Abstract
Selected Issues
Principal Governance Challenges
Mongolia faces several challenges with respect to governance which in turn weigh on potential economic growth and increase macro-economic volatility. Mongolia has taken important steps to address these challenges, but more should be done to tackle remaining gaps and ensure effective enforcement.
A. Introduction
1. Improving governance is a crucial step for Mongolia to achieve sustainable and inclusive growth. As a still young democracy and a natural resource-based economy, Mongolia has many features that weigh on governance including relatively weak institutions, large lumpy capital projects, and windfall revenues from mining booms. Shortfalls in governance have manifested themselves in a variety of ways including foregone FDI due to concerns about the investment climate, higher public debt because of insufficient fiscal procedures, and pressures on correspondent banking relationships following concerns about insufficient Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) controls.
2. Encouragingly, there are important signs of progress in addressing these challenges. The authorities have made upgrades to the anti-corruption legal framework over the last two decades. Issues with governance are well known by the public, and civil society is active in advocating for required reforms. Recently, there has been growing public scrutiny regarding the opaque financing of political parties and the role of vested interest groups in entrenching poor governance. Nonetheless, more work remains and achieving the sustainable growth vision in the government’s Economic Recovery Plan crucially depends on further improving governance.
3. This paper aims to take stock of key challenges and propose recommendations on how to address them. The discussion of governance in this note is broken down into 6 categories: A) Anti-Corruption Framework, B) Rule of Law and Regulatory Framework, C) Fiscal Governance, D) Financial Sector Oversight, E) Central Bank Governance and Operations, and F) AML/CFT. The focus within each category is on the governance issues that are macro-critical in nature.
B. Key Areas and Recommended Reforms
Anti-Corruption Framework
4. Mongolia has taken important steps to develop an anti-corruption framework. Mongolia adopted the Anti-Corruption Law in 1996, ratified the United Nations Convention against Corruption in 2006, amended its Anti-Corruption law in the same year to introduce criminal penalties for corruption and most recently revised its Criminal Code in 2017. Mongolia has also signed up to the Istanbul Anti-Corruption Action Plan (the sub-regional peer-review program launched in 2003 supporting the OECD’s Anti-Corruption Network for Eastern Europe and Central Asia) which monitors compliance with the UN Convention. The Independent Authority Against Corruption (IAAC) was established in 2007 to oversee the implementation of the law and the anti-corruption strategy. The first anti-corruption strategy covered the period of 2002–10. The next strategy was adopted in 2016 and covers the period of 2016–23. The IAAC prepares an annual report on implementation of the anti-corruption strategy that is submitted to Parliament.
5. Nonetheless, corruption is still seen as a concern. The 2019 Monitoring Report by the OECD’s Anti-Corruption Network for Eastern Europe and Central Asia (OECD-ACN) finds that corruption remains widespread.1 It emphasizes that implementation of the authorities’ action plans has been limited and uneven. Moreover, the IAAC lacks the independence, resources, and necessary support from state bodies to fully exercise its mandate. The 2019 OECD-ACN Monitoring Report included many recommendations focusing on the legal framework, institutional capacity, accountability, operational independence, and enforcement of existing laws and regulations (see box).
Transparency International Corruption Perceptions Index 1/
(Score, 2017)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A001
Sources: Transparency International Organization.1/ Perceptions-based measures should be interpreted with some caution, as they reflect biases of respondents.Transparency International Corruption Perceptions Index 1/
(Score, 2017)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A001
Sources: Transparency International Organization.1/ Perceptions-based measures should be interpreted with some caution, as they reflect biases of respondents.Transparency International Corruption Perceptions Index 1/
(Score, 2017)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A001
Sources: Transparency International Organization.1/ Perceptions-based measures should be interpreted with some caution, as they reflect biases of respondents.Summary of Some Key Recommendations of the 2019 OECD-ACN Monitoring Report
Address the numerous gaps and weaknesses remaining in the legal framework such as lack of criminalization of all corruption offences.
Strengthen capacities of key institutions, especially the IAAC, the Judiciary and the General Prosecutor’s Office and guarantee their independence.
Ensure transparent selection of and accountability for the Public Council members responsible for the oversight of the IAAC. Any decisions to change management must be based on credible arguments.
Strengthen the implementation of the National Anti-Corruption Strategy and the Action Plan by the responsible bodies and provide necessary cooperation to the IAAC to advance reforms.
Intensify efforts to detect, investigate and prosecute high-profile corruption cases using diverse sources of detection and tools. Eliminate immunity and put in place protections for whistleblowers.
Take necessary measures to address the politicization of the civil service and malpractices in appointments, as well as the high turnover of staff after each political change.
Ensure the systematic and objective verification of income and asset declarations by Politically Exposed Persons (PEPs) and follow-up on potential violations.
Ensure proactive and systematic engagement with civil society.
6. To substantially reduce corruption, a stronger anti-corruption framework should be accompanied by governance reforms across a range of state functions. Reforms to strengthen governance in areas such as the rule of law, the regulatory framework, fiscal and central bank governance, financial sector oversight, and AML/CFT controls will reduce vulnerabilities to corruption and hence substantially aid the anti-corruption effort Such reforms will also improve economic efficiency and growth more generally. The following sections thus examine ways to strengthen governance in selected areas.
C. Rule of Law and Regulatory Framework
7. On rule of law, the Worldwide Governance Indicators (WGI) place Mongolia above peers in Asia but below regional averages, indicating room for improvement. While Mongolia has developed a legal framework since the transition to a market economy, observers point out that there are often loopholes and unintended consequences.2 The relevant laws should be reviewed and amended specially to ensure a level playing field between foreign and local investors. Regarding enforcement, it is important that local courts do not discriminate between local and foreign investors in any disputes and that de facto practices should be consistent with the de jure protections to investors. Investment protection guarantees that have been signed with key trading partners to provide legal predictability and local remedies should be fully implemented. In particular, the Investor Protection Council (IPC), established in 2016, should upgrade its capacity through training and more funding to enhance investor confidence. The following reforms would help improve the investment climate in Mongolia:
The judiciary can improve its capabilities through new judges, better training in specialized areas, and improvements in IT. Mongolia also needs to develop arbitral institutions, professionals, practice and case-law.
The insolvency and creditor rights regime needs to be reformed in line with advice provided by the IMF and other institutions to facilitate creditors’ ability to collect collateral in the event of non-payment.
Although systems are in place to ensure the proper distribution of mining licenses, in practice, there is scope for rent seeking activities by well-connected insiders. Existing regulations including the “use it or lose it” requirement need to be properly enforced.
Laws and regulations that discriminate between local and domestic investors and the number of areas that are closed to FDI could be reduced to promote investment improve productivity.
Consider the recommendations to strengthen judicial institutions, as presented in the 2019 OECD ACN Monitoring Report.
D. Fiscal Governance
8. Given the scope for windfall tax revenues in natural resource rich countries such as Mongolia, fiscal governance is a macro critical area where special efforts should be focused. The WGI for Government Effectiveness has a score of -0.26 (on a scale of -2.5 to 2.5).3 This is better than peers in Asia although relatively low compared to the global average and emerging-market countries in Asia. Mongolia has a well-designed fiscal rule-based system, embedded in the Fiscal Stability Law of 2010 (FSL) and the Integrated Budget Law. However, adherence to the key requirements of the FSL, including on fiscal deficits and debt, has been uneven with serious implications for macroeconomic stability. At a high level, it is important to ensure a strong institutional framework with clear roles and responsibilities amongst various agencies such the National Audit Office, Fiscal Stability Council, Ministry of Finance and Parliamentary offices. Below are some recommendations in key areas.
Revenue Administration
9. Weak revenue administration can undermine fiscal sustainability while uneven enforcement of tax rules can damage the investment climate. The Asia Foundation’s 2018 survey of the private sector’s perceptions of corruption found that the “Tax Office, Specialized Inspection Agency, and Customs highest among government agencies creating obstacles for business…the three agencies are the most affected by corruption.”4 To improve the impact of revenue administration on the economy, the IMF has provided large scale TA on tax administration by the General Department of Taxation (GDT) and tax policy by the MOF. Key recommendations include:
Implement fully and consistently the revised tax laws that strengthen the effectiveness of the tax administration and support a simplified tax regime for small and micro businesses (namely, General Tax Law, Corporate Income Tax Law and Personal Income Tax approved by Parliament in March 2019). To support the introduction of tax legislation changes, the GDT should formulate a detailed action plan for designing and implementing new regulations, tax forms and instructions, administrative processes, information systems and training programs for taxpayers and tax offices.
Formalize the adoption of a Compliance Risk Management (CRM) process to improve taxpayers’ compliance. This should feature greater differentiation across the four taxpayer segments with a simplified regime for smaller businesses. Allocate adequate budgetary funding to support the implementation of the compliance improvement strategies.
Build a well-developed data management, research, and analytics capability to implement effective CRM. The GDT is in the process of adopting a new Tax Administration Integrated System (TAIS), which will integrate the GDT’s currently dispersed tax data and will provide automated reporting of management information for compliance strategies.
Remove tax expenditures. Current tax legislation provides too generous tax exemptions and holidays that lead to revenue losses and inefficiencies.5 According to the World Bank’s Public Expenditure Review 2018 (PER), tax expenditures are a significant source of tax base erosion in Mongolia and undermine budgetary discipline with macroeconomic consequences.6 Key recommendations include: broadening the tax base by progressively removing distortionary tax exemptions/incentives by initiating a process of comprehensive and systematic evaluation (cost-benefit analysis) of tax expenditures and enhancing transparency in the process of establishing tax expenditures.7
Avoid establishing tax amnesty schemes and consider alternatives such as payment instalment agreements, voluntary disclosure programs, simplification of the tax policy regime, and strengthening of the legal framework.8
Expenditure Policy and Public Financial Management
10. Public investment management needs to be upgraded. There are four main concerns highlighted by recent reports by the IMF and WB.9 First, Mongolia’s capital expenditures in recent years have been among the highest in the world. At an average of about 11 percent of GDP in 2010–16, Mongolia’s capital expenditures far exceed the 4.8 percent of lower middle-income countries and the 3 percent of East Asia and Pacific countries. Second, Mongolia ranks 124th globally regarding the efficiency of that public spending in the World Economic Forum’s Global Competitiveness Index.10 Third, the high level of volatility of annual aggregate spending on public investment makes it difficult to plan over the project cycle of the portfolio of ongoing projects and results in project delays, arrears, and project cancellations when funding is less than expected. And finally, Mongolia has a history of engaging in public-private partnerships which are associated with higher costs and poor selection. To address these concerns, improve investment efficiency, and reduce vulnerabilities to corruption, several steps would help
Estimating sustainable levels of public investment spending, separate from proposed public investment spending levels, and publish it in the Medium-term Budget Framework.
Continuing to strengthen the annual budget formulation for public investment by:
Requiring all projects, regardless of financing source (including concessions), to be appraised prior to the budget process and be approved through the budget process.
Establishing project selection criteria for investment projects consistent with planning guidelines and publish the criteria.
Establishing a consolidated methodology for determining the appropriate level of maintenance funding by sector and publish the methodology.
Improving payables reporting to better control the execution of public investment projects and monitor arrears.
Expanding the MTFF and annual budget narrative to highlight maintenance needs and the allocation in the budget for routine maintenance, capital repairs, on-going investment projects and new investment projects.
11. The Development Bank of Mongolia (DBM) needs continued improvements in management to limit fiscal risks. The DBM was established in 2011 to finance large-scale projects that can have a significant impact on the economy. However, in 2012–16, the government used the DBM as the major off-budget financing vehicle with allocations averaging 5.2 percent of GDP. The recent audit by the National Audit Office and a special audit by PricewaterhouseCoopers (PwC) both confirmed significant weaknesses in corporate governance, policies and procedures, and internal control of the DBM during 2012–17.11 In 2017, as part of the Extended Fund Facility (EFF) commitments, Parliament passed a revised DBM Law that strengthens its independence and restricts it to purely commercial activities. Nonetheless, asset quality remains a major concern at DBM, primarily on legacy loans. To improve its operations further, key recommendations include:
Adopt a Conflict of Interest policy and clearly define the situations that could create conflict of interest. Approve a risk strategy and develop a robust risk management framework for all material risks. Manage, control, and monitor risks on a consolidated level. Adopt the internal control framework and define overall methodology components of ICS.
Improve the credit granting process and rely more on a debtor’s ability to repay the loan from its cashflow. Review the methodology for defining NPLs and adopt a methodology for identification of forborne exposures. Update the collateral valuation methodology.
12. State-owned enterprises (SOEs) would benefit from better governance, particularly given their central role in output and potential for creating fiscal liabilities. SOEs operate in key sectors including utilities, energy, transport, and mining and have an important influence on the overall efficiency and productivity of the economy. In addition, they are important contributors to the fiscal accounts. For instance, the Erdenet copper mine is traditionally the largest tax payer in Mongolia. However, their ownership, management, and activities are typically opaque and there is limited data on their balance sheets. Moreover, it is unclear whether there is a consistent investment approach across the SOEs that is integrated into the overall development strategy. To lower fiscal risks, increase productivity, and reduce vulnerabilities to corruption, key recommendations include:
SOE ownership and reporting structures should be made transparent Fiscal oversight, especially of hidden subsidies and fiscal costs, for instance in the energy sector, should be improved through better reporting and budgeting. Special focus should be placed on improving the accountability and transparency of Erdenes Mongol as it holds the country’s strategic mining assets and any weakness in its governance structure will have an important impact on the overall economy.
SOEs should comply with government procurement standards.
There should be a level playing field with the private sector in terms of tendering, competition policies, and disclosure.
The privatization process should move ahead as a way of encouraging competition and best standards in corporate governance. Allowing foreign participation would help in this regard.
13. The government’s special funds’ need greater attention as these have raised substantial governance concerns. After public reports of financial mismanagement regarding some of the 29 special funds (as at end 2018), a special examination carried out in 2018 and early 2019 by the Ministry of Finance into the operations and management of these funds revealed significant deficiencies. These included the provision of direct loans to PEPs, lack of public oversight, and absence of risk management practice. One of these funds, the Future Heritage Fund Law (FHF) approved in February 2016, deserves special attention. This fund is likely to increase substantially in the coming years as mining revenues increase and thus will need strong governance. Key recommendations include:
Greater disclosure and accountability for each fund.
Better integrating these special funds into the annual budgetary process.
Ensuring that the governance and independence of the FHF are in line with best international practices.
14. PPPs are an important source of fiscal risk. PPPs have been widely used to implement capital projects. While such structures can be an efficient means of leveraging private sector capital, they have also proven to be a way to bypass the deficit constraints of the Fiscal Stability Law and parliamentary oversight. Often these PPP projects were only brought into the budget when the projects had been completed and needed to be paid. Under the EFF, such practices have stopped and the MOF has strengthened its gatekeeping role regarding PPPs. However, safeguards relating to contract management, integration with the budget, risk allocation, and government guarantees should be formalized including through a new PPP Law.
15. Procurement rules and procedures need to be properly enforced. Notionally, the government has a strong framework for procurement. There is the Public Procurement Law (PPL) introduced in 2000 (with the last amendments in 2019) and the Government Procurement Agency (GPA) established in 2012. Importantly, all contracts are to be made available online (Law on Glass Accounts).12 A e-procurement system (from publication of the procurement notice through the award of the contract to the successful bidder) was introduced in December 2016. While there are still gaps, the volume of procurement that used the electronic system has increased more than seven-fold during 2015–18. Nonetheless, the particularly large scale of public investment continues to create opportunities for corruption, lowering the boost to productivity of such investments and undermining fiscal sustainability. To reduce the scope for rent seeking, reforms should include: ensuring that (i) the Procurement Agency is independent and has an adequate budget with well qualified staff and (ii) all procurements use the e-procurement system. Under the National Anti-Corruption Strategy, Mongolia aims to transfer all tender processes to the e-procurement system, but this has been slow.
16. Fiscal transparency should be enhanced to lower the scope for rent seeking activities. This is especially crucial given the importance of the public sector in the economy and its involvement in the mining sector. Reforms in the following two areas are especially important:
Budgetary transparency. The Law on Glass Accounts (2014) requires all government agencies and SOEs to make information on budgets and financial matters, including financing and debt, available to the public. However, according to the 2017 Open Budget Index (OBI) of the International Budget Partnership, Mongolia is among the countries that release limited budget information.13 Although budget oversight and public-sector auditing are satisfactory, Mongolia’s score on transparency dropped from 60 (out of 100 points) in 2010 to 46 (out of 100) in 2017. Mongolia is also lagging the global average score regarding opening opportunities for citizen participation (7 out of 100 points). The Fiscal Council that was established in 2018 lacks sufficient autonomy and budget. The Natural Resource Governance Institute (NRGI) has highlighted the need to quickly return to the original fiscal rule targets adopted in 2010 as part of the FSL and to improve the newly established Fiscal Stability Council’s independence, capacity, transparency, and remit to oversee compliance with the FSL14 Key recommendations include:
Undertaking regular dialogue with members of the public during both the formulation of the national budget and the monitoring of its implementation. Holding legislative hearings on the formulation of the annual budget, during which members of the public or civil society organizations can testify. Establishing formal mechanisms for the public to participate in relevant audit investigations. Ensuring that audit processes are reviewed by an independent agency.
Ensuring the independence of Fiscal Stability Council with a view to strengthen budget oversight and compliance with fiscal rules.
Mining sector transparency. Mongolia is complaint with the Extractive Industries Transparency Initiative (EITI).15 It has also undertaken the Open Government Partnership—an initiative by which civil society and government work together to agree on ways to strengthen governance. Under this, the government of Mongolia has committed in the 2016–18 National Action Plan to the “transparency of contracts of public resource exploitation.”. However, the Natural Resource Governance Institute (NRGI) has noted that many of the most important contracts for publicly owned oil, gas, and minerals in Mongolia remain undisclosed.16 To improve transparency, it is important to strengthen EITI compliance by high level participation in the EITI National Council and ensure the comprehensive and consistent publication of all contracts in the mining sector.
17. Improving public financial management (PFM) controls. Weak PFM raises fiscal risks with limited monitoring, reporting, and control mechanisms in place. These gaps and weaknesses are macro critical. To address challenges in the public financial management system, the Ministry of Finance has adopted a Public Financial Management Reform Strategy for 2018–2020 in September 2018. Important steps include:
Integrating the Accounting and Reporting Frameworks. Financial reporting in Mongolia is still fragmented due to the absence of a fully integrated Government Financial Management Information System (GFMIS) system. Success of PFM reforms heavily depends on the successful implementation of the new version of GFMIS. There’s a further need to improve the Chart of Accounts (COA).
Enhancing the Accounting Policies. Limited compliance with International Public Sector Accounting Standards (IPSAS) raises fiscal risks and is macro critical. Review of accounting practices of the government revealed that substantial work needs to be done to achieve full compliance with IPSAS. The government formulated an IPSAS action plan 2017–22 and is gradually moving towards achieving full compliance.
Better consolidation of Financial Statements. Lack of consolidation limits monitoring and raises fiscal risks. Consolidated financial statements exclude part of the government-controlled entities and other government engagements with the private sector. Despite recent improvements in implementing E-tailan17, consolidation and elimination still involves manual processes and require developing additional guidelines.
E. Financial Sector Oversight
18. Weak management and supervision of the banking sector has contributed to frequent boom bust cycles including the most recent economic crisis. Tackling these issues is a macro critical priority. Regulatory forbearance has allowed weak banks to expand credit rather than build needed capital. In addition, it has boosted overheating pressures and undermined the key program objective of reserves accumulation. While improving the financial system, policymakers should start to focus on the following key recommendations:
The regulators should strengthen the financial sectors’ corporate governance and ensure proper implementation of international best standards. They should focus on the following:
Ensuring full transparency in terms of beneficial ownership of financial sector institutions and require that they maintain arms-length relationship in dealing with shareholders, directors, and intra group entities;
Requiring that banks explore ways of listing on the Mongolian Stock Exchange to: raise new capital; diversify ownership; and enhance market discipline and disclosure.
Being more proactive in relation to regulation on transactions with related parties (including those with shareholders) with a sufficiently broad definition of related-parties’ transactions and ensuring effective monitoring and strict enforcement.
The regulators should move ahead with upgrading credit risk management to improve credit culture of Mongolian banking industry. Specific technical assistance (TA) areas include regulations and supervision on: (i) asset classification and provisioning; (ii) collateral valuation; (iii) non-performing loan (NPL) management; and (iv) loan origination/risk management.
Regarding the supervision of non-bank financial institutions, the FRC should address fundamental issues first – the adequacy of human (qualified staff) and IT resources, above all. TA focusing on improvement of regulatory and supervisory framework on non-banks could be useful once these preconditions are met.
Financial sector infrastructure, including professional skills such as accounting, auditing, and valuation, needs to be enhanced through better training and enforcement of standards.
F. Central Bank Governance and Operations
19. Poor governance at the central bank has had macro-economic consequences and required reforms are macro-critical. As highlighted in the 2018 Klynveld Peat Marwick Goerdeler (KPMG) Report on BOM activities, past governance weakness lead to high levels of quasi fiscal activities; politicized monetary policy decisions; and weak supervision with a culture of forbearance and lack of transparency in the banking sector, including with respect to the ownership of the banks.18 These factors contributed to the boom-bust cycles and the 2016 crisis. The 2017 IMF Safeguards Assessment by the IMF’s Finance Department and TA by the IMF’s Legal Department both recommended a thorough review of the BOM Law. The Legal Department’s TA included a detailed set of drafting recommendations strengthening the BOM’s autonomy, mandate, and governance. Amendments of the BOM Law, enacted in January 2018, resulted in several notable improvements, such as redrafting its mandate, limiting monetary financing of the government, prohibiting the BOM from conducting quasi-fiscal activities, and the appointment of Monetary Policy Committee (MPC) non-executive members by the Economic Standing Committee of Parliament rather than just the Governor. However, some weaknesses remain and key improvements with respect to the BOM governance and autonomy include:
Institutional Autonomy. The mandate of the BOM should be sharpened to highlight core mandates of maintaining price and financial stability. The BOM should be autonomous in formulating and implementing its policies; it should not be obliged nor allowed to seek approval or instructions on this from any third person or entity, including the Government or the Parliament.
Personal Autonomy:
The incompatibility criteria for the appointment of key officials of the BOM (including Governor and Deputy Governors) or members of its decision-making bodies (such as the Monetary Policy Committee) should be strengthened and explicitly provided for in the BOM Law. The criteria should prohibit government officials, civil servants, and officials and employees and persons with close links to institutions overseen by the BOM from occupying positions at the BOM.
Appointment (i.e. the introduction of a so-called double veto procedure) and dismissal procedures need to be revisited especially as the grounds for the latter are too wide and flexible: currently the BOM Law allows for a dismissal in case of unsatisfactory fulfillment of duties. The term of appointment of members of the Supervisory Board needs to be explicitly provided for in the BOM Law.
Legal immunity for banking supervisors. This was removed in 2018 but should be reinstated in the BOM law.
Financial autonomy. The BOM’s power to provide emergency liquidity support to banks should be accompanied by additional safeguards, such as application of penalty interest rates and limiting the coverage of lending to illiquid or (possibly) insolvent banks which would require a state guarantee.
Oversight. In addition to safeguarding the autonomy of the BOM, legal amendments would also need to strengthen further the Supervisory Board’s oversight of BOM’s activities. The Supervisory Board should have fiduciary responsibilities only to the BOM, and its mandate should be expanded to be aligned with that of a conventional audit committee.
Accountability. Recommendations to strengthen the autonomy of the BOM should be complemented with improvements to accountability. There should be stronger independent oversight, increased transparency, and other checks and balances.
G. Anti-Money Laundering/Combating the Financing of Terrorism
20. The AML/CFT legal framework needs to be strengthened and effectively implemented. The second mutual evaluation (ME) of Mongolia’s AML/CFT regime was conducted by the Asia/Pacific Group on Money Laundering (APG) in 2016 and found a low level of compliance with the FATF 40 Recommendations and a low level of effectiveness of the AML/CFT system.19 Mongolia is weak in areas that affect governance – i.e. risk-based supervision, monitoring the activities of PEPs, access to beneficial ownership information, and in ensuring fit and proper criteria for bank shareholders. Appropriate legal and institutional frameworks are being developed, but gaps and weakness remain. The effectiveness of law enforcement and criminal justice measures is low with only a small number of prosecutions underway. Inter-agency cooperation is weak—although it is improving. Key recommendations include:
Recent IMF TA indicates that there needs to be continuous political will, more commitment, and prompt decisive action to ensure effective implementation of AML/CFT measures. A high level of TA from donors on a range of technical and operational issues will be needed. High priority areas include:
Increasing risk-based supervisory activities, notably onsite examinations by the BOM, the FIU, and the FRC. These should focus on high-risk areas, such as implementation of requirements relating to targeted financial sanctions (TFS), beneficial ownership, and PEPs, and on high-risk sectors such as banks, real estate, and designated non-financial businesses and professions (DNFBPs).
Improve the legal framework. This includes the following: (i) passing and ensuring the effective implementation of additional amendments to the law and regulations relating to AML/CFT and preventative measures and targeted financial sanctions (TFS) on proliferation financing (PF) and terrorist financing (TF); (ii) putting in place provisions relating to TFS and fit and proper requirements for senior management and owners of financial institutions; (iii) increasing the powers of the FIU; and (iv) enforcing current TFS regulations.
Increasing resources for the FIU, BOM, FRC, and law enforcement agencies is needed to support fulfilment of their respective mandates. Improving the operations of the FIU, including the quality of its analysis. Implementing the appropriate criminal justice measures and enforcement by investigators and prosecutors and ensuring adequate inter-agency coordination.20
Ensuring that constitutional issues relating to the Administrative Court, which hears appeals related to fines imposed under the Law on Infringements related to breaches of the AML/CFT Law, are resolved so that this problem does not affect existing or future penalties imposed under the Law on Infringements.
References
Asia Foundation, 2018, “Study of Private Sector Perceptions of Corruption (STOPP) Survey,” Ulaanbaatar, Mongolia. https://asiafoundation.org/publication/study-of-private-sector-perceptions-of-corruption-stopp-survey-2018/
Asia-Pacific Group, 2017, Anti-Money Laundering and Counter-Terrorist Financing Measures in Mongolia, Mutual Evaluation Report, Brisbane, Australia.
Extractive Industries Transparency Initiative, 2018, “Mongolia EITI Report 2017,” Ulaanbaatar, Mongolia.
GAN Integrity Business Anti-Corruption Portal, 2016, “Mongolia Corruption Report,” https://www.business-anti-corruption.com/country-profiles/mongolia/
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Meville et al.
“Worldwide Governance Indicators”, 2018.
Asia Foundation, 2018, “Study of Private Sector Perceptions of Corruption (STOPP) Survey”.
Total tax expenditures were estimated at 3.2 percent of GDP, which accounts for nearly 14 percent of total revenues in 2017. Direct investors and service providers in the mining sector are given tax incentives on profit and VAT exemptions. Tax expenditures due to Corporate Income Tax and Value Added Tax exemptions in 2017 amounted to 1.15 and 0.75 percent of GDP, respectively. Exemptions from excise and Personal Income Tax laws represent the next largest sources for tax expenditures.
World Bank, 2018, Public Expenditure Review 2018.
Mongolia is now a member of the G20/OECD Inclusive Framework on BEPS, and has committed to implement the various BEPS minimum standards, including Action 5 on countering harmful tax practices which may require the amendment or removal of some of its tax incentive schemes.
Voluntary disclosure programs (VDPs) should be carefully designed to ensure their effectiveness in bringing taxpayers forward to disclose past non-compliance while minimizing unfairness to compliant taxpayers. A poorly designed VDP can have a negative impact on tax morale in the country and discourage tax compliance.
World Economic Forum, 2017, Global Competitiveness Index 2016–17.
“Financial Diagnostic of the Development Bank of Mongolia” PwC, December 2018
Since BOM is not financed from the state budget, the law does not apply but, BOM publishes its budget, contracts, tenders etc. on its website according to the Glass Account Law.
International Budget Partnership (IBP), 2017, Open Budget Survey 2017, Mongolia.
Natural Resource Governance Institute, 2018, “Fiscal Sustainability in Mongolia in 2018”
Mongolia EITI Report 2017, Extractive Industries Transparency Initiative.
Mongolia’s Missing Oil, Gas and Mining Contracts, Robert Pitman NRGI, 2019.
E-tailan, a web-based software for the consolidation of the financial statements introduced by MOF.
“Bank of Mongolia, Special Review of Quasi-Fiscal Policy Activities”, November 15, 2018, KPMG
A low level of effectiveness was found in 9 out of 11 rubrics and moderate in 2 rubrics. Regarding the Technical Compliance Ratings, the AML/CFT regime was either partially compliant or non-compliant in half the rubrics. APG
The World Bank’s Stolen Asset Recovery (StAR) initiative should play an important role focusing on verification and enforcement. World Bank (WB), 2018, Stolen Asset Recovery Initiative (StAR).
