## ppea2019041

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### Executive summary — safeguards activity and trends (May 2017–April 2019)
- Assessments completed: 15 during May 2017 to April 2019; further 6 in progress at end-April 2019.
- Prior comparison: 21 assessments completed and 5 in progress during September 2015 to April 2017.
- Drivers of lower assessments: 19 arrangements approved in the current period compared to 24 arrangements in the previous period.
- Monitoring coverage: number of central banks subject to monitoring broadly unchanged at 62 central banks at end-April 2019 (63 at end-April 2017).
- Monitoring missions: 7 missions conducted during the current period, compared to 3 in the previous period.

### Risk profile and assessment coverage
- Risk profile: relatively high for central banks assessed during the period.
- First-time/update cases: more than a quarter of assessments were either a first-time engagement or an update where the previous engagement was about a decade ago; these cases typically have higher risk ratings.
- Country coverage: all assessed member countries were emerging market and low-income countries: 8 of the 15 assessments were in low-income countries; remaining countries are emerging market economies.
- Risk ratings distribution: almost half of assessed central banks had a high-risk rating; the remaining 8 split evenly between medium-high and medium-low risk ratings.

### Monitoring activity drivers and notable cases
- Triggers for monitoring missions included:
  - unresolved significant safeguards issues;
  - deteriorating safeguards framework at the central bank;
  - emergence of governance issues (including non-operational Boards and suboptimal oversight during political transitions);
  - slow implementation of safeguards recommendations;
  - instances of significant monetary financing of the government in breach of statutory limits or irregular liquidity lending;
  - compromised external audit quality and weaknesses in controls related to monetary data reporting.
- Forensic involvement: staff, in close collaboration with area departments, engaged in a case concerning a forensic audit related to fraud in foreign currency operations at one central bank.

### Key findings across the ELRIC framework (External audit, Legal structure and autonomy, Financial reporting, Internal audit, Internal controls)
- External Audit:
  - Generally strong external audit mechanisms identified.
  - All assessed central banks had audits conducted by international audit firms.
  - Audit opinions stated compliance with International Standards on Auditing (ISA); focus remained on application of ISA and audit quality.
- Legal Framework:
  - Legal reforms to strengthen central banks’ autonomy and governance were recommended in nearly all assessments.
  - Strengthening legislation is challenging due to lengthy processes and multiple stakeholders.
  - Legislative progress: seven central bank laws with recommended amendments were enacted during the period; seven additional central banks have either submitted draft amendments to Cabinet for Parliamentary consideration and enactment or are finalizing amendments.
- Financial Reporting:
  - Nearly all assessed central banks published audited financial statements, albeit with delays in some cases.
  - Accounting frameworks: seven central banks have IFRS as their accounting framework; a further six have taken decisions to adopt IFRS and are in the transition process to implementation.
- Internal Audit:
  - Modest improvements observed; capacity constraints remain.
  - In five assessments, practices found to be in line with international standards.
  - Ongoing challenges: limited staffing, lack of professional certifications, insufficient training or audit expertise, and in some cases lack of independence of internal audit functions.
- Internal Controls:
  - Governance arrangements remain a key source of high risks.
  - Board vacancies or ineffective oversight due to insufficient expertise or weak legal provisions contributed to risks.
  - Other risks: fiscal dominance exposures in over half of the assessments; weak controls in foreign reserves management; weaknesses in compilation of program monetary data; operations related to Emergency Liquidity Assistance (ELA).

### Implementation of safeguards recommendations and technical assistance
- Implementation rates (current period):
  - Recommendations anchored in program conditionality: 80 percent (current period) vs. 57 percent (previous period).
  - Remaining recommendations: 58 percent (current period) vs. 50 percent (previous period).
- Overdue recommendations: about half relate to measures addressing shortfalls in the internal control environment and often require significant undertakings and greater capacity building (examples: establishing a middle office function or operationalizing an ELA framework).
- Delays: reforms on IFRS and legislative amendments frequently faced delays due to multiple stakeholders.
- Cumulative implementation since policy inception:
  - 89 percent for recommendations included under program conditionality.
  - 79 percent for the remainder.
- Role of technical assistance: TA facilitated reforms in IFRS, compilation and submission of monetary statistics, organizational restructuring, internal audit, and risk management; safeguards staff closely collaborated with other departments, particularly on legal and governance reforms.

### Misreporting and mitigation of program monetary data risks
- Misreporting cases:
  - No cases of misreporting of program monetary data during the current period.
  - Misreporting cases reviewed by the Executive Board during the current period related mainly to breaches of program requirements on external arrears.
- Ex-ante assessments and reconciliations:
  - Ex-ante assessments continue to identify issues proactively with program definitions and compilation procedures.
  - Staff reconciles key monetary data with audited financial statements or underlying accounting records; ex-ante work uncovered issues early in at least four cases that could have led to misreporting if unresolved.
- Key recurring themes identified:
  - Program data compilation controls: weaknesses in six assessments, including lack of internal coordination and documentation; in two cases verification procedures outsourced to external auditors due to internal audit capacity constraints.
  - TMU definitions: eight cases where definitions did not properly capture elements of Net International Reserves (NIR) (treatment of non-convertible currencies, non-monetary gold, government and state-owned enterprises’ foreign currency deposits, letters of credit, and poor-quality assets); addressed through revised definitions in updated TMUs.
  - Off-balance sheet items: two instances where encumbered foreign assets were not excluded from NIR (guarantees issued on behalf of the government and foreign assets pledged to support a loan facility).
- Staff recommendations and mitigation measures:
  - Closer engagement with central banks and collaboration with area departments.
  - Additional assurances including reviews of monetary data by external or internal auditors at test dates.
  - Establishment of committees from various central bank functions to document compilation procedures and review monetary data.
  - Clarification of program definitions for treatment of certain types of assets and liabilities.

### Evolution of safeguards work, governance, and risk management
- Safeguards framework evolution:
  - Assessments adapted after 2015 review to give closer evaluation of governance arrangements and more comprehensive coverage of risk management functions.
  - Consideration being given to risks from Fintech initiatives and cybersecurity.
  - First-ever fiscal safeguards review conducted during the period.
  - Safeguards staff involved in the Fund’s framework for enhanced engagement on governance.
- Governance assessments:
  - Focus on adequacy of checks and balances and effectiveness of decision-making and oversight bodies (central bank boards and audit committees).
  - Factors considered: mandate strength, composition, appointment practices, independence, expertise, and operational modalities; pragmatic consideration of political environments and capacity constraints.
- Risk management assessments:
  - New approach finalized in 2018 using an internally developed maturity assessment tool.
  - Tool benchmarks risk management practices against key elements: strategy, policies, process, governance structure, monitoring and reporting; determines maturity levels and development needs.
  - Modular approach allows tailoring recommendations to central bank capacity with periodic checkpoints.
  - Assessment outcomes for the period:
    - Of the 15 central banks assessed, only 2 have not yet formally started developing integrated risk management structures.
    - Risk management functions had areas for improvement in about 50 percent of central banks with respect to governance arrangements and processes (examples: separation from internal audit or business areas, strengthening executive management, reporting to an oversight body, establishing risk registers or action plans, enhancing risk reporting and monitoring).
    - Capacity constraints and lack of technical expertise identified.
    - Optimized risk management practices remain aspirational for all but 1 of the central banks assessed; comprehensive coverage of all financial and non-financial risks within one full-fledged framework is a common challenge.

### Fiscal safeguards review and policy requirements
- Background: 2015 safeguards policy review endorsed evaluation framework and risk-based approach to expand assessments beyond central banks where significant IMF lending is directed to budget support.
- Fiscal safeguards trigger: to be conducted for arrangements where member requests exceptional access and an expectation exists that at least 25 percent of funds will finance the state budget.
- Case example: June 2018 Argentina Stand-By Arrangement met criteria; mission fielded in October 2018.
- Argentina findings and program response:
  - Vulnerabilities identified: strengthening modalities in the budget process; improving oversight of entities outside the federal central administration; increasing quality of fiscal reports through reconciliation exercises.
  - Program structural benchmark: establish a treasury single account at the central bank rather than at a state-owned commercial bank.
  - Multi-department mission led by FAD with support from LEG and FIN provided lessons to strengthen modalities; lessons to be considered in coordination with FAD and factored into the 2020 safeguards assessment policy review.

### IMF enhanced engagement on governance — safeguards contributions
- 2018 framework: Enhanced Fund Engagement on Governance assesses governance vulnerabilities and corruption in six categories: (i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) anti-money laundering and combating the financing of terrorism.
- Use of existing work: safeguards assessments utilized under the framework; coordination required where safeguards coverage is incomplete.
- Safeguards contributions included:
  - Participation in centralized institutional process to select countries and governance areas with FIN participation.
  - Brainstorming sessions: FIN safeguards staff assist country teams preparing policy consultation notes and missions with background on safeguard findings and central bank governance experience.
  - Ad-hoc requests: FIN safeguards staff contributed to area department initiatives for regional cross-country analysis on governance and reviewed policy consultation notes and staff reports where governance vulnerability resolution was critical to program success.

### Staff resources, tools, publications, and outreach
- Division staffing: management (Division Chief and a deputy), ten professional staff, one research assistant, and two staff assistants; during the period one staff transferred and was replaced by an external candidate.
- Analytical activity: increased work on internal audit, risk management, and external audit, resulting in publications and outreach.
- Safeguards Portal: new Portal finalized in July 2019 to enhance IT capabilities and data management of safeguards findings and monitoring; developed in-house with collaboration between FIN and ITD to enable enhanced data integration with other Fund financial information.
- Publications:
  - Two working papers published:
    - Effectiveness of Internal Audit and Oversight at Central Banks: Safeguards Findings—Trends and Observations (WP/18/125). Covered 111 assessments at 64 central banks; found internal audit challenges: (i) limited independence, (ii) capacity constraints, and (iii) inadequate oversight by the Board or Audit Committee. Empirical data finds strong oversight by a high-performing Audit Committee is a key enabler of good governance.
    - External Audit Arrangements at Central Banks (WP/18/199). Reviewed audited financial statements and legislation covering 170 central banks; identified vulnerabilities due to (i) weak capacity and deficient quality control processes for some audit firms, (ii) deficient procedures for selection and appointment of external auditors, and (iii) weak or lacking Audit Committee oversight.
  - Two additional publications on (i) central banks’ financial reporting practices and safeguards experience with the implementation of IFRS, and (ii) risk management frameworks at central banks, are being finalized.
- Outreach and collaboration:
  - Fund joined the International Operational Risk Working Group (IORWG), which comprises 85 central banks and monetary and supervisory authorities and the Bank for International Settlements.
  - High-level forums on governance held in 2019 and 2018; 2019 forum emphasized legal underpinnings of board oversight, financial risk management, FinTech, data analytics, and Artificial Intelligence.
  - Five regional safeguards seminars held during the update period in Kuwait (two), Austria, Mauritius, and Singapore; almost 150 participants representing over 100 central banks attended the seminars during the period.
  - Increased engagement with World Bank RAMP; staff contributed to internal audit and accounting workshops (December 2018; March 2019 and 2018).
  - Participation in courses and conferences on cybersecurity, internal audit, risk management, governance, and accounting matters with various international organizations and central banks.

### Increased advisory engagement and staff input in an advisory capacity
- Nature of engagement: advisory, facilitative, focused on substantive expertise; concentrated where multi-stage TA programs support governance, legislative reforms, or transition to IFRS; customized guidance for forensic work and special audits.
- Events and participation:
  - Five such events held since 2013; two during this period (January 2019 and March 2018).
  - Almost 150 participants representing over 100 central banks attended the safeguards seminars during the period.
- Governance and legal reforms:
  - In three cases of governance-focused legal reforms, staff participated in legal TA missions to aid formulation of governance and central bank autonomy provisions; engagements included discussions with central bank authorities and other stakeholders (ministries of finance or justice).
  - Staff joined one area department visit to follow up on a longstanding safeguards recommendation to amend the central bank law.
- IFRS transition support:
  - Staff developed comprehensive roadmaps, advised on external auditors’ role, engaged accounting regulatory bodies, anchored transitions in program commitments, and collaborated with MCM to prioritize and facilitate TA.
- Forensic work:
  - In three countries, staff involved in forensic audits arising from allegations of misappropriation of banknotes and foreign exchange, and concerns about adequacy of capital injections for recapitalization and restructuring of certain financial institutions.
  - Staff provided input to terms of reference for audits, reviewed audit results and remedial action plans, and assisted in reviewing terms of reference for a special audit of one central bank.

### Reporting, sharing, and confidentiality
- Safeguards reports: confidential; Board informed primarily through country staff reports.
- Safeguards paragraph: continues to be included in staff reports for countries under safeguards monitoring (members with outstanding Fund credit or active arrangements) to inform the Board on status of safeguards recommendations and key developments (e.g., enactment of proposed central bank law amendments).
- Sharing with other institutions: safeguards reports can be shared with the World Bank and the European Central Bank (ECB) in accordance with Board decision; staff seeks consent from the central bank prior to sharing.
- Report sharing statistics: 23 reports shared with the World Bank during the period (17 during the previous period) for fiduciary assessments related to development policy lending; no requests received from the ECB in either period.

### Emerging risks and renewed priorities
- Governance: continued priority under the Fund’s renewed governance framework; anticipated growing demand as framework matures; challenges include competing priorities, resource constraints, and data gaps because safeguards assessment policy covers only a subset of members (those with lending arrangements or outstanding Fund credit).
- Financial Risk Management:
  - Need for comprehensive coverage of financial risks at central banks beyond foreign reserves management to include policy-related operations exposing the central bank to financial risks.
  - Recommendation: bank-wide risk management frameworks should consider financial risks at policy and balance sheet levels to safeguard central bank financial strength and policy soundness.
- Cybersecurity:
  - Central banks’ role increases exposure to cyber risks; active cyber risk management, including robust business continuity and recovery plans, is crucial and should be embedded in comprehensive risk management frameworks.
  - Coverage in safeguards assessments is in initial stages; only a few central banks covered during this period have active management of cyber risks.
  - Internal guidance being developed to inform assessment coverage and related recommendations.
- Fintech:
  - Rapid advances in digital technology (Fintech) create opportunities and challenges; interlinkages with payment systems important.
  - As central banks venture into new technologies (e.g., digital currencies), safeguards work in risk management must ensure new risks from Fintech initiatives are considered.

### Activity and assessment statistics (selected)
- Assessments completed during the period under review: 15.
- Annex II — Assessments and Monitoring Visits Completed During the May 2017 – April 2019 Period:
  - Assessments — 2019: Angola, Morocco — Total 2
  - Assessments — 2018: Argentina, Barbados, BCEAO, The Gambia, Guinea, Malawi, Mauritania, Seychelles — Total 8
  - Assessments — 2017: BEAC, Ecuador, Jamaica, Mongolia, Sierra Leone — Total 5
  - Monitoring Visits — 2019: Tunisia — 1 in progress
  - Monitoring Visits — 2018: Ghana, Liberia, Madagascar, Nepal, Sierra Leone — Total 5
  - Monitoring Visits — 2017: The Gambia, Guinea — Total 2
- Annex III — Assessments Completed During and in Progress at Fiscal Year-End:
  - Type of Activity FY 2019 — Assessments Completed 6, Assessments in Progress 6, Total 12
  - First Time — Barbados — 1
  - Update — Angola, Argentina, Malawi, Mauritania, Morocco — Ecuador, Haiti, Honduras, Kenya, São Tomé and Príncipe, Ukraine — 11
  - FY 2018 — 9 completed, 2 in progress, Total 11
  - FY 2017 — 13 completed, 5 in progress, Total 18
  - FY 2016 — 16 completed, 6 in progress, Total 22
  - FY 2015 — 13 completed, 6 in progress, Total 19
  - FY 2014 — 15 completed, 6 in progress, Total 21
  - FY 2013 — 11 completed, 12 in progress, Total 23
  - FY 2012 — 15 completed, 11 in progress, Total 26
  - FY 2011 — 23 completed, 9 in progress, Total 32

*Prepared by George Kabwe, Elie Chamoun, Riaan van Greuning, Mowele Mohlala, and Júlia Cardoso (FIN); Approved by Andrew Tweedie (FIN).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Safeguards activity and trends (May 2017–April 2019)
- 15 assessments were completed during the period May 2017 to April 2019 and a further six were in progress at end-April 2019.
- This compares with 21 assessments completed and five in progress during the previous period from September 2015 to April 2017.
- The lower number of assessments primarily reflects the decrease in new Fund programs: 19 arrangements were approved in the current period compared to 24 arrangements in the previous period.
- Monitoring of safeguards developments at central banks continues until Fund credit is fully repaid. The number of central banks subject to monitoring remained broadly unchanged at 62 central banks at end-April 2019 (63 at end-April 2017).
- Monitoring missions increased: seven missions were conducted during the current period, compared to three in the previous period.

### Risk profile and assessment coverage
- The risk profile of central banks assessed during the period was relatively high.
- More than a quarter of the assessments were either a first-time engagement or an update where the previous engagement was about a decade ago; experience in such cases is that risk ratings are typically higher owing to limited exposure with staff on safeguards issues.
- All assessed member countries during the period were emerging market and low-income countries: eight of the 15 assessments were in low-income countries, and the remaining countries are emerging market economies.
- Almost half of assessed central banks had a high-risk rating; the remaining eight were split evenly between medium-high and medium-low risk ratings.

### Monitoring activity drivers and cases
- Monitoring missions were triggered by:
  - unresolved significant safeguards issues;
  - deteriorating changes in the central bank’s safeguards framework;
  - emergence of governance issues (including non-operational Boards and suboptimal oversight arrangements during political transitions);
  - slow implementation of safeguards recommendations;
  - instances of significant monetary financing of the government in breach of statutory limits or irregular liquidity lending;
  - compromised external audit quality and weaknesses in controls related to monetary data reporting.
- Staff were involved, in close collaboration with area departments, in a case concerning a forensic audit conducted in response to fraud uncovered in foreign currency operations at one central bank.

### Key findings across the ELRIC framework (External audit, Legal structure and autonomy, Financial reporting, Internal audit, Internal controls)
- External Audit
  - Assessments found generally strong external audit mechanisms.
  - All central banks assessed during the period had audits conducted by international audit firms.
  - Audit opinions stated compliance with International Standards on Auditing (ISA); assessments continued to focus on application of these standards and on audit quality.
- Legal Framework
  - Legal reforms to strengthen central banks’ autonomy and governance arrangements were recommended in nearly all assessments.
  - Strengthening legislation remains challenging because it involves lengthy processes and multiple stakeholders.
  - Seven central bank laws with recommended amendments were enacted during the period; seven additional central banks have either submitted draft amendments to Cabinet for Parliamentary consideration and enactment or are finalizing amendments.
- Financial Reporting
  - Nearly all central banks assessed during the period published their audited financial statements, albeit with delays in some cases.
  - Seven central banks have IFRS as their accounting framework, and a further six have taken decisions to adopt IFRS and are in the transition process to implementation.
- Internal Audit
  - Modest improvements were observed in internal audit, but capacity constraints remain.
  - In five assessments, practices were found to be in line with international standards.
  - Overall challenges include limited staffing, lack of professional certifications, insufficient training or audit expertise, and, in some cases, lack of independence of internal audit functions.
- Internal Controls
  - Governance arrangements remain a key source of high risks in the internal control environment.
  - Vacancies on Boards or ineffective oversight due to insufficient expertise or weak legal provisions contributed to these risks.
  - Other risks included heightened exposures from fiscal dominance in over half of the assessments, weak controls in foreign reserves management, weaknesses in compilation of program monetary data, and operations related to Emergency Liquidity Assistance (ELA).

### Implementation of safeguards recommendations and technical assistance
- Recommendations anchored in program conditionality had a higher implementation rate of 80 percent in the current period (compared to 57 percent in the previous period).
- Implementation rate for the remaining recommendations improved to 58 percent in the current period (compared to 50 percent in the previous period) but remains lower than desired.
- Half of the overdue recommendations relate to measures addressing shortfalls in the internal control environment and often require significant undertakings and greater capacity building (for example, establishing a middle office function or operationalizing an ELA framework).
- Reforms on IFRS and legislative amendments frequently faced delays due to involvement of multiple stakeholders.
- Overall implementation since inception of the policy remains high: 89 percent for recommendations included under program conditionality and 79 percent for the remainder.
- Technical assistance (TA) continues to be essential in advancing implementation; TA in the period facilitated reforms in IFRS, compilation and submission of monetary statistics, organizational restructuring, internal audit, and risk management. Safeguards staff closely collaborated with other departments, particularly on legal and governance reforms.

### Misreporting and mitigation
- There were no cases of misreporting of monetary program data during the current period.
- Misreporting cases reviewed by the Executive Board during the current period related mainly to breaches of program requirements on external arrears.
- The ex-ante nature of safeguards assessments continues to proactively identify issues on monetary program data regarding clarifying definitions and strengthening compilation procedures.

### Evolution of safeguards work and broader engagement
- Following the 2015 safeguards policy review, assessments were adapted to provide closer evaluation of governance arrangements and more comprehensive coverage of risk management functions at central banks.
- Consideration is being given to risks emerging from Fintech initiatives and cybersecurity.
- The first-ever fiscal safeguards review was conducted during the period.
- Safeguards staff has been involved in the Fund’s recently adopted framework for enhanced engagement on governance to help assess central bank vulnerabilities.

*Prepared by George Kabwe, Elie Chamoun, Riaan van Greuning, Mowele Mohlala, and Júlia Cardoso (FIN); Approved by Andrew Tweedie (FIN).*

### 17.      Mitigating the risks surrounding program monetary data reported to the Fund is a

### 17.      Mitigating the risks surrounding program monetary data reported to the Fund is a

### Program monetary data risks and findings
- No cases of misreporting of program monetary data occurred during the current period.
- Ex-ante assessments continue to identify issues proactively with program definitions and compilation procedures; review of compilation procedures and evaluation of control processes are important.
- Staff reconciles key monetary data with audited financial statements or underlying accounting records; ex-ante work uncovered issues early in at least four cases that could have led to misreporting if unresolved.
- Key recurring themes identified:
  - Program data compilation controls: Weaknesses in six assessments, including lack of internal coordination and documentation of processes; in two cases capacity constraints in internal audit functions required verification procedures to be outsourced to external auditors.
  - Technical Memorandum of Understanding (TMU) definitions: Staff identified eight cases where definitions did not properly capture elements of Net International Reserves (NIR) (treatment of non-convertible currencies, non-monetary gold, government and state-owned enterprises’ foreign currency deposits, letters of credit, and poor-quality assets). These issues were addressed through revised definitions in updated TMUs.
  - Off-balance sheet items: Two instances where encumbered foreign assets were not excluded from NIR (guarantees issued on behalf of the government and foreign assets pledged to support a loan facility).

### Mitigation measures and staff recommendations
- Closer engagement with central banks and collaboration with area departments helps mitigate misreporting risk through inter-departmental discussion on complex items.
- Where additional assurances were needed, staff’s recommendations included:
  - Reviews of monetary data by external or internal auditors at test dates.
  - Establishment of committees from various central bank functions to document compilation procedures and review monetary data.
  - Clarification of program definitions for treatment of certain types of assets and liabilities.

### Evolution within the safeguards framework
- The safeguards framework continues to evolve in line with experience and lessons learned; assessment of governance arrangements has progressed consistent with mandates from the 2010 and 2015 Board reviews.
- Deeper evaluations of risk management practices are now integral to safeguards assessments, and proactive engagement with stakeholders has been embedded to facilitate legal reforms and secure sustained commitment.

### Governance
- Safeguards assessments have been adapted for closer evaluation of governance arrangements, focusing on decision-making bodies and independent oversight of central banks.
- Evaluations aim to assure:
  - (i) the adequacy of checks and balances, and
  - (ii) the effectiveness of key governance bodies such as central bank boards and audit committees.
- Factors considered include mandate strength, composition, appointment practices, independence, expertise, and operational modalities; assessments require pragmatic consideration of political environments and capacity constraints.

### Risk management
- A more comprehensive coverage of risk management functions at central banks is now integral to safeguards work.
- Staff finalized a new approach in 2018 for assessment of risk management practices, guided by an internally developed assessment tool.
- The maturity assessment tool:
  - Benchmarks risk management practices against key elements of a full-fledged framework (strategy, policies, process, governance structure, monitoring and reporting).
  - Ascertains current maturity levels to determine development needs to progress from informal to optimized implementation.
- A modular approach allows tailoring recommendations to central bank capacity and provides periodic checkpoints and paths forward.
- Assessment outcomes during the period:
  - Of the 15 central banks assessed, only two have not yet formally started on developing integrated risk management structures.
  - Risk management functions had areas for improvement in about 50 percent of central banks with respect to governance arrangements and processes (e.g., separation from internal audit or business areas, strengthening executive management, reporting to an oversight body, establishing risk registers or action plans, enhancing risk reporting and monitoring).
  - Capacity constraints and lack of technical expertise were identified.
  - Optimized risk management practices remain aspirational for all but one of the central banks assessed; comprehensive coverage of all financial and non-financial risks within one full-fledged framework is a common challenge.

### Fiscal safeguards review – 2015 policy review and requirements
- The first-ever fiscal safeguards review was conducted during the period.
- At the 2015 safeguards policy review, the IMF Executive Board endorsed an evaluation framework and risk-based approach to expand assessments beyond central banks in cases where significant IMF lending resources are directed to budget support.
- Fiscal safeguards are to be conducted for all arrangements where a member requests exceptional access to Fund resources and an expectation exists that a significant proportion, i.e., at least 25 percent, of the funds will be directed to financing of the state budget.
- The June 2018 Argentina Stand-By Arrangement met the criteria for a fiscal safeguards review; a mission was fielded in October 2018.
- The fiscal safeguards review for Argentina identified vulnerabilities considered in the program, including:
  - Strengthening modalities in the budget process.
  - Improving oversight of entities outside the federal central administration.
  - Increasing the quality of fiscal reports through reconciliation exercises.
- The program included a structural benchmark for a treasury single account to be established at the central bank rather than at a state-owned commercial bank.
- The multi-department mission led by FAD, with support from LEG and FIN, provided lessons to strengthen modalities; lessons will be considered in coordination with FAD and factored into the 2020 safeguards assessment policy review on scope, modalities, and review process.

### IMF enhanced engagement on governance
- In 2018, the Fund adopted a framework for Enhanced Fund Engagement on Governance to assess governance vulnerabilities and corruption in six categories most relevant to economic activity:
  - (i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) anti-money laundering and combatting the financing of terrorism.
- Existing work, including safeguards assessments, is utilized under the framework; coordination among staff (area and functional departments) is required where safeguards coverage is incomplete.
- Safeguards contributions under the framework included:
  - Governance assessments: centralized institutional process to select countries and governance areas to assess, with FIN participation.
  - Brainstorming sessions: FIN safeguards staff participate to assist country teams preparing policy consultation notes and missions, providing background on safeguard findings and central bank governance experience.
  - Ad-hoc requests: FIN safeguards staff contributed to area department initiatives for regional cross-country analysis on governance and reviewed policy consultation notes and staff reports where governance vulnerability resolution was critical to program success.

### Staff resources, tools, and outreach
- Safeguards staff complement remains unchanged from the previous period; the division comprises management (Division Chief and a deputy), ten professional staff, one research assistant, and two staff assistants. During the period, one staff transferred to another division and was replaced by an external candidate.
- Notable increases in activity include analytical work on internal audit, risk management, and external audit, resulting in publications and outreach at global conferences.
- Development of a new Safeguards Portal (finalized in July 2019) enhances IT capabilities, data management of safeguards findings, and monitoring; developed in-house with close collaboration between FIN and ITD to enable enhanced data integration with other Fund financial information.
- Analytical publications and findings:
  - Two working papers published during the period:
    - Effectiveness of Internal Audit and Oversight at Central Banks: Safeguards Findings—Trends and Observations (WP/18/125). Covered 111 assessments at 64 central banks; found internal audit challenges: (i) limited independence, (ii) capacity constraints, and (iii) inadequate oversight by the Board or Audit Committee. Empirical data finds strong oversight by a high-performing Audit Committee is a key enabler of good governance.
    - External Audit Arrangements at Central Banks (WP/18/199). Reviewed audited financial statements and legislation covering 170 central banks; identified vulnerabilities due to (i) weak capacity and deficient quality control processes for some audit firms, (ii) deficient procedures for selection and appointment of external auditors, and (iii) weak or lacking Audit Committee oversight.
  - Two additional publications on (i) central banks’ financial reporting practices and safeguards experience with the implementation of IFRS, and (ii) risk management frameworks at central banks, are being finalized.
- Outreach and stakeholder collaboration:
  - The Fund joined the International Operational Risk Working Group (IORWG), expanding engagement on operational risk management; the IORWG comprises 85 central banks and monetary and supervisory authorities and the Bank for International Settlements.
  - High-level forums on governance were held in 2019 and 2018 for central banks and external auditors; the 2019 forum emphasized legal underpinnings of board oversight, financial risk management, FinTech, data analytics, and Artificial Intelligence.
  - Five regional safeguards seminars held during the update period in Kuwait (two), Austria, Mauritius, and Singapore.
  - Increased engagement with the World Bank’s Reserves Advisory and Management Program (RAMP); staff contributed to internal audit and accounting workshops (December 2018; March 2019 and 2018).
  - Other outreach included participation in courses and conferences on cybersecurity, internal audit, risk management, governance, and accounting matters with organizations including the National Institute of Standards and Technology, Central Bank of Turkey, Asian Development Bank, Bank of Indonesia, European Central Bank, Bank for International Settlements, and Banco de Portugal.

*Source: ppea2019041 - 17.      Mitigating the risks surrounding program monetary data reported to the Fund is a*

### 31.      Solicitations for staff’s expertise and input in an advisory capacity have increased.

### 31.      Solicitations for staff’s expertise and input in an advisory capacity have increased.

### Increased advisory engagement and nature of input
- Staff continued to be proactively engaged, in close collaboration with other departments within the Fund, in cases that presented safeguards challenges.
- Safeguards staff’s contributions were of an advisory nature and focused on aspects that required substantive expertise and a facilitative role.
- Engagements were particularly concentrated where multi-stage technical assistance programs were being undertaken to support governance and legislative reforms or transition to IFRS.
- Customized guidance was provided in cases concerning forensic work and special audits.

### Key highlights of advisory activities
- Events and participation:
  - Five such events have been held since 2013, two of which were during this period (January 2019 and March 2018).
  - Almost 150 participants representing over 100 central banks attended the safeguards seminars during the period.
- Governance matters and legal reforms:
  - In three cases of governance focused legal reforms, staff participated in legal technical assistance missions to aid the formulation of governance and central bank autonomy provisions.
  - Such engagements involved discussions with the central bank authorities and other stakeholders (i.e., ministries of finance or justice).
  - Staff also joined one area department visit to follow up on a long outstanding safeguards recommendation to amend the central bank law.
- International Financial Reporting Standards (IFRS):
  - Staff’s efforts focused on advancing the transition to IFRS, including through the development of comprehensive roadmaps, advising on the nature and scope of external auditors’ involvement, and engaging accounting regulatory bodies in their role in advancing IFRS in their jurisdictions.
  - Internally, staff worked with area departments to anchor such transitions in program commitments and collaborated with MCM to help prioritize and facilitate technical assistance in some cases.
- Forensic work:
  - As part of ongoing safeguards support to area departments under IMF-supported programs, staff was closely involved in work, in three countries, related to forensic audits that resulted from allegations of misappropriation of banknotes and foreign exchange, and concerns regarding the adequacy of capital injections within the financial system for recapitalization and restructuring of certain financial institutions.
  - In all these cases, staff provided input to the terms of reference for the audit and reviewed audit results and remedial action plans.
  - Safeguards staff also assisted in reviewing terms of reference for a special audit (review of financial structure) of one central bank.

### Reporting to the Board and sharing of safeguards reports
- Safeguards reports are confidential, and the Board is informed primarily through country staff reports.
- A safeguards-related paragraph continues to be included in staff reports for countries that are under safeguards monitoring, i.e., member countries with outstanding Fund credit or active arrangements.
- This paragraph informs the Board on the status of safeguards recommendations, and key developments in safeguards-related issues, such as enactment of proposed amendments to the central bank law.
- Sharing with other institutions:
  - In accordance with the Board decision, safeguards reports can be shared with the World Bank and the European Central Bank (ECB).
  - Staff seeks consent from the relevant central bank prior to sharing the report.
  - In the period under review, 23 reports were shared with the World Bank (17 during the previous period) for their fiduciary assessments related to development policy lending.
  - No requests were received from the ECB in either period.

### Emerging risks and renewed priorities
- Governance:
  - In line with the Fund’s renewed framework on governance, engagement in this area will continue to be a priority.
  - Staff anticipates a growing demand in this institutional effort as the framework continues to mature.
  - Challenges include competing priorities of other safeguards work, resource constraints, and data gaps because the safeguards assessment policy only covers a subset of member countries (those that have lending arrangements or outstanding Fund credit).
  - There is a need to continue refining the approach to ensure appropriate contribution to, and evenhanded application of, the new framework, given that the depth of coverage of a typical safeguards assessment across the membership is not a feasible option.
- Financial Risk Management:
  - Additional work is needed to ensure comprehensive coverage of financial risks at central banks.
  - Central banks continue to make progress in risk management by progressively expanding their coverage of non-financial risks and formalizing an enterprise risk management (ERM) framework.
  - Financial risk management is often narrowly focused on foreign reserves management and does not encompass the policy-related operations which also expose the central bank to financial risks.
  - Bank-wide risk management frameworks with broader consideration of financial risks at policy and balance sheet levels help safeguard the financial strength of a central bank and the soundness of its policies.
- Cybersecurity:
  - The role of central banks in the financial sector increases their exposure to cyber risks.
  - An active cyber risk management strategy that includes robust business continuity and recovery plans is crucial, and should be embedded in a comprehensive risk management framework.
  - Coverage of this topic in safeguards assessments is in its initial stages. Only a few central banks covered during this period have active management of cyber risks.
  - Internal guidance is being developed by staff to inform coverage in assessments, and the related recommendations to address identified vulnerabilities.
- Fintech:
  - Rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for central banks.
  - These innovations, often referred to as “fintech”, are changing the way in which financial transactions are conducted, especially given the interlinkages with payment systems.
  - To the extent that central banks are venturing into new technologies, such as digital currencies, safeguards work in risk management will need to ensure that any new risks emerging from Fintech initiatives are being considered.

### Activity and assessment statistics (selected)
- During the period under review, 15 assessments were completed.
- Annex II — Assessments and Monitoring Visits Completed During the May 2017 – April 2019 Period:
  - Assessments — 2019: Angola, Morocco — Total 2
  - Assessments — 2018: Argentina, Barbados, BCEAO, The Gambia, Guinea, Malawi, Mauritania, Seychelles — Total 8
  - Assessments — 2017: BEAC, Ecuador, Jamaica, Mongolia, Sierra Leone — Total 5
  - Monitoring Visits — 2019: Tunisia — 1 in progress
  - Monitoring Visits — 2018: Ghana, Liberia, Madagascar, Nepal, Sierra Leone — Total 5
  - Monitoring Visits — 2017: The Gambia, Guinea — Total 2
- Annex III — Assessments Completed During and in Progress at Fiscal Year-End:
  - Type of Activity FY 2019 — Assessments Completed 6, Assessments in Progress 6, Total 12
  - First Time — Barbados — 1
  - Update — Angola, Argentina, Malawi, Mauritania, Morocco — Ecuador, Haiti, Honduras, Kenya, São Tomé and Príncipe, Ukraine — 11
  - FY 2018 — 9 completed, 2 in progress, Total 11
  - FY 2017 — 13 completed, 5 in progress, Total 18
  - FY 2016 — 16 completed, 6 in progress, Total 22
  - FY 2015 — 13 completed, 6 in progress, Total 19
  - FY 2014 — 15 completed, 6 in progress, Total 21
  - FY 2013 — 11 completed, 12 in progress, Total 23
  - FY 2012 — 15 completed, 11 in progress, Total 26
  - FY 2011 — 23 completed, 9 in progress, Total 32

*SAFEGUARDS ASSESSMENTS—2019 UPDATE, INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/pp/2019/ppea2019041.pdf_