## _070110 - Executive Summary ## Source details **Canonical URL:** [_070110 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110.pdf.json) --- ### Objectives, experience, and scope - Marks the 10th anniversary of the safeguards policy introduced in March 2000. - Main objective: to mitigate potential risks of misuse of resources, including Fund resources, and misreporting of monetary program data. - Policy evolution and oversight: - Last reviewed in 2005; Executive Board re-affirmed the policy’s effectiveness and its application to central banks. - A panel of experts advised the Executive Board on implementation and future focus and application. - Key factual outcomes and trends: - As of end-March 2010, 165 safeguards assessments of 75 central banks had been completed. - Data indicate greater transparency and improved control systems in central banks, alongside continued occurrences of control overrides. - Core policy emphasis: - Strong governance and independent oversight mechanisms are necessary to ensure controls function and are not subject to abuse. - Safeguards assessments help identify emerging governance and misreporting issues but cannot fully eliminate risk of control overrides. ### Key activities, phases, and methodology - Two phases of safeguards work: - First-time (initial) and update assessments for new arrangements. - Monitoring of safeguards frameworks at central banks while credit is outstanding. - Trends and drivers: - Focus shifted from initial assessments to update assessments for successor arrangements over the decade. - Assessment activity varies with volume and nature of financing arrangements: annual output declined after 2005 but increased sharply with renewed lending. - In 2005–2008 a greater proportion of work focused on PRGT arrangements; more recently a balanced mix of PRGT and GRA arrangements increased initial assessments. - Six voluntary assessments were conducted in the last five years. - Monitoring approach: - Risk-based monitoring methodology introduced after the 2005 review. - Minimum monitoring: annual desk reviews of financial statements and related external audit reports, staff contact with area department teams and central bank officials. - Monitoring records are key inputs into update assessments and enabled streamlining (shorter, targeted update missions; greater use of headquarters-based work for lower-risk cases). - Transitional note: - 27 abbreviated assessments of the external audit mechanism only were conducted in 2000–2002 under transitional procedures. ### Evolving modalities and flexibility - Phased assessments for post-conflict countries: interim assessments focused on external audit mechanism and controls over foreign reserves and monetary program data reporting; full assessment later. - Tailored monitoring work programs for country-specific risk factors. - Use of indicators to signal emerging safeguards issues and trigger targeted re-assessments. - During emergency financing in 2008–09, adapted procedures drew on the monitoring framework to identify significant safeguards risks early. - Specific adaptation for new lending instruments (RCF and FCL) — see New lending instruments section. ### Lessons learned, panel input, and proposed changes - Staff assessment: safeguards policy continues to serve the Fund well and helps maintain the Fund’s reputation as a prudent lender. - Panel-proposed measures include: - Updating the ELRIC framework to: - (i) include consideration of key principles of good governance to sharpen focus on governance, and - (ii) give greater prominence to risk management. - Adapting modalities: - Harness technology to make safeguards relationship with central banks more open and collaborative. - Improve interaction with large external audit firms to address audit quality issues. - Possible mandate for safeguards assessments in budget financing: - Staff identified a possible approach to assessing fiscal safeguards risks at the state treasury level, partly based on recent fiscal ROSCs; staff could revert with a specific proposal if Directors see merit. - Wider dissemination of safeguards findings as part of a phased move to enhanced transparency while keeping reports confidential at this time. ### Panel conclusions and staff response - Panel concluded assessments and monitoring framework effectively met policy objectives. - Panel report addresses key measures and recommends further adaptations over time. - Staff concurs and will operationalize observations by building on existing materials and safeguards tools and working with country authorities. *Source: _070110 - Executive Summary (Executive Summary section).* --- ### New lending instruments, budget financing, and communications ### New lending instruments: RCF and FCL - Rapid Credit Facility (RCF): - Requesting members commit to undergo a safeguards assessment and authorize staff access to the central bank’s most recently completed external audit reports and discussions with auditors. - Timing/modalities determined case-by-case; presumed assessment completed before Board approval of any subsequent arrangement to which policy applies. - Flexible Credit Line (FCL): - Safeguards assessments are not conducted for FCL arrangements because eligible countries presumptively have strong institutional arrangements. - Staff authorized to hold discussions with central bank external auditors to ensure recent external audit reports do not raise significant issues. - Note: discussions held as early as practicable; in four of the five FCL arrangements approved so far discussions concluded prior to Board consideration; in the fifth, discussions were held only after approval due to audit cycle timing. ### Budget financing and safeguards scope - Increasing instances where IMF resources disbursed to provide budget financing. - Central bank roles in budget financing cases: - (i) government’s banker and custodian of official foreign exchange reserves, which may service IMF obligations; and - (ii) Fund’s depository for its own currency holdings. - Safeguards assessments apply only to the central bank, not other government entities, but seek to ensure appropriate controls for timely servicing of member obligations to the Fund. - Safeguards objectives/measures in budget financing: - Clear framework between central bank and government for servicing IMF lending; Fund resources deposited with the central bank. - Objective to replicate where Fund resources are on-lent to government by central bank. - External assurances sought for integrity of NIR and NDA performance criteria components sourced outside the central bank. - In absence of well-defined government balance sheets, safeguards called for transparent disclosure of Fund transactions in notes to central bank financial statements. - Terminology: “budget financing” refers to cases where a member uses the domestic counterpart of Fund resources to finance the government budget deficit. ### Communications, outreach, and sharing - Outreach: - Over 500 representatives from 122 central banks and 125 countries participated in semiannual safeguards seminars. - Seminars include external parties (international accounting firms, professional bodies, World Bank). - Staff guidance notes and implementation templates welcomed by central banks. - Regular channels: - Ongoing contact via email, tele- and video-conferencing; central banks provide a designated contact person for safeguards issues. - Publication and internal guidance: - Publication on IMF website of a range of safeguards materials, including annual activity reports, summaries where staff reports are published, and a Fact Sheet; operational guidelines posted on the intranet. - Collaboration: - Stronger and early collaboration with area department teams; increasing interaction with external auditors during assessment work and monitoring. - Sharing safeguards reports: - Reports have been confidential since policy inception. - Since 2005, reports shared with World Bank staff subject to confidentiality criteria and central bank consent. - A total of 44 reports have been shared with World Bank staff; 3 central banks have withheld consent. --- ### Misreporting, governance abuses, and remedial experience ### Recent misreporting and governance cases - Since the last policy review: - Three instances of misreporting of central bank monetary data reviewed by the Board. - Governance abuses arose in three other cases. - Safeguards measures played a key role in detection of two misreporting cases and in one governance abuse case. - Misreporting examples: - Types of inaccurate reporting: international reserves, credit to government, and reserve money. - Mauritania: assessment identified significant data issues initially in foreign exchange reserves; authorities adjusted data on net domestic assets and net domestic financing of the budget. - DR Congo: significant safeguards risks and inaccuracies in reporting of government balances to the Fund. - Tajikistan (2007): inaccuracies in net international reserves and reserve money stemmed from central bank financing of the cotton sector. - Remedial measures: (i) improving accounting systems with Fund-supported technical assistance; and (ii) independent review by external auditors of monetary data as at program test dates. - Governance abuse examples: - Incidents involved fraudulent transactions (see Annex III). - Tanzania: forensic investigations confirmed significant fraudulent transactions through an account administered by the central bank on behalf of government, facilitated by high-level override of controls and weakened Board oversight and internal audit. - Burundi: Inspector General found fraudulent payments based on false documents submitted by the Minister of Finance and central bank Governor; controls overridden and an earlier recommendation for an independent audit oversight body had not been implemented. - CEMAC / BEAC: special audits confirmed misappropriation in period 2004-07, deliberate high-level override, breakdown of controls in Paris Office and BEAC headquarters, absence of effective oversight, and significant risk of unauthorized outflows due to poor oversight and inadequate internal controls. ### High-profile case lessons (Annex III summary) - Control override by executive management is a common theme; prevention requires effective governance and independent oversight rather than more operational controls. - Short-term remedial measures (e.g., special audits, forensic investigations) important but cannot substitute for restoring integrity of control mechanisms and effective governance oversight. - Examples of remedial actions: - BEAC: Action Plan approved December 2009; IMF conditioned program reviews and new programs on BEAC making satisfactory progress; Board consideration of some program reviews postponed due to BEAC delays. - Burundi: semi-annual special audits of controls over significant Fund resources established until restoration of controls confirmed. - Tajikistan: replacement of NBT Chairman, publication of executive summary of special audit, appointment of an international firm to audit 2008 and 2009 financial statements, independent reviews of NIR data at test dates, internal audit outsourcing for near-term coverage. - Tanzania: dismissal of the Governor, criminal investigations, appointment of new Board, reconstitution of Audit Committee chaired by external member. --- ### Safeguards findings, trends, and implementation performance ### Evolution of findings and key trends - Early findings: - Some 14 central banks had no external audit at all. - Few had adopted recognized accounting and financial reporting standards. - Governance oversight weak and internal audit often inadequate. - Tracking across eight vulnerability areas shows movement toward greater transparency and improved control systems over ten years. - Specific trend findings: - Almost 60 per cent of central banks assessed through end-2002 had no or deficient external audit mechanisms; deficiencies included lack of auditor independence and inadequate audits by local firms. - These deficiencies identified in about 25 percent of central banks assessed since 2002 (trend flat). - Around 75 percent of central banks now complete and publish full financial statements, compared with about 55 percent earlier in the decade. - Deficiencies in adoption of benchmark accounting standards: around 30 percent of central banks assessed now, compared with 80 percent at inception. - Internal audit improvements still needed at about 40 percent of central banks assessed, markedly less than earlier findings. - Reserves management practices and controls continue to strengthen, drawing on IMF Reserves Management Guidelines and World Bank RAMP. - Data management processes strengthened more recently; internal audit increasingly covers program data compilation and reconciliations at key milestones. ### Remaining challenges and plateauing progress - Inconsistencies and weaknesses in external audits persist in about one in four central banks: impaired independence and poor understanding of central banking by auditors. - Governance oversight bodies increasingly in place but not always effective; deficiencies found in close to half of all assessments, focusing on scope and professional underpinnings. - Slower progress in strengthening governing legislation; staff uses temporary measures (Board resolution or MOU) to address risks. ### Implementation rates and monitoring (section 21) - Overall implementation rate for some 1006 recommendations as at end-March 2010 was 77.1 percent. - Implementation of priority safeguards recommendations has averaged around 95 percent. - Safeguards monitoring plays an important role through follow-up of prior recommendations. - Safeguards reports typically recommend conditionality for high priority findings, but need for conditionality varies by country circumstances and timing. - Introduction of conditionality reforms in March 2009 does not appear to have significantly impacted implementation rates; early indications show implementation rates have not declined despite removal of structural performance criteria. - Review-based conditionality: - Promotes country ownership and provides flexibility to elevate commitments to structural benchmarks later. - Critical safeguards recommendations can be included as prior actions under program conditionality. - Visibility caveat: absence of waivers may reduce visibility of delayed implementation. ### Annex IV summary statistics (March 2000 to end March 2010) - 1. Recommendations with formal commitment from the authorities - a. Under program conditionality: 1059 6.2 - Of which: Implemented: 101 - Not Implemented: 4 - b. LOI/MEFP commitments: 779 2.2 - Of which: Implemented: 71 - Not Implemented: 6 - 2. Other recommendations: 824 - Of which: Implemented: 604 73.3 - Not Implemented: 220 - 3. Total recommendations (1+2): 1006 77.1 - Of which: Implemented: 776 - Not Implemented: 230 - Overdue less than 3 months: 49 - Overdue 3 months to one year: 94 - Overdue more than one year: 39 - Overdue more than two years: 48 --- ### ELRIC framework updates, risk management, and options for change ### ELRIC framework and governance chapeau - Staff finds ELRIC framework flexible and effective; five ELRIC pillars remain relevant. - Proposed updates to pillar descriptions to reflect developments (e.g., ISA, IFRS, Sarbanes-Oxley, OECD/G30 guidance, UK Walker Report). - Governance chapeau added to explicitly define governance principles overarching ELRIC pillars: - (i) discipline; (ii) transparency; (iii) autonomy; (iv) accountability by key decision-makers; (v) responsibility; (vi) fairness; and (vii) social responsibility. For central banks, fairness and social responsibility are subsumed under responsibility. ### Risk management and integrated risk management frameworks (IRMF) - Panel recommends more attention to IRMF within safeguards framework; staff concurs. - Immediate approach: assess central banks’ approach to risk management within the “C” pillar of ELRIC. - Observations: - Assessments currently ascertain whether an IRMF is in place, but few central banks have formalized and implemented IRMF across functions. - Some banks have centralized risk management and a Risk Management Committee of the Board, but integration across the entity is incomplete. - Capacity constraints exist; sequencing reforms matters—implementing IRMF may be premature before basic ELRIC building blocks are in place. ### Monitoring modalities and operational practice - Policy requirements to continue: - (i) publication of financial statements independently audited in accordance with international standards; and - (ii) deadline of the first program review for completion of a safeguards assessment. - Risk-based monitoring framework remains appropriate; monitoring continues for as long as Fund financing is outstanding. - Monitoring intensities and cycles (Annex II): - Central banks divided into four groups determining work program intensity and monitoring cycle length. - Monitoring intensities rated High or Medium-High have a 12 month cycle. - Monitoring intensities rated Medium-Low and Low have an 18 month cycle. - Minimum monitoring includes desk reviews of financial statements, management letters and staff reports, and ongoing contact with area department staff and central bank contacts. - Monitoring can trigger reassessment or update assessments if significant risk events arise. - Monitoring supported by Paisley database since May 2008; planned upgrade in 2010 for streamlined reporting and management oversight. ### Options and tool enhancements - Suggested enhancements: - Improve internal collaboration and staff awareness of safeguards relevance to program and TA work. - Examine peer review or regulator reports in assessing external auditor quality. - Incorporate assessment of whistle-blowing mechanisms into the safeguards toolkit. - Explore technology platforms (extranet, social networking tools) to make the process more open and support self-assessment. - Conduct an annual forum at global firm level for audit quality (“top down” approach) complementing “bottom up” efforts. --- ### Budget financing challenges and targeted state treasury assessments ### Limits of current safeguards and possible extensions - Current mandate covers central banks only; does not provide assurances about entities beyond the central bank. - Extending safeguards to fiscal issues would require a new mandate and faces practical obstacles: - Informational obstacles on government accounts quality and timing and wide dispersion of practices. - Safeguards assurances beyond central government (state enterprises, lower tiers) not feasible given PFM weaknesses in many developing countries. - Conclusion: a safeguards assessment of the whole of government remains unfeasible. ### Instruments providing limited fiscal assurances - Existing instruments: - 1998 Code of Good Practices on Fiscal Transparency and voluntary fiscal ROSCs covering more than 90 countries. - Manual on Fiscal Transparency updated in 2007. - PEFA Performance Measurement Framework (2005) with 28 indicators covering PFM effectiveness. ### Possible additional steps for budget financing cases (standardizable steps) - Formalize central bank involvement requirements: - (i) maintenance of a specific government account at the central bank to receive Fund resources; - (ii) government should hold foreign exchange balances only with the central bank; and - (iii) clear framework agreement between central bank and government on responsibilities for servicing obligations to the Fund. - Consider more explicit reporting to the Board on known fiscal safeguards risks drawing on ROSC and PEFA, while avoiding expectation that these diagnostics provide entity-level safeguards assurances. ### Targeted assessment of the state treasury (proposal and limits) - Staff identified an approach for a narrow assessment focused on criteria derived from the Fiscal Code to evaluate the state treasury and core budget/spending process. - Implementation caveats: - Framework would need further development and piloting. - Many members, particularly low-income countries, may face difficulties complying with criteria; remedial actions may be hard to implement. - Overlap with other multilateral partners (notably the World Bank) possible; Fund is not lead PFM institution. - Box 5 — tentative end-point criteria for targeted state treasury assessment (examples preserved as end-point objectives): 1. State Treasury operates a main bank account at the central bank through which all government transactions are processed; alternate accounts consolidated regularly; commercial bank accounts preferably zero-balanced or consolidated regularly. 2. All central government expenditure authorized by budgetary appropriation or law; annual budget and amendments approved by parliament defining uses of resources from main central bank account. 3. Main bank account reconciled regularly, reconciling expenditure, revenues and financing flows with account statements. 4. Final accounts prepared by the state treasury using defined national accounting standards aligned on major issues with international standards (e.g., IPSAS); minimum timeliness standard example: within 6 months of year end for developing countries. 5. Final accounts audited by independent commercial or state audit institution according to national standards aligned on major issues with ISA and/or INTOSAI; minimum timeliness standard example: twelve months. 6. Observations by auditors addressed systematically with monitoring by external auditor or Public Accounts Committee. 7. Adequate internal control procedures in place at the state treasury, documented and subject to regular review. ### Institutional implications of extending to state treasury - Would require: - Parallel assessment mandate and product (single-entity focus, single external audit firm interaction, central bank response currently standard). - Engagement with government auditors and access to information and documentation. - Separate reports due to confidentiality and single-entity coverage; consolidation of key findings in country paper for Executive Board. - Additional staffing expertise beyond existing FIN team of accountants. ### Panel position (section 54) - Panel supports adoption of a framework for targeted assessments of state treasuries and found merit in the proposed criteria. - Existing data could be leveraged with due diligence on data quality. - Assessments to be performed independently from other IMF operations with the state treasury. - Next steps if Directors see merit: - Staff to revert with a specific proposal, develop a prototype assessment, identify gaps in ROSC coverage, propose specific modalities, and estimate resource implications. --- ### Confidentiality, dissemination, and phased transparency ### Confidentiality rationale and staff assessment - Staff believes confidentiality has been key to policy implementation, enabling access to sensitive information and encouraging candor. - Fund’s transparency policy calls for disclosure unless there are “strong and specific reasons” not to. - Staff concludes safeguards reports should remain confidential at this time. ### Downside risks of publication - Redactions required for market-sensitive information; agreement on deletions could delay reports and consume resources. - Reports are candid and include precise ELRIC risk assessments that external readers might misinterpret. - Comparator documents (management letters, private due diligence) are typically not public. - Collaboration with external auditors likely to deteriorate; firms could react adversely to public criticism with legal implications. - Voluntary publication by central banks on a case-by-case basis could create negative perceptions when a member chooses not to publish. ### Options for wider dissemination and phased transparency - Possible dissemination options: - Adapt report format to include a bulleted list at the beginning identifying top safeguards-related risk factors for lending to inform staff reports and public disclosures. - Supplement staff reports with an expanded standalone annex describing safeguards measures at the central bank and substantive summary of issues and measures agreed. - Expand annual safeguards activity papers to include aggregate, anonymous findings and corrective actions taken. - Provide formal confidential briefings to donors with central bank consent. - Consider extending World Bank sharing arrangements to other IFIs (ADB, AfDB, EBRD, IADB). - Encourage voluntary publication by central banks of their own safeguards action plans and accomplishments as a middle ground; staff would need modalities and a template for disclosures. --- ### Monitoring framework, tools, and staff resources ### Safeguards monitoring framework (Annex II key points) - Risk-based monitoring methodology implemented after 2005 review. - Policy calls for monitoring central banks previously assessed for as long as member has Fund financing outstanding. - Some 72 central banks were subject to safeguards monitoring work at end-March 2010, of which 44 were low income countries. - A Risk Mitigation Strategy (RMS) determines monitoring intensity across objective criteria. - Monitoring intensities: - High or Medium-High: 12 month cycle. - Medium-Low and Low: 18 month cycle. - Minimum monitoring: desk reviews of financial statements, management letters, staff reports, and ongoing contact with area department staff and central bank designated contacts. - Paisley automated database in use since May 2008; planned upgrade in 2010. ### Staff resources and costs - Safeguards assessments work mainly conducted by a specialized team of 8-10 professional accountants. - Team averaged around 14 FTEs since 2005 including divisional management and support. - Other departments involved: area, MCM, LEG, SPR, STA, and OIA; LEG conducts desk reviews of central bank laws and occasionally participates in missions. - Overall resource envelope stable over last 5 years. - Recent increase in assessment volume accommodated by: - Hiring two additional accountants on limited term positions. - Internal redeployment from OIA. - Significant increase in uncompensated overtime. - Safeguards work represented less than three percent of total staff time allocated to Use of Fund Resources (UFR) over 2005-2009 (based on TRS). - Using FY11 standard costs, direct annual personnel cost of the safeguards team is around $3m, or about $45,000 per central bank monitored. - FINSA staffing and time allocation (Annex V): - FINSA staff FTEs by Calendar Year: 2005: 13; 2006: 13; 2007: 14; 2008: 15; 2009: 17; 2010 (March): 17. - Safeguards assessments and monitoring accounted for around 55 percent of regular FINSA time over 2009-2010. - FINSA time as percent of Total Fund TRS: 0.4 0.4 0.4 0.5 0.6 0.6. - Safeguards (total) as percent of Fund UFR: 2.3 2.6 2.7 3.4 3.7 3.7. - FINSA overtime as percent of regular hours: 9 10 11 13 15 21. - Number of central banks under assessment or monitoring increased from 55 to 72 over 2009-2010, including seven first time assessments and updates of several higher risk countries. - Uncompensated overtime increased to around 15 percent of total regular hours in 2009, and 21 percent in first three months of 2010. ### Activity and mission data (Annex V Table 3 highlights) - Average number of mission days: 9 8 9 8 5 7 6 6. - Number of initial assessments completed (annual entries): 13 2 3 4 1. - Number of update assessments completed (annual entries): 118 10 12 24 5. - Desk-based assessments and monitoring database use facilitated streamlining; update assessments typically shorter absent significant issues. --- ### External audit mechanism and ELRIC pillar objectives ### External audit mechanism (Annex VI and section 1) - Purpose: - Enables an independent auditor to express an opinion on whether financial statements are prepared in accordance with an established framework (e.g., IFRS). - Critical for central bank credibility. - Assessment objective: - Establish whether an independent external audit is conducted regularly in accordance with accepted auditing standards such as ISA. - Verify previous audit recommendations implemented and that external audit opinion is published with full audited financial statements. ### Legal structure and autonomy - Government interference undermines central bank autonomy and increases risks. - Assessment objectives: - (i) establish whether legal framework provides appropriate autonomy and checks and balances; - (ii) ascertain compliance with key legal requirements without interference or override; - (iii) identify other legislation impairing autonomy; - (iv) clarify roles where monetary authority is shared; - (v) ensure legal framework supports other ELRIC pillars. ### Financial reporting, internal audit, and internal controls - Financial reporting: - Assessment objective: ensure central bank adheres to international good practices (e.g., IFRS) for internal and published reporting—relevance, reliability, timeliness, consistency. - Internal audit: - Assessment objective: determine whether internal audits performed per International Standards for the Professional Practice of Internal Auditing and whether function has sufficient independence and authority. - System of internal controls: - Assessment objective: ascertain quality of high level governance and oversight, employee integrity, and commitment to internal competence. - Focus areas: controls in reserves management, accounting, currency and banking operations; measures to ensure accurate and timely reporting of monetary program data. *Source: IMF safeguards review document content provided.* ### Executive Summary ...................................................................................................... ### _070110 - Executive Summary ...................................................................................................... ### Executive summary — objectives, experience, and scope - Marks the 10th anniversary of the safeguards policy introduced in March 2000. - Main objective: to mitigate potential risks of misuse of resources, including Fund resources, and misreporting of monetary program data. - Policy evolution and oversight: - Last reviewed in 2005, when the Executive Board re-affirmed the policy’s effectiveness and its application to central banks. - A panel of experts was invited to advise the Executive Board on implementation and future focus and application. - Key factual outcomes and trends: - As of end-March 2010, 165 safeguards assessments of 75 central banks had been completed. - Data show a general move towards greater transparency and improved control systems in central banks, alongside continued occurrences of control overrides. - Core policy elements emphasized: - Strong governance and independent oversight mechanisms are necessary to ensure controls function and are not subject to abuse. - Safeguards assessments have helped identify emerging governance and misreporting issues but cannot fully eliminate risk of control overrides. ### Key activities and monitoring — volume, phases, and methodology - Two distinct phases in safeguards work: - Conduct of first-time (initial) and update assessments for new arrangements. - Monitoring of safeguards frameworks at central banks while credit is outstanding. - Trends and activity drivers: - The focus shifted over the last decade from initial assessments to update assessments for successor arrangements. - Assessment activity varies with the volume and nature of financing arrangements; annual output declined after 2005 but increased sharply with renewed lending. - In 2005–2008 a greater proportion of work focused on PRGT financing arrangements; recently a more balanced mix of PRGT and GRA arrangements led to an uptick in initial assessments. - Six voluntary assessments were conducted in the last five years. - Monitoring approach: - Risk-based monitoring methodology introduced after the 2005 review; intensity of monitoring varies by underlying safeguards risks (Annex II referenced). - Minimum monitoring: annual desk reviews of financial statements and related external audit reports, staff contact with area department teams and central bank officials. - Monitoring records are a key input into update assessments and have enabled streamlining (shorter, more targeted update missions; greater use of headquarters-based work for lower-risk cases). - Transitional and historical note: - A further 27 abbreviated assessments of the external audit mechanism only were conducted in 2000–2002 under transitional procedures during the experimental phase. ### Evolving modalities — flexibility and instrument adaptations - Flexibility in assessment conduct to reflect country circumstances: - Phased assessments for post-conflict countries: interim assessment focused on external audit mechanism and controls over foreign reserves and monetary program data reporting; full assessment later when operations normalize. - Tailored monitoring work programs for country-specific risk factors and circumstances. - Use of indicators to signal emerging safeguards issues and trigger targeted re-assessments. - Addressing known safeguards risks in program negotiations: - Safeguards monitoring information and discussions with external auditors used to ensure high priority safeguards measures are incorporated in Fund arrangements, even where an update assessment is not completed before Board approval. - During emergency financing in 2008–09, safeguards procedures were adapted to identify significant safeguards risks as early as possible, drawing on the staff’s monitoring framework. - Specific adaptation for new lending instruments: - Modified safeguards modalities to accommodate the Rapid Credit Facility (RCF) and the Flexible Credit Line (FCL). - FCL involves limited safeguards procedures focused on discussions with external auditors of central banks. ### Lessons learned, panel input, and proposed changes - Staff assessment: safeguards policy continues to serve the Fund well and helps maintain the Fund’s reputation as a prudent lender. - Panel input emphasized measures for continuous improvement; key proposed measures include: - Updating the ELRIC framework to: - (i) include consideration of the key principles of good governance to sharpen focus on governance given some high profile governance abuses, and - (ii) give greater prominence to risk management. - Adapting safeguards modalities based on stakeholder-identified issues: - Harness technology to make the safeguards relationship with central banks more open and collaborative. - Improve interaction with large external audit firms to address audit quality issues. - Possible establishment of a mandate for safeguards assessments in the context of budget financing: - Staff identified a possible approach to assessing fiscal safeguards risks at the level of the state treasury, partly based on information from recent fiscal ROSCs. - If Directors see merit in targeted assessments of state treasuries, staff could revert with a specific proposal. - Wider dissemination of safeguards findings as part of a phased move to enhanced transparency: - Staff believes safeguards reports should remain confidential at this time given their prime due diligence focus. - Nonetheless, staff recommends enhanced dissemination of safeguards information to the Executive Board, donors, and the public more generally. ### Panel conclusions and staff response - The panel concluded that the conduct of safeguards assessments and the monitoring framework have effectively met the policy objectives. - The panel’s report (circulated concurrently) addresses the key measures summarized above and recommends further adaptations to the framework over time. - Staff concurs with the panel’s observations and will operationalize them by building on existing material and safeguards tools and working with country authorities. *Source: _070110 - Executive Summary (Executive Summary section).* ### 10. New lending instruments. Safeguards modalities have been modified to ### _070110 - 10. New lending instruments. Safeguards modalities have been modified to ### New lending instruments: RCF and FCL - Safeguards modalities modified to accommodate the Rapid Credit Facility (RCF) and the Flexible Credit Line (FCL). - Rapid Credit Facility (RCF): - A member’s request for assistance under the RCF requires a commitment to undergo a safeguards assessment and an authorization for Fund staff to have access to the central bank’s most recently completed external audit reports and to hold discussions with the auditors. - The timing and modalities of the assessment under the RCF are determined on a case-by-case basis; it is presumed, however, that the safeguards assessment would have been completed before Executive Board approval of any subsequent arrangement to which the Fund’s safeguards policy applies. - Flexible Credit Line (FCL): - Safeguards assessments are not conducted for FCL arrangements on the grounds that eligible countries have strong institutional arrangements in place that would mitigate risks of misuse and misreporting. - Instead, staff is authorized to hold discussions with the central bank’s external auditors with the objective of ensuring that recent external audit reports do not raise significant issues that could place FCL purchases at risk. - Note: Such discussions are held as early as practicable; in four of the five FCL arrangements approved so far, the discussions were concluded prior to the Executive Board’s consideration of the FCL arrangement. In the fifth case, the timing of the audit cycle was such that staff was able to hold such discussions only after the approval of the arrangement. ### Budget financing and safeguards scope - Increasing instances where IMF resources were disbursed to provide budget financing. - In budget financing cases, the central bank serves as: - (i) the government’s banker and the custodian of the country’s official foreign exchange reserves, which will be a source for servicing IMF obligations, and - (ii) the Fund’s depository for its own currency holdings. - Safeguards assessments apply only to the central bank and have not been extended to other government entities in budgetary financing cases, but they seek to ensure appropriate controls for timely servicing of member obligations to the Fund. - Safeguards assessment objectives and measures in budget financing cases: - Looked for a clear framework between central bank and government for the servicing of IMF lending so that their respective roles and obligations are transparent and understood. In all such cases, the authorities have also agreed that Fund resources be deposited with the central bank. - The objective has been to replicate as far as possible the situation where Fund resources are on-lent to the government by the central bank. - Sought external assurances of the integrity of components of NIR and NDA performance criteria that are sourced outside the central bank. - In the absence of well-defined government balance sheets, safeguards assessments have called for the transparent disclosure of Fund transactions in the notes to the central bank’s financial statements. - Terminology note: The term “budget financing” in this paper is used to refer to cases in which a member uses the domestic counterpart of resources received from the Fund to finance the budget deficit of the government. ### Communications and outreach on safeguards - Raising awareness: - Over 500 representatives from 122 central banks and 125 countries have participated in semiannual safeguards seminars, which are case-study based and equip participants to conduct a self-assessment of their own central bank. - Seminars adapted to include presentations from external parties, such as the international accounting firms, professional bodies, and the World Bank. - Staff’s guidance notes, including templates for implementation of safeguards measures, have been welcomed by central banks. - Information disseminated in partnership with central banks and international accounting firms at regional workshops and in ad hoc publications. - Regular communication channels: - Ongoing contact via email, tele- and video-conferencing, especially after safeguards missions and throughout monitoring phases. - Use of video-conferencing enables central banks to maintain close links with staff. - Central banks now provide a designated contact person for safeguards issues, facilitating continued outreach, generally timely official responses, and follow-up of safeguards findings. - Publication and internal guidance: - Publication on the IMF website of a range of safeguards related material, including annual safeguards activity reports, a summary of findings and recommendations for individual assessments (where the respective staff reports are published), and a Fact Sheet. - Staff operational guidelines posted on the intranet. - Collaboration with area departments and external auditors: - Stronger and early collaboration with area department teams; early notification to FIN staff of potential new arrangements ensures early signaling of deviations from key safeguards requirements. - Increasing interaction with external auditors during assessment work and ongoing monitoring to maintain auditor awareness and enable exchanges on safeguards-related audit issues. ### Sharing of safeguards reports - Safeguards reports have been confidential documents since policy inception; they are prepared for an internal purpose and contain confidential information. - Since 2005, reports have been shared with World Bank staff, subject to certain confidentiality criteria and the consent of the central bank. - A total of 44 reports have been shared with World Bank staff, and to date 3 central banks have withheld consent for such sharing. - Box summary of sharing decision (December 2005 Executive Board decision 12/1/05): - Managing Director must obtain satisfactory assurances from the World Bank that the report will be kept confidential, internal distribution restricted, and the report will not be quoted, cited or used in publications; and the consent of the central bank concerned to transmittal of the report. - World Bank staff requests are coordinated through the office of the Head of the Financial Management Sector Board and routed to the Finance Department, which seeks consent of the relevant central bank. ### Recent misreporting and governance abuse cases - Safeguards assessments are preventive and diagnostic; they are not audits and do not provide verification assurances. - Since the last policy review: - Three instances of misreporting of central bank monetary data have been reviewed by the Board. - Governance abuses have arisen in three other cases. - Safeguards measures played a key role in detection of two of the misreporting cases and in one of the governance abuse cases. - In all cases, safeguards measures were core elements of action plans to address underlying weaknesses. - Misreporting case details: - Types of inaccurate reporting included data on international reserves, credit to government, and reserve money. - Mauritania: a safeguards assessment identified significant data issues initially in respect of foreign exchange reserves; subsequent review led to authorities notifying the IMF of adjustments to data on net domestic assets of the central bank and net domestic financing of the budget. - DR Congo: safeguards assessment found significant safeguards risks and inaccuracies in the reporting of government balances to the Fund due to ongoing weaknesses in the central bank’s financial reporting and controls framework. - Tajikistan (2007): authorities notified the IMF of inaccuracies in data reported on net international reserves and reserve money that stemmed from central bank financing of the cotton sector. - Key remedial safeguards measures centered on: (i) improving accounting systems with guidance from Fund-supported technical assistance advisors; and (ii) independent review by external auditors of monetary data as at program test dates. - Governance abuse case details: - Incidents involved fraudulent transactions (Annex III). - Tanzania: external auditors raised concern about a potential serious fiduciary issue; forensic investigations confirmed significant fraudulent transactions through an account administered by the central bank on behalf of government, facilitated by high-level override of controls and weakened central bank Board oversight and internal audit. - Burundi: Inspector General found fraudulent payments based on false documents submitted by the Minister of Finance and the central bank Governor; controls at both central bank and Ministry of Finance were overridden and an earlier recommendation for an independent audit oversight body had not been implemented. - CEMAC / BEAC: following media reports of fraud in its Paris Office, special audits confirmed misappropriation in the period 2004-07, deliberate high-level override and breakdown of controls in both the Paris Office and BEAC headquarters, absence of effective oversight by headquarters, and a subsequent special audit indicated significant risk that unauthorized outflows from BEAC’s reserves could occur due to poor oversight and inadequate internal controls. ### Taking stock — Safeguards findings and trends - Evolution over 10 years: central banks have strengthened their ELRIC frameworks; initial findings revealed significant vulnerabilities across areas. - Early findings: - Some 14 central banks were found to have no external audit at all. - Relatively few had adopted a recognized set of accounting and financial reporting standards. - Governance oversight was weak and internal audit often inadequate. - Tracking findings across eight key areas of vulnerability (Figure 2) shows move toward greater transparency and improved control systems over the last ten years. - Key trend findings: - Almost 60 per cent of the central banks assessed through end-2002 were found to have no or deficient external audit mechanisms; deficiencies included lack of auditor independence and inadequate audits conducted by local auditing firms. - These deficiencies have been identified in only about 25 percent of the central banks assessed since 2002, although the trend is flat. - Around 75 percent of central banks are now completing and publishing their full set of financial statements, compared with about 55 percent earlier in the decade. - Significant improvements in adoption of benchmark accounting standards: deficiencies in this area in around 30 percent of central banks assessed, compared with 80 percent at inception of the policy. - Internal audit practices are being modernized; improvements still needed at about 40 percent of central banks assessed, markedly less than earlier findings. - Reserves management practices and controls continue to strengthen; staff has seen a more structured approach drawing on the IMF’s Reserves Management Guidelines and partnership with the World Bank’s Reserves Advisory Management Program (RAMP). - Data management processes have been strengthened more recently; internal audit increasingly covers program data compilation and reconciliations at key milestones, such as test dates. - Remaining challenges and plateauing progress: - Inconsistencies and weaknesses in external audits persist in about one in four central banks; issues include impaired independence and poor understanding of central banking by auditors. - Governance oversight bodies (independent audit committees, investment committees) increasingly in place but not always effective in practice; deficiencies found in close to half of all assessments, focusing on scope and professional underpinnings rather than formal mandate. - Slower progress in strengthening governing legislation due to practical difficulties in enacting new laws; staff addresses risks through temporary measures such as a Board resolution or a MOU between government and central bank. - Adaptation of ELRIC analysis: - Preponderance of update assessments shifts focus to developments and emerging risks since last assessment (e.g., review of practices of a new audit firm). - Modernization of internal audit and financial reporting functions runs along a spectrum; update assessments focus on extent to which reliance can be placed on these functions and whether weaknesses need mitigation. - Controls and audit procedures under the “C” component of ELRIC now include currency and banking operations in light of experience with fraud investigations. *Source: IMF safeguards review document content provided.* ### 21. The implementation rate of safeguards recommendations has remained high ### 21. The implementation rate of safeguards recommendations has remained high ### Implementation rates and monitoring - Overall implementation rate for some 1006 recommendations as at end-March 2010 was 77.1 percent. - Implementation of priority safeguards recommendations has averaged around 95 percent. - Safeguards monitoring plays an important role through follow-up of prior recommendations. - Safeguards reports typically recommend that conditionality is warranted for high priority findings, but: - The need for conditionality varies according to country specific circumstances and the timing for implementation of safeguards measures. - Formal conditionality becomes moot when central banks have already addressed a safeguards finding prior to program approval (or the first review). ### Conditionality reforms and effects - The introduction of conditionality reforms in March 2009 does not appear to have had a significant impact on implementation rates. - Early indications: implementation rates have not declined despite the removal of structural performance criteria. - Review-based conditionality: - Helps promote country ownership. - Provides greater flexibility in elevating commitments to structural benchmarks at a later stage of an arrangement. - Critical safeguards recommendations can continue to be considered for inclusion as prior actions under program conditionality. - Visibility caveat: the absence of any needed waivers may somewhat reduce the visibility of delayed implementation of safeguards measures. ### Dissemination and confidentiality - 2008: staff received requests in two country cases from the donor community for details about safeguards assessment mission findings. - Staff could point to expected publication of summary findings through staff reports and annual activity papers, but could not provide comprehensive briefings on mission detailed findings due to confidentiality of the reports. ### Lessons learned — key findings - Safeguards assessments signal IMF emphasis on due diligence as an essential component of program design; strong governance and control frameworks at central banks help safeguard Fund resources and reduce misreporting risk. - Control override by executive management is a common theme in high-profile governance abuse cases; preventing such override requires effective governance and independent oversight rather than more operational controls. - Improvements in operating controls, internal audit review, and external audit and financial reporting need to be complemented by effective oversight mechanisms (e.g., independent audit committee) and a sound overarching governance framework. - Update assessments show challenges in sustaining ELRIC frameworks at central banks: - Progress uneven across countries and assessment areas. - Improvements in internal controls have generally lagged behind strengthening of financial reporting frameworks. - New measures (e.g., introduction of an internal audit function) can be vulnerable to departure of key personnel. - Audit committees are not always adequately equipped for effective oversight. - These challenges underscore the need for continued vigilance and a risk-based monitoring framework. - Ownership of safeguards measures is key to sustaining effectiveness: - Central banks often see advantages beyond IMF objectives and generally welcome safeguards findings when aligned with their reform goals. - A very few central banks object to requirements like external audit or publication of financial statements; others question prioritization or urgency of recommendations. - External auditors remain important partners, provided quality is maintained: - External audits serve as an independent “first line of defense” and provide independent verification of assets and liabilities. - External audits do not guarantee against fraud due to relatively narrow scope and materiality thresholds (example: BEAC case involved fraudulent payments below audit materiality thresholds). - Audit quality can be uneven and deteriorate quickly; delays in releasing signed audit opinions can mask issues. - Continued vigilance by staff over status and timing of external audits is important, including periodic follow-up with central banks and auditors. - Raising awareness of safeguards risks among stakeholders is a key driver to meet policy objectives: - Central bank staff increasingly introduce data reconciliations with audited financial statements as standard procedure. - Raised awareness by external auditors and area department teams has helped identify and address inconsistencies and potential misreporting. - Publication of special investigations into high-profile cases has raised awareness and may deter future fraudulent activities. - Reputation effects: - Fast, decisive action by country authorities, with IMF assistance to diagnose problems, publish investigative findings, and take remedial actions, positions the Fund as a respected partner. - Unexpected emergence of governance abuse into the public domain without direct IMF involvement can create the impression the Fund was “asleep at the wheel.” - Continued engagement in a trusted advisor role is a key consideration. ### Box 3 — Observations from the High Profile Governance Abuse Cases - It is important that the substance of governance and control measures is present, and not just the legal form. For example, oversight bodies need to be effective, and not just exist in form. - The control environment is dynamic and may deteriorate over time. No control framework can guarantee against the willful override of controls, but it may facilitate earlier detection. - Ex-ante and ex-post controls are important, especially over government accounts and accounts maintained abroad. - Frauds can be perpetrated in a non-core function of the central bank, where transactions are rare or exploitation of gaps in controls may go unnoticed. - Central bank staff needs to have access to appropriate channels to report fraud or questionable behavior. - A quality external audit can play a key role in uncovering the fraud. Staff needs to remain vigilant to identify cases where external auditors face any restrictions of scope. - Short term remedial measures are important but cannot substitute for the restoration of the integrity of control mechanisms and effective governance oversight. ### Summary of safeguards effectiveness - Safeguards assessments have helped identify emerging governance abuse and misreporting issues at central banks but cannot eliminate control overrides. - Improved operating controls, internal audit, external audit, and financial reporting need to be complemented by sound governance oversight and independent mechanisms to deter control override. - Important factors identified: - The monitoring framework to ensure sustainability of safeguards measures. - Maintaining focus on underlying objectives to ensure stakeholder ownership. - Raising awareness of safeguards issues to deter and detect misreporting and misuse of IMF resources. - Remaining vigilant on external audit quality and reacting to emerging indicators of vulnerability. ### Staff resources and costs - Safeguards assessments work is mainly conducted by a specialized staff team of 8-10 professional accountants. - The team has averaged around 14 FTEs since 2005, including divisional management and support. - Other departments involved in review: area, MCM, LEG, SPR, STA, and OIA; LEG conducts desk reviews of central bank laws and occasionally participates in missions. - The overall resource envelope has stayed quite stable over the last 5 years. - Recent increase in assessment volume was accommodated by: - Hiring two additional accountants on limited term positions. - Internal redeployment on a temporary basis from OIA. - A significant increase in uncompensated overtime. - Safeguards work represented less than three percent of total staff time allocated to Use of Fund Resources (UFR) over 2005-2009 (based on TRS). - Using FY11 standard costs, the direct annual personnel cost of the safeguards team is around $3m, or about $45,000 per central bank monitored. ### Looking ahead — options for change - Staff view: the safeguards policy continues to serve the Fund well and helps maintain the Fund’s reputation as a prudent lender. - Panel affirmation: stakeholders broadly approve the policy and acknowledge its value. - Areas examined for potential change: - Appropriateness of changes in scope and focus of safeguards assessments at central banks. - Options for providing safeguards assurances of fiscal fiduciary risks in cases of budget financing. - Issues surrounding confidentiality of safeguards reports. ### Scope and focus of safeguards assessments (ELRIC framework) - Staff believes the inherent flexibility of the ELRIC framework remains effective. - The five ELRIC pillars are sufficiently encompassing to accommodate new control and related benchmarks; none of the components is redundant or irrelevant. - The panel endorsed applicability of the framework and recommended continuous improvements. - Proposed updates: - Descriptions of the five ELRIC pillars could be updated to reflect developments in control frameworks over the past 10 years (e.g., Sarbanes-Oxley Act of 2002, strengthened national legislations on audit committees, expanded international auditing and accounting standards, OECD and Group of 30 governance guidance, UK Walker Report of July 2009). - Staff proposes updating the description of the five ELRIC pillars and adding key principles of governance as a chapeau to explicitly define governance principles as overarching the ELRIC pillars. - Integrated risk management frameworks (IRMF): - Panel recommends more attention to IRMF within safeguards framework. - Staff concurs: the effectiveness of central banks in managing their own risks affects the degree of risk exposure for the Fund. - Assessments currently ascertain whether an IRMF is in place, but few central banks have completed formalizing and implementing an IRMF across functions. - Some banks have centralized risk management and established a Risk Management Committee of the Board, but integration across the entity is incomplete. - Capacity constraints exist in implementing IRMF in substance rather than just form. - Appropriately sequenced reforms are important; implementing an IRMF may be premature before basic ELRIC building blocks are in place. *Source: IMF safeguards policy chapter excerpt.* ### 40. In the context of the goal of continuous improvement in the safeguards ### _070110 - 40. In the context of the goal of continuous improvement in the safeguards ### Risk management and ELRIC framework updates - Staff recommends greater prominence to risk management in safeguards assessments and consideration of central banks’ progress towards an IRMF. - For the immediate future, central banks’ approach to, and progress with, risk management can be assessed within the “C” pillar of the ELRIC framework. - Box 4 — Changes to the ELRIC Framework: - The descriptions of the external audit (“E”) and financial reporting (“R”) now refer to International Standards on Auditing (ISA) and International Financial Reporting Standards (IFRS) as accepted international benchmarks. - The description of the internal audit mechanism (“I”) revised to reflect the emergence of International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors. - The description of the legal structure and autonomy (“L”) revised to reflect improved central bank governance and autonomy, lessons on limiting outside interference (besides government credit), reduced need to focus on statutory audit/financial reporting/publication requirements, and the shift towards monetary policy as principal objective reducing the role of credit to government as a source of impaired autonomy. - The description of the system of internal controls (“C”) updated to reflect evolution in control models and good governance, placing greater emphasis on the control environment established by top management and governance/oversight from the highest level. - A governance chapeau was added to the ELRIC framework describing attributes of good corporate governance: (i) discipline; (ii) transparency; (iii) autonomy; (iv) accountability by key decision-makers; (v) responsibility; (vi) fairness; and (vii) social responsibility. For central bank purposes, fairness and social responsibility are subsumed under responsibility. ### Monitoring modalities and operational practice - Key lessons from experience: - Importance of continued vigilance in monitoring, quick and appropriate reaction to emerging issues, focus on areas critical to safeguarding Fund resources, and adapting remedial measures to country circumstances to ensure ownership. - Policy requirements that should continue to be applied consistently: - (i) the publication of financial statements that have been independently audited in accordance with international standards; and - (ii) the deadline of the first program review for completion of a safeguards assessment. - The existing risk-based monitoring framework remains broadly appropriate and depends on cooperation of central banks and their external auditors. - Monitoring continues for as long as Fund financing is outstanding, but staff has sometimes found it difficult to obtain required monitoring documentation once an arrangement has concluded. Shortening the monitoring period (e.g., to one year after the conclusion of an arrangement) or adjusting it by underlying risk could help but would negate advantages of staying engaged. - Staff proposal on monitoring information: - Central banks should continue to provide monitoring information in accordance with current requirements. - Instances of non-receipt of such information should be explicitly flagged in staff reports. - Monitoring documentation comprises financial statements, management letters issued by the external auditors, and authorization to hold discussions with the external auditors.15 ### Stakeholder concerns, collaboration, and technology - Stakeholders emphasized closer collaboration with central banks and systematic addressing of external audit quality concerns. - Suggested enhancements: - Explore technology platforms (extranet websites, social networking tools) to make safeguards process more open, collaborative, and to promote self-assessment techniques. - Increase frequency of dialogue between central bank officials and safeguards team; facilitate cross-country information and knowledge sharing. - Complement existing “bottom up” approach to audit-quality issues with a “top down” approach by conducting an annual forum at the global firm level. ### Adaptations for Fund financing modalities - Limited safeguards procedures applied for FCL cases appear effective in the context of an insurance-type facility and presumptively strong institutions. - Similar adaptations may be feasible for further lending reforms, depending on instrument nature and practical challenges in conducting a safeguards assessment. ### Other proposed modalities and tool enhancements - Staff believes existing modalities can be adapted in several areas noted by the panel: - (i) improve internal collaboration by raising staff awareness of safeguards relevance to program issues and technical assistance work; - (ii) examine peer review or regulator’s reports in assessing the quality of external auditors; - (iii) incorporate assessment of the need for, and appropriateness of, a “whistle blowing” mechanism into the safeguards toolkit. ### Budget financing: limits of current safeguards and potential extensions - Current safeguards framework mandate covers central banks only and does not provide assurances about entities beyond the central bank. - The shift toward budget financing cases has changed the nature of the risk to Fund resources. - Past reviews (2002, 2005) reaffirmed that extending safeguards to fiscal issues would require a new mandate and identified practical obstacles: - Significant informational obstacles on government accounts quality and timing and wide dispersion of practices. - Obtaining safeguards assurances beyond central government (state enterprises, lower tiers) not feasible; PFM systems in many developing countries are often very weak and attainment of whole-of-government standards would require a multi-decade development effort. - Conclusion: A safeguards assessment of the whole of government remains unfeasible. ### Existing instruments providing limited fiscal assurances - Instruments and frameworks in place: - 1998 Code of Good Practices on Fiscal Transparency and voluntary fiscal transparency assessments (fiscal ROSCs) covering now more than 90 countries. - First Manual on Fiscal Transparency issued in 1998; Code and Manual updated in 2007. - PEFA Performance Measurement Framework (2005) with 28 high level performance indicators covering PFM effectiveness; PEFA evaluations are quantitative and score performance against the 28 indicators. - Program design as a safeguard: IMF budget support finances the fiscal deficit and emphasizes quality of budgetary processes, fiscal transparency and accountability, rather than quality of budgetary spending. ### Possible additional steps for budget financing cases - Standardizable steps to incorporate under safeguards policy: - Formalize central bank involvement requirements: - (i) maintenance of a specific government account at the central bank to receive Fund resources;16 - (ii) the government should hold foreign exchange balances only with the central bank; and - (iii) establishment of a clear framework agreement between central bank and government on responsibilities for servicing obligations to the Fund. - Consider a more explicit reporting approach to the Board: staff reports for new arrangements involving budget financing would specifically report on known fiscal safeguards risks drawing on available information (ROSC reports, PEFA). Care required to avoid creating expectation that such procedures provide safeguards assurances, since these diagnostics do not go to entity-level depth. ### Targeted assessment of the state treasury: proposal and limits - Staff identified an approach for a narrow assessment focused on criteria derived from the Fiscal Code to evaluate the state treasury and core budget/spending process, which could provide additional but limited assurances. - Implementation caveats: - The proposed framework would need further development and piloting to ensure value-added outweighs costs. - Many Fund members, particularly low-income countries, may face difficulties complying fully with criteria, and remedial actions may be difficult to implement. - The Fund is not the lead institution among donors on PFM; overlap with other multilateral partners (notably the World Bank) is possible. - Most information for a targeted assessment should be available from recent fiscal ROSCs, though ROSCs may not review all necessary issues systematically and additional information (PEFA, mission work) may be needed. ### Box 5 — Criteria for a Possible Targeted Assessment Covering the State Treasury (tentative outline) - Purpose: end-point objectives for state treasuries; require development and piloting. - Criteria (as end-point objectives): 1. Does the State Treasury operate a main bank account at the central bank through which all government transactions are processed, with legal requirement and practice enforcement; alternate central government bank accounts consolidated regularly and held at the central bank; commercial bank accounts preferably zero-balanced or consolidated regularly? 2. Is all central government expenditure authorized by the budgetary appropriation or other law, with the annual budget and formal amendments approved by parliament defining uses of resources from the main central bank account? 3. Is the main bank account at the central bank (and other possible authorized accounts) reconciled regularly, reconciling expenditure, revenues and financing flows with account statements? 4. Are all central government transactions executed through the state treasury properly accounted for using clearly defined national accounting standards aligned on major issues with international standards such as International Public Sector Accounting Standards, with final accounts produced in a timely fashion? A minimum timeliness standard for final accounts of developing countries could be, for example, within 6 months of the end of the year. 5. Are the final accounts prepared by the state treasury audited by an independent commercial or state audit institution, according to national standards aligned (on major issues) with ISA and/or INTOSAI standards, and are audit reports provided to parliament in a timely manner? A minimum timeliness standard for developing countries providing audited final accounts could be, for example, twelve months. 6. Are observations by the commercial and/or the state auditor addressed to the state treasury to improve financial management processes taken onboard systematically, with monitoring by the external auditor or Public Accounts Committee? 7. Are adequate internal control procedures in place at the state treasury to safeguard public resources, generate reliable financial reports, and comply with applicable laws and regulations, with the system documented and subject to regular review? ### Institutional and practical implications of extending safeguards to the state treasury - Adding the state treasury would require: - A parallel assessment mandate and product given safeguards assessments are typically for one entity and one external audit firm, include authorization for external auditor discussion with Fund staff, and include an official central bank response. - Engagement with other parties (government auditors) and requisite access to information and documentation. - Separate reports likely needed due to confidentiality and single-entity coverage; key findings would need consolidation in the relevant country paper for the Executive Board. - Additional staffing expertise beyond the existing FIN team of accountants. *Source: IMF safeguards policy review content unit _070110 - 40.* ### 54. The panel supports adoption of a framework for targeted assessments of state ### _070110 - 54. The panel supports adoption of a framework for targeted assessments of state ### Targeted assessments of state treasuries - The panel supports adoption of a framework for targeted assessments of state treasuries. - The panel found merit in the proposed criteria for conducting such assessments. - Existing data could be leveraged so long as due diligence by staff ascertains the quality of data. - Assessments would need to be performed independently from other IMF operations with the state treasury, consistent with existing practices for central banks. - Next steps, if Directors see merit, include: - staff will revert with a specific proposal; - develop a prototype assessment; - identify gaps in the availability of fiscal ROSCs and other information relative to recent budget support financing; - propose specific modalities for the conduct of targeted assessments; - estimate the resource implications. ### Confidentiality of safeguards reports — staff assessment and rationale - Staff believes confidentiality of reports has been a key factor in successful implementation of the policy. - Confidentiality has enabled staff to be freely granted access to sensitive information (including those classified as state secrets in some countries), secured physical areas at central banks, and confidential client information contained in external auditor management letters. - Limited availability of safeguards reports encourages candor in assessment reports and protects the Fund’s role as a confidential advisor. - The Fund’s transparency policy (recently amended) calls on the Fund to disclose documents unless there are “strong and specific reasons” not to. - Some central banks see potential benefits from publication, including enhanced accountability for actions to strengthen ELRIC frameworks. - Staff’s conclusion: on balance, safeguards reports should remain confidential at this time. ### Downside risks identified for publication of full reports - Redactions would be needed for potentially market sensitive information; reaching agreement on deletions would deflect attention and require additional discussions with country authorities, delaying reports and consuming staff resources. - Reports are candid and include precise risk assessments by ELRIC category, which could be misinterpreted by external readers with different needs and objectives from the Fund. - Equivalent comparator reports (e.g., the “management letters” issued by external auditors and due diligence reports produced in the private sector for investment decision making) are typically not made publicly available. - Collaboration with external auditors would likely deteriorate; international audit firms could react adversely to public criticism, impairing policy effectiveness and possibly creating legal implications if reports are seen as the reason for loss of clients or used as evidence by litigants. - Voluntary publication on a case-by-case basis, with central bank consent, could create negative perception issues when a member chooses not to publish. ### Options for wider dissemination and phased enhanced transparency - There is scope for wider dissemination of safeguards findings as part of a phased move to enhanced transparency; factual findings have a public good element. - Possible options for broader dissemination of findings both internally and externally: - Adapt the safeguards assessment report format to include a bulleted list at the beginning that identifies the top safeguards-related risk factors for lending; this list could form the basis for what is included in staff reports, bringing a more structured reporting format of safeguards findings to the Executive Board and to the public, when staff reports are published. - Supplement staff reports with an expanded standalone annex that describes the safeguards measures in place at the central bank, and a substantive summary of safeguards issues and measures agreed with country authorities. - Expand the annual safeguards activity papers released to the general public to include findings in an aggregate, anonymous form that reveals issues, not central banks, and indicate corrective actions taken. - Provide formal confidential briefings to donors, if requested and with the consent of the central bank. - Consider extending the current arrangement for sharing reports with World Bank staff to other IFIs (e.g., the ADB, AfDB, EBRD, and IADB). ### Encouraging voluntary publication by central banks - The panel recommends central banks be encouraged to voluntarily publish their own safeguards action plans and accomplishments as a “middle ground” for voluntary public disclosure that would not carry the same risks as publication of full reports. - Because such information would be sourced from confidential Fund documents, staff would need to agree on modalities and a template for disclosures to reduce resource needs for clearing individual disclosures. ### Issues for Board discussion (areas for Directors’ comments) - The appropriateness and effectiveness of the policy in helping mitigate the risks of misreporting and misuse and maintaining the Fund’s reputation as a prudent lender. - The proposals for updating the scope of the safeguards framework through a sharper focus on governance and more attention to risk management as central banks develop capacities in this area. - The proposed adaptations to safeguards modalities to enhance collaboration with stakeholders, including engagement with large international accounting firms to address audit quality issues. - The sufficiency of steps proposed to be a standard part of budget financing cases (paragraph 50) and the merits of an assessment mandate in the context of budget financing that targets risks at the level of the state treasury. - The confidentiality of safeguards assessment reports and the options for wider dissemination of safeguards findings as part of a phased move to enhanced transparency. ### Annex II — The Safeguards Monitoring Framework (key points) - A risk-based monitoring methodology was put in place following the 2005 policy review. - The safeguards policy calls for monitoring of central banks previously subject to an assessment for as long as the member country has Fund financing outstanding. - Some 72 central banks were subject to safeguards monitoring work at end-March 2010, of which 44 were low income countries. - Monitoring focuses on ex-ante prevention of misuse and misreporting through follow-up on the status of safeguards recommendations and identification of emerging new risks. - The risk-based methodology assigns monitoring intensities and adopts uniform work plans based on a number of criteria, starting from existing information from earlier safeguards assessments supplemented by information provided by the authorities and external auditors. - A Risk Mitigation Strategy (RMS) determines the intensity of monitoring based on evaluation across objective criteria. - Central banks are divided into four groups that determine intensity of work programs and the length of the monitoring cycle. - Monitoring intensities rated as High or Medium-High have a 12 month cycle. - Monitoring intensities rated Medium-Low and Low have an 18 month cycle. - At a minimum, monitored central banks are subject to desk reviews of financial statements, management letters and staff reports, and ongoing contact with area department staff and central bank designated contacts. - Monitoring can trigger reassessment or update assessments if a significant or potentially significant risk event arises. - Where implementation rates for safeguards measures are high, monitoring intensity typically declines, releasing staff resources for high profile cases. - Safeguards monitoring has been supported by an automated database since May 2008 called Paisley. - Paisley provides a structured platform for guiding and documenting all safeguards work and supports a library of guidelines, best practice notes, case studies, and an archive of safeguards reports. - A planned upgrade in 2010 will provide further “safeguards user-friendly” streamlining and enhanced reporting for management oversight. - Key aspects of recent ongoing monitoring activities included: - A focus on high-risk areas to ensure adequate management of resources, particularly where there is a high likelihood of future Fund resources being provided under active financing arrangements. - Identification and follow up of “risk triggers” that may indicate emerging safeguards issues. - Update assessment work during the global financial crisis benefited from information from monitoring and earlier assessments (example: design of the Stand-By Arrangement with Iraq, approved by the Board in February 2010, already included three safeguards-related prior actions). - Ongoing contact with internal and external stakeholders, including area department mission teams, resident representatives, central bank officials, and external auditors. *Source: _070110 - 54. The panel supports adoption of a framework for targeted assessments of state (IMF PDF).* ### Annex III. High Profile Safeguards Cases: Experience and Remedies ### Annex III. High Profile Safeguards Cases: Experience and Remedies ### Bank of the Central African States (BEAC) - Context: - BEAC is the regional central bank of the Central African Economic and Monetary Community (CEMAC). - Safeguards assessment cycle: every four years; most recent assessment completed in July 2009. - Key findings: - Possible instances of unauthorized expenses in BEAC’s Paris Office were reported while the assessment was underway. - Special audits (Audit Committee/Internal Audit and an external audit firm) focused on Paris Office operations. - Audits revealed fraudulent transactions at the Paris Office involving deliberate high-level override and breakdown of controls at both the Paris Office and BEAC headquarters. - The Paris Office’s functions expanded beyond its official role, lacked effective oversight by independent bodies, was assigned directly to the Governor’s office, and neither internal nor external auditors had access to it. - Earlier safeguards recommendations from 2001 and 2004 had only limited implementation. Key unimplemented recommendations included strengthening Board oversight, increasing communication between external auditors and the audit committee, and implementing risk-based audit planning. - A subsequent audit (completed in May 2010) revealed significant risk that unauthorized outflows from BEAC’s reserves could occur due to poor oversight and inadequate internal controls. - Remedial measures: - An Action Plan approved by the BEAC Board in December 2009 to strengthen governance and internal controls, including an audit of BEAC headquarters focusing on budgetary and accounting practices. - Remedial measures focused on implementation of time-bound action plans based partly on special audit findings, and heightened staff monitoring of progress and developments. - IMF staff adopted an approach allowing program reviews and new programs for CEMAC countries to proceed conditional on BEAC making satisfactory progress addressing safeguards issues. - Board consideration of program reviews for the Central African Republic and Republic of Congo scheduled for late May were postponed because of BEAC’s delays in implementing some actions. - IMF staff engaged with BEAC and CEMAC authorities to assist in addressing underlying issues that gave rise to safeguard risks. ### Burundi - Context: - The 2008 assessment was conducted amid allegations of a high-level override of controls at the central bank and the Ministry of Finance facilitating significant misappropriations of government resources. - Misappropriations estimated at 1.6 percent of GDP, based on seemingly fraudulent documents submitted by officials at the highest levels of the Ministry of Finance and the central bank. - The Inspector General’s report pointed to substantial irregular government payments made to a third party and highlighted improprieties that may have occurred in 2007. - What went wrong: - Controls were overridden at a high level, with apparent bypassing or override of internal controls at the central bank and the Ministry of Finance allowing alleged significant misappropriations of government resources held at the central bank. - Ex-ante controls over Fund resources and transfers were poorly applied or lacking; authorized signatory protocols fell short of good banking practices. - Earlier safeguards recommendations (priority recommendation of the 2006 assessment) to establish an effective and independent audit oversight mechanism had not been implemented. - No incident reporting mechanism existed to alert stakeholders, such as the Board, of possible unauthorized transactions. - Remedial measures: - Focused on restoration of ex ante and ex post controls. - Importance highlighted of ex ante controls: appropriate authorized signatory protocols requiring additional senior approvals as amounts increase. - Importance highlighted of ex post controls: a risk reporting framework that regularly informs the audit committee, Board and senior management of significant control and audit concerns, and a risk based internal audit function. - Special (semi-annual) audits of the controls over significant Fund resources and transfers were established until restoration of controls could be confirmed by audits. ### Tajikistan - Context: - In late 2007 authorities provided information confirmed as giving rise to misreporting in the context of the PRGF arrangement that concluded in February 2006 (the so-called cotton financing fraud). - During 2007 the National Bank of Tajikistan (NBT) had pledged substantial portions of its foreign reserves and issued numerous guarantees in favor of foreign commercial banks to facilitate loans to the cotton sector. - Authorities commissioned a special investigative and forensic audit to verify revised data and underlying transactions. - What went wrong: - Fraud was fuelled by central bank weaknesses: fragmented accounting, silo organizational structure, inadequate internal audit, and manual procedures for compiling program data that posed high risk of inadvertent error. - Special audit uncovered repeated high level overrides of controls, widespread accounting fraud and forging of documents including bank confirmations provided to external auditors, and a lack of independent oversight. - Misreporting came to light only upon notification by the authorities; external audit failed to detect underlying misreporting because accounting records were extensively falsified, information withheld from auditors, controls overridden at the highest level, and the external audit firm had never signed off on the purportedly final audit reports presented to staff. - Protracted confirmed weaknesses in the NBT safeguards framework: (i) absence of an independent Board; (ii) inadequate internal audit authority, coverage, and capacity; (iii) absence of independent audit oversight directly accessible by internal and external auditors. - Remedial measures: - Actions focused on rebuilding NBT credibility and establishing independent audits of financial statements and program data. - Replacement of the NBT Chairman and publication of the executive summary of the special audit report as initial steps. - Bank adopted an action plan to implement recommendations of the special audit report. - Appointment of an international firm to audit the 2008 and 2009 annual financial statements. - Independent reviews of the net international reserves data introduced for each test date under the ECF arrangement. - Internal audit of the bank’s foreign exchange lending and liquidity support activities outsourced to an external consulting firm to ensure adequate near-term audit coverage and to build internal capacity over time. ### Tanzania - Context: - Safeguards assessment of the Bank of Tanzania (BoT) conducted in 2003 concluded BoT had a relatively sound control environment but recommended implementing IFRS and appointing an external auditor with expertise in IFRS, ISA, and information systems audits. - During FY 2005/06 audit, the external auditor raised concerns about a potentially serious fiduciary issue; the auditor’s contract was then terminated by BoT management. - Scheduled sixth review under the PRGF arrangement was delayed; review completed on basis of a supplementary letter of intent from the Minister of Finance explaining alleged fraudulent transactions involving the External Payments Arrears account (EPA) and steps to address them, including a forensic audit by an international audit firm agreed with Fund staff. - Forensic audit completed in late 2007 identified fraudulent transactions of about 1 percent of GDP. - What went wrong: - Controls were deliberately overridden at a high level. Excessive authority vested in the Governor who served as Governor, Chairman of the BoT Board, and Chairman of the Audit Committee. - Checks and balances failed: the BoT Board was informed of auditors’ concerns but there was limited follow-up; for much of the period there was no head of the Internal Audit Department (IAD), IAD staff were denied access to information and denied access to the Audit Committee. - Remedial measures: - Key measures taken upon receipt of the forensic audit report and later strengthened via an updated safeguards assessment. - January 2008: authorities issued a press release detailing forensic audit conclusions and steps underway. - Actions taken included dismissal of the then-Governor of the BoT, launching criminal investigations against all those involved, appointment of a new Board of Directors of the BoT, and reconstitution of the Audit Committee now chaired by an external member of the Board with the Governor no longer a member. ### Annex IV — Implementation of Safeguards Recommendations (March 2000 to end March 2010) - Summary statistics: - 1. Recommendations with formal commitment from the authorities - a. Under program conditionality: 1059 6.2 - Of which: Implemented: 101 - Not Implemented: 4 - b. LOI/MEFP commitments: 779 2.2 - Of which: Implemented: 71 - Not Implemented: 6 - 2. Other recommendations: 824 - Of which: Implemented: 604 73.3 - Not Implemented: 220 - 3. Total recommendations (1+2): 1006 77.1 - Of which: Implemented: 776 - Not Implemented: 230 - Overdue less than 3 months: 49 - Overdue 3 months to one year: 94 - Overdue more than one year: 39 - Overdue more than two years: 48 ### Annex V — Staff Resources - FINSA composition and staffing: - Safeguards assessments work averaged less than 15 FTE’s in recent years. - FINSA historically comprised of a Chief, Deputy Chief, 8-9 accountants, a research officer and three assistants. - Composition changed during 2009 and 2010: two additional accountants hired on limited term positions; one assistant position eliminated. - Staff resources for evaluation of central bank legal frameworks provided by Legal Department (LEG) staff. - Table 1: FINSA staff in terms of FTE’s (Calendar Year) - 2005: 13 - 2006: 13 - 2007: 14 - 2008: 15 - 2009: 17 - 2010 (March): 17 - Allocation of FINSA time: - Safeguards assessments and ongoing monitoring accounted for around 55 percent of total regular FINSA time over 2009-2010. - FINSA division team time represents about 0.4-0.6 percent of total Fund time reported in TRS. - Direct safeguards assessment work by FINSA represented 2.6-3.7 percent of total staff time allocated to the Use of Fund Resources over 2006-2010. - Table 2: FINSA and Fund UFR Time: TRS regular hours as percent of total (Calendar Year) - FINSA as percent of Total Fund TRS: 0.4 0.4 0.4 0.5 0.6 0.6 - Safeguards (total) as percent of Fund UFR: 2.3 2.6 2.7 3.4 3.7 3.7 - Safeguards (country specific) as percent of Fund UFR: 1.6 1.5 1.9 2.7 2.9 2.9 - FINSA overtime as percent of regular hours: 9 10 11 13 15 21 - 2009–2010 activity and workload management: - Number of central banks under assessment or monitoring increased from 55 to 72 over 2009-2010, including seven first time assessments and update assessments of several higher risk countries. - Uncompensated overtime increased to around 15 percent of total regular hours in 2009, and 21 percent in the first three months of 2010. - Streamlining measures: greater use of desk-based reviews, smaller and shorter missions (2–4 people), tele- and video-conferencing, machine-based translation, use of draft quality documents for final reports. - Table 3: Assessments and Mission Data 2005–March 2010 (in days / counts) - Average number of mission days: 9 8 9 8 5 7 6 6 - Number of initial assessments completed: 13 2 3 4 1 - Number of update assessments completed: 118 10 12 24 5 - Number of assessments completed (initial and update): 12 11 12 15 28 6 - Number of missions completed: 7 8 10 12 2 13 - Percent of total country time spent on the 5 most resource intensive central banks: 3 2 40 41 29 23 60 - Note: desk-based assessments and use of monitoring database facilitated streamlining; update assessments typically shorter unless significant issues arise. ### Annex VI — An Updated ELRIC Framework - Governance as overarching theme: - Governance in the safeguards context aligns with good governance principles relevant for central bank structure. - Governance attributes are cross-cutting across ELRIC pillars (auditing, financial reporting, internal control systems, legal structure and autonomy). - Key attributes of good governance reflected in ELRIC: - Discipline: senior management’s commitment to observe and promote good governance. - Transparency: necessary to facilitate effective communication to, and meaningful analysis and decision-making by, external parties. - Autonomy: essential for top decision-making bodies (e.g., Board) to operate without undue influence or conflicts of interest; achieved through objective criteria for composition and appointments. - Accountability: decision-makers (Board, committees, top management) have mechanisms to report to, and discuss actions with, the Parliament. - Responsibility: prioritizing observance of ethical standards and permitting corrective action, including for mismanagement where appropriate. - ELRIC pillars and safeguards assessment objectives: - The five ELRIC pillars and the main safeguards assessment objectives for each pillar are set out in the framework. *Source: Annex III–VI, “High Profile Safeguards Cases: Experience and Remedies,” (excerpt).* ### 1. External Audit Mechanism. This encompasses the practices and procedures in place to ### 1. External Audit Mechanism ### External audit objectives and scope - Enables an independent auditor to express an opinion on whether the financial statements are prepared in accordance with an established financial reporting framework, such as IFRS. - Importance: critical for the credibility of a central bank. - Assessment objective: establish whether an independent external audit of the central bank’s financial statements is conducted regularly in accordance with internationally accepted auditing standards such as ISA, previous audit recommendations have been implemented, and to ensure that the external audit opinion is published with the full audited financial statements. ### Legal structure and autonomy - Government interference in central bank operations undermines central bank autonomy and could increase the risks facing the central bank. - A sound legal framework enshrines central bank autonomy and complementary transparency and accountability. - Assessment objective: to - (i) establish whether the legal framework provides the central bank with an appropriate level of autonomy (including institutional and operational autonomy) along with adequate internal and external checks and balances; - (ii) ascertain whether key legal requirements are complied with without interference or override; - (iii) clarify if other legislation exists that could impair central bank autonomy; - (iv) determine whether the respective roles and responsibilities of the central bank and other agencies are transparently and explicitly defined in cases of shared monetary authority; and - (v) ascertain that the legal framework supports the other four ELRIC pillars. ### Financial reporting framework - Adequate financial reporting principles and practices are essential elements of effective central bank operations. - Published interim and annual financial statements provide financial information to central bank management and external parties. - For usefulness, information must be relevant, reliable, timely, readily available, consistent in presentation over time, and based upon recognized standards, such as IFRS. - Assessment objective: ensure that the central bank adheres to international good practices in the adoption of accounting principles for internal reporting to management, and the published annual and interim financial statements. ### Internal audit mechanism - Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. - Purpose: help achieve objectives by bringing a systematic, disciplined approach that adheres to international standards to evaluate and improve the effectiveness of risk management, control, and governance processes. - Assessment objective: determine whether internal audits are performed in accordance with international standards, such as International Standards for the Professional Practice of Internal Auditing, and whether the function is assigned sufficient independence and authority to fulfill its mandate effectively, including whether procedures exist for communicating results without interference. ### System of internal controls - Internal control: a process put in place by an entity’s board, senior management, or staff to provide reasonable assurance regarding the achievement of objectives in: - (i) effectiveness and efficiency of operations; - (ii) reliability of financial reporting; and - (iii) compliance with applicable laws and regulations. - A sound internal control system is a key component of an entity’s risk management framework and essential in safeguarding the integrity of its operations, resources, and reputation. - Assessment objective: ascertain the quality of high level governance and oversight, employee integrity, and the bank’s commitment to building and maintaining internal competence. - Assessment focus areas: controls in reserves management, accounting, and currency and banking operations; measures to ensure accurate and timely reporting of monetary program data. *Source: _070110 - 1. External Audit Mechanism (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110.pdf_