prior audits deter future corruption in subnational governments (Ferraz and Finan 2008; Zamboni and Litschig 2018).
  - Increased inspections reduce teacher absenteeism (Muralidharan and others 2017).
  - Audits must be supported by sanctions to be effective (Olken 2007).
- Transparency, media, and civil society:
  - Transparency more effective when media and civil society are active.
  - Brazil: audit results affected reelection prospects where local radio existed.
  - Uganda: reporting on use of education grants and community monitoring with "report cards" improved outcomes.

### Cross-country evidence on fiscal institutions
- Institutional measures: procurement quality, tax institutions, fiscal transparency, digitalization (e-government), administrative burden.
- Significant associations (controlling for other factors):
  - Tax complexity (time required to pay taxes) and revenue administration aspects (audits) significantly associated with control of corruption.
  - Fiscal transparency and lower administrative burden correlated with lower corruption.
- Complementarities:
  - Good revenue institutions and lower tax complexity reinforce each other.
  - Efficient judiciary complements fiscal institutions.
  - Fiscal transparency effective only with press freedom.
  - Degree of digitalization positively associated with lower corruption.
  - Revenue institutions particularly important when other institutions are weak.
- Nonlinearities by history:
  - Low-corruption tradition countries: digitalization, administrative burden, procurement, tax complexity more relevant.
  - High-initial-corruption countries: fiscal transparency and digitalization stand out; press freedom and speed of judicial processes also important.

---

### Legal frameworks, AML, and enforcement priorities
- Anticorruption regimes:
  - Sound statutory frameworks implemented by effective institutions focusing on detection, investigation, prosecution, adjudication.
  - Anticorruption agencies vary: preventive, repressive, hybrid (examples: Hong Kong SAR, Latvia).
  - Corruption cases usually in regular courts; where judicial corruption exists, distinct courts/units with safeguards may be used.
- AML regimes:
  - FATF requires financial institutions monitor transactions, focus on Politically Exposed Persons, and report suspicious transactions.
  - AML supports investigations via financial tracing and beneficial ownership transparency.
  - Adequate sanctions needed; money laundering as stand-alone offense enables conviction of accomplices.
- Beneficial ownership importance:
  - Nigeria example (1998): minister granted himself oil field rights and transferred them to a firm he secretly controlled.

---

### Implementation priorities and expected benefits
- Benefits of curbing corruption:
  - Lower revenue leakage; less wasteful expenditure; higher quality education and infrastructure.
  - Improved chances of meeting Sustainable Development Goals and restoring trust in government.
- Nature of reform:
  - Major political change can enable rapid reforms; typically progress is gradual and requires political will and long-term institutional upgrades.
- Institutional priorities:
  - Improve fiscal institutions across public sector: professional ethical civil service; procurement and revenue administration; internal controls; high fiscal transparency; independent external scrutiny by SAIs, civil society, media.
  - Complement fiscal reforms with legal frameworks and evenhanded court enforcement; transparency more effective with press freedom and active civil society.
  - Adopt technologies (digitalization, e-procurement) to promote transparency, increase competition, and reduce discretionary decisions.
- International dimension:
  - Global cooperation needed on anti-bribery legislation, natural resource transaction transparency, AML activities, information sharing, and reducing opacity of beneficial ownership abroad.
  - International institutions can promote dissemination of good practices and peer learning.

---

### Box 2.2 — IMF diagnostic tools and capacity-building
- IMF diagnostics support PFM and revenue administration reform and capacity building in cooperation with other institutions.
- Public Investment Management Assessments (PIMAs):
  - Evaluate 15 institutions across planning, allocation, implementation.
  - As of February 2019, 51 countries completed a PIMA.
- Fiscal Transparency Evaluations (FTEs):
  - Assess practices against the Fiscal Transparency Code: fiscal reporting; forecasting and budgeting; fiscal risk analysis and management; resource revenue management.
  - As of February 2019, 25 FTEs publicly available.
- Other diagnostics:
  - Public Expenditure and Financial Accountability assessment.
  - Public-Private Partnership Fiscal Risk Assessment Model.
  - Fiscal Analysis of Resource Industries framework.
- Revenue administration diagnostics:
  - Tax Administration Diagnostic Tool (TADAT) for objective assessment of tax administration health (reference URL shown in source).
  - Revenue Administration Fiscal Information Tool compiles performance indicators.
  - Revenue Administration–Gap Analysis Program estimates tax gaps and noncompliance drivers.
- Practical use:
  - Diagnostics provide basis for tailored reform plans and prioritize capacity-building.

*Source: ch2 - Introduction, Fiscal Monitor: Curbing Corruption, International Monetary Fund | April 2019*

### Introduction

### ch2 - Introduction

### Overview and framing
- Corruption is defined as "the abuse of public office for private gain."
- Corruption distorts state activities, weakens tax collection and expenditure choices, reduces quality of public services and infrastructure, and contributes to growing inequality and social and political instability.
- Corruption has a global dimension through bribery of foreign officials and the use of opaque financial centers or secrecy jurisdictions to hide corrupt gains or evade taxes.
- The IMF’s Framework for Enhanced IMF Engagement in Governance (IMF 2018) informs the chapter’s focus on fiscal institutions and practices that policymakers can control.

### Measurement challenges and patterns
- Corruption is hard to measure; most assessments rely on indirect measures (perceptions by experts, business surveys, or household/corporate experience surveys).
- The chapter uses the Control of Corruption Index from the Worldwide Governance Indicators (available since 1996) and employs a version that strips out subcomponents explicitly related to fiscal institutions.
- Two empirical patterns noted:
  - Corruption is persistent: over the past two decades, large improvements have been rare and typically followed major political change; progress in stable environments is gradual and may require many years or decades.
  - Perceptions of control of corruption are positively correlated with GDP per capita (Panel 2 in Figure 2.1). Numeric indicators shown in Figure 2.1: r = 0.91, p = 0.00 (Panel 1); r = 0.65, p = 0.00 (Panel 2). The Control of Corruption Index ranges from –2.5 (high corruption) to 2.5 (low corruption).

### Three main goals of the chapter
- Raise the veil on how corrupt activities affect government decisions and operations (taxes, roads, schools, hospitals).
- Assess the fiscal costs of corruption: leakages of public money through lower tax revenues, overpayment for goods and services or investment projects, and distortions in spending priorities that undermine sustainable and inclusive growth.
- Highlight core elements of an effective fiscal governance framework, based on new data on fiscal institutions and country experiences.

### Key lessons and policy directions
- A comprehensive, persistent approach is required because leakages can occur at myriad points; plugging a few holes can shift wrongdoing elsewhere.
- Identified lessons:
  - Politicians must take a clear stand to fight corruption; heads of agencies, ministries, and public enterprises need to set a strong "tone at the top."
  - Invest in transparency and independent external scrutiny to enable audit agencies and the public to provide effective oversight and accountability.
  - Continuously upgrade institutions and internal controls, especially in higher-risk areas (procurement, tax administration, public enterprises); mutually supporting reforms raise chances of success (for example, simplifying tax laws while reducing discretion in tax administration).
  - Strengthen international cooperation: combat foreign bribery by national companies, pursue anti–money laundering activities, reduce opportunities to hide proceeds in opaque destinations, and improve international exchange of information to fight tax evasion and prosecute corrupt acts.

### What constitutes corruption (typology)
- Forms of corruption covered:
  - Administrative corruption (corrupt acts taking laws/regulations as given).
  - State capture (bribes to alter legislation or regulation).
  - Grand corruption (large-scale, e.g., allocation of major investment projects) versus petty corruption (e.g., bribes to avoid traffic violations).
- Examples of corrupt acts (drawn from Rose-Ackerman and Palifka 2016):
  - Payment of bribes to get public services or to evade taxes.
  - Embezzlement and public service fraud (stealing from investment funds, pilfering supplies, neglecting duties).
  - Nepotism or cronyism.
  - Influence peddling and conflicts of interest; kleptocracy as extreme state capture.

### Corruption leakages and fiscal "hotspots"
- Corruption causes leakages as funds flow into, through, and out of the public sector (illustrated in Figure 2.3). Hotspots include:
  - Tax legislation: corrupt legislators giving away tax exemptions and investment incentives in exchange for bribes.
  - Revenue administration and tax collection: corrupt tax administrators colluding with taxpayers to let them evade taxes.
  - Treasury/financial management: theft from unmonitored accounts and embezzlement enabled by weak financial controls.
  - Budget choices and execution: decisions on investment projects and subsidies driven by bribes and patronage; overpricing and low-quality products/services in procurement; "ghost" workers and pensioners in wages and pensions.
  - Extrabudgetary funds and public enterprises: lack of controls, misappropriation of budget and own funds, conflicts of interest.
  - Natural resource production and state-owned companies: corrupt negotiation of poor contracts, weak oversight of SOEs, and risks in allocation of exploration rights and revenue collection.

### Fiscal costs: impact on revenue collection
- Corruption harms revenue collection at legislative (tax exemptions, loopholes for bribes) and collection stages (discretion in complex tax systems and customs, bribery, and undervaluation).
- Evidence from cross-country comparisons:
  - Among advanced economies, a country in the top 25 percent in control of corruption collects 4½ percent of GDP more in revenues, on average, than a country in the lowest 25 percent.
  - Among emerging market economies, the gap is 2¾ percent of GDP.
  - Among low-income countries, the gap is 4 percent of GDP.
- Econometric finding:
  - An improvement in the Control of Corruption Index by one-third of a standard deviation (equivalent to the average improvement for countries that reduced corruption between 1996 and 2017) is associated with an increase of 1.2 percentage points in government revenues as a share of GDP.
  - If that improvement is applied to all countries, the implied increase in total tax revenues could be $1 trillion, or 1¼ percent of global GDP.
  - Gains would be greater once higher economic growth associated with lower corruption is accounted for.
- Caveats:
  - Dominant effect likely runs from corruption to fiscal outcomes, but fiscal outcomes can also affect corruption indicators.
  - Fully disentangling corruption effects from broader institutional quality is not always feasible; results can be interpreted as benefits of improved governance more generally.

### Extractive industries as a special hotspot
- Extractive industries stand out due to large profits and lower scrutiny when revenues come from export receipts and multinationals rather than taxing citizens.
- Areas particularly prone to corruption in extractive industries:
  - Allocation of exploration rights, especially with discretionary official power and secrecy around contract terms.
  - Revenue collection, where companies and tax officials may negotiate payments in exchange for bribes.
  - State-owned enterprises that negotiate exploration terms with limited oversight or engage in noncommercial activities without proper vetting.
- Empirical note: petroleum windfalls have been linked to increases in wealth hidden abroad for residents of some oil-rich countries (Andersen and others 2017).

### How corruption distorts public spending and service delivery
- Corruption redirects spending toward projects with higher opportunities for kickbacks (large investment projects, complex defense equipment) and away from sectors harder to extract bribes from (education, health).
- Empirical association: corruption is associated with fewer resources allocated to education or health spending, especially in low-income and emerging market economies (Figure 2.6).
- Budget execution vulnerabilities include procurement fraud, payroll fraud (ghost workers), misappropriation in off-budget spending (extrabudgetary funds), and extortion in the provision of public services or subsidies.
- Example evidence: subsidies for research and innovation became more effective after an anticorruption campaign in China (Fang and others 2018).

*Source: ch2 - Introduction, Fiscal Monitor: Curbing Corruption, International Monetary Fund | April 2019*

### 1. Revenue Efficiency2. Revenue

### 1. Revenue Efficiency2. Revenue

### Revenue efficiency and corruption: empirical associations
- Revenue efficiency is calculated based on personal income tax efficiency and value-added tax c-efficiency; it compares what countries collect relative to what they should collect, based on average statutory tax rates. Revenue data is the average of 2015–17 (excludes oil exporters), and revenue efficiency is an average of 2013–16. Control of corruption shows 2017 data.
- Correlations reported:
  - r = 0.22; p = 0.00 (panel relating revenue efficiency and Control of Corruption Index, adjusted for GDP per capita).
  - r = 0.30; p = 0.00 (second reported correlation in the same analysis).
- Less corruption is associated with higher revenue collection relative to what should be collected (the figures distinguish low tax revenue and high tax revenue countries after adjustment for GDP per capita).

### Procurement, public investment, and fiscal losses from corruption
- Purchase of goods and services by the government is sizable: 13 percent of GDP among Organisation for Economic Co-operation and Development (OECD) countries.
- Procurement shows the highest perception of bribery risk (OECD 2013; World Bank 2012b).
- Empirical estimates and examples of direct public losses:
  - An analysis in five sectors across eight EU countries finds direct public loss from corruption varied between 7 and 43 percent of the value of individual procurement contracts suspected of being corrupt (PwC 2013). These amounts reflect cost overruns, implementation delays, and loss of effectiveness.
  - Some estimates suggest that losses from corruption range between 10 and 30 percent of construction value (Matthews 2016).
  - A high-profile case cited: an investigation in the Canadian province of Quebec found a widespread bribe-for-contracts scandal in the construction industry.
  - Public-private partnerships present challenges because of (1) their complexity; (2) confidentiality clauses in contracts; and (3) frequent renegotiation of contract terms with limited transparency and significant discretion.

### State-owned enterprises (SOEs): corruption risks and performance impacts
- SOE corruption risk drivers: operation in corruption-prone sectors (energy, utilities, transportation), weaker controls, conflicts of interest, undue influence by civil servants or elected officials, mismanagement, lending to related entities, and corruption of prudential authorities leading to fiscal costs from subsidies or bailouts.
- Empirical findings:
  - In an OECD survey, 42 percent of SOE respondents reported that corrupt acts or other irregular practices occurred in their company during the past three years (OECD 2018a).
  - Evidence suggests that 80 percent of foreign bribes go to SOE officials (OECD 2014).
  - Cross-country evidence based on a large SOE data set covering 38 countries (1,446 firms in electricity, mining, transport, and water sectors, 2000–17) suggests SOEs’ performance (profitability and efficiency) is weaker in countries with high levels of corruption (Figure 2.7).
- Figure/box statistics:
  - Database: 1,446 firms in 38 countries.
  - Performance indicators: efficiency (operating revenue per cost of employee) and profitability (return on equity) show lower medians and percentiles in high-corruption countries.

### How corruption impairs government policy effectiveness: public investment and education
- Public investment efficiency:
  - The analysis uses public investment efficiency measured as the degree to which countries turn public investment spending into physical capital; inefficiency is measured as the distance to an efficiency frontier controlling for GDP per capita.
  - Public investment efficiency is positively associated with control of corruption (Figure 2.8, panel 1).
  - An emerging market economy in the top 25 percent of the control of corruption scale wastes half as much as one in the bottom 25 percent.
  - Improving the control of corruption by one standard deviation is associated with a fall in the average efficiency gap from 34 to 20 percentage points.
- Education outcomes:
  - The quality of education, measured by test scores, is positively associated with control of corruption (Figure 2.8, panel 2).
  - Mechanisms include corruption in hiring for teaching positions, teacher absenteeism as petty corruption, and leakages in education grants that negatively impact test scores and are associated with higher dropout rates.
- Correlations reported:
  - For public investment efficiency: r = 0.32; p = 0.00.
  - For test scores: r = 0.33; p = 0.00.

### Fiscal institutions and country experiences: lessons from anticorruption reforms
- Corruption persistence and tipping points:
  - Corruption can be persistent as a social equilibrium; escaping high-corruption equilibria is difficult, but some countries reached a “tipping point” following major political change or broad domestic consensus.
  - Examples of substantial progress: Estonia, Georgia, Liberia, Rwanda; Chile sustained lower corruption than peers.
- Georgia:
  - Until 2003, Georgia was considered one of the most corrupt countries in the world; interactions with the state required bribes and corruption in tax administration decimated revenue collection.
  - In late 2003 a new government launched an all-out anticorruption campaign focused on eliminating corruption in the civil service, reducing the number of regulations, improving the business environment; actions included dismissing the entire traffic police force and arresting high-level officials suspected of corruption.
  - Fiscal impact: Tax revenues increased from 12 percent of GDP in 2003 to 25 percent of GDP in 2008—one of the largest increases recorded for any country—partly due to a new culture of taxpayer compliance. (Figure 2.9 shows Tax Revenues [percent of GDP] and survey responses to “Is It Justifiable to Cheat on Taxes?”.)
  - Institutional reforms: civil service reforms (reductions in public employment, elimination of ghost workers), increases in wages, competitive merit-based recruitment, mandatory asset declarations, public financial management and transparency enhancements, simplification of the tax code, elimination of many tax loopholes, reduction in the number of taxes and import tariffs, one-stop windows for business registration and customs, and introduction of e-procurement in 2011.
- Rwanda:
  - Over the past two decades Rwanda enacted legal and institutional reforms including anticorruption legislation, money laundering criminalization, a code of conduct and rules of disclosure for public officials, dismissals or prosecutions of high-ranking officials.
  - Revenue-to-GDP ratio rose by 6 percentage points.
  - Institutional reforms: civil service reforms similar to Georgia, one-stop windows and eventually e-procurement implementation starting in 2016, tax administration reforms with improvements in collection efforts, auditing procedures, and scrutiny of large taxpayers.
- Sustaining gains:
  - Both Georgia and Rwanda continued strengthening and modernizing institutions after initial reforms (for example, e-procurement implementation) to sustain anticorruption gains.

_Italic: Sources: IMF; World Economic Outlook database; Worldwide Governance Indicators; OECD; World Bank; PwC; Patrinos and Angrist 2018; IMF staff estimates, as presented in Chapter 2 of the April 2019 Fiscal Monitor._

### CHAPTER 2 CuRbINg CORRupTION

### CHAPTER 2 CuRbINg CORRupTION

### Country case studies: institutional strengthening over time
- Chile
  - Had lower levels of corruption than comparators for decades.
  - Institutional responses included: Auditor General since 1925; legal reforms in the 1960s to reduce slush funds or pork-barrel spending; economic reforms in the 1970s and 1980s to simplify procedures and reduce excessive public discretion.
  - 2003: launched ChileCompra (an electronic procurement system, e-procurement) to increase transparency and accountability.
  - 2009: Transparency Law strengthened oversight of public money.
  - 2016: law on public probity to prevent conflicts of interest in the public sector.
- Estonia
  - Reforms after independence: made economy more open and business-friendly, transformed judiciary and public administration, privatized SOEs.
  - Embraced digitalization: "99 percent of state services are now provided online."
  - 2000: adoption of the Public Information Act had a large positive impact, including on tax administration and promotion of transparency.
- Liberia
  - Since 2006, donor-supported anticorruption program with significant fiscal institution reforms improved corruption perceptions.
  - Reforms included promoting independence of the General Auditing Commission, launching transparent budget processes, establishing the Liberia Anti-Corruption Commission, and ensuring compliance with the Extractive Industries Transparency Initiative (EITI).

### Lessons from policy experiments: incentives, monitoring, and technology
- Procurement and e-procurement
  - Hungary: abandoning open auction for a negotiation procedure increased corrupt rents, raised the price of every dollar of public spending by "8 cents", and reduced productivity of selected contractors.
  - Italy: introduction of a central procurement agency led to a reduction in waste measured by the price gap relative to prices paid by individual public entities; Bandiera, Prat, and Valletti (2009) estimate corruption accounted for "20 percent" of the waste, remainder attributed to inefficiency.
  - India and Indonesia: introduction of e-procurement increased competition and led to better quality of construction (Lewis-Faupel and others 2016).
- Digitalization and benefit targeting
  - India: electronic platform for managing a social assistance program produced a "17 percent" decline in spending with no corresponding decline in benefits.
  - Andhra Pradesh (India): smart ID cards reduced leakage by "41 percent" relative to the control group.
  - Indonesia: ID cards displaying copay led to significant reduction in leakages and a "26 percent" increase in actual received benefits in villages with the new ID cards.
- Wages and performance incentives
  - Cross-country sample of 90 countries: tentative evidence of a positive association between higher wages and lower corruption (see online-only Annex 2.1); however, solely relying on higher wages likely too costly and insufficient.
  - Studies on absenteeism of teachers and nurses in several developing countries find wages did not have an impact.
  - Pakistan experiment: performance-based salaries of tax officials increased tax collection by as much as "50 percent" but bribe requests increased by "30 percent" (Khan, Khwaja, and Olken 2015).
  - Complementary institutional features (monitoring, sanctions) can increase effectiveness of higher wages.
- Tax compliance and deterrence
  - Denmark: prior audits and threat-of-audit letters have significant effects on self-reported income (Kleven and others 2011).
  - Yang (2008): preshipment inspections of containers increase import duty collection by "15–30 percentage points".
  - Tajikistan: introducing e-filing led to lower compliance costs, and tax payments doubled among firms previously more likely to evade, likely by disrupting collusion with officials (Okunogbe and Pouliquen 2018).
- Monitoring, audits, and sanctions
  - Audits can decrease costs of public purchases (Di Tella and Schargrodsky 2003).
  - Performance monitoring improves performance of public sector workers (Banerjee and others 2012).
  - Brazil: increased audit risk or prior audits tend to deter future corruption in subnational governments (Ferraz and Finan 2008; Zamboni and Litschig 2018).
  - Increased frequency of inspections can reduce teacher absenteeism (Muralidharan and others 2017).
  - Audits may need to be supported by sanctions or other penalties to be effective (Olken 2007).
- Transparency, media, and civil society
  - Transparency is more effective when supported by the media and civil society participation.
  - Brazil: audit results affected reelection prospects of officials suspected of misuse of public money, with larger effects where local radio stations existed.
  - Uganda: information on local officials’ use of education grants and community monitoring with "report cards" on health facilities improved outcomes.

### Cross-country evidence: fiscal institutions and corruption
- Institutional measures analyzed include procurement system quality, tax institutions, fiscal transparency, digitalization (e-government), and administrative burden (red tape).
- Individual-institution findings (significant associations controlling for other factors)
  - Tax complexity (time required to pay taxes) and aspects of revenue administration (for example, audits) are significantly associated with control of corruption.
  - Fiscal transparency and a lower administrative burden are correlated with lower corruption.
- Complementarities and interactions
  - Good revenue institutions and lower tax complexity reinforce each other and have a stronger association with lower corruption.
  - Administratively efficient judiciary institutions display complementarities with some fiscal institutions (tax complexity and public financial management).
  - Fiscal transparency is relevant only when there is press freedom.
  - Degree of digitalization of the government has a positive relationship with lower corruption (references Andersen 2009; Elbahasawy 2014).
  - Revenue institutions are particularly important (higher correlation with control of corruption) when other institutions are weak.
- Nonlinearities and heterogeneity by history of corruption
  - Regression tree approach indicates different institutions matter depending on past corruption levels:
    - Countries with a tradition of low corruption: degree of digitalization, administrative burden, procurement, and complexity of the tax system are more relevant.
    - Countries with high initial corruption: fiscal transparency and digitalization stand out; press freedom and speed of judicial processes are also important.

### Promoting good governance in the public sector: implications
- Institutional design supported by technology can create incentives to promote integrity (e-procurement, e-filing, digital service delivery).
- Effective anticorruption strategies are multi-faceted, typically combining:
  - Reducing discretion and complexity in tax and procurement systems.
  - Increasing transparency and timely public information.
  - Strengthening monitoring and audit capacity coupled with credible sanctions.
  - Leveraging digitalization and e-government to reduce opportunities for collusion and leakage.
  - Supporting press freedom and civil society participation to amplify transparency effects.
- Context matters: the relative importance and sequencing of reforms should reflect a country’s history of corruption and the strength of complementary institutions (judiciary, press freedom, administrative capacity).

*International Monetary Fund | April 2019*

### CHAPTER 2 CuRbINg CORRupTION

### CHAPTER 2 CuRbINg CORRupTION

### Executive summary and overall approach
- Success in containing corruption requires simultaneous improvements in several, mutually supporting institutions; when capacity is constrained, governments can prioritize higher-risk areas (for example, procurement or tax administration) but should eventually expand efforts to all core institutions.
- Key elements of strong fiscal governance emphasized for reducing vulnerabilities to corruption:
  - Overarching, cross-cutting elements: the legal framework, a professional civil service, and the degree of digitalization. An effective system of sanctions is also necessary.
  - Design of organizational structures and integrity of processes, especially higher-risk processes.
  - An effective control framework: (1) internal controls and internal audits and (2) independent external oversight.
  - Fiscal transparency to ensure accountability and support other governance elements.
- Building these elements helps fight corruption, reduce tax evasion and waste in public programs, and foster accountability in decision making.

### Fiscal governance framework (Figure 2.14)
- Core components listed as interdependent:
  - Legal framework
  - Professional civil service
  - Digitalization
  - Integrity of processes
  - Effective internal controls
  - Independent external oversight
  - Fiscal transparency
  - Enforcement (sanctions)

### Overarching legal framework and information systems
- Country experiences highlight the need for:
  - A legal and regulatory framework defining accountability, transparency, and control for use of public resources (example: Australia’s Public Governance, Performance and Accountability Act of 2013 for central government agencies and SOEs).
  - Ex ante review of new laws (“corruption proofing”) to minimize future corruption risks (examples cited: Albania, Lithuania, South Korea).
  - A professional civil service with transparent, merit-based hiring and remuneration; codes of conduct; conflict of interest guidelines; mandatory reporting of gifts; and declaration of assets and interests accessible to the public.
- Investment in digitalization:
  - E-procurement, greater data access, and controls reduce human interaction and create audit trails.
  - A robust integrated financial management information system is a core element (example: France integrated budget and accounting processes in the 2010s).
  - New technologies present both challenges and opportunities; governments must tackle threats including cyberattacks (Kopp, Kaffenberger, and Wilson 2017).

### Integrity of processes, institutions, and mechanisms
- High-risk processes most exposed to corruption:
  - Bank transactions
  - Interactions with third parties (revenue collection, public procurement, management of SOEs)
  - Recurrent, less-scrutinized operations (payments for wages or goods and services)
- Designing mechanisms that create appropriate incentives, limit discretion, and include controls reduces corruption vulnerabilities.

### Revenue administration and tax authorities (Figure 2.15)
- Effectiveness depends on institutional agency framework and broader governance context.
- Features that promote better governance in tax administrations:
  - Processes that reduce compliance costs and use a risk-based approach.
  - Operational independence and effective internal audit and anti-corruption units.
  - Digitalized and automated processes, including automated internal controls and risk assessment.
  - Institutional efforts to promote integrity (see online-only Annex 2.3).
- Examples:
  - Estonia’s Tax and Customs Board uses big data analysis to create risk profiles of tax payment transactions and permits close monitoring of high-risk transactions.
  - Tax and law enforcement authorities can cooperate and share information because tax crime and corruption are often linked (OECD and World Bank 2018).
- Attitudinal and control metrics:
  - The Control of Corruption Index ranges from –2.5 (high corruption) to 2.5 (low corruption).

### Public procurement and public investment management
- Procurement and investment management remain especially challenging.
- Recommended features:
  - Competitive, transparent procurement allowing fair treatment of complaints.
  - Limit and tightly regulate noncompetitive procedures and unsolicited proposals.
- Initiatives and tools:
  - Alert systems or “red flags” for procurement correlated with corruption: large tenders; lack of transparency and collusion among bidders; complaints from nonwinning bids; substantial post-award project changes; shortened bidding time spans (Ferwerda, Deleanu, and Unger 2017).
  - European Commission assesses procurement performance across EU countries using indicators such as proportion of contracts awarded with a single bidder; proportion of procurement procedures negotiated without a call for bids; and value of public procurement advertised to businesses.
  - Growing adoption of e-procurement systems to promote transparency and efficiency (example: Korea’s complete e-procurement system covering the entire procurement cycle with a corrupt activity analysis system).
  - Investment project oversight needed across planning, selection, and implementation stages (example: Malaysia’s central coordination unit produces weekly monitoring reports measuring financial and physical progress).
  - South Africa’s competitive public-private partnership program for renewable energy in 2011 led to significant price drops through a clear, transparent framework and a dedicated public-private partnership unit of the Ministry of Finance.

### Budget, treasury systems, payroll, and extra-budgetary funds
- Well-functioning budget and treasury systems require:
  - A strong chain of control with adequate segregation of duties throughout budget execution.
  - Comprehensive budget systems and centralized, legally authorized borrowing.
  - Avoidance of extra-budgetary funds because they tend to have less stringent controls and greater misuse vulnerability.
  - Digitalized wage bill payments and payroll monitoring systems to identify irregularities or ghost workers.
  - Comprehensive treasury systems, tightly controlled bank transactions, and a Treasury single account to consolidate all government receipts and payments for monitoring and control.

### State-owned enterprises (SOEs) governance
- Many countries lack key elements of good corporate governance for SOEs in law or practice; OECD guidelines provide core international standards.
- Governance responsibilities of the state as owner include proper exercise of ownership duties: regular performance monitoring and avoidance of undue political interference, including addressing conflicts of interest.
- Challenges:
  - Transparent selection of independent and qualified SOE boards.
  - Integrating corporate governance in day-to-day activities, including internal controls and risk management.
  - Ensuring accountability through broad transparency.
- Example findings:
  - A study of local public utilities in Italy found boards dominated by politically connected directors correlated with higher SOE employment and worse firm performance (Menozzi, Urtiaga, and Vannoni 2012).
  - Countries perceived as having good monitoring have still faced corruption in large companies, prompting governance reforms (examples: Brazil, South Africa).
  - Transparency International issued a guide in 2017 to strengthen corporate governance by committing to specific procedures to reduce corruption risks.

### Governance and transparency in resource-rich countries and sovereign wealth funds (Figure 2.16)
- Commodity-rich countries need especially strong institutional safeguards because economic rents create incentives for bribes or state capture.
- Critical needs:
  - High transparency and accountability in exploration and management of natural resources.
  - Frameworks that limit discretion and allow heavy scrutiny.
  - Strong management of financial assets held in sovereign wealth funds and appropriate spending of resource proceeds.
- International initiatives:
  - The Extractive Industries Transparency Initiative (EITI) promotes disclosure standards within countries and for foreign companies; some progress has been made but few countries follow most EITI recommendations.
- Empirical notes from figures and data presented:
  - Figure 2.16 panel descriptions reference sovereign wealth fund corporate governance and transparency scores measured against asset values as a percent of 2016 GDP.
  - Control of Corruption Index values for country comparisons use the range –2.5 (high corruption) to 2.5 (low corruption).
  - Specific asset values shown include: Timor-Leste: 650; Kuwait: 479; Libya: 361 (as displayed in the figure context).

*International Monetary Fund | April 2019*

### CHAPTER 2 CuRbINg CORRupTION

### CHAPTER 2 CuRbINg CORRupTION

### Effective Internal Control Environment
- Internal controls and audits are essential to help minimize waste, mismanagement, and corruption.
- The control environment should be:
  - based on risk assessments with corresponding mitigating measures,
  - documented and disseminated,
  - regularly assessed by both internal and external auditors.
- Implementation challenges:
  - Public sector often has many “formal” controls (signatures and approvals) with uneven efficiency.
  - Lessons from the private sector: the Sarbanes-Oxley Act of 2002 spurred overhaul of financial controls, board oversight, and external auditor independence; principles are being gradually adopted in public sectors (especially EU countries).
  - Countries still making progress on core elements including managerial accountability, independent internal audits, and fraud/corruption prevention and detection capacity.
- Country examples:
  - Peru: external auditor pushing reform because most public institutions have weak internal control systems.
  - United States: over the past 20 years the Government Accountability Office has not been able to express an opinion on the consolidated financial statements of the US government, mostly because of inadequate financial management and internal control weaknesses at the Department of Defense; the Department of Defense conducted its first audit in 2018.

### Independent External Oversight
- External scrutiny by supreme audit institutions (SAIs), parliaments, and civil society safeguards public finances and holds officials accountable.
- SAI functions:
  - Certify that public resources are raised and spent in accordance with legal requirements.
  - Ensure activities are accurately reported to the public.
  - Perform focused audits to identify waste and mismanagement (example: social audits in India since 2005 for a large job guarantee program).
  - Review reliability of internal control and audit frameworks.
- Constraints and challenges:
  - 2014 survey of 177 SAIs (IDI 2014): 40 percent indicated executive interference in their budget process, including unapproved cuts by the Ministry of Finance, undermining effectiveness and independence.
  - Many SAIs in developing countries need further capacity-building and political support to fulfill mandates of preventing, detecting, and reporting on corruption.
- Fiscal transparency link: timely and accurate fiscal reports are critical for monitoring budget execution and detecting fraudulent use of funds.

### Transparency Standards
- High degree of transparency enables intrusive scrutiny and accountability.
- IMF’s Fiscal Transparency Code sets standards for international good practices in fiscal transparency.
  - Key principles: fiscal reports should be timely and comprehensive; cover fiscal flows, assets and liabilities, and contingent commitments; classify information to make clear use of public resources; and align with international standards.
- Trends and examples:
  - Many countries still provide limited or incomplete reporting.
  - New legislation in some countries mandates public disclosure of fiscal information (examples: New Zealand’s Fiscal Responsibility Act; Australia’s Charter of Budget Honesty Act 1998).
  - Use of technology to increase availability/timeliness of information: Colombia, Costa Rica, and Paraguay use an online platform (with Inter-American Development Bank support) to monitor physical and financial progress of investment projects, increasing completion rates and reporting of irregularities (Kahn, Baron, and Vieyra 2018).

### Enforcement
- Effective detection and punishment systems are needed to support governance elements.
- Mechanisms to encourage reporting:
  - Tip-off boxes, confidential hotlines, feedback mechanisms.
  - Whistleblower protections are crucial (OECD 2016).
- Role of financial institutions:
  - Obligated to report to national financial intelligence units when suspecting client involvement in corruption or related money laundering.
- Sanctions and enforcement agencies:
  - Some SAIs can enforce sanctions (require refunds, impose fines) and some have judicial roles (example: France).
  - Ministries of finance can impose administrative or disciplinary sanctions.
  - Main route: criminal enforcement by law enforcement agencies, often specialized units/agencies.
- Balancing sanctions and public interest:
  - Zero-tolerance policies can lead to suspension of projects when corruption is detected (some Latin American cases).
  - Alternative approach: continue projects if in public interest while adopting safeguards and prosecuting corrupt actors (examples: Canada, European Union).

### International Cooperation
- Corruption has transnational dimensions: multinational firms pay bribes abroad; bribe recipients hide proceeds in secrecy jurisdictions and international financial centers.
- Recent examples:
  - Siemens (Germany): paid more than $1.4 billion in bribes to government officials across Asia, Africa, Europe, the Middle East, and the Americas (US SEC).
  - Odebrecht (Brazil): paid bribes in at least 12 countries (10 in Latin America and two in Africa) (Transparency International).
- Scale of hidden wealth:
  - Opaque offshore financial centers estimated to hold about $7 trillion in hidden wealth deposited by individuals—equivalent to 10 percent of world GDP (Damgaard, Elkjaer, and Johannesen 2018).
- International standards and cooperation:
  - Growing adoption of anti-bribery laws modeled on the US Foreign Corrupt Practices Act and coordinated action through the OECD Anti-Bribery Convention.
  - Enforcement by individual countries has been uneven; cross-border information flows are often slow and unreliable (OECD 2018b).
  - Group of 20 and OECD developed a global standard on automatic exchange of information to fight tax evasion, including stricter requirements to disclose beneficial owners.
- Role of donors and international institutions:
  - Donors can promote aid that supports good governance and improve transparency in aid use (practices vary greatly; Publish What You Fund Aid Transparency Index documents differences).
  - International institutions, including the IMF, promote standards and disseminate country experiences in transparency and governance.

### Governance in the Extractive Industries (IMF Fiscal Transparency Code guidance)
- Allocation and Disclosure of Rights:
  - Open and clear procedures for allocating resource rights; procedures should be based on clear objectives (example: Mexico’s recent licensing rounds).
  - Disclosure of resource rights in a license or contract registry is best practice (examples: Colombia, Liberia, United Kingdom).
  - Define fiscal regimes in model contracts and legislation; establish variable parameters and bid evaluation criteria ahead of time; limit officials’ discretion by using competitive and open allocation processes.
  - Reporting on beneficial owners of resource rights: all 51-member countries of the Extractive Industries Transparency Initiative (EITI) have established plans for such disclosure by 2020; publication of associated corporate structure (chain of intermediaries) is recommended.
- Resource Revenue Administration and Collection:
  - Clear collection, audit, and compliance procedures; report revenues at the project level (progress: Indonesia, Kazakhstan).
  - Require companies to report all payments to government; extend disclosure to any corporate entity engaging in exploration, extraction, or commodity trading.
- National Oil and Mining Companies (SOEs):
  - EITI 2016 Standard outlines requirements for SOEs, including disclosure of beneficial ownership, commodity sales, revenue transfers, and quasi-fiscal expenditures.
  - SOEs are increasingly defining governance guidelines and publishing governance information (examples: Chile’s Codelco; Brazil’s Petrobras).
  - Strengthen transparency with detailed disclosure of quasi-fiscal spending and procurement contract awards.
- Sovereign Wealth Funds:
  - Ensure large financial assets in sovereign wealth funds are transparently managed to reduce misuse; transparency varies (example: Norway vs. several Gulf oil exporters).
  - Sovereign wealth funds should follow established rules and governance, report regularly with externally audited annual financial statements; Santiago Principles provide a basis.
  - Preferably, sovereign wealth funds should not be allowed to undertake extrabudgetary spending.

### Legal Frameworks, Anticorruption, and Anti–Money-Laundering (AML)
- Anticorruption regime components:
  - Sound statutory framework implemented by effective institutions focusing on detection, investigation, prosecution, and adjudication.
  - Functions often carried out by regular law enforcement agencies, sometimes with specialized anti-corruption officers/sections.
  - Anticorruption agencies vary: preventive, repressive, or hybrid (examples: Hong Kong Special Administrative Region, Latvia).
  - Corruption cases usually filed before regular courts; where judicial corruption exists, distinct courts or units with special safeguards may be used.
- Anti–Money-Laundering regimes strengthen deterrence:
  - Financial Action Task Force requires countries to mandate financial institutions to monitor transactions, with attention to transactions by “Politically Exposed Persons,” and report suspicious transactions.
  - AML supports investigations via financial investigations (“follow the money”) and transparency of beneficial ownership—requiring legal entities and arrangements to disclose natural persons who ultimately own or control them.
  - Adequate sanctions: officials convicted of corruption and money laundering face more severe penalties; money laundering as a stand-alone offense enables conviction of accomplices; sanctions should be “dissuasive.”
- Country example on beneficial ownership importance:
  - Nigeria (1998): a former oil minister granted himself rights to exploit a large oil field, signing them over before leaving office to an ostensibly independent firm he secretly controlled.

### Conclusion: Implementation Priorities and Expected Benefits
- Curbing corruption brings substantial fiscal and social benefits:
  - Lower revenue leakage, less waste in expenditures, higher quality public education and infrastructure.
  - Increases chances of meeting the Sustainable Development Goals and restoring trust in government.
- Nature of reform:
  - Major political changes can enable rapid reforms, but typically progress is gradual and requires political will, perseverance, and long-term institutional upgrades.
- Key institutional priorities:
  - Improve fiscal institutions and practices to enhance integrity and accountability across the public sector.
  - Upgrade mutually supporting institutions: professional and ethical civil service; procurement and revenue administration; internal controls; high levels of transparency; independent external scrutiny by SAIs, civil society, and media.
  - Complement fiscal reforms with appropriate legal frameworks and evenhanded court enforcement; transparency is more effective with press freedom and active civil society.
  - Adopt new technologies (for example, digitalization and e-procurement) to promote transparency, increase competition, and reduce discretionary decisions.
- International dimension:
  - Global cooperation is necessary on legislation against bribery of foreign officials, transparency in natural resource transactions, AML activities, information sharing among authorities, and reducing opacity of beneficial ownership abroad.
  - International institutions can promote dissemination of good practices and peer learning.

*International Monetary Fund | April 2019*

### Box 2.2. Supportive Legal Systems

### Box 2.2. Supportive Legal Systems

### IMF diagnostic tools and capacity-building
- The International Monetary Fund has built up comprehensive diagnostics on the quality of fiscal institutions, supplying information on public financial management and revenue administration.
- These tools have been part of the IMF’s capacity-building work across its membership and are used to strengthen core institutional processes, promote integrity in public administration, and promote fiscal transparency.
- Work has been undertaken in cooperation with other international institutions (for example, the World Bank) and donors.

### Public Investment Management Assessments (PIMAs)
- Purpose: Help countries evaluate the strength of their public investment management practices.
- Scope: Evaluate 15 institutions that shape public investment decision making at three key investment stages: planning, allocation, and implementation.
- Coverage: As of February 2019, 51 countries had completed a PIMA, providing a basis to set up a reform plan tailored to each country’s needs.
- Reference URL as shown in source: https://www .imf .org/ external/ np/ fad/ publicinvestment/ #3.

### Fiscal Transparency Evaluations (FTEs)
- Purpose: Assess fiscal transparency practices against the principles outlined in the Fiscal Transparency Code.
- Focus areas: (1) fiscal reporting; (2) fiscal forecasting and budgeting; (3) fiscal risk analysis and management; and (4) resource revenue management for specific needs of resource-rich countries.
- Coverage: As of February 2019, 25 FTEs were publicly available.
- Reference URL as shown in source: https://www .imf .org/ external/ np/ fad/ trans/ index .htm.

### Other public financial management (PFM) diagnostics
- Public Expenditure and Financial Accountability assessment: long-established, covering many low-income countries.
- Public-Private Partnership Fiscal Risk Assessment Model: gauges potential fiscal costs and risks arising from public-private partnerships.
- Fiscal Analysis of Resource Industries framework: assists countries in designing fiscal regimes for natural resources.

### Revenue administration diagnostics
- Tax Administration Diagnostic Tool (TADAT):
  - Purpose: Provide an objective assessment of the health of key components of a country’s system of tax administration.
  - Use: Identify relative strengths and weaknesses to help set and prioritize reform agendas and facilitate external support for reforms.
  - Reference URL as shown in source: http://www .tadat .org/ .
- Revenue Administration Fiscal Information Tool: compiles a set of performance indicators.
- Revenue Administration–Gap Analysis Program: helps countries estimate the size of tax gaps for major taxes and understand factors affecting the size of, and changes in, those gaps—particularly those stemming from taxpayer noncompliance.

### Practical use and outcomes
- Diagnostic results provide a basis to set up reform plans tailored to country needs.
- Tools support identification of weaknesses in institutional arrangements for investment, budgeting, transparency, and revenue administration, and facilitate targeted capacity-building and reform prioritization.

*International Monetary Fund | April 2019 — Box 2.2. Supportive Legal Systems (ch2 - Box 2.2. Supportive Legal Systems).*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2019/april/english/ch2.pdf_