## _092315

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### EXECUTIVE SUMMARY — purpose, scope, and overall assessment
- Purpose: review experience with the safeguards assessment policy since the last review in 2010.
- Main objective: mitigate risks of misuse of Fund resources and misreporting of monetary data under Fund arrangements.
- Independent oversight: an external panel of experts provided an independent perspective on implementation, including review of confidential safeguards reports.
- Consultations: staff engaged area and functional departments at an early stage; the external panel visited headquarters and solicited views of Executive Directors, central bank officials, and staff from area and functional departments.
- Date of document: September 23, 2015.
- Overall assessment:
  - Central banks have continued to strengthen frameworks, but challenges remain, notably oversight, internal audit capacity, and modern central bank legislation.
  - Staff view: general design remains appropriate, with proposed refinements to reflect evolving safeguards risks.
  - External panel: policy applied effectively during the review period; panel recommended refinements which staff has incorporated into proposals.

### Activity, monitoring, and geographic patterns
- Assessments completed April 2010–August 2015: 83 assessments of 57 central banks.
- Comparative (2010 review period): 81 assessments of 61 central banks.
- Cumulative since inception: 248 safeguards assessments of 90 central banks.
- FCL procedures: limited safeguards procedures for 12 FCLs performed during 2010-15 (three during 2005-10).
- Typical annual activity: averaged about 13 assessments per year since the crisis peak.
- Crisis peak: annual assessments rose to over 25 annually in 2009 and 2010.
- First-time assessments in current review period: 15 (compared to 14 during the 2010 review).
- Facility mix change: EFFs accounted for just over one-third of 30 new arrangements, compared with ten percent of 35 new arrangements during the 2010 review period.
- Monitoring intensity:
  - Peak central banks monitored: 80 during 2011-13.
  - Central banks monitored at end-August 2015: 67.
  - Instances flagged for non-receipt of monitoring information: seven occurrences.
- Geographic shift: Africa largest number; Europe and Middle East and North Africa accounted for 48 percent of assessments during the current review period.

### Enhancements to safeguards modalities and ELRIC emphasis
- Focus shifted sharper to governance and risk management; governance assessment integrated into ELRIC (external audit, legal structure, financial reporting, internal audit and control mechanisms).
- Governance assessment scope: boards and audit committees, composition, appointment practices, members’ independence and expertise, efficacy of role and responsibilities; control culture and “checks and balances” in key operations.
- Remedial measures: often require changes to central bank legislation.
- Collaboration and fiscal risk focus: increased collaboration with stakeholders; staff encouraged to highlight fiscal risks in staff reports drawing on diagnostic TA in fiscal area.
- ELRIC retention with broader coverage: continue five pillars with governance as overarching theme and deeper evaluation of risk management.

### Risk management findings and internal audit
- IRMF adoption:
  - Only two of the 57 central banks assessed had a fully functioning and mature IRMF in place.
  - A further eight central banks were implementing an IRMF with additional work in train.
- General observation: risk management technically demanding and requires sufficient institutional capacity.
- Internal audit findings:
  - Internal audit functions had areas for improvement in about 50 percent of central banks (compared with 40 percent in the last review period).
  - Some 6 central banks had no internal audit practice.
  - Capacity constraints in about 40 percent of central banks.
  - Weak institutional status in some 35 percent of internal audit departments.
  - Inadequate oversight of internal audit in nearly 50 percent of central banks.
- Outreach and engagement:
  - High-level contacts with IFAC, observer representation at IAASB Consultative Advisory Group and IESBA.
  - Inaugural governance forum for central bank officials and external auditors in 2013; second forum in 2014.
  - Self-evaluation questionnaire disseminated since 2014 at regional seminars; cannot replace staff judgment.

### Misreporting, misuse, and safeguards outcomes
- Counterfactual not determinable due to ex-ante nature of assessments.
- No serious misreporting on monetary data since 2010.
- January 2010–May 2015: Executive Board considered 26 cases of misreporting of program data; only two related to monetary data:
  - Ukraine, July 2010: inaccurate Net International Reserves due to technical discrepancy with TMU definitions.
  - Angola: misreporting caused by fiscal revenue misreporting used for program adjustors, not central bank data.
- No observed cases of direct misuse of Fund resources by central banks since 2010.
- Assessments identified cases where resources were exposed to substantive risks in reserves management.
- Safeguards staff collaborated with area departments on governance input, special audit TORs, forensic investigations and review of results when fiscal fraud or misappropriation cases arose.

### Fiscal safeguards pilot, lessons, and proposed risk-based approach
- Pilot concluded in 2013: FAD covered five budget financing cases (Antigua and Barbuda, Cyprus, Greece, Ireland, Kyrgyz Republic).
- Pilot questionnaire covered legal framework, treasury arrangements, internal controls, reporting, and independent audit.
- Diagnostics leveraged: PEFA and Fiscal Transparency Evaluations (FTE) launched in 2014.
- Pilot lessons:
  - Most information can be derived from existing diagnostics; diagnostics provide a good basis though additional case-specific information may be needed.
  - Sometimes need to look beyond the state treasury where functions are decentralized.
- Proposed risk-based approach for fiscal safeguards reviews:
  - Use existing diagnostic tools to identify fiscal safeguards risks for countries channeling a significant proportion of Fund resources to the budget.
  - Fiscal safeguards reviews would be conducted only for countries with both:
    - (i) exceptional access to Fund resources, and
    - (ii) more than half of the financing directed to budget support. (Note: staff later proposes modification in paragraph 43 — see next section.)
  - Rationale: cost-effective given scope and resource challenges; limited experience since pilot as number of budget financing cases has decreased.
- Trends and statistics on budget financing cases:
  - GRA arrangements involving budget financing averaged three per year during 2011-2014, compared with seven in 2010.
  - Of new arrangements in 2010-14, about half were exceptional access cases, concentrated in 2010-12.
  - In 2014-2015, only one country, Ukraine, had a program with exceptional access involving budget financing; a fiscal safeguards review was conducted for Ukraine and did not uncover significant shortcomings based on the standardized questionnaire.

### Proposed fiscal safeguards applicability and modalities (paragraphs 43 and follow-up)
- Applicability (proposed modification):
  - Fiscal safeguards reviews should be conducted for all arrangements where a member requests exceptional access to Fund resources, with an expectation that a significant proportion, i.e., at least 25 percent, of the funds will be directed to financing of the state budget.
  - Replaces prior proposition of more than half with at least 25 percent to recognize difficulties in ex-ante estimation.
  - If criteria met during an arrangement due to further budget financing or RCF/RFI disbursements, a fiscal safeguards review would need to be conducted.
  - An update review not required if one completed not more than 18 months prior.
- Modalities:
  - Reviews based on available PFM diagnostics within the past six years, supplemented by a questionnaire.
  - Where a PEFA or FTE exists within six years, review primarily based on FAD evaluation of relevant PEFA indicators or FTE practices/indicators plus recent TA reports and public information.
  - If no recent PFM assessment and none planned, FAD would conduct a stand-alone review.
- Timing:
  - Complete no later than the first program review (consistent with central bank safeguards assessment deadline); case-by-case timing where budget financing decision occurs at subsequent reviews.
- Reporting and confidentiality:
  - FAD reports subject to normal review by Area, FIN, LEG, MCM, SPR; include summary of key findings and measures to mitigate risks; approved by senior FAD management.
  - Confidentiality mirrors central bank assessments; reports shared with country authorities and, subject to authorities’ consent, with World Bank and ECB.

### Streamlining proposals for safeguards modalities and monitoring (paragraphs 44–51)
- Rationale: flat budget environment prompting reallocation and efficiency; estimated annual staff savings of the order of two FTEs from proposed changes.
  - Savings sources: augmentations (1 FTE), central banks with strong track records (0.5 FTE), monitoring (0.5 FTE).
- Assessments — proposed changes:
  - Discontinue update safeguards assessments for augmentations of existing arrangements.
  - Successor arrangements:
    - If prior assessment completed no more than 18 months before approval of successor arrangement, no update assessment required; ongoing monitoring to follow up prior recommendations.
    - If new arrangement includes budget support, relevant central bank–treasury framework and fiscal safeguards review requirements continue to apply.
  - Central banks with strong track records — streamlined modalities:
    - Streamlined procedures apply where all eligibility conditions met (all must be met):
      - Recommendations from previous assessment implemented;
      - Previous assessment did not identify substantial issues (risk assessment for each ELRIC pillar low or medium-low);
      - Previous assessment completed no more than four years prior to Board approval of new arrangement;
      - No substantial political or governance changes;
      - Monitoring since previous assessment did not uncover significant adverse developments;
      - Authorities represent in letter of intent that safeguards framework remains robust.
    - Streamlined modalities based on FCL procedures (limited review of external audit arrangements); staff to report assessment of these conditions in staff paper seeking Board approval.
    - Monitoring continues and may entail on-site visits if significant adverse developments occur.
- Monitoring refinements:
  - Refine monitoring to reflect diminishing safeguards risks as credit outstanding repaid, using Post-Program Monitoring (PPM) practices.
  - Under PPM, monitoring intensity limited to desk-review of annual external audit results once credit outstanding falls below PPM threshold, currently 200 percent of quota.
  - Decision on PPM normally made during last program review by Executive Board.
  - Staff will explore options for more first-hand verification in post-program period (short monitoring visits, participation in area missions, further coordination).

### Implementation, remedial measures, and outcomes
- Implementation rates for current review period:
  - 94 percent for recommendations included under program conditionality.
  - 72 percent overall implementation rate during the current review period.
- Cumulative to March 2010 (last review): implementation rates were 95 percent (conditionality) and 77 percent (overall).
- When vulnerabilities identified: targeted mitigating measures may include recommendations as program conditionality; safeguards staff assist in formulating remedial measures and provide input on governance, special audit TORs, forensic investigations, and review of investigation results.
- Statistics on report sharing:
  - Staff shared 47 safeguards assessment reports during current review period, including eight with the ECB.
  - Comparatively, 44 reports were shared with the World Bank during the last review period.
  - One central bank withheld consent for such sharing (compared with three during previous review).

### Trends and quantitative indicators (external audit, financial reporting, standards, staff resources)
- External audit and financial reporting improvements:
  - 75 percent of assessments found low or medium-low risk in external audit over the past five years.
  - 62 percent of assessments found low or medium-low risk in financial reporting over the past five years.
  - Over 90 percent of central banks now publish full financial statements (compared with 75 percent at last review and 55 percent at 2005 review).
  - Of 67 central banks subject to monitoring as at end-August 2015:
    - 56 percent apply IFRS.
    - 7 percent apply ECB guidelines.
    - About 20 percent do not have an externally defined accounting framework.
    - 7 percent apply IFRS with exceptions.
    - 9 percent use country specific GAAP.
  - Six central banks partially applying IFRS during 2010 review became fully compliant; three with no external framework partially implemented IFRS.
- Reserves management controls: about 16 percent of central banks found to have shortcomings in controls over foreign reserves (compared with 20 percent at last review).
- Governance shortfalls: over half of assessments in last five years included recommendations to amend central bank legislation; 20 percent of these recommendations included recommendations, of which half were incorporated as program conditionality (structural benchmarks).
- Implementation of recommendations (Annex V figures for April 2010–August 2015):
  - Total recommendations with formal commitment due: 70
    - a. Under program conditionality 1/48 — 93.8 (Of which: Implemented 45)
    - b. LOI/MEFP commitments 2/22 — 63.6 (Of which: Implemented 14)
  - Other recommendations: 469 (Of which: Implemented 328 — 69.9)
  - Total recommendations (1+2): 539 (Of which: Implemented 387 — 71.8)
  - Footnotes: 1/ Three outstanding program-conditionality recommendations involve amendment of central bank legislation at different stages; 2/ Six of eight LOI/MEFP recommendations relate to two countries with poor implementation track records.
- Staff resources and costs:
  - Safeguards staff complement averaged 15 FTEs since 2011.
  - Proposed streamlining measures expected to generate efficiency gains equivalent to two FTEs.
  - Safeguards staff represents 0.6 percent of total Fund personnel positions in recent years.
  - Overall personnel expenses averaged $3.4 million per fiscal year during FY 2011–15 (decrease from $3.8 million in FY 2010).
    - This $3.4 million averaged some 0.4 percent of the Fund-wide budget in the personnel expenditure category for FY 2015.
  - Safeguards labor cost represented about four percent of the Fund-wide labor costs in the UFR category during FY 2011-14 (compared to three percent over 2005-2009).
  - Travel costs averaged $0.5 million per fiscal year.
  - Average number of mission days remained stable at nine per mission.

### Developments in central banks’ operating environments and associated safeguards risks (Annex VI highlights)
- Currency management trends and risks:
  - Trends: automation, increased outsourcing, more cash centers, demanding banknote production, Banknote Ethics Initiative 2013, increased public awareness of currency fraud.
  - Risks: audit trail difficulties, IT risks, insufficient storage, procurement incentives, impact on program monetary data.
- Reserves management trends and risks:
  - Trends: low-return environment prompting unorthodox investments (embedded derivatives, equities, emerging market bonds), currency diversification, increased external asset managers, local development/sovereign wealth funds, increased use of fx swap lines.
  - Risks: governance bodies lacking experience, inadequate staff and audit expertise, misreporting risks in valuation and existence of instruments, higher loss and reputational risk, off-balance sheet commitments.
- Domestic FX operations trends and risks:
  - Trends: increased use of swaps and derivatives, foreign currency auctions, currency swaps with undisclosed objectives, non-repatriable non-convertible balances.
  - Risks: data reporting impact, valuation challenges, lack of transparency, limited audit capacity.
- Lending/financial assistance trends and risks:
  - Trends: financial stability objectives in legislation, expanded LOLR exposures, easing collateral standards, provision of solvency support, reduced fiscal dominance leading to less transparent lending.
  - Risks: lack of ELA legal framework, inadequate governance and transparency, balance sheet risks, difficulty establishing solvency during crises, political interference.

### Confidentiality, reporting, and recommended disclosure practice
- Safeguards reports are confidential Fund documents; confidentiality endorsed by Executive Board in 2010.
- Sharing limited to World Bank and ECB where relevant and with prior consent of central bank; confidential briefings can be provided to donors.
- Executive Director of borrowing member receives a copy; Executive Board informed of main findings and recommendations in summary form in country reports.
- Panel recommends greater consistency in the safeguards summary paragraph in staff reports and periodic safeguard activity reports to the Board. Minimum coverage recommended:
  - any instances of misuse or misreporting;
  - significant recommendations on legislative amendment that fall outside central bank powers;
  - problems obtaining access to data;
  - deviations from commitments in relation to safeguards recommendations.
- Staff supports consistent placement in main body of staff reports and minimum content principles.

### Issues for Board discussion (enumerated focus areas)
- Appropriateness and effectiveness of the safeguards assessment policy in mitigating misreporting and misuse and maintaining the Fund’s reputation.
- Proposals to adopt fiscal safeguards reviews to identify fiscal risks in arrangements involving budget financing.
- Proposals for risk-based streamlining of modalities for safeguards assessments and monitoring.
- Proposed enhancements within safeguards framework: continued emphasis on governance, broader coverage of risk management and internal audit issues, more proactive engagement with domestic stakeholders on legislative amendment recommendations.
- Confidentiality of safeguards reports and reporting of key findings and recommendations in country staff reports.

*Source: SAFEGUARDS ASSESSMENTS (excerpts from content unit _092315), September 23, 2015.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Introduction and background
- Purpose: review experience with the safeguards assessment policy since the last review in 2010.
- Main objective of the policy: mitigate risks of misuse of Fund resources and misreporting of monetary data under Fund arrangements.
- Independent oversight: an external panel of experts provided an independent perspective on implementation, including review of confidential safeguards reports.
- Consultations: staff engaged area and functional departments at an early stage; the external panel visited headquarters and solicited views of Executive Directors, central bank officials, and staff from area and functional departments.
- Date of document: September 23, 2015.

### Developments since the 2010 review — overall assessment
- General finding: central banks have continued to strengthen their frameworks, but challenges remain in some areas (notably oversight, internal audit capacity, and modern central bank legislation).
- Staff view on policy design: the general design remains appropriate, with proposed refinements to reflect evolving safeguards risks.
- External panel conclusion: the safeguards assessment policy was applied in an effective manner during the review period and key stakeholders voiced approval and support. The panel recommended some refinements to safeguards modalities; staff concurs and has incorporated recommendations into its proposals.

### Activities and monitoring
- Assessments completed during current review period (April 2010 to August 2015): 83 assessments of 57 central banks.
- Comparative activity: 81 assessments of 61 central banks during the 2010 review period.
- Cumulative since inception: 248 safeguards assessments of 90 central banks have been completed.
- FCL procedures: limited safeguards procedures for 12 FCLs were performed during 2010-15 (three during 2005-10).
- Typical annual activity: activity averaged about 13 assessments per year since the crisis peak.
- Crisis peak: annual assessments rose to over 25 annually in 2009 and 2010.
- First-time assessments in current review period: 15 first–time assessments (compared to 14 during the 2010 review).
- Facility mix change: Extended Fund Facility (EFF) usage increased — EFFs accounted for just over one-third of 30 new arrangements, compared with ten percent of 35 new arrangements during the 2010 review period.
- Monitoring intensity:
  - Peak central banks monitored: 80 during 2011-13.
  - Central banks monitored at end-August 2015: 67.
  - Instances flagged for non-receipt of monitoring information during current review period: seven occurrences.
- Geographic shift: aside from Africa (largest number), Europe and Middle East and North Africa accounted for 48 percent of the assessments during the current review period, reflecting effects of the global financial crisis and the Arab Spring.

### Enhancements to safeguards modalities since 2010
- Focus on governance and risk management: sharper emphasis following the 2010 review, with integration of governance assessment into the ELRIC framework (external audit, legal structure, financial reporting, internal audit and control mechanisms).
- Governance assessment scope: closer review of boards and audit committees, including composition, appointment practices, members’ independence and expertise, and efficacy of role and responsibilities; assessment of control culture and existence of “checks and balances” in key central bank operations.
- Remedial measures: often require changes to central bank legislation to assure sustained change in practices.
- Collaboration and fiscal risk focus: increased collaboration with stakeholders and encouragement to highlight fiscal risks in staff reports by drawing on existing diagnostic technical assistance in the fiscal area.

### Proposals and forward agenda
- Staff proposals (high level summary from Executive Summary):
  - Introduce a risk-based approach for fiscal safeguards reviews for arrangements involving budget financing.
  - Change safeguards modalities as part of Fund-wide streamlining efforts to identify resource savings.
  - Enhance safeguards framework to maintain emphasis on governance and risk management.
  - Increase outreach on internal audit issues.
  - Address transparency and confidentiality aspects within safeguards work.
- Structure of follow-up in the paper: Section IV develops proposals on fiscal safeguards, streamlining and safeguards modalities, further enhancements within the safeguards framework, increased outreach on internal audit issues, and transparency and confidentiality.

### Panel and staff coordination
- External panel: provided independent review and made recommendations on safeguards modalities; panel report circulated concurrently and the Chair scheduled to attend the Board discussion.
- Staff concurrence: staff concurs with the panel’s observations and recommendations and has taken them into account in its proposals.
- Confidentiality and reporting: main output of a safeguards assessment is a confidential report with time-bound recommendations; Executive Director of the borrowing member receives a copy; Executive Board is informed of main findings and recommendations in summary form in country reports; safeguards reports can be shared, upon request and with consent, with World Bank and European Central Bank staff subject to strict confidentiality.

*Source: EXECUTIVE SUMMARY (Safeguards Assessments), September 23, 2015.*

### 12.      The focus of assessments has been broadened to take stock of risk management

### 12.      The focus of assessments has been broadened to take stock of risk management

### Risk management at central banks
- Staff continues to find that few central banks have completed, or embarked on, the process of formalizing and implementing an integrated risk management framework (IRMF).
- Most central banks manage risk within functional areas under the broad oversight of senior management and the Board.
- Where an IRMF is in place, or steps to establish one are in process, assessments review:
  - coverage of key risk areas; and
  - governance arrangements, i.e., reporting on main findings and remedial measures.
- Experience shows:
  - risk management is technically demanding; and
  - its application requires a sufficient level of institutional capacity.
- Key statistics from the review period:
  - Only two of the 57 central banks assessed in the review period had a fully functioning and mature IRMF in place.
  - A further eight central banks were implementing an IRMF with additional work in train to ensure full integration of practices with all bank operations.

### Engagement with the accounting and auditing profession
- Staff established high-level contacts with the accounting and auditing profession to raise awareness of audit quality issues at central banks.
- Under the umbrella of the International Federation of Accountants (IFAC), staff briefed IFAC’s Forum of Firms on audit quality issues encountered in safeguards work.
- Staff has observer representation at:
  - the Consultative Advisory Group of the International Auditing and Assurance Standards Board (IAASB); and
  - the International Ethics Standards Board for Accountants (IESBA).

### Collaboration with central banks and external auditors
- New initiatives since the last review:
  - inaugural forum on governance for high-level central bank officials and their external auditors in 2013;
  - a second forum was held in 2014.
- Forum objectives and outcomes:
  - provided a platform for exchange of cross-regional experiences on governance issues;
  - targeted central banks that had undergone safeguards assessments, primarily in the Middle East, Africa, and Europe;
  - external auditors’ participation raised awareness of governance and audit quality issues and facilitated sharing of best practices in oversight and auditors’ communication with audit committees.
- Additional outreach:
  - staff presented at seminars and conferences involving the central banking community, audit firms, and standard setters.

### Formal frameworks in Fund arrangements involving budget financing
- The 2010 policy review called for frameworks that outline repayment and servicing responsibilities; the policy requires that IMF resources be deposited at the central bank.
- Safeguards staff coordinate with area departments; since the 2010 review, such frameworks are now typically finalized before the first program review, or earlier.
- A pilot for fiscal safeguards reviews is discussed in the next section.

### Self-evaluation questionnaire
- Objective: raise awareness and knowledge of key safeguards attributes.
- Dissemination: the questionnaire has been disseminated to central bank officials at regional safeguards seminars since 2014.
- Coverage areas in the questionnaire:
  - transparency;
  - internal and external audits;
  - selected internal controls; and
  - oversight responsibilities.
- The questionnaire includes examples of safeguards risks and related mitigating measures and prompts central banks to compare their institutions against broad benchmarks.
- Considerations and limitations:
  - expanding use of the tool to information gathering as part of ongoing assessments could be considered;
  - experience suggests a self-evaluation cannot replace staff’s judgment and independent assessment because:
    - it is not possible to develop a one-size-fits-all questionnaire as country circumstances and program nuances differ; and
    - due to inherent subjectivity of self-evaluations, it would be difficult to conclude whether some reported safeguards exist in substance as well as in form.

### Confidentiality and information sharing
- In the 2010 review, the Executive Board endorsed the confidential nature of safeguards reports.
- Sharing practice:
  - Safeguards reports are shared only with the World Bank and ECB where relevant and if requested.
  - Confidential briefings can be provided to donors.
  - Staff must obtain prior consent from the concerned central bank to share the safeguards report.
  - While safeguards reports are not shared with the Executive Board as a whole, the respective member’s Executive Director receives a copy of the report.
  - A summary paragraph of key findings and recommendations is included in the relevant country’s staff report.
- Statistics:
  - Staff shared 47 safeguards assessment reports, including eight with the ECB during the current review period.
  - Comparatively, 44 reports were shared with the World Bank during the period of the last review.
  - One central bank withheld consent for such sharing, as compared with three during the previous review period.
- Note: The Executive Board in 2011 approved transmittal of safeguards reports to the ECB for national central banks in the European System of Central Banks where the member state received financial assistance jointly from the European Union and the Fund.

### Use of technology
- Technology has been increasingly utilized to facilitate monitoring:
  - tele- and video-conference and new platforms (Skype, Polycom, FaceTime) have allowed increased engagement with central banks and external auditors;
  - this facilitates timely follow-up on the status of safeguards recommendations and early identification of emerging safeguards risks.
- Safeguards information database (Paisley):
  - reporting capabilities were strengthened with new automated reports to aid monitoring of developments at central banks, including the status of recommendations and other key metrics.

### Budget financing and fiscal safeguards reviews — scope and challenges
- Mandate focus:
  - the safeguards framework focuses solely on central banks, which are the primary counterparty in the Fund’s financing activities.
  - extending the mandate beyond the central bank has been considered but practical difficulties in replicating safeguards assessments in other government entities are a major challenge.
- Practical obstacles to replicating safeguards assessments across government include:
  - informational obstacles in the quality of, and delays in finalizing, government accounts;
  - wide dispersion of practices precluding a uniform approach;
  - infeasibility of obtaining safeguards assurances beyond the central government to state enterprises and lower tiers of government;
  - weaknesses in Public Financial Management (PFM) systems in developing countries, especially at the line ministry and agency level.
- 2010 Board guidance:
  - Directors encouraged staff to highlight fiscal safeguards risks in staff reports, drawing on available PFM diagnostic sources;
  - many Directors encouraged exploration of targeted safeguards assessments at the level of state treasuries.

### Fiscal safeguards pilot and lessons
- Pilot exercise concluded in 2013:
  - Staff from the Fiscal Affairs Department (FAD) covered five budget financing cases: Antigua and Barbuda, Cyprus, Greece, Ireland, and Kyrgyz Republic.
  - Staff prepared a questionnaire, based on criteria developed in the 2010 review, to assess institutional arrangements and reporting requirements with respect to identification and monitoring of fiscal safeguards risks.
  - The questionnaire covered thematic areas on:
    - the legal framework for budgetary appropriations;
    - government banking arrangements through the treasury;
    - internal controls of public expenditure;
    - the reporting of financial data; and
    - the independent audit of government financial statements.
  - The questionnaire supplements existing information from diagnostic sources.
- Diagnostics relevant:
  - Public Expenditure and Accountability Framework (PEFA); and
  - Fiscal Transparency Evaluations (FTE) launched in 2014 (replaced the fiscal module of fiscal ROSC).
- Pilot lessons:
  - most information required to conduct the fiscal safeguards review can be derived from existing diagnostic evaluations, since there is substantial overlap;
  - diagnostics provide a good basis for identifying fiscal safeguards risks, though additional information and approaches may be necessary on a case-by-case basis;
  - in some cases it may be advisable to look beyond the state treasury to adequately highlight fiscal safeguards risks (e.g., where treasury functions are decentralized and key safeguard functions reside at line ministries).

### Risk-based approach for fiscal safeguards reviews
- Given scope and resource challenges, staff proposed anchoring fiscal safeguards reviews on a risk-based approach as a cost-effective strategy.
- Under the proposed risk-based approach:
  - existing diagnostic tools and evaluations would be used to identify fiscal safeguards risks for countries that channel a significant proportion of Fund resources to the budget;
  - fiscal safeguards reviews would only be conducted for countries with both:
    - (i) exceptional access to Fund resources, and
    - (ii) more than half of the financing directed to budget support.
- Rationale:
  - these criteria were considered appropriate given resource constraints and the need to absorb additional work within the Fund’s existing resource envelope.
- Experience since the pilot:
  - limited, as the number of budget financing cases has decreased.

### Trends and statistics on budget financing cases
- GRA arrangements involving budget financing averaged three per year during 2011-2014, compared with seven in 2010.
- Of the new arrangements in the 2010-14 period, about half were exceptional access cases, concentrated in the 2010-12 period.
- In 2014-2015, only one country, Ukraine, had a program with exceptional access involving budget financing.
  - A fiscal safeguards review was conducted for Ukraine since it met the risk-based criteria (exceptional access and half of resources directed to budget financing).
  - The review did not uncover any significant shortcomings based on the standardized questionnaire on the domestic institutional framework.
- Budget financing data exclusions:
  - does not include emergency assistance (RFI, RCF), 2014-2015 assistance through augmentations of arrangements or RCFs for members impacted by the Ebola epidemic;
  - arrangements with members of the BEAC and the BCEAO are excluded as these countries are part of currency unions with no national central banks.

### Box 2 — Fiscal Safeguards Reviews (summary points)
- Fiscal safeguards risks arise when funds are channeled through the treasury for budget financing; fiduciary risks could include possible misuse due to weaknesses in:
  - the legal framework;
  - government banking arrangements;
  - internal controls;
  - audit procedures; or
  - other areas of budget execution.
- Institutional coverage:
  - fiscal safeguards reviews generally evaluate treasury operations and may not extend to the country’s PFM system as a whole.
  - coverage is inherently limited since a review of the whole of government is not feasible.
  - fiscal safeguards reviews utilize the questionnaire outlined in Annex IV.
- How fiscal safeguards reviews differ from central bank safeguards assessments:
  - different institutional context: safeguards assessments cover one institution with generally well defined reporting and control systems; treasury functions may be decentralized;
  - central bank assessments are conducted independently of technical assistance (TA) work; fiscal safeguards reviews draw on TA information and may be conducted alongside TA activities;
  - approach: fiscal safeguards reviews are a high level exercise to ascertain the design of institutional safeguards at the state treasury, with a primary focus on indicators rather than verification of actual practices; they do not necessarily assess the effectiveness of control and accountability systems unless such information is available from other diagnostics;
  - financial reporting practices are more advanced at central banks, so program data accuracy is more easily identifiable.

### Misreporting and misuse
- Safeguards assessments are a key element of the broader framework for managing financial risks the Fund faces in its financing operations.
- Since introduction in 2000, the safeguards assessment policy has:
  - played an important role in helping to mitigate the risks of misreporting and misuse of Fund resources; and
  - helped maintain the Fund’s reputation as a prudent lender.
- Experience shows:
  - the safeguards framework has helped identify serious governance and misreporting issues at central banks;
  - the framework is not a panacea against intentional lapses in controls or fraud.
- Increased emphasis on governance aims to mitigate such incidents by highlighting the importance of independent oversight on bank operations as a counterweight to possible risks of high level overrides of controls.

*Source: SAFEGUARDS ASSESSMENTS, INTERNATIONAL MONETARY FUND (excerpts).*

### 26.      Owing to the ex-ante nature of safeguards assessments, a counterfactual on the extent

### _092315 - 26.      Owing to the ex-ante nature of safeguards assessments, a counterfactual on the extent

### Misreporting, misuse, and safeguards outcomes
- A counterfactual on the extent to which potential misreporting and misuse is prevented is not determinable owing to the ex-ante nature of safeguards assessments.
- There has been no serious misreporting on monetary data since 2010.
- From January 2010-May 2015, the Executive Board considered 26 cases of misreporting of program data, of which only two related to program monetary data.
  - One case (Ukraine, July 2010) involved inaccurate reporting of Net International Reserves, due to a technical discrepancy between the central bank’s investment policy and the definitions in the Technical Memorandum of Understanding (TMU).
  - One case (Angola) involved misreporting on monetary data caused by misreporting on fiscal revenues used for program adjustors, rather than data originating from the central bank.
- The remaining misreporting cases were outside of the safeguards assessment scope and primarily involved debt management or non-compliance with continuous performance criteria on nonconcessional external debt.
- Since the 2010 review, there have been no observed cases of direct misuse of Fund resources by central banks.
- Assessments have identified cases where resources were exposed to substantive risks in the management of foreign reserves.
- Safeguards staff collaborated with area departments in cases involving fiscal fraud or other misappropriation, providing input on governance issues, terms of reference for special audits and forensic investigations, and review and analysis of audit/investigation results.

### Evaluation of controls, data reporting, and audit involvement
- Evaluation of controls and processes surrounding program data reporting by central banks is a core component of safeguards work.
- Where additional assurances are needed, staff recommends involvement of central bank internal auditors and, where warranted, an external audit verification.
- Safeguards staff increased collaboration with area departments on data definition issues for complex central bank balance sheets and accounting treatments (examples cited: Ghana, Honduras, Pakistan, Serbia, and Tunisia).
- Early engagement helped clarify data components and TMU definitions to avoid potential errors in subsequent reporting.
- Review of audited financial statements aided understanding of monetary data composition in difficult cases.
- Increased participation of internal audit in the review of program monetary data compilation and reconciliations supported improvements in data reporting practices, though treatment of complex financial instruments remains a difficulty in some cases.

### General trends in safeguards findings (ELRIC framework)
- Findings evolve as central banks strengthen frameworks, but challenges remain.
- Trend analysis covers periods: 2000-2005, 2005-2010, and 2010-2015 across the five ELRIC pillars.
- External audit and financial reporting practices improved significantly:
  - 75 percent of assessments found to be low or medium-low risk in external audit over the past five years.
  - 62 percent of assessments found to be low or medium-low risk in financial reporting over the past five years.
- Publication and accounting framework adoption:
  - Over 90 percent of central banks now publish their full financial statements (compared with 75 percent at the last review and 55 percent at the 2005 review).
  - Of the 67 central banks subject to monitoring as at end-August 2015:
    - 56 percent apply International Financial Reporting Standards (IFRS).
    - 7 percent apply ECB guidelines.
    - About 20 percent do not have an externally defined accounting framework.
    - 7 percent apply IFRS with exceptions.
    - 9 percent use country specific generally accepted accounting practices.
  - Six central banks that partially applied IFRS during the 2010 review have become fully compliant; three central banks that had no external framework have now partially implemented IFRS.
- Reserves management and controls:
  - Institutional frameworks for reserves management improved, supported by increased automation and IT systems.
  - About 16 percent of central banks were found to have shortcomings in controls over foreign reserves during the review period (compared with 20 percent at the last review).
- Despite improvements, areas with increased medium or high risk in the past five years include internal audit capacity and legal structures, reflecting greater rigor in review and emergence of first-time assessments (notably from the Middle East and North Africa and some Eurosystem members).

### Key vulnerabilities and specific areas of concern
- Legal structure and independence:
  - Strengthening legislation is frequently a challenge; over half of assessments in the last five years included recommendations to amend central bank legislation.
  - Of these recommendations, 20 percent included recommendations of which half were incorporated as program conditionality (structural benchmarks).
  - Observed needs: stronger de jure provisions on transparency and accountability, explicit provisions on use of international accounting and audit standards, publication of financial statements, and well-functioning audit committees.
- Internal audit:
  - Internal audit functions had areas for improvement in about 50 percent of central banks (compared with 40 percent in the last review period).
  - Some 6 central banks were found to have no internal audit practice.
  - Key challenges:
    - Capacity Constraints: limitations in staffing levels, audit expertise, and/or professional qualifications observed in about 40 percent of the central banks.
    - Independence and authority: some 35 percent of central banks’ internal audit departments had weak institutional status (lack of functional reporting to the Board or continued performance of operational responsibilities).
    - Oversight: inadequate oversight of internal audit observed in nearly 50 percent of central banks (non-risk based methodologies, inadequate monitoring of audit plan completion and recommendations, infrequent reporting to the Board).
- Internal controls and governance oversight:
  - Over 70 percent of central banks assessed in the past five years have audit committees, but effectiveness of oversight is lacking in many cases.
  - Some 53 percent of central banks assessed in the current review period were found to fall short of good governance practices.
  - Recommended remedial measures included:
    - Expanding audit committee oversight scope to include internal and external audit arrangements.
    - Reviewing composition and appointment practices for Board and audit committee members to ensure independence.
    - Hiring an advisor with expertise in financial reporting and auditing to assist the audit committee.
    - Encouraging accountability through publication of the audit committee annual activity report.

### Implementation and remedial measures
- Implementation rates for safeguards recommendations:
  - 94 percent for recommendations included under program conditionality during the current review period.
  - 72 percent overall implementation rate during the current review period.
  - For the cumulative period to March 2010 (last review), implementation rates were 95 percent (conditionality) and 77 percent (overall).
- When vulnerabilities are identified, targeted mitigating measures may include recommendations included as part of program conditionality; these recommendations are extensively discussed with central bank counterparts to ensure ownership and understanding of program implications.
- When concerns regarding possible misuse of public resources emerge, safeguards staff assist in formulating remedial measures and may provide input on governance, terms of reference for special audits and forensic investigations, and review of investigation results.

### Lessons learned from 2010–2015 safeguards experience
- The ELRIC framework remains appropriate and sufficiently flexible to tailor assessments to country circumstances, evolving central bank operations, and leading practices.
- Developments in international accounting and audit standards have been integrated into safeguards work; new IFRS on valuation of financial instruments and related disclosures facilitate assessment of potential linkages to misreporting of monetary data.
- An effective audit committee with members having financial expertise is key to strong governance and engagement with external and internal auditors.
- Control systems cannot guarantee against willful override or collusion; good governance and independent oversight together with robust control systems mitigate risks and facilitate early detection.
- Close collaboration with stakeholders (central banks and their auditors) is critical for early identification and resolution of issues and reinforcing safeguards messages.
- Outreach initiatives and regional safeguards seminars provide valuable cross-regional dialogue and peer discussion on challenges and good practices; FIN has collaborated with LEG and MCM on outreach events.

### Staff resources and costs
- Safeguards work is conducted by specialized professional staff with backgrounds in accounting, auditing, central banking, and risk-management; LEG staff contribute desk reviews of central bank legislation and mission participation when necessary.
- Safeguards staff complement averaged 15 FTEs since 2011.
- Proposed streamlining measures outlined in Section IV are expected to generate efficiency gains equivalent to two FTEs.
- Safeguards staff represents 0.6 percent of total Fund personnel positions in recent years.
- Overall budget envelope for staff resources (personnel expenses) averaged $3.4 million per fiscal year during FY 2011–15 (a decrease from $3.8 million in FY 2010).
  - This $3.4 million averaged some 0.4 percent of the Fund-wide budget in the personnel expenditure category for FY 2015.
- Safeguards labor cost represented about four percent of the Fund-wide labor costs in the UFR category during FY 2011-14 (compared to three percent over 2005-2009).
- Travel costs averaged $0.5 million per fiscal year.
- The average number of mission days remained stable at nine per mission.
- Assessment activity since 2010 included first-time assessments in emerging new regions (four members of the Eurosystem, and four members in the Middle East and North Africa region) and complex update assessments for Afghanistan, BEAC, Djibouti, Pakistan, and Ukraine.
- The overall safeguards activity level remained broadly stable; safeguards work comprises primarily professional staff time on assessments and monitoring, including overtime.

*Source: SAFEGUARDS ASSESSMENTS (excerpts from the specified content unit).*

### 41.      The safeguards assessment policy continues to be an important element of the Fund’s

### 41.      The safeguards assessment policy continues to be an important element of the Fund’s

### Safeguards policy role and assessment of effectiveness
- The safeguards assessment policy is an important element of the Fund’s risk-management framework.
- The independent panel’s report:
  - Notes the policy has met its primary objective to mitigate potential risks of misuse of Fund resources and misreporting of monetary program data.
  - Views notable improvements in central banks’ governance and control frameworks as substantial “collateral benefits” that flow from the safeguards assessment process.
- Historical staffing: The FTEs comprised 10–11 accountants, division management (Division Chief and a deputy), one research assistant, and two staff assistants. In the FY2005–2010 period, the staff complement averaged 14 FTEs.

### Overall policy design and proposed refinements (paragraph 42)
- Staff considers the general design of the policy continues to be appropriate but proposes refinements to reflect:
  - Evolving nature of safeguards risks.
  - The independent panel’s recommendations.
  - Developments in central banks’ operations and institutional safeguards.
- Areas for continued focus: governance and risk-management.
- Streamlining proposals are risk-based and part of a Fund-wide effort to identify resource savings.
- Proposed changes cover:
  - Disclosure of safeguards information in staff reports and staff’s discussions with parties outside the central bank when recommendations to amend central bank legislation are involved.
  - Applicability and modalities for fiscal safeguards reviews.
  - Internal audit issues.
- Operational Guidelines on safeguards modalities will be updated following conclusion of the review.

### A. Fiscal safeguards — Way Forward (paragraphs 43 and follow-up)
- Staff developed an evaluation framework and a risk-based approach after pilot fiscal safeguards reviews; proposes incorporation with modifications into the safeguards assessment policy.
- Operational guidelines for fiscal safeguards reviews would be developed to ensure timely coordination with Fund-supported programs.
- Proposed safeguards requirements and operational modalities for arrangements involving budget financing:

  - Applicability:
    - Fiscal safeguards reviews should be conducted for all arrangements where a member requests exceptional access to Fund resources, with an expectation that a significant proportion, i.e., at least 25 percent, of the funds will be directed to financing of the state budget.
    - Modification from the 2013 pilots: replaces a prior proposition of more than half of support to the budget with at least 25 percent, recognizing difficulties in establishing ex-ante the proportion of Fund resources to be directed to the budget.
    - If criteria are met during an arrangement due to further budget financing or RCF/RFI disbursements, a fiscal safeguards review would need to be conducted.
    - An update fiscal safeguards review would not need to be conducted if one was completed not more than 18 months prior.
    - Staff will ensure the review process during an arrangement identifies new instances of budget financing not indicated at program approval.

  - Modalities:
    - Reviews would be based on available PFM diagnostics conducted within the past six years, supplemented by a questionnaire covering thematic areas discussed in Section II.
    - Where either a PEFA assessment or an FTE has been carried out within the past six years, the fiscal safeguards review would primarily be based on an evaluation by FAD staff of the relevant PEFA indicators or FTE practices/indicators, plus recent TA reports and other publicly available information.
    - Where there is no recent PFM assessment and no plans to conduct one in the near future, FAD would conduct a stand-alone review of fiscal safeguards risks.

  - Timing:
    - A fiscal safeguards review should in principle be completed no later than the first program review (consistent with the deadline for safeguards assessments of central banks).
    - Arrangements where a decision to direct Fund resources to budget financing is taken at subsequent reviews and the applicability criteria are met will be treated case-by-case with respect to timing.

  - Reporting:
    - Fiscal safeguards review reports prepared by FAD would be subject to the normal review process by relevant departments (Area, FIN, LEG, MCM, SPR), before completion.
    - Reports would include a summary of key findings to be included in staff reports, along with measures to mitigate any potential risks.
    - Reports would be approved by senior FAD management.

  - Report confidentiality:
    - Confidentiality requirements would mirror those for assessments of central banks.
    - Reports would be confidential Fund documents shared with the country authorities and, if relevant and subject to authorities’ consent, with the World Bank and the European Central Bank if so requested.

### B. Streamlining and safeguards modalities (paragraphs 44–51)
- Context:
  - Fund’s flat budget environment has prompted reallocation and efficiency efforts.
  - Staff has considered streamlining opportunities in safeguards modalities, balancing efficiency with preserving assurance levels.
  - Estimated annual staff savings from initiatives are of the order of two FTEs.
    - These savings derive from proposed changes in the approach for augmentations (1 FTE), central banks with strong track records (0.5 FTE) and monitoring (0.5 FTE).
  - Independent panel’s recommendations on enhancements (e.g., coverage of risk management frameworks) may result in additional work, which staff expects could be absorbed while still allowing the estimated savings.

- Assessments — proposed changes:
  - Discontinue conducting update safeguards assessments for augmentations of existing arrangements.
    - Rationale: countries requesting augmentations would generally have had an assessment at approval; change in access does not necessarily translate to heightened safeguards risks.
    - Historical frequency: In the past ten years, the Fund has approved on average three augmentations per year.
  - Successor arrangements (time-based):
    - Current policy requires an update assessment for a successor arrangement irrespective of proximity of a prior assessment.
    - Staff proposes that where a safeguards assessment was completed no more than 18 months prior to approval of the successor arrangement, no update assessment would be necessary; instead, ongoing monitoring would follow up on implementation of prior recommendations.
    - If the new arrangement includes budget support, requirements for an appropriate central bank–treasury framework and a fiscal safeguards review (where relevant criteria are met) continue to apply.
  - Central banks with strong track records — streamlined modalities:
    - Streamlined modalities would apply where central bank has a strong track record of implementing recommendations and no substantial issues were identified in the prior assessment or subsequent monitoring.
    - Streamlined procedures would be subject to a “shelf-life” for the previous assessment of four years and supported by a written representation by authorities in the letter of intent for the successor arrangement that the central bank’s safeguards framework remains robust.
    - Streamlined modalities would be based on those conducted for FCL arrangements (i.e., limited review of external audit arrangements).
    - Proposed eligibility conditions (all must be met):
      - The recommendations from the previous safeguards assessment have been implemented;
      - The previous assessment did not identify any substantial issues, i.e., the risk assessment for each of the ELRIC pillars was either low or medium-low;
      - The previous assessment was completed no more than four years prior to the Board’s approval of the new arrangement;
      - No substantial political or governance changes, such as overhaul of central bank management, have taken place;
      - Monitoring activities since the previous assessment did not uncover any significant adverse developments at the central bank;
      - The authorities represent in the letter of intent for the new arrangement that the safeguards framework remains robust.
    - Staff would need to report on its assessment of these conditions in the staff paper seeking Board approval of the arrangement.
    - Monitoring of the member’s central bank would continue and could entail on-site visits in the event of significant adverse developments.

- Monitoring — proposed refinements:
  - 2010 review endorsed a risk-based framework assigning monitoring intensity to central banks based on risk criteria; high intensity monitoring involves frequent contact and may include monitoring missions.
  - Proposal to refine monitoring to reflect diminishing safeguards risks as credit outstanding is repaid over time, using Post-Program Monitoring (PPM) practices:
    - Under PPM, monitoring intensity would be limited to a desk-review of the annual external audit results (financial statements and management letters) once a member’s credit outstanding falls below the PPM threshold, currently 200 percent of quota.
    - Safeguards monitoring would follow institutional practices for PPM, including the exceptions.
    - The decision on PPM is normally made during the last program review by the Executive Board.
  - Panel encouraged integration of metrics for more first-hand verification in the post-program period; staff will explore options such as:
    - Combining travel for assessments with short monitoring visits in the region;
    - Participation in area department missions to follow up on specific safeguards developments;
    - Further coordination with area department staff to follow up on safeguards issues during program or Article IV missions.

### C. Further enhancements within the safeguards framework (paragraph 52)
- The five pillars of the ELRIC framework are proposed to be retained with broader coverage in some areas.
- Broader coverage would include:
  - Continued emphasis on governance;
  - Deeper evaluation of risk management;
  - More proactive engagement where amendments to central bank legislation are proposed.
- Rationale:
  - ELRIC provides an adequate basis for safeguards work, covering good governance, autonomy, audit and control systems.
  - The framework enables a structured approach while allowing tailoring to specific cases and adjusting focus as central banks develop.

*Source: SAFEGUARDS ASSESSMENTS — INTERNATIONAL MONETARY FUND (content unit _092315 - 41.)*

### 53.      Governance should continue to be a common theme transcending the ELRIC pillars.

### 53. Governance should continue to be a common theme transcending the ELRIC pillars.

### Governance as an overarching theme
- The panel’s report strongly endorses the sharper focus on governance effectiveness that followed the 2010 review and recommends this work continue either as an apex concept (a prism through which safeguards are viewed) or as a separate pillar alongside the ELRIC components.
- Staff proposes to continue to assess governance as an overarching theme across all five ELRIC pillars with increased clarity and guidance taking account of emerging leading practices.
- Governance key attributes considered in assessments:
  - discipline, represented by senior management’s commitment to promoting good governance
  - transparency, necessary to facilitate effective communication to, and meaningful analysis and decision making by, third parties
  - autonomy, which is essential for a top decision-making body—for example, a central bank board—to operate without risk of undue influence or conflict of interest
  - accountability, under which decision makers have effective mechanisms for reporting to a designated public authority, such as the parliament
  - responsibility, which entails high priority on ethical standards and corrective action, including for mismanagement where appropriate

### Risk management: coverage and integration
- Panel recommended expanding coverage of risk management; options included a new ELRIC pillar or integration into the core safeguards framework.
- Staff view: risk management analysis fits within the “C” pillar (overall control systems) but should be given more prominence and deeper evaluation beyond stock-taking to assess effectiveness.
- Observations:
  - Risk management remains relatively underdeveloped at many central banks subject to safeguards assessments.
  - Progress has lagged on development of risk management structures, potentially reflecting the absence of a specific standard or international framework.
- Staff commitments:
  - Develop an internal framework for assessing and providing modular recommendations that take account of country circumstances.
  - Foster simple building blocks for central banks in nascent stages or with capacity constraints; engage on leading practices with advanced frameworks.
  - Proposed additional text in Annex II on the ELRIC framework to underscore this shift.

### Legal framework amendments and broader engagement
- Panel recommends a more proactive approach to engage key domestic players when assessments recommend amendments to central bank legislation.
- Staff positions and sequencing constraints:
  - Broader engagement must be sequenced following discussion with the central bank on findings and recommendations (normally at mission conclusion).
  - Broader engagement may require follow-up visits or coordination with program missions; close coordination with area department staff will be necessary.
  - Such engagement would typically involve discussions with the ministry of finance, in close collaboration with the central bank; staff would not envisage engagement with legislative entities but limit interaction to the ministry.
- Practical implication: broader engagement on legal amendments should be carefully considered and sequenced.

### Audit and accounting standards
- Staff will continue to use international standards as benchmarks for financial reporting and external and internal audits and will take account of developments in audit and accounting standards.
- Noted change: coming audit standards will introduce new elements in the external auditor’s report on communications with audit committees during the audit, helping highlight significant risks identified during audits.
- Staff will maintain close review of such developments and adapt the approach as needed.

### Increased outreach on internal audit issues
- Internal audit capacity constraints remain a challenge; internal audit is the “third line of defense.”
- Proposed actions to strengthen internal audit focus:
  - Increased coverage of topical issues in regional safeguards seminars to elevate awareness of leading good practices.
  - Actively promote peer central bank dialogue between mature and developing functions based on safeguards findings.
  - Identify external experts/speakers with deep audit knowledge for initial and continuing bilateral engagement with central banks.

### Transparency, confidentiality, and reporting
- Staff considers confidentiality of safeguards reports a key success factor because assessments grant access to sensitive information, including foreign reserves data and confidential external auditor management letters.
- Benefits of confidentiality: supports due diligence, enables candor, and facilitates open collaboration with third parties.
- Key risks of publication: need for redactions of market-sensitive information (delays, resource burden), deterioration in frank discussions with external auditors and central bank authorities, and reduced access to confidential information including external auditor reports subject to third-party restrictions.
- The panel endorsed the confidential nature of safeguards reports, noting wider dissemination could affect central bank candor and disincentivize information sharing.
- Panel recommendation on staff reports: greater consistency in the safeguards summary paragraph in staff reports and periodic safeguard activity reports to the Board. Minimum coverage recommended:
  - any instances of misuse or misreporting
  - significant recommendations on legislative amendment that fall outside the powers of the central bank to effect
  - problems in obtaining access to data
  - deviations from commitments in relation to safeguards recommendations
- Staff agrees that consistent placement in the main body of staff reports and minimum content principles would be a positive development and can be integrated fairly quickly.

### Issues for Board discussion (areas Directors may wish to focus on)
- The appropriateness and effectiveness of the safeguards assessment policy in mitigating risks of misreporting and misuse of Fund resources, and maintaining the Fund’s reputation as a prudent lender.
- The proposals to adopt fiscal safeguards reviews, as part of the safeguards assessment policy, to help identify and highlight fiscal risks in Fund arrangements involving budget financing.
- The proposals for a risk-based streamlining of the modalities for safeguards assessments and monitoring.
- The proposed enhancements within the safeguards framework for continued emphasis on governance, broader coverage of risk management and internal audit issues, and a more proactive approach to engage key domestic stakeholders in cases with recommendations on amendments to central bank legislation.
- The confidentiality of safeguards assessment reports and reporting of key findings and recommendations in country staff reports.

### Annex I: Safeguards policy applicability and streamlining (key numeric thresholds and modalities)
- Current policy: safeguards assessments apply to members seeking financial arrangements with the IMF, except Flexible Credit Line (FCL) arrangements; they apply to new and successor arrangements, augmentations, arrangements treated as precautionary, and Rights Accumulation Programs (RAP) where resources are being committed but no arrangement is in place.
- Safeguards assessments do not apply to financing extended through first credit tranche purchases.
- Safeguards assessment requirements apply to disbursements involving liquidity and emergency assistance under the Rapid Credit Facility (RCF), Rapid Financing Instrument (RFI), and a 6-month Precautionary and Liquidity Line (PLL).
- Periodic assessment cycle for members of currency unions with no autonomous national central banks: BCEAO, BEAC, and ECCB are assessed every four years.
- Streamlined policy proposals:
  - Safeguards assessments would not be updated for (i) augmentations, (ii) successor arrangements where a safeguards assessment was completed no more than 18 months prior to the approval of the successor arrangement; and (iii) central banks with a strong track record, if the previous assessment was completed within the past four years and no substantial issues were identified in the prior assessment or subsequent monitoring.
  - In the last case, staff would only conduct safeguards monitoring procedures based on a review of external audit arrangements and audit results (i.e., similar to the procedures applicable to FCLs).
  - Limited monitoring intensity would apply to countries that are exempt from Post Program Monitoring (PPM).
  - Monitoring activity would be reduced for central banks of members whose credit outstanding is below the PPM threshold, currently 200 percent of quota, have no active program, and where no program is expected in the near future. The limited monitoring would encompass a desk-review of the annual external audit results.

### Annex II: Updated ELRIC framework — five pillars and objectives
- ELRIC defined: a diagnostic exercise to evaluate the adequacy of five key areas of control and governance within a central bank. Governance is an overarching theme.
- Pillar 1 — External Audit Mechanism:
  - 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.
- Pillar 2 — Legal Structure and Autonomy:
  - Objective: (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.
- Pillar 3 — Financial Reporting Framework:
  - 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; financial information must be relevant, reliable, timely, readily available, consistent in presentation over time, and based upon recognized standards, such as IFRS.

*Source: SAFEGUARDS ASSESSMENTS (excerpts from the provided chapter).*

### 4.       Internal Audit Mechanism. Internal auditing is an independent, objective assurance and

### _092315 - 4.       Internal Audit Mechanism. Internal auditing is an independent, objective assurance and

### Internal Audit Mechanism: definition and assessment objective
- Internal auditing is described as "an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations."
- Purpose:
  - To help an organization achieve its 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 for a central bank’s internal audit function:
  - Determine whether internal audits are performed in accordance with international standards, such as International Standards for the Professional Practice of Internal Auditing.
  - Determine whether the function is assigned sufficient independence and authority to fulfill its mandate effectively.
  - Verify whether procedures exist for communicating results without interference.

### System of Internal Controls: scope, objectives, and assessment focus
- A sound system of internal controls:
  - Encompasses a thorough assessment of risks and the design of adequate mitigating controls.
  - Includes behaviors, policies and procedures put in place by an entity’s board, senior management, or staff to manage risks and provide reasonable assurance regarding achievement of objectives in the following categories:
    - (i) conducting ethical, effective and efficient operations;
    - (ii) fulfilling accountability obligations, including through reliable financial reporting;
    - (iii) safeguarding resources against loss and misuse;
    - (iv) compliance with applicable laws and regulations.
- Relationship with risk management:
  - Risk management and internal controls systems are a key component of an entity’s risk management framework and essential in safeguarding integrity of operations, resources and reputation good governance.
  - They are effective if built on rules of conduct and integrity upheld by governance bodies at a central bank.
- Assessment objective for internal control system in a central bank:
  - Ascertain the quality of high level governance and oversight, employee integrity, and the bank’s commitment to building and maintaining internal competence a robust control environment.
  - Particular focus on risk management and controls in areas of high importance for central bank operations and of significant relevance to a Fund arrangement, including:
    - Controls in reserves management.
    - Accounting.
    - Currency and banking operations.
    - Measures to ensure accurate and timely reporting of monetary program data.
- Note on framework update:
  - "This component of the framework is proposed to be updated as shown to take account of the increased coverage of risk management functions, as recommended by the panel."

### Assessments completed (Annex III): calendar coverage and counts
- Table header: "Assessments Completed since 2000 (Calendar Years 2000-August 2015)"
- Source: FINSA database.
- Yearly listings (as provided in source):
  - 2015Ghana, Honduras, Kenya, Madagascar, Morocco, Serbia, Sierra Leone, Ukraine, Yemen9
  - 2014 Albania, Armenia, Bosnia and Herzegovina, Georgia, Romania, Samoa, Seychelles, Sierra Leone, Ukraine 9
  - 2013 BCEAO, BEAC, Bosnia and Herzegovina, Cyprus, Egypt, Jamaica, Jordan, Liberia, Libya, Morocco, Pakistan, São Tomé and Príncipe, Seychelles, Solomon Islands, Tunisia, Yemen 16
  - 2012 Burundi, Djibouti, ECCB, Gambia, Greece, Guinea, Kenya, Kosovo, Lesotho, Malawi, Solomon Islands, Tanzania 12
  - 2011 Afghanistan, Bangladesh, Fiji, Georgia, Haiti, Honduras, Ireland, Kenya, Kyrgyz Republic, Liberia, Macedonia, Nepal, Portugal, Romania, Serbia, Ukraine, Yemen 17
  - 2010 Angola, Armenia, BCEAO, Cambodia, Comoros, Democratic Rep. of the Congo, Dominican Republic, El Salvador, Georgia, Greece, Iraq, Jamaica, Kosovo, Lesotho, Malawi, Maldives, Mauritania, Moldova, Mozambique, Pakistan, Samoa, Seychelles, Sierra Leone, Solomon Islands, Tajikistan, Zambia 26
  - 2009 Armenia, BEAC, Belarus, Bosnia and Herzegovina, Costa Rica, Djibouti, El Salvador, Ethiopia, Ghana, Guatemala, Hungary, Iceland, Kenya, Kyrgyz Rep., Latvia, Lebanon, Mongolia, Nicaragua, Pakistan, Romania, Sao Tome & Principe, Serbia, Sierra Leone, Sri Lanka, Tanzania, The Gambia, Ukraine, Zambia 28
  - 2008 Afghanistan, Burundi, Cape Verde, Congo Dem. Rep., Georgia, Haiti, Honduras, Iraq, Lebanon, Liberia, Madagascar, Malawi, Mozambique, Seychelles, Tanzania 15
  - 2007 Comoros, ECCB, Guinea, Guyana, Haiti, Liberia, Mauritania, Nicaragua, Peru, Rwanda, The Gambia, Uganda 12
  - 2006 Afghanistan, Albania, Burundi, Croatia, Iraq, Macedonia, Madagascar, Malawi, Moldova, Paraguay, Sierra Leone 11
  - 2005 Armenia, Bangladesh, BCEAO, Bosnia and Herzegovina, Colombia, Croatia, Dominican Republic, Haiti, Kenya, Kyrgyz Republic, Turkey, Uruguay 12
  - 2004 Argentina, BEAC, Belarus, Bolivia, Brazil, Bulgaria, Burundi, Cambodia, Georgia, Honduras, Mauritania, Mozambique, Nepal, Peru, Romania, Sao tome & Principe, The Gambia, Ukraine, Zambia 19
  - 2003 Bolivia, Colombia, Congo Dem. Rep., Croatia, Dominican Republic, ECCB, Ecuador, Ghana, Guyana, Jordan, Kenya, Lao People's Republic, Lesotho, Macedonia, Malawi, Mongolia, Nicaragua, Paraguay, Rwanda, Sri Lanka, Tajikistan, Tanzania, Uganda, Uruguay 24
  - 2002 Albania, Argentina, Armenia, Azerbaijan, Bangladesh, BCEAO, Bosnia and Herzegovina, Brazil, Brazil, Bulgaria, Cape Verde, El Salvador, Georgia, Guatemala, Guinea, Kyrgyz Republic, Moldova, Mongolia, Nepal, Romania, Sierra Leone, Turkey 22
  - 2001 Albania, BEAC, Ethiopia, Kenya, Latvia, Lesotho, Lithuania, Madagascar, Malawi, Nicaragua, Nigeria, Pakistan, Peru, Serbia, Sri Lanka, Tajikistan 16
  - Transitional Assessments Argentina, Bolivia, Bosnia and Herzegovina, Bulgaria, Cambodia, Colombia, Djibouti, Estonia, Ghana, Guyana, Honduras, Indonesia, Jordan, Latvia, Lithuania, Mauritania, Mozambique, Panama, Papua New Guinea, Romania, Sao Tome & Principe, Tanzania, Turkey, Ukraine, Uruguay, Yemen, Zambia 27

### Fiscal Safeguards questionnaire (Annex IV): aim and questionnaire structure
- Broad aim of a fiscal safeguard exercise:
  - To give “reasonable” assurance that funds provided for budget financing:
    - Will be spent on LEgally appropriated expenditures;
    - Will be paid into a Treasury account from which all legally appropriated central government expenditures are financed;
    - Will be financing transactions carried out through a central government budget, that is subject to transparent and effective Internal budget execution procedures and controls;
    - Will be supporting and financing a central government budget that is subject of comprehensive, timely and regular Fiscal monitoring and reporting;
    - Is also subject both to effective internal Audit procedures and to an external audit conducted by an independent auditor, who reports to the Parliament rather than the central government.
- Questionnaire sections and sample questions (selection from source):
  - Legal Authorization:
    - What are the provisions in the Constitution (if any) and what are the principal laws in place that govern Parliamentary approval of the overall central government budget (and component appropriations)? Is there a consolidated organic budget law?
    - Are there annual budget and finance laws authorizing central government expenditures and the tax regime respectively?
  - Treasury Account:
    - Is there a single treasury bank account (TSA) for central government expenditures and revenues held at the central bank? How is it structured; main sub-accounts etc?
    - How will Fund budgetary support/financing be paid into this account; can Fund monies be drawn down into any other account and if so how?
    - Is there a legal basis for the TSA?
  - Internal Controls i) Budget Execution System:
    - What are the rules for virements (transfers of appropriation across and within Appropriation Heads)? How does the MOF ensure it is always controlling against the most up to date budget (reflecting approved virements)?
    - Are the internal budget execution controls documented and subject to periodic review and update?
    - Does the MOF (or other party such as the Auditor General) exercise any ex-ante control over release of budget funds from the TSA?
  - Internal Controls ii) Indicators:
    - Over each of the last three years, what was the average percentage variance between the original central government budget approved by Parliament and the outturn? Was this variance all legally authorized through supplementary budgets and /or Excess Votes?
    - Is there a legal definition of what constitutes a payment arrear (e.g. a bill outstanding for more than 60 days after the prescribed payment date)?
  - Fiscal Monitoring and Reporting:
    - How frequently (daily/weekly/monthly) are reports on central government expenditures and revenues provided to the MOF of above-the-line data, below-the-line data, reconciliations, and reconciliation of flow of debt operations with changes in the stock of government debt?
    - In each of the last three years, what was the average number of months (after financial year end) before comprehensive central government accounts were available internally within government and submitted to the external auditor for audit?
  - Audit i) Internal:
    - Is there an internal audit system/mechanism within central government? If so is it under MOF or individual line ministry supervision?
    - Are all internal audit reports available to the external auditor?
    - What mechanism exists for follow up on internal audit recommendations?
  - Audit ii) External:
    - What is the legal basis of the external audit function for central government? Does the head of external audit report to the executive, legislature, or judiciary?
    - Who sets the standards for external audit? Are these consistent with international standards such as INTOSAI or ISAs?
    - In each of the last three years, what was average lag between the publication of accounts by central government and the external auditor’s report? Was a formal audit opinion issued and published?

### Safeguards recommendations: implementation statistics (Annex V)
- Table: Implementation of Safeguards Recommendations (for the period April 2010 to August 2015)
- Source: FINSA database.
- Key figures (as presented):
  - Total number of recommendations with formal commitment from the authorities that are due 70
    - a. Under program conditionality  1/48                         93.8
      - Of which: Implemented  45
    - b. LOI/MEFP commitments  2/22                         63.6
      - Of which: Implemented  14
  - Other recommendations 469
    - Of which: Implemented  328                       69.9
  - Total recommendations (1+2)  539                       71.8
    - Of which: Implemented  387
- Footnotes included in source:
  - 1/ The three outstanding recommendations with program conditionality all involve amendment of the central bank legislation, which is at different stages of progress.
  - 2/ Six of the eight recommendations relate to two member countries with poor implementation track records.

### Developments in central banks’ operating environments and associated safeguards risks (Annex VI)
- Currency Management — Trends and related safeguards risks:
  - Trends and developments:
    - Cash management continues to be a core function. The use of electronic money has not reduced currency in circulation.
    - Increased automation and use of technology – for processing and vault security.
    - Interface of currency processing and vault systems with the accounting system.
    - Increased reliance on external suppliers (software, equipment, engineering).
    - More involvement of private sector (e.g., sorting and processing) and more outsourcing. More cash centers – i.e., vaults and processing in outside locations.
    - Banknote production is more demanding – counterfeit risks, life expectancy, environmental impact of notes.
    - The Banknote Ethics Initiative established in 2013, to provide business practice with a focus on the prevention of corruption and on compliance with anti-trust law. The industry acknowledges that there is a problem.
    - Increase in public awareness of incidents of currency fraud involving central bank staff.
    - Inadequate capacity to operate advanced equipment.
  - Safeguards risks:
    - Capacity of internal and external audit – audit trail of cash processing activities more difficult.
    - IT risks – audit trails; lack of qualified IT auditors; override of controls possible from locations outside the central bank; less human oversight.
    - Insufficient storage space increases custody risks.
    - Procurement of high-value equipment and notes. Incentives to award contracts to selected suppliers.
    - Impact on program monetary data – misstatement of currency in circulation/reserve money.
- Reserves Management — Trends and related safeguards risks:
  - Trends and developments:
    - Low-return environment creates incentives to pursue “unorthodox” investment opportunities, for example:
      - Increased investments in instruments with embedded derivatives. (e.g., BIS dual-currency deposits; high-risk repos)
      - Investment in equities & emerging market bonds
      - Currency diversification – may involve not freely convertible currencies
      - Excessive concentration and/or counterparty risk (e.g., large proportion of reserves invested with a single counterparty)
    - Increased use of external asset managers.
    - Higher price of gold – more attractive investment including unrefined gold.
    - IT developments: increased use of straight-through processing (dealing/settlement/recording); increase in automated controls around SWIFT.
    - Establishment of local “development funds” and sovereign wealth funds – resulting in the central bank not being the sole holder of the country’s reserves.
    - Increased use of fx swap lines between central banks.
  - Safeguards risks:
    - Governance bodies may not have the relevant experience to oversee and challenge investment decisions.
    - Inadequate staff capacity to manage complex instruments and monitor the risks.
    - Internal and external audit lack special expertise to audit complex investments and the related IT systems.
    - Misreporting risks increase: (i) difficulties in measuring the value of investments; (ii) it may also be difficult to confirm whether these instruments exist, are in freely convertible currencies, and readily available.
    - Higher risk of loss in underlying investments –resulting in erosion of equity, and reputational losses.
    - Off balance sheet commitments related to complex or derivative instruments may be difficult to identify.
- Domestic FX Operations — Trends and related safeguards risks:
  - Trends and developments:
    - Development of financial markets - increased use of foreign exchange swaps and other derivative transactions.
    - Foreign currency auctions have become more prevalent; development of auction systems.
    - Currency swaps that may have undisclosed objectives; e.g., requirement that counterparties invest related resources in government securities.
    - Central banks acquiring from domestic entities non-convertible cash balances in foreign currency that cannot be repatriated.
  - Safeguards risks:
    - Impact on data reporting, including compliance with definitions on readily available and convertible foreign exchange reserves.
    - Challenges in valuation of the derivative instrument.
    - Lack of transparency regarding objective and counterparties. Lack of adequate disclosures in financial statements.
    - Limited capacity of internal and external auditors to review these transactions and the related systems.
- Lending/Financial Assistance to Banks and Other Institutions — Trends and related safeguards risks:
  - Trends and developments:
    - Financial stability objective now more frequently incorporated in central bank legislation; increased lender of last resort (LOLR) exposure.
    - LOLR evolved from traditional easing (standing facilities) to extraordinary targeting specific institutions and provision of FX liquidity.
    - Easing requirements on the quality of collateral.
    - Providing solvency support together with liquidity support.
    - Trends to reduce fiscal dominance may lead to less transparent and indirect lending to government (i.e., round tripping). Lending to state-owned enterprises/government entities using intermediary banks for the purpose of financing quasi-fiscal activity.
  - Safeguards risks:
    - Lack of a clear ELA legal framework to ensure minimum requirements are met (solvency, collateral, interest rate, repayment terms).
    - Inadequate governance arrangements and transparency on decision-making.
    - Balance sheet risks (sustained drainage of central bank capital).
    - Solvency is difficult to establish during a crisis.
    - Lack of autonomy – political interference in decision-making.

*Source: Excerpts from the original PDF content unit provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_092315.pdf_