## Report of the Independent Panel on Safeguards Assessments — _013105

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---

### Executive Summary
- Mandate and timing:
  - An independent panel of four deputy central bank governors reviewed the Safeguards Assessments (SA) policy in early 2005, pursuant to the Executive Board’s March 2002 review.
  - Panel presentation date: January 31, 2005.
- Survey and methodology:
  - A brief survey was distributed to 27 central banks that have undergone a safeguards assessment; 26 central banks responded.
  - The panel used survey responses, follow-up conversations with central bank staff, and its own perspective to draft the report.
- Core findings:
  - The SA policy has been highly successful in achieving its objectives.
  - Positive results observed in: improved controls, enhanced transparency and accountability at central banks, reduced risk of misreporting, and enhanced reputation of the IMF as a prudent lender.
  - The SA process has generally been appropriate and efficient.
- Forward-looking emphasis:
  - Safeguards communication is a key area for improvement.
  - Future monitoring should include both off-site and on-site components.

### I. Impact of the Safeguards Assessments Policy
- Overall assessment:
  - Surveyed central banks and panel members agree the SA process has had a markedly positive impact on central banks and enhanced the IMF’s reputation.
- Specific operational improvements attributed to SAs:
  - External audit:
    - Most-cited improvement was a more effective external audit mechanism.
    - Notable changes: first-time appointment of independent and qualified external auditors; increased transparency in auditor appointment; more frequent auditor rotation; enhanced cooperation between external and internal audit functions.
  - Legal structure:
    - Some central banks used SAs to initiate changes enhancing operational independence.
    - Typical implementation: SA recommendations were generally implemented through board resolutions rather than amendments to central bank law; panel members cautioned that pursuing legal amendments could, in some cases, inadvertently weaken independence during political processes.
  - Financial reporting:
    - Many central banks adopted internationally recognized financial reporting frameworks (either IFRS or ECB accounting guidelines) or substantially improved financial reporting due to SAs.
    - First-time publication of audited financial statements was common.
  - Internal audit and internal control:
    - Majority reported establishment or strengthening of internal audit functions, capacity building in auditing and accounting, adoption of risk-based internal auditing, and improvements in reserves management.
    - Development of internal management systems improved control over key risk areas, including those related to IMF data reporting.
- Additional benefits:
  - Creation of financial controller functions integrating budgeting, accounting, and reporting controls in some cases.
  - Adoption of risk management frameworks identifying vulnerabilities and enabling appropriate measures to control and minimize risk.
  - Improvement in internal risk scores reported by at least one central bank.
- Transparency and accountability:
  - Enhanced transparency and accountability widely reported, tied to adoption of international accounting frameworks and appointment of international accounting firms as auditors.
- Panel synthesis:
  - SAs reduced risk of misreporting and substantially improved controls over central bank and IMF resources.
  - SAs formed part of a broader global improvement in governance at financial institutions.

### II. The Safeguards Assessments Process and Monitoring
- Process efficiency:
  - Most central banks found the SA process efficient: off-site preparations in Washington followed by short on-site missions were cited as useful and appropriate.
  - Some central banks wanted more time for off-site documentation gathering or longer on-site missions for more detailed analysis.
  - On-site missions were critical, especially for the first assessment, to ensure central bank ownership and enable communication.
- Communication:
  - Panel members recommend closer and more regular communication between IMF staff and designated central bank counterparts.
- Monitoring modalities:
  - Majority view: a combination of on-site and off-site monitoring is appropriate for implementation and continuous tracking of recommendations.
  - Off-site monitoring should continue to include submission of annual external audit reports and management letters.
  - Several central banks recommended a concise safeguards monitoring matrix to serve as a template for periodic off-site monitoring and/or a tool for central bank self-assessment.
  - Panel view on matrix:
    - A safeguards tracking matrix should include general checklists related to each ELRIC area and track individual SA recommendations for specific central banks.
    - Completion of the matrix should not substitute for IMF staff opinions on the viability of controls.
    - IMF staff should decide case-by-case when on-site monitoring missions are required.
- Note on external-auditor special audits:
  - Some central banks suggested external auditors include a tailored SA-related audit in the ELRIC areas; panel members cautioned this could constitute a conflict of interest and a loss of IMF control over safeguards issues.

### III. Other Suggested Improvements
- Two priority areas identified by central banks:
  - Safeguards communications and exchange of experiences among central banks.
  - Flexibility in implementation deadlines for safeguards recommendations, taking into account country circumstances and resource constraints.
- Communication enhancements proposed by central banks:
  - Establishment of an SA website and periodic e-mails regarding safeguards developments.
  - Creation of a compendium of safeguards best practices.
  - Regional training and conferences on safeguards issues.
  - Greater coordination between safeguards and IMF technical assistance; central banks reported weak linkage and sparse technical assistance for SA implementation.
  - Clarification of distinctions between SAs and overlapping IMF initiatives (FSAPs, statistics missions, monetary missions, Article IV surveillance, program reviews); resident representatives often relatively unaware of specific safeguards issues.
- Panel recommendations on communication:
  - Promote central bank ownership of the safeguards process by:
    - Communicating more regularly with central bank staff on safeguards issues;
    - Establishing a website containing a compendium of safeguards knowledge;
    - Facilitating regional and global forums on safeguards issues.
- Flexibility:
  - Panel recommends continued flexible application of the SA policy, with consideration of specific country circumstances and resource constraints when developing recommendation deadlines.

### IV. Conclusion
- Overall finding:
  - The panel finds the safeguards policy a success: improved central bank control systems and greater safeguarding of IMF resources than previously.
  - Surveyed central banks were broadly pleased with SA effects despite implementation challenges for some recommendations.
  - The policy has made significant progress in accomplishing its main objectives as set out in 2000.
- Monitoring recommendations:
  - Future monitoring should include both off-site and on-site components.
  - Off-site monitoring should include an SA tracking matrix submitted by central banks to the IMF.
  - The on-site component should remain at the discretion of IMF staff; the combination ensures active monitoring while maintaining flexibility.
- Communication and even application:
  - The IMF should enhance communication with key safeguards stakeholders using workshops and a website.
  - The IMF should continue to apply safeguards principles evenly, taking into account specific country circumstances and resource constraints when establishing implementation deadlines.

### Section 2 — Panel access, review logistics, framework, and survey
- Panel access, confidentiality, and rights:
  - The panel will have access to all information in possession of the IMF in regard of safeguards assessments and will elicit the views of central bank authorities that have undergone a safeguards assessment.
  - Each panel member undertakes to protect the confidentiality of all information obtained in the course of the review.
  - The IMF reserves the exclusive rights to the written views of the panel and panel members undertake not to publish any part of these views separately.
- Review period, meetings, and schedule:
  - The panel’s review will be conducted during the period November 2004–January 2005.
  - Meetings requiring attendance:
    - Washington, D.C.: November 18–19, 2004
    - Paris, France: January 27–28, 2005
  - The chair of the panel will be invited to be present at the Board meeting, which is scheduled for March 2005.
- Background materials, preparatory work, and first-visit objectives:
  - Background information to be provided in advance of the November meetings:
    - Background information on the safeguards experience
    - A list of central banks that have undergone a safeguards assessment
    - Suggested survey questions
    - A draft outline of the IMF staff paper
  - During the Washington visit, panel members will:
    - Obtain all additional documentation necessary for their assessment
    - Meet with the external consultant and IMF staff
  - At the conclusion of the first visit, the panel should agree on:
    - The number of central banks to be surveyed.
    - The specific central banks to be surveyed.
    - The content of the survey.
    - The central banks that each panel member will contact by phone for follow-up interviews.
    - The procedural modalities for the remainder of the review process, including the dates of the meeting in Paris; procedures to review the draft report prepared by the external consultant under the guidance of the panel; and allocation of areas of responsibility for finalizing the report, etc.
- Second meeting, report finalization, and Board submission:
  - At the second meeting, scheduled for January 27–28, 2005, the panel will finalize its report with the assistance of the external consultant.
  - IMF staff will provide a draft of its board paper to the panel in advance of the second meeting and the panel will make its report available to IMF staff before its finalization.
  - Both the staff report and the panel’s report will be issued to the Board for its consideration.
- Logistics and administrative support:
  - The first meeting will take place in Washington, D.C. The second meeting will take place in Paris, France.
  - Administrative services will be provided to the panel members by the IMF.
- Safeguards policy framework and ELRIC acronym:
  - The safeguards policy is an ex ante mechanism to strengthen the IMF’s framework of measures to safeguard the use of Fund resources and minimize the possibility for misreporting.
  - Safeguards Assessments are conducted for central banks and consider the adequacy of five key areas of control and governance within a central bank under the acronym ELRIC:
    - (i) the External audit mechanism,
    - (ii) the Legal structure and independence of the central bank,
    - (iii) the financial Reporting,
    - (iv) the Internal audit mechanism, and
    - (v) the system of internal Controls.
- Survey objective and content:
  - Objective:
    - To determine the effectiveness of the IMF’s safeguards assessment policy, and whether the policy has met the objectives of strengthening safeguards and minimizing misreporting.
    - To elicit views from central banks on the efficiency of the safeguards assessments and suggest ways of improving the process.
    - Answers will be reflected in a report submitted by the independent panel to the Executive Board of the IMF.
  - Sample survey questions:
    1. Did the safeguards assessment improve the way your central bank operates in the areas of external audit, legal structure, financial reporting, internal audit, and internal controls?
    2. Do you believe that safeguards assessments have helped to reduce risk, increase transparency, and add to the accountability and credibility of the central bank and of the IMF as a prudent lender? Please explain, as necessary.
    3. Have safeguards assessments assisted or helped leverage changes that were already being contemplated at the central bank?
    4. Was the safeguards assessment conducted in an efficient manner? Please explain how any underlying concerns affected the efficacy of the process.
    5. What is the best way for the IMF to monitor safeguards at your central bank?
    6. Do you have any suggestions to improve the modalities of safeguards assessments to enhance their effectiveness and efficiency?
    7. Please provide any other general comments you wish to make.
- Central banks surveyed (list of 27):
  - Albania
  - Argentina
  - Armenia
  - Banque des Etats de l’Afrique Centrale
  - Bolivia
  - Bosnia and Herzegovina
  - Brazil
  - Bulgaria
  - Colombia
  - Georgia
  - Ghana
  - Guinea
  - Honduras
  - Indonesia
  - Jordan
  - Malawi
  - Mauritania
  - Mongolia
  - Pakistan
  - Paraguay
  - Romania
  - Rwanda
  - Sri Lanka
  - Tanzania
  - Turkey
  - Ukraine
  - Vietnam

*Source: _013105 - Section 2*

### Section 1

### Report of the Independent Panel on Safeguards Assessments — Section 1

### Executive Summary
- Mandate and timing:
  - An independent panel of four deputy central bank governors was convened to review the Safeguards Assessments (SA) policy in early 2005, pursuant to the Executive Board’s March 2002 review.
  - Panel presentation date: January 31, 2005.
- Survey and methodology:
  - A brief survey was distributed to 27 central banks that have undergone a safeguards assessment; 26 central banks responded.
  - The panel used survey responses, follow-up conversations with central bank staff, and its own perspective to draft the report.
- Core findings:
  - The SA policy has been highly successful in achieving its objectives.
  - Positive results observed in: improved controls, enhanced transparency and accountability at central banks, reduced risk of misreporting, and enhanced reputation of the IMF as a prudent lender.
  - The SA process has generally been appropriate and efficient.
- Forward-looking emphasis:
  - Safeguards communication is a key area for improvement.
  - Future monitoring should include both off-site and on-site components.

### I. Impact of the Safeguards Assessments Policy
- Overall assessment:
  - Surveyed central banks and panel members agree the SA process has had a markedly positive impact on central banks and enhanced the IMF’s reputation.
- Specific operational improvements attributed to SAs:
  - External audit:
    - Most-cited improvement was a more effective external audit mechanism.
    - Notable changes: first-time appointment of independent and qualified external auditors; increased transparency in auditor appointment; more frequent auditor rotation; enhanced cooperation between external and internal audit functions.
  - Legal structure:
    - Some central banks used SAs to initiate changes enhancing operational independence.
    - Typical implementation: SA recommendations were generally implemented through board resolutions rather than amendments to central bank law; panel members cautioned that pursuing legal amendments could, in some cases, inadvertently weaken independence during political processes.
  - Financial reporting:
    - Many central banks adopted internationally recognized financial reporting frameworks (either IFRS or ECB accounting guidelines) or substantially improved financial reporting due to SAs.
    - First-time publication of audited financial statements was common.
  - Internal audit and internal control:
    - Majority reported establishment or strengthening of internal audit functions, capacity building in auditing and accounting, adoption of risk-based internal auditing, and improvements in reserves management.
    - Development of internal management systems improved control over key risk areas, including those related to IMF data reporting.
- Additional benefits:
  - Creation of financial controller functions integrating budgeting, accounting, and reporting controls in some cases.
  - Adoption of risk management frameworks identifying vulnerabilities and enabling appropriate measures to control and minimize risk.
  - Improvement in internal risk scores reported by at least one central bank.
- Transparency and accountability:
  - Enhanced transparency and accountability widely reported, tied to adoption of international accounting frameworks and appointment of international accounting firms as auditors.
- Panel synthesis:
  - SAs reduced risk of misreporting and substantially improved controls over central bank and IMF resources.
  - SAs formed part of a broader global improvement in governance at financial institutions.

### II. The Safeguards Assessments Process and Monitoring
- Process efficiency:
  - Most central banks found the SA process efficient: off-site preparations in Washington followed by short on-site missions were cited as useful and appropriate.
  - Some central banks wanted more time for off-site documentation gathering or longer on-site missions for more detailed analysis.
  - On-site missions were critical, especially for the first assessment, to ensure central bank ownership and enable communication.
- Communication:
  - Panel members recommend closer and more regular communication between IMF staff and designated central bank counterparts.
- Monitoring modalities:
  - Majority view: a combination of on-site and off-site monitoring is appropriate for implementation and continuous tracking of recommendations.
  - Off-site monitoring should continue to include submission of annual external audit reports and management letters.
  - Several central banks recommended a concise safeguards monitoring matrix to serve as a template for periodic off-site monitoring and/or a tool for central bank self-assessment.
  - Panel view on matrix:
    - A safeguards tracking matrix should include general checklists related to each ELRIC area and track individual SA recommendations for specific central banks.
    - Completion of the matrix should not substitute for IMF staff opinions on the viability of controls.
    - IMF staff should decide case-by-case when on-site monitoring missions are required.
- Note on external-auditor special audits:
  - Some central banks suggested external auditors include a tailored SA-related audit in the ELRIC areas; panel members cautioned this could constitute a conflict of interest and a loss of IMF control over safeguards issues.

### III. Other Suggested Improvements
- Two priority areas for improvement identified by central banks:
  - Safeguards communications and exchange of experiences among central banks.
  - Flexibility in implementation deadlines for safeguards recommendations, taking into account country circumstances and resource constraints.
- Communication enhancements proposed by central banks:
  - Establishment of an SA website and periodic e-mails regarding safeguards developments.
  - Creation of a compendium of safeguards best practices.
  - Regional training and conferences on safeguards issues.
  - Greater coordination between safeguards and IMF technical assistance; central banks reported weak linkage and sparse technical assistance for SA implementation.
  - Clarification of distinctions between SAs and overlapping IMF initiatives (FSAPs, statistics missions, monetary missions, Article IV surveillance, program reviews); resident representatives often relatively unaware of specific safeguards issues.
- Panel recommendations on communication:
  - Promote central bank ownership of the safeguards process by:
    - Communicating more regularly with central bank staff on safeguards issues;
    - Establishing a website containing a compendium of safeguards knowledge;
    - Facilitating regional and global forums on safeguards issues.
- Flexibility:
  - Panel recommends continued flexible application of the SA policy, with consideration of specific country circumstances and resource constraints when developing recommendation deadlines.

### IV. Conclusion
- Overall finding:
  - The panel finds the safeguards policy a success: improved central bank control systems and greater safeguarding of IMF resources than previously.
  - Surveyed central banks were broadly pleased with SA effects despite implementation challenges for some recommendations.
  - The policy has made significant progress in accomplishing its main objectives as set out in 2000.
- Monitoring recommendations:
  - Future monitoring should include both off-site and on-site components.
  - Off-site monitoring should include an SA tracking matrix submitted by central banks to the IMF.
  - The on-site component should remain at the discretion of IMF staff; the combination ensures active monitoring while maintaining flexibility.
- Communication and even application:
  - The IMF should enhance communication with key safeguards stakeholders using workshops and a website.
  - The IMF should continue to apply safeguards principles evenly, taking into account specific country circumstances and resource constraints when establishing implementation deadlines.

*Report of the Independent Panel on Safeguards Assessments (Section 1), presented to the Executive Board of the International Monetary Fund, January 31, 2005.*

### Section 2

### _013105 - Section 2

### Panel access, confidentiality, and rights
- The panel will have access to all information in possession of the IMF in regard of safeguards assessments and will elicit the views of central bank authorities that have undergone a safeguards assessment.
- Each panel member undertakes to protect the confidentiality of all information obtained in the course of the review.
- The IMF reserves the exclusive rights to the written views of the panel and panel members undertake not to publish any part of these views separately.

### Review period, meetings, and schedule
- The panel’s review will be conducted during the period November 2004–January 2005.
- Meetings requiring attendance:
  - Washington, D.C.: November 18–19, 2004
  - Paris, France: January 27–28, 2005
- The chair of the panel will be invited to be present at the Board meeting, which is scheduled for March 2005.

### Background materials, preparatory work, and first-visit objectives
- Background information to be provided in advance of the November meetings:
  - Background information on the safeguards experience
  - A list of central banks that have undergone a safeguards assessment
  - Suggested survey questions
  - A draft outline of the IMF staff paper
- During the Washington visit, panel members will:
  - Obtain all additional documentation necessary for their assessment
  - Meet with the external consultant and IMF staff
- At the conclusion of the first visit, the panel should agree on:
  - The number of central banks to be surveyed.
  - The specific central banks to be surveyed.
  - The content of the survey.
  - The central banks that each panel member will contact by phone for follow-up interviews.
  - The procedural modalities for the remainder of the review process, including the dates of the meeting in Paris; procedures to review the draft report prepared by the external consultant under the guidance of the panel; and allocation of areas of responsibility for finalizing the report, etc.

### Second meeting, report finalization, and Board submission
- At the second meeting, scheduled for January 27–28, 2005, the panel will finalize its report with the assistance of the external consultant.
- IMF staff will provide a draft of its board paper to the panel in advance of the second meeting and the panel will make its report available to IMF staff before its finalization.
- Both the staff report and the panel’s report will be issued to the Board for its consideration.

### Logistics and administrative support
- The first meeting will take place in Washington, D.C. The second meeting will take place in Paris, France.
- Administrative services will be provided to the panel members by the IMF.

### Safeguards policy framework and ELRIC acronym
- The safeguards policy is an ex ante mechanism to strengthen the IMF’s framework of measures to safeguard the use of Fund resources and minimize the possibility for misreporting.
- Safeguards Assessments are conducted for central banks and consider the adequacy of five key areas of control and governance within a central bank under the acronym ELRIC:
  - (i) the External audit mechanism,
  - (ii) the Legal structure and independence of the central bank,
  - (iii) the financial Reporting,
  - (iv) the Internal audit mechanism, and
  - (v) the system of internal Controls.

### Survey objective and content
- Objective:
  - To determine the effectiveness of the IMF’s safeguards assessment policy, and whether the policy has met the objectives of strengthening safeguards and minimizing misreporting.
  - To elicit views from central banks on the efficiency of the safeguards assessments and suggest ways of improving the process.
  - Answers will be reflected in a report submitted by the independent panel to the Executive Board of the IMF.
- Sample survey questions:
  1. Did the safeguards assessment improve the way your central bank operates in the areas of external audit, legal structure, financial reporting, internal audit, and internal controls?
  2. Do you believe that safeguards assessments have helped to reduce risk, increase transparency, and add to the accountability and credibility of the central bank and of the IMF as a prudent lender? Please explain, as necessary.
  3. Have safeguards assessments assisted or helped leverage changes that were already being contemplated at the central bank?
  4. Was the safeguards assessment conducted in an efficient manner? Please explain how any underlying concerns affected the efficacy of the process.
  5. What is the best way for the IMF to monitor safeguards at your central bank?
  6. Do you have any suggestions to improve the modalities of safeguards assessments to enhance their effectiveness and efficiency?
  7. Please provide any other general comments you wish to make.

### Central banks surveyed
- The surveyed central banks were:
  - Albania
  - Argentina
  - Armenia
  - Banque des Etats de l’Afrique Centrale
  - Bolivia
  - Bosnia and Herzegovina
  - Brazil
  - Bulgaria
  - Colombia
  - Georgia
  - Ghana
  - Guinea
  - Honduras
  - Indonesia
  - Jordan
  - Malawi
  - Mauritania
  - Mongolia
  - Pakistan
  - Paraguay
  - Romania
  - Rwanda
  - Sri Lanka
  - Tanzania
  - Turkey
  - Ukraine
  - Vietnam

*Source: _013105 - Section 2*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2005/_013105.pdf_