## _sdn1605

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---

### Executive summary and scope
- Focus: corruption defined as “the abuse of public office for private gain,” emphasizing public-sector abuse while recognizing private-sector roles (for example, bribes).
- Manifestations: transactional (petty/bribery) and systemic (business–government networks and “state capture”).
- Macro-critical concern: systemic corruption can undermine the state’s ability to raise revenue, supply public goods, regulate markets, and perform redistributive roles, risking social unrest, violence, or conflict.
- Objective of the SDN: highlight corruption’s macroeconomic relevance and strategies to combat it; not an assessment of the IMF’s governance policy.

### Key quantified findings on costs of corruption
- Global bribery estimate: "$1.5 to $2 trillion annually (roughly 2 percent of global GDP)."
- Fiscal loss example: "0.8 percentage point of GDP."
- Correlations (deviations from values predicted by income level):
  - Correlation = –0.417*** (Tax revenue vs. Corruption Perception Index, avg. 1995–2014).
  - Correlation = –0.249** (C-efficiency ratio vs. Corruption Perception Index, avg. 2005–13).
  - Correlation = 0.426*** (CPI inflation vs. Corruption Perception Index, avg. 1995–2014).
  - Correlation = 0.488** (Emerging market yield spread vs. Corruption Perception Index, avg. 1995–2014).
  - Correlation = 0.466*** (Number of procedures to register a business vs. Corruption Perception Index, avg. 2003–15).
  - Correlation = 0.236* (Number of days required to clear customs (imports) vs. Corruption Perception Index).
- Revenue and tax thresholds:
  - Tax-to-GDP tipping point: once the tax-to-GDP ratio reaches "12¾ percent," real GDP per capita increases sharply (Gaspar, Jaramillo, and Wingender 2016).
  - Policy guidance: countries should strive to remain above the "15 percent" level to avoid frequent reversals.
- Procurement and public investment:
  - Corruption raised costs of a public project by "13 percent on average" in eight European states (PwC 2013).
  - Public Investment Efficiency (PIE) index ranges from "0–1" (larger numbers mean higher efficiency).
- Leakage and social spending:
  - Uganda PETS (1991–95): on average only "13 percent" of government education grants reached schools.
  - Tanzania PETS (2009): about "37 percent" of money intended for education was lost.
  - Teacher absenteeism example: "35 percent" (India, randomized experiment).
- Human and social outcomes:
  - Child mortality: about "one-third higher" in countries with high corruption than in low-corruption countries.
  - Infant mortality rates and share of low-birthweight babies: "almost twice as high."
  - Dropout rates: "five times as high."
- Conflict and post-conflict costs:
  - By the end of a typical civil war, incomes are on average "15 percent lower" than they otherwise would have been.
  - About "30 percent more" people live in absolute poverty after a typical civil war.

### Channels through which corruption harms economies
- Taxation and revenue mobilization:
  - Corruption reduces tax compliance and VAT C-efficiency; in aid-dependent, highly corrupted countries the incentive to mobilize domestic revenues can be lower.
  - VAT C-efficiency compares actual VAT revenue with potential revenue under a uniform rate; shortfalls reflect VAT design and compliance.
- Public spending and procurement:
  - Weak expenditure controls, off-budget transactions, and lack of oversight inflate procurement costs and create leakages (notably in defence and large-scale public investment).
  - Wasteful spending combined with lower revenue can generate large fiscal deficits, debt accumulation, and debt crisis risks.
- Monetary policy and macro stability:
  - Corruption can increase reliance on seigniorage finance, risk fiscal dominance, undermine central bank independence, and is associated with higher inflation.
- Financial sector and inclusion:
  - Corrupt countries tend to have lower deposits, less private credit, weaker supervision, higher nonperforming assets, and larger fiscal risks from bank failures.
- Investment, productivity, and business climate:
  - Corruption distorts public investment selection (lower PIE), raises costs and uncertainty for private investment, deters FDI, and reduces innovation and total factor productivity.
  - Corruption correlates with more days/procedures to start a business and to clear imports.
- Human capital, social services, and environment:
  - Corruption reduces effectiveness of spending in education and health, promotes absenteeism, and yields worse health and education outcomes.
  - Higher corruption is associated with higher per capita emissions (sulfur dioxide and carbon dioxide) and over-extraction of natural resources via bribery for licenses.
- Political and social stability:
  - Systemic corruption erodes state legitimacy, can trigger instability and conflict, and may fuel greed- or grievance-driven rebellions, especially in resource-rich contexts.

### Illustrative empirical and anecdotal points
- Panama Papers: highlighted opacity of corporate vehicles and potential for tax evasion and criminal activity.
- IMF program conditionality: evidence that conditionality becomes ineffective in countries with high corruption (Crivelli and Gupta 2016).
- Notable failures linked to corruption: payroll controls (Ghana), public financial systems (Malawi), defence procurement (Mali), Kabul Bank (Afghanistan), Asia Universal Bank (Kyrgyz Republic).
- Brazil Petrobras scandal: corruption evidence contributed to credit downgrades since December 2015.

### Corruption-mitigating strategies (IMF perspective)
- Overarching principles:
  - Strategies must be holistic, multifaceted, appropriately prioritized and sequenced to country circumstances.
  - Manage expectations: legal reforms can be enacted quickly, credible enforcement and cultural/behavioral change take time.
  - Preventive reforms (for example, transparency measures) can be as effective as punitive measures.
  - Measurement challenges: many indicators rely on perceptions; defining and measuring corruption is difficult.
- Four priority elements based on IMF experience:
  - Transparency.
  - Rule of law.
  - Economic reform to eliminate excessive regulation and reduce discretionary decision-making.
  - Building effective institutions that enforce rules impartially.
- Institution-building objectives and approaches:
  - Aim for a competent civil service independent from private influence and public interference.
  - Essential institutional features: clear legal mandates, governance/oversight, accountability, operational and financial autonomy, eligibility and dismissal procedures, legal protections for officers acting in good faith.
  - Technical expertise and training tailored to specialized domains (for example, AML analysis, insolvency).
  - Incentive design: mix “sticks” (prosecution/dismissal) with “carrots” (transparent, merit-based wage increases); evidence links increased wages to improved corruption-perception indicators in low-income countries (Van Rijckeghem and Weder 2002).
  - Leadership matter: top-level political and administrative leadership can accelerate reform (examples: Indonesia, Lee Kuan Yew/Singapore).
  - Institution-building evolution: shift from technical/process training toward results-based approaches emphasizing professional values, integrity, and accountability.

### Transparency, rule of law, and operational examples
- Transparency:
  - Greater public budget transparency is associated with lower perceived corruption.
  - IMF participation (as of end-April 2016):
    - "184 countries" participated in the data dissemination standards.
    - "110" in the Enhanced General Data Dissemination System (e-GDDS).
    - "64" in the Special Data Dissemination Standard (SDDS).
    - "10" in SDDS-plus.
    - "93 countries" published results under the Code on Fiscal Transparency.
    - "10 countries" published the outcome of their Fiscal Transparency Evaluations (Bolivia, Costa Rica, Finland, Ireland, Mozambique, Peru, Philippines, Portugal, Romania, and Russia).
  - IMF fiscal transparency work: "11 fiscal transparency evaluations (FTEs)" including Finland, Ireland, Bolivia, and the Philippines.
  - Extractive sector focus: OECD study finds extractive industries are the greatest contributor to bribery of foreign government officials (OECD 2014); EITI status: "51 implementing countries," of which "31 comply" with EITI requirements.
  - Use of conditionality to improve disclosure: Indonesia—annual wealth declarations compliance increased from "56 percent (2006)" to "85 percent (2009)" after IMF-supported program conditionality.
- Enhancing the rule of law:
  - Predictable enforcement, prosecution, and confiscation of ill-gotten assets are critical deterrents; prosecuting a small number of senior officials can have transformative effects.
  - Specialized anti-corruption institutions have been established where core enforcement institutions are compromised (examples: Indonesia, Kenya, Latvia, Lithuania, Queensland and New South Wales (Australia), Ukraine).
  - AML frameworks are important for prosecuting and deterring corruption; Operation Malaya (Spain) led to convictions and approximately "€520 million" in criminal fines (FATF 2014).
  - Weak AML regimes can cause loss of correspondent banking relationships (example: Niue banned in January 2001 and regained access after delisting in 2002 following AML improvements).
  - Enforcement should target the private sector as well; OECD Convention on Combating Bribery of Foreign Public Officials (1999) addresses the two-sided nature of bribery.
- Economic reform:
  - Eliminating excessive regulation reduces rent-seeking and bribery opportunities (Krueger 1974; Ades and Di Tella 1999).
  - Streamlining procedures and using technology (for example, computerized processing) can strengthen integrity in customs and other areas.
  - IMF diagnostics and country examples: Ukraine (streamlining legal framework), Eastern Caribbean (reducing discretionary tax exemptions), Grenada, Jamaica, Bolivia, Côte d’Ivoire, Uruguay (automated customs risk management), India and small island economies (labor and product market liberalization).
  - Risks: rapid liberalization with weak institutions (1990s transition economies) sometimes led to capture of state institutions; other cases (Poland) were successful.

### IMF operational experience and support for institution building
- IMF roles: technical assistance, surveillance under Article IV, and limited use of conditionality where corruption is acute.
- Box 1 — suspension of IMF lending due to corruption concerns (selected recent examples):
  - Ukraine (February 2016): IMF Managing Director expressed concern about slow governance progress and fighting corruption; noted risk to program success.
  - Malawi (November 2013): IMF delayed completion of the third Extended Credit Facility (ECF) review due to revelations of misappropriated public funds and resulting uncertainty; partners became reluctant to disburse funds into government systems.
- Box 2 — selected areas of IMF support:
  - Central Banking: mandates, governance, internal controls, autonomy, accountability, and transparent financial reporting; IMF safeguards assessments strengthened governance and audit frameworks of central banks.
  - Anti–Money Laundering (AML): policy advice, capacity building, compliance assessments; IMF helped countries transition off gray lists (examples: Ghana, Myanmar, Nepal, Sudan).
  - Financial Sector Assessment Program (FSAP): vulnerability assessments; mandatory reassessments every five years for 25 jurisdictions with systemically important financial sectors (policy adopted in September 2010).
  - Public Financial Management (PFM): strengthen fiscal frameworks, budget execution, treasury and cash management, internal control and audit; IMF conducted about "100 technical assistance missions" on PFM in financial year 2015 and supports member countries through "9 regional technical assistance centers."

### Practical lessons and policy recommendations
- Prioritize sequenced reforms tailored to country context; balance rapid legal reforms with long-term institution-building.
- Emphasize transparency measures, fiscal reporting, and consolidation of off-budget activity to reduce corruption opportunities.
- Strengthen rule of law and AML frameworks, including targeting private-sector facilitators of corruption.
- Reduce discretionary regulation and simplify administrative procedures; leverage technology to limit rent-seeking.
- Invest in institution-building: clear legal mandates, operational autonomy, technical expertise, merit-based incentives, and leadership commitment.
- Use targeted measures with rapid impact (for example, public wealth declarations) alongside medium- and long-term capacity development.

*International Monetary Fund — SDN: “Corruption: Costs and Mitigating Strategies” (selected excerpts and staff estimates).*

### EXECUTIVE SUMMARY __________________________________________________________________________ III

### EXECUTIVE SUMMARY

### Introduction
- Addressing corruption has become increasingly urgent amid subdued growth and employment prospects and high-profile corruption cases that have fueled moral outrage.
- The urgency is global: corruption affects both developed and developing countries.
- The note focuses on corruption defined as “the abuse of public office for private gain,” emphasizing public-sector abuse and acknowledging private-sector roles in many corrupt acts.
- The IMF’s SDN aims to highlight corruption’s macroeconomic relevance and strategies to combat it; it does not assess the effectiveness of the IMF’s governance policy.

### Definitions and Manifestations
- Definition used: “the abuse of public office for private gain,” consistent with World Bank, Transparency International, and the United Nations Convention against Corruption.
- The definition excludes fraudulent acts exclusively among private citizens but recognizes private-sector participation in many corrupt acts (for example, bribes).
- Corruption can be transactional (petty/bribery) or systemic (powerful business-government networks and “state capture” that privatize public policy).
- Corruption need not produce direct financial gain for an official to be corrupt; extraneous influences (financial or otherwise) that cause departure from legal/administrative duties constitute corruption.
- As corruption becomes more systemic and ingrained, the state’s ability to raise revenue, supply public goods and services, regulate markets, and perform redistributive roles can be significantly undermined, potentially triggering social unrest, violence, or conflict.

### The Economic and Social Costs of Corruption
- Bribery alone is estimated at about $1.5 to $2 trillion annually (roughly 2 percent of global GDP). The overall costs of corruption are likely larger since bribes are only one form of corruption.
- Empirical evidence and IMF staff experience indicate corruption negatively affects key drivers of potential and inclusive growth: macro-financial stability, public and private investment, human capital accumulation, and total factor productivity.
- Corruption breeds public distrust and weakens the state’s capacity to perform core functions, distorting policies and their implementation.
- There is a negative feedback loop: low rates of inclusive growth can increase corruption incidence, which in turn reduces growth, potentially making the loop self-reinforcing and persistent.
- Measurement challenges complicate causal inference: varied understandings of “corruption,” differences between perceived and actual levels, and aggregation issues of indices.
- Evidence highlighted in figures and appendices:
  - Figure 1: Corruption-Growth Nexus schematic linking corruption to weakened state functions and growth channels.
  - Corruption is negatively associated with tax revenue collection; widespread corruption harms the culture of compliance and increases tax evasion (Figure 2A).
  - A strong correlation exists between low VAT C-efficiency and high corruption across 108 countries (Figure 2B).
  - Appendix 1 contains new econometric analysis showing that improvements in corruption perception are associated with higher tax revenues (exact magnitudes reported in Appendix 1).

### Corruption: Mitigating Strategies (IMF perspective)
- Key elements to prioritize in anti-corruption strategies, based on IMF experience:
  - Transparency
  - Rule of law
  - Economic reform policies aimed at eliminating excessive regulation
  - Building effective institutions that can enforce rules impartially
- Institutional development objective: a competent civil service proud of its independence from private influence and public interference.
- Institution building is complex and time-consuming, involving intangible elements, but central to addressing corruption effectively.
- The note draws on IMF country experience and lessons for designing and implementing corruption-mitigating strategies (further details and examples appear in Section IV and Boxes).

### Conclusion
- Corruption is macro-critical and can seriously undermine inclusive economic growth across multiple channels.
- Addressing corruption requires multi-level change, with priority on institutions, transparency, rule of law, and economic reforms that reduce rent-seeking opportunities.
- The IMF will take up broader assessment of its governance and corruption policies in the context of a review of the Fund’s 1997 governance policy, as requested by the IMFC.

*International Monetary Fund — SDN: “Corruption: Costs and Mitigating Strategies” (Executive Summary and selected sections).*

### 0.8 percentage point of GDP.

### _sdn1605 - 0.8 percentage point of GDP.

### Key quantified findings on costs of corruption
- Fiscal losses example: "0.8 percentage point of GDP."  
- Correlations (deviations from values predicted by income level):  
  - Correlation = –0.417*** (Tax revenue vs. Corruption Perception Index, avg. 1995–2014).  
  - Correlation = –0.249** (C-efficiency ratio vs. Corruption Perception Index, avg. 2005–13).  
  - Correlation = 0.426*** (CPI inflation vs. Corruption Perception Index, avg. 1995–2014).  
  - Correlation = 0.488** (Emerging market yield spread vs. Corruption Perception Index, avg. 1995–2014).  
  - Correlation = 0.466*** (Number of procedures to register a business vs. Corruption Perception Index, avg. 2003–15).  
  - Correlation = 0.236* (Number of days required to clear customs (imports) vs. Corruption Perception Index).  
- Revenue and tax thresholds:  
  - Recent IMF research suggests that once the tax-to-GDP ratio reaches 12¾ percent, real GDP per capita increases sharply (Gaspar, Jaramillo, and Wingender 2016).  
  - Countries should strive to remain above the 15 percent level in order to avoid frequent reversals.  
- Procurement and public investment:  
  - Corruption raised the costs of a public project by 13 percent on average in eight European states (PwC 2013).  
  - Public Investment Efficiency (PIE) index scores range from 0–1 (larger numbers mean higher efficiency).  
- Leakage and social spending metrics:  
  - Uganda PETS (1991–95): on average only 13 percent of government education grants reached schools.  
  - Tanzania PETS (2009): about 37 percent of money intended for education was lost.  
  - Teacher absenteeism example: 35 percent (India, randomized experiment).  
- Human and social outcomes:  
  - Child mortality rates in countries with high corruption are about one-third higher than in countries with low corruption.  
  - Infant mortality rates and the share of low-birthweight babies are almost twice as high.  
  - Dropout rates are five times as high.  
- Conflict and post-conflict economic costs:  
  - By the end of a typical civil war, incomes are on average 15 percent lower than they otherwise would have been.  
  - About 30 percent more people live in absolute poverty after a typical civil war.

### Channels and mechanisms through which corruption harms economies
- Taxation and revenue mobilization:  
  - Corruption creates disincentives for taxpayers to pay taxes; exemptions perceived as the product of a bribe reduce compliance.  
  - In aid-dependent, highly corrupted countries, incentive to mobilize domestic revenues (including VAT) can be lower.  
  - VAT C-efficiency measures compare actual VAT revenue with potential revenue under a uniform rate; shortfalls reflect VAT design and compliance.  
- Public spending and procurement:  
  - Weak expenditure controls, off-budget transactions, and lack of oversight lead to inflated procurement costs and leakages, particularly in military and large-scale public investment.  
  - Wasteful public spending combined with lower revenue can generate large fiscal deficits and substantial debt accumulation, risking debt crises.  
- Monetary policy and macro stability:  
  - Corruption can increase reliance on seigniorage finance, risk fiscal dominance, undermine central bank independence, and be associated with higher inflation.  
- Financial sector and inclusion:  
  - Corrupt countries tend to have lower deposits and less private credit, weaker supervision, higher nonperforming assets, and greater fiscal risk from bank failures.  
- Investment, productivity, and business climate:  
  - Corruption distorts public investment selection, lowers PIE, raises costs and uncertainty for private investment, deters foreign direct investment, and reduces innovation and productivity.  
  - Corruption correlates with more days/procedures to start a business and to clear imports.  
- Human capital, social services, and environment:  
  - Corruption reduces public spending effectiveness in education and health, promotes absenteeism, and leads to worse health and education outcomes.  
  - Higher corruption is associated with higher per capita emissions (sulfur dioxide and carbon dioxide) and over-extraction of natural resources via bribery for licenses.  
- Political and social stability:  
  - Systemic corruption can erode state legitimacy, trigger political instability and conflict, promote greed or grievance-based rebellions, and exacerbate risks in resource-rich countries.

### Illustrative empirical and anecdotal points
- Panama Papers: highlighted scope of global financial secrecy and potential for tax evasion and criminal activity.  
- IMF program conditionality: recent IMF research suggests conditionality becomes ineffective in countries with high corruption (Crivelli and Gupta 2016).  
- Examples of financial integrity failures linked to corruption: payroll controls (Ghana), public financial systems (Malawi), defence procurement (Mali), Kabul Bank (Afghanistan), Asia Universal Bank (Kyrgyz Republic).  
- Brazil Petrobras scandal: evidence of corruption contributed to credit downgrades since December 2015.

### Mitigating strategies: consensus lessons and IMF experience
- Overarching principles:  
  - Effective strategies require a holistic, multifaceted approach, appropriately prioritized and sequenced for country-specific circumstances.  
  - Manage expectations: legal reforms can be enacted quickly, but credible enforcement depends on institutions that require time to develop and cultural/behavioral change.  
  - Preventive reforms (for example, transparency measures) can be as effective as punitive measures.  
  - Measurement challenges: corruption is hidden; many indicators rely on perceptions and face definitional variances.  
- IMF operational experience and focus areas:  
  - IMF involvement has included technical assistance, surveillance under Article IV, and, in limited cases, conditionality where corruption was acute.  
  - Four reviewed strategies from IMF experience: transparency; enhancing the rule of law; economic reform and regulation; building institutions.  
  - Targeted measures with rapid impact can include systems for public officials to report their wealth.

*Source: CORRUPTION: COSTS AND MITIGATING STRATEGIES (IMF staff estimates and cited studies, as presented in the source PDF).*

### Box 1. Suspension of IMF Lending Due to Corruption Concerns: Recent Examples

### Box 1. Suspension of IMF Lending Due to Corruption Concerns: Recent Examples

### Policy basis
- The 1997 governance policy provides for suspension of IMF financing because of poor governance, including corruption, if it could have significant macroeconomic implications that threaten successful program implementation or casts doubt on the purposes for which IMF resources are used.

### Recent cases in which lending was suspended, in part due to governance and corruption issues
- Ukraine (February 2016)
  - Quoted concern: “I am concerned about Ukraine’s slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policymaking. Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported program can continue and be successful. Ukraine risks a return to the pattern of failed economic policies that has plagued its recent history. It is vital that Ukraine's leadership acts now to put the country back on a promising path of reform.”
  - Reference: Statement by the Managing Director on Ukraine, Press Release No. 16/50, February 10, 2016, available at https://www.imf.org/external/np/sec/pr/2016/pr1650.htm.

- Malawi (November 2013)
  - Summary: “The policy reforms initiated in May 2012 have produced positive results. However, recent revelations that substantial amounts of public funds have been misappropriated through fraudulent transactions using the government’s financial management system, introduced considerable uncertainty to the economic outlook. Aside from the direct loss through theft, external financial assistance to the budget was placed at risk. Development partners became reluctant to disburse funds into government systems they viewed as insecure. With fiscal buffers already weakened by excessive borrowing in the first quarter of FY2013/14, and with an emerging large fiscal gap, the IMF decided to delay completion of the third Extended Credit Facility (ECF) review until the fiscal situation could be clarified and necessary corrective measures put in place.”
  - Action taken: Delay of completion of the third Extended Credit Facility (ECF) review until clarification of the fiscal situation and implementation of necessary corrective measures.

*Source: _sdn1605 - Box 1. Suspension of IMF Lending Due to Corruption Concerns: Recent Examples*

### Conclusion of an IMF Mission to Malawi, Press Release No. 13/458, November 20, 2013, available at

### Conclusion of an IMF Mission to Malawi, Press Release No. 13/458, November 20, 2013 — CORRUPTION: COSTS AND MITIGATING STRATEGIES (excerpts)

### Transparency
- Transparency is a core component of an effective anti-corruption policy and supports efficient allocation of resources by allowing market discipline and increasing political risk of unsustainable policies (Kopits and Craig 1998).
- Empirical correlation: greater public budget transparency is associated with lower perceived corruption (Renzio and Wehner 2015; Sedmihradská and Haas 2013).
- IMF promotes compliance with international standards in twelve policy areas including data dissemination, fiscal policy, and monetary and financial policy.
- Participation and coverage statistics (as of end-April 2016):
  - 184 countries participated in the data dissemination standards.
  - 110 in the Enhanced General Data Dissemination System (e-GDDS).
  - 64 in the Special Data Dissemination Standard (SDDS).
  - 10 in SDDS-plus.
  - 93 countries published their results under the Code on Fiscal Transparency.
  - 10 countries published the outcome of their Fiscal Transparency Evaluations (Bolivia, Costa Rica, Finland, Ireland, Mozambique, Peru, Philippines, Portugal, Romania, and Russia).
- IMF fiscal transparency work and examples:
  - 11 fiscal transparency evaluations (FTEs), including Finland, Ireland, Bolivia, and the Philippines.
  - Key FTE themes: coverage of institutions, credibility of budgets, fiscal risk reporting; consolidation of off-budget and extra-budgetary activity reduces corruption risk.
  - Country examples of reforms following IMF advice:
    - Gabon broadened the budget to incorporate off-budget funds and state-owned enterprises.
    - Baltic states, the Czech Republic, and Poland improved public financial management and their corruption perception scores.
    - The Philippines enhanced fiscal risk statements, published updated reports on tax expenditures, and improved fiscal reporting.
    - Burundi and Guinea: IMF assisted supreme audit institutions to improve oversight.
- Extractive industries focus:
  - OECD study: extractive industries are the greatest contributor to the bribery of foreign government officials (OECD 2014).
  - IMF actions: Guide on Resource Revenue Transparency; expanded Fiscal Transparency Code to add a pillar on the sector; pilots applied to Peru and Tanzania.
  - EITI status: 51 implementing countries, of which 31 comply with EITI requirements.
  - IMF template aligns EITI data with Government Finance Statistics Manual 2014.
- Use of conditionality to improve disclosure:
  - Indonesia: IMF-supported program required annual wealth declarations by government officials, administered by the Anti-Corruption Commission; excerpts publicly accessible; compliance rate increased from 56 percent (2006) to 85 percent (2009) (World Bank 2013).
  - Mali: IMF conditionality included auditing and publication of off-budget transactions, cancellation of contracts tainted by corruption, and stricter implementation of budget and procurement rules.
- Panama Papers implications:
  - Revealed opacity of corporate vehicles and trusts; FATF AML standards require transparency on beneficial owners, but many jurisdictions have not fully implemented the standard.
  - The revelation is likely to increase pressure for reforms.

### Enhancing the Rule of Law
- Predictable and effective enforcement, including prosecution and confiscation of ill-gotten assets, is a critical deterrent to corruption; prosecuting a small number of senior officials can have transformative effects (Klitgaard 1991).
- When core enforcement institutions are compromised, specialized anti-corruption institutions have been established (sometimes with IMF support); examples include Indonesia, Kenya, Latvia, Lithuania, Queensland and New South Wales (Australia), and Ukraine.
- Credibility factors for specialized institutions:
  - Probity, integrity, expertise, and independence of staff.
  - Civil society and media support can sustain credibility and effectiveness (example: Indonesia’s Anti-Corruption Commission).
  - Contention arises when civil society experts are excluded (noted for Ukraine’s anti-corruption bureau under IMF-supported program).
- AML framework importance:
  - AML measures contribute to prosecuting and deterring corruption by addressing laundering of corrupt proceeds.
  - International standards call for heightened scrutiny of “politically exposed persons,” transparency of company ownership, and credible financial intelligence units.
  - Operation Malaya (Spain): AML framework identified companies used to launder corruption proceeds; convictions and approximately €520 million in criminal fines imposed (FATF 2014).
  - Weak AML regimes allow transfer of ill-gotten funds abroad (Ukraine example).
- De-risking and correspondent banking:
  - Weak AML regimes risk loss of correspondent banking relationships; example: Niue was banned by major global banks in January 2001 after FATF listing and regained access after delisting in 2002 following AML improvements.
- Enforcement should target private sector too:
  - For every bribe taken there is a bribe given; OECD Convention on Combating Bribery of Foreign Public Officials (1999) aims to address this two-sided nature.
  - Large fines (regularly in the hundreds of millions of U.S. dollars) imposed on companies violating anti-bribery laws (e.g., U.S. Foreign Corrupt Practices Act, 1977).

### Economic Reform
- Eliminating excessive regulation can promote growth and reduce corruption by limiting rent-seeking where discretionary government approvals create opportunities for extortion (Krueger 1974; Ades and Di Tella 1999; Johnson, Kaufmann, and Ziodo-Lobaton 1997).
- Streamlining and using technology (e.g., computerized processing) can strengthen integrity in areas such as customs (Crotty 2010).
- IMF diagnostics and country examples:
  - Ukraine: complex and unclear legal framework for business was a root cause of corruption; program emphasizes streamlining, simplifying, and clarifying the framework (Government of Ukraine 2014; IMF 2014a).
  - Eastern Caribbean regional project: reducing discretionary and nondiscretionary tax exemptions for tourism investments; Grenada reduced discretion in tariff concessions and income tax breaks; Jamaica eliminated discretionary waivers; Bolivia, Côte d’Ivoire, and Uruguay implementing automated risk management in customs.
  - Reports for India and small island economies: labor and product market liberalization can reduce transaction costs associated with corruption (Anand and Khera 2016; Greenidge, McIntyre, and Yun 2016).
  - Middle East and central Asia: mediocre growth partly attributable to corruption rooted in patronage-ridden state-owned enterprises, complex regulations, and bureaucratic red tape (Mitra and others 2016).
- Risks of rapid liberalization where institutions are weak:
  - 1990s transition economies: rapid privatization in an oversight vacuum sometimes led to reconstitution of cartels/monopolies and capture of state institutions (Kaufmann and Siegelbaum 1996; Tanzi 1998, 1999; Hellman and Kaufmann 2001).
  - Note: in some cases rapid privatization coupled with dispersion of ownership was successful (Poland).

### Building Institutions
- Strong institutions underpin transparency, rule of law, and effective regulation; institution-building priorities include:
  - A clear legal framework that establishes institutions, defines objectives, and grants necessary attributes for effectiveness.
    - Essential legal elements: clear mandate, governance and oversight, accountability structure, operational and financial autonomy (including adequate funding), eligibility criteria for appointments, transparent dismissal procedures, and legal protection for officers acting in good faith.
    - IMF advice has supported legal reforms in central banking and supervision in Burundi, Macedonia, Tunisia, Ukraine, Serbia, Moldova, and Rwanda.
  - Technical expertise: officials must understand specialized domains (e.g., insolvency, AML analysis); IMF assistance example: Kuwait—IMF helped establish the financial intelligence unit, IT tools, manuals, and provided extensive training on financial analysis and international cooperation.
  - Incentive design: balance “sticks” (prosecution and dismissal) with “carrots” (transparent, merit-based wage increases for high-skilled officials) to reduce bribery incentives.
    - Research links increased wages with improved corruption-perception indicators, particularly in low-income countries (Van Rijckeghem and Weder 2002).
    - Any remuneration increases must be transparent and merit based to avoid perceptions of political patronage; effectiveness requires credible enforcement signals.
  - Leadership role: political and administrative leadership can change attitudes and behavior; example—Indonesia’s minister of finance (2005–10) removed and replaced top tax and customs officials, sending a strong signal; Lee Kuan Yew in Singapore demonstrated how top-level conduct can accelerate reform.
- Institution-building evolution:
  - Historical approaches (1960s–1990s) focused on process and technical training often failed.
  - More recent, results-based approaches emphasize soft skills, professional values, integrity, and accountability measures. 

*Source: Conclusion of an IMF Mission to Malawi, Press Release No. 13/458, November 20, 2013 (excerpts).*

### Box 2. Selected Areas of IMF Support for Institution Building

### Box 2. Selected Areas of IMF Support for Institution Building

### Central Banking
- IMF assistance areas:
  - establishing clear mandates through design of objectives, functions, and powers;
  - appropriate governance arrangements, with a clear allocation to decision-making bodies of responsibilities pertaining to daily management, policy setting, and oversight;
  - ensuring sound internal controls and providing for checks and balances within and between the various decision-making bodies, supported by rules of conduct and integrity upheld by these bodies;
  - functional, personal, and financial autonomy, ensuring that political bodies do not unduly hamper the execution of the central bank’s functions, that central bank officials are autonomous from political and private economic interests, and that the central bank has sufficient financial resources to fulfill its mandate;
  - explicit and robust accountability and transparency mechanisms vis-à-vis the relevant political bodies and the public at large, including through the publication of periodic reports and of audited and certified financial statements prepared according to accepted audit and financial reporting standards.
- IMF safeguards assessment policy effects:
  - significant impact on strengthening governance and audit and control frameworks of central banks;
  - emphasis on transparency and effective oversight arrangements;
  - timely publication of central banks’ financial statements prepared and audited in accordance with international standards is described as the cornerstone of safeguards requirements;
  - observed significant shift toward transparent financial reporting by central banks.

### Anti–Money Laundering (AML)
- Scope of IMF work:
  - policy advice, capacity development, and the assessment of compliance with international standards;
  - building and strengthening institutions across financial intelligence, legislative drafting, national strategies, risk assessments, and supervision and regulation of bank and nonbank entities.
- Strategic aims:
  - embed financial integrity principles and practices into government ministries and central banks globally;
  - work closely with the Financial Action Task Force and its regional bodies to promote adherence to international standards.
- Reported outcomes and examples:
  - IMF has helped countries make a transition from, or avoid, sanctions and the black- and gray-listing process;
  - Latin America: the presidents of Costa Rica, Paraguay, Peru, and Uruguay endorsed and promoted the national anti-money-laundering strategy developed with the IMF;
  - IMF assistance directly assisted Ghana, Myanmar, Nepal, and Sudan in movement off the gray list.

### Financial Sector Assessment Program (FSAP)
- Key facts:
  - FSAP adopted in 1999 to help countries assess vulnerabilities in the financial sector and identify needs for corrective actions, including on institutional and governance issues.
  - Since adoption, the Fund has conducted numerous FSAP exercises.
  - 2014 FSAP Review found the Fund’s experience with FSAP exercises satisfactory.
  - In September 2010, the IMF made it mandatory for 25 jurisdictions with systemically important financial sectors to undergo financial stability assessments under the FSAP every five years.

### Public Financial Management (PFM)
- IMF advice objectives:
  - strengthen fiscal frameworks and budget preparation to enhance the role of the budget as the central instrument for allocation of public resources.
- Focus areas:
  - budget execution and financial management in accounting and fiscal reporting, treasury management, financial management information systems, and internal control and audit;
  - adoption of good international practices in medium-term fiscal and budget frameworks, fiscal rules, fiscal councils, performance-based budgeting, accrual accounting standards, and fiscal risk management;
  - expertise in organization of ministries of finance, state treasuries, and debt and cash management offices.
- Delivery and examples:
  - IMF sent about 100 technical assistance missions from headquarters to help with public financial management in financial year 2015;
  - supported member countries through 9 regional technical assistance centers in Africa, Asia, Latin America, and the Middle East;
  - examples: Mongolia and El Salvador—IMF technical assistance helped improve transparency by developing and publishing medium-term fiscal frameworks, including information on fiscal risks facing the government.

*Source: Box 2. Selected Areas of IMF Support for Institution Building, _sdn1605.*

### References

### _sdn1605 - References

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*International Monetary Fund*

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