The 2017 Joint Review of Standards and Codes Initiative—Policy Area Background Paper
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International Monetary Fund
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Publication Date:
08 Mar 2017
eISBN:
9781498346450
Language:
English
Keywords:
PP; policy area; policy; standards and code; data policy recommendation; area review; financial crisis; country authorities; balance sheet; emerging market; fiscal policy; Anti-money laundering and combating the financing of terrorism (AML/CFT); Financial sector; Global; ROSC program
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The 2017 Joint Review of the Standards and Codes Initiative

Abstract

The 2017 Joint Review of the Standards and Codes Initiative

I. Data Transparency—Standards and Quality Framework1

A. Background

1. This paper is a background reference to the 2017 Joint Review of the Standards and Codes Initiative (the Initiative). The paper discusses changes to the data policy area, which includes both the data dissemination standards and the data quality assessment framework (DQAF), since the Initiative’s last review in 2011 and the contribution of these standards to Fund’s work.

2. Data transparency is an essential element of effective policy making. It helps ensure that public policy decisions are informed by a shared and accurate assessment of economic and financial conditions, underpinning policy credibility and market confidence. Data transparency also facilitates effective economic surveillance, helps to mitigate spillover risks between countries, and enhances economic and financial resilience. Policy reforms enhancing data transparency, reflected in subscriptions to the IMF’s Data Standards Initiatives (SDDS and GDDS), are found to reduce emerging market sovereign bonds spreads (Choi and Hashimoto, 2017).

3. The Data Standards Initiative was launched after the crises of the mid-1990s, to promote timely publication of quality data to support policy making and efficient functioning of financial markets. Data transparency is viewed as essential for policy transparency and good governance. Against this backdrop, the standards and codes initiative (the initiative) was launched including a module on data transparency. The data module of the Reports on Observance of Standards and Codes (ROSC) focused on assessing data dissemination practices in reference to the Special Data Dissemination Standard (SDDS) established in 1996 and the General Data Dissemination System (GDDS) established in 1997 (Annex Both the SDDS and GDDS include data quality dimensions, in addition to dissemination aspects, such as data coverage, periodicity, and timeliness.

4. In 2001, the Fund introduced a comprehensive data quality framework (DQAF) to provide a common structure for the assessment of data quality. The DQAF was developed to provide a common structure for the assessment of data quality and recognizes the multidimensional nature of data quality. The DQAF focuses on evaluating country practices for the compilation and dissemination of selected datasets against internationally accepted standards. The generic DQAF reflects best practices and internationally accepted concepts and definitions in the compilation and dissemination of statistics, and the United Nations Fundamental Principles of Official Statistics (Annex I.2).

5. The 2011 Standard and Codes Review recommended a targeted approach to standards and prioritization of recommendations in accordance with countries’ needs. Specifically, the IMF Executive Board endorsed the following recommendations in 2011:

  • Adapt the coverage of the initiative to better safeguard financial stability, including by undertaking more targeted assessments when other analysis indicates weaknesses or possibly larger systemic repercussions in concrete policy areas;

  • Promote efforts to meet standards in the context of overall surveillance; improve the link between ROSC assessments and capacity building, including by integrating them more systematically into area departments’ Regional Strategy Notes (RSNs);

  • Better integrate ROSC findings into Fund surveillance, improve the public’s access to ROSCs and encourage their publication; and

  • Enhance efficiency of the initiative through a broader application of targeted ROSCs.

B. Developments Since 2011

Modifications to the Data Quality Framework

6. In response to 2011 review, seven domain specific data quality assessment (DQAF) modules have been updated in 2012, along with the generic DQAF. Revisions reflect experience from applications in ROSC missions, and response to international statistical developments. The seven domain-specific DQAFs are: (1) national accounts, (2) consumer price index, (3) producer price index, (4) government finance statistics, (5) monetary statistics, (6) balance of payments and international investment position statistics, and (7) external debt statistics.2 Revisions also reflect additional experience with data module ROSC missions and the updated statistical methodologies of the 2008 SNA and BPM6 as well as expanded coverage of the monetary statistics—the Other Financial Corporations (OFCs). Following the global financial crisis in 2008, there has been increased interest in OFC data—including to analyze developments in shadow banking.

7. The update of the DQAFs in 2012 was also triggered by the implementation of new statistical methodologies to ensure methodological soundness of the compiled macroeconomic statistics. Hence, new statistical methodologies have also played a role in the refinement and update of the DQAF. Issuance of 2008 SNA and BPM6 (2009) triggered a wave of revisions of related statistical methodologies, resulting in the publication of

  • Public Sector Debt Statistics Guide for Compilers and Users (2011);

  • International Reserves and Foreign Currency Liquidity Guidelines for a Data Template (2013);

  • External Debt Statistics Guide (2013);

  • BPM6 Compilation Guide (2014);

  • Government Finance Statistics Manual 2014 (GFSM 2014); and

  • Enhancements to Data Standards Initiatives.

8. The enhancements to data standards initiatives were aimed at addressing new data needs (SDDS and SDDS Plus) and the slow statistical progress in GDDS countries. In particular,

  • The SDDS enhancements approved by the Board in 2010 and 2012 included additional data categories, such as sectoral balance sheet, general government gross debt at nominal value, and financial soundness indicators on encouraged basis, and made international investment position (IIP) and the reserve data template required categories.

  • The SDDS Plus approved by the Board in February 2012 was aimed at economies with systemically important financial sectors. It was created to help address data gaps identified in the wake of the global financial crisis, requiring nine additional data categories. It is closely linked with the IMF/FSB G-20 Data Gaps Initiative (DGI).

  • An enhanced GDDS (e-GDDS) was endorsed by the Board in May 2015 to: (i) align the GDDS data categories with the common indicators used by the Fund for surveillance; (ii) promote publication of data in addition to metadata through the National Summary Data Page (NSDP), and (iii) set a path to achieving higher dissemination standards by the introduction of dissemination thresholds.

9. The enhancements also included the introduction of the use of SDMX technology for data dissemination under the SDDS Plus and e-GDDS.3 The use of this technology improved the capabilities of the dissemination vehicle—the NSDP—by allowing data to be disseminated in machine-readable, time-series format, rather than the latest data point. Benefits include improved timeliness, expanded coverage, reduced reporting burden on countries, and lower observance costs by member countries and monitoring costs for the Fund.

C. Recent Experience and Prospects

Application of DQAF in Data Module ROSC Missions

10. Since the DQAF was integrated into the data ROSC in 2001, over 100 data ROSC missions were conducted for 88 countries in different regions and at different stages of development (Figure 1a).4 Most data ROSC missions were conducted between 2002 and 2006 (Figure 1b).

Figure I.1a.
Figure I.1a.

Data Module ROSC Breakdown of Missions by Region

(In percent of total)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Source: Statistics Department, IMF.
Figure I.1b.
Figure I.1b.

Data Module ROSC Number of Missions by Year

(as of end-2016)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Source: Statistics Department, IMF.

Findings and Feedback on the Data Module ROSCs and DQAF

11. The main conclusions and lessons emerging from the ROSC missions and developments in data standards include:

  • The data ROSC findings and recommendations have continued to provide a useful framework for TA planning and prioritization for STA as well as other TA providers.

  • Country authorities have welcomed the DQAF-based extensive and detailed documentation in the data ROSCs5 and have used it to improve statistical operations. Publication of the data ROSCs include the authorities’ intent to redress shortcomings identified in the reports.

  • The current data ROSC places more weight on statistical processes, affecting data quality, rather than assessing data quality per se, as pointed by the 2016 IEO report on data and statistics (“Behind the Scenes with Data at the IMF”).

  • STA has also used the DQAF for guiding (i) the metadata standardization for the GDDS/e-GDDS, SDDS, and SDDS Plus; and (ii) single topic and multi-topic diagnostic missions conducting comprehensive reviews and identifying areas for improvements.

  • The DQAF is also a tool for self-assessment aimed to help guide (i) countries’ efforts to strengthen their statistical systems, including donor support; and (ii) data users—both in the private and the public sectors—in assessing data adequacy for meeting their own needs.

  • Data standards initiatives have increasingly focused on promoting the publication of data needed to support surveillance and reduce data gaps. Both the e-GDDS and SDDS Plus focus on standardized data dissemination in the format of SDMX as the key output.

  • With a shift in focus toward disseminating data for Fund surveillance purpose, the e-GDDS facilitates identification of capacity development needs. By bringing together STA experts, area department country teams, and data producing agencies, the e-GDDS helps identify data gaps critical for surveillance and assists the Fund and member countries to set priorities to improve the availability and quality of data.

Table I.1.

Data ROSC Missions Conducted Since 2011

article image

Comprehensive assessments cover all seven statistical areas under the DAQF as applicable, whereas modular assessments cover a few selected statistical areas.

12. The number of data ROSCs in recent years have been small, mostly due to the resource constraints (Table 1). Since 2011, only seven data ROSCs have been prepared. While feedback to the recent Standards and Codes Review suggests that data ROSCs are perceived by the authorities as the most useful among all the ROSCs, they are also among the costliest (Appendix II, IMF, February 2011). To this end, the current data ROSC is being reviewed with a view to producing a successor instrument that would improve cost efficiency, and enhance effectiveness.

D. Concluding Observations and the Way Forward

13. The 2017 review of the standards and codes initiative provides a timely opportunity to assess the need to reform the Fund’s data policy transparency framework. The reforms would focus on data needs for effective policy making (“operational data”), and thus also facilitate better Fund surveillance of member policies. The current tiered approach (differentiating countries by capacity levels) will continue, but the content may be updated to reflect member countries’ operational needs. It is expected that these reforms will be guided by the Fund’s forthcoming strategy for data and statistics.

14. A new data ROSC will be developed to inform the assessment of data adequacy for surveillance and help guide statistical capacity development efforts. This new ROSC is expected to be partly based on the DQAF, and address the IEO recommendation for closer integration with IMF and UFR program work. It is envisaged that the successor instrument would be, as relevant, based on and complement other standards and diagnostics, such as Module I of the Fiscal Transparency Codes and the new monetary and financial policy transparency code. This instrument will be used to identify weaknesses in member countries statistical capacity, which could be addressed in turn by developing sequenced action plans and supported by statistical capacity development as needed.

15. Once the new data ROSC has been developed, it would need to be tested through pilot exercises. Lessons from the pilots would be applied to refine the module and the outcome would be reported in the 11th review of the Fund’s data standards, scheduled for 2019/20. The review will report on the allocation of outputs across the membership, and will consider and report on whether there is further scope for making modifications to assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of assessments and, if necessary, make recommendations on how this can be improved going forward.

Figure I.2.
Figure I.2.

Country Membership of IMF Data Standards Initiatives

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Source: Statistics Department, IMF.

Data Standards Initiatives

The IMF’s Data Standards Initiatives are designed to promote the dissemination of timely and comprehensive statistics. The initiatives have nearly universal coverage and are intended to contribute to the formulation of sound macroeconomic policies and the efficient functioning of financial markets. There are three tiers under the Initiatives:

  • The SDDS was established in 1996 to guide members that have or that might seek access to international capital markets in providing their economic and financial data to the public. SDDS identifies four dimensions of data dissemination: (i) data coverage, periodicity, and timeliness, (ii) access by the pubic, (iii) integrity of the disseminated data, and (iv) quality of the disseminated data (http://dsbb.imf.org/pages/sdds/home.aspx). As of January 2017, 62 jurisdictions are participants in the SDDS.

  • The GDDS/e-GDDS: GDDS was created in 1997 to guide countries in providing to the public comprehensive, accessible, timely, and reliable economic, financial, and socio-demographic data. Beginning from May 2015, an enhanced GDDS (e-GDDS) superseded the GDDS (http://dsbb.imf.org/pages/gdds/home.aspx). The e-GDDS aligned the data categories more closely with surveillance needs, placing a stronger focus on dissemination of data in addition to metadata. As of January 2017, 110 countries are participants in the e-GDDS.

  • The SDDS Plus was created in 2012 as the third and highest tier of the IMF’s Data Standards Initiatives with a view to helping address data gaps identified during the global financial crisis, including in the context of the G-20 Data Gaps Initiative (DGI). As of January 2017, 12 countries are participants in the SDDS Plus.

Fundamental Principles of National Official Statistics

Background

The need for principles governing official statistics became apparent in the late 1980s when countries in Central Europe began to transition from centrally planned to market-oriented economies. It was essential to ensure that national statistical systems can produce appropriate and reliable data based on certain professional and rigorous standards. Towards this end, the Conference of European Statisticians developed and adopted the Fundamental Principles of Official Statistics in 1991 (CES/702), which were subsequently adopted in 1992 at the ministerial level as decision C (47). Statisticians in other parts of the world soon realized that the principles were of much wider, global significance. Following international consultation, the United Nations Statistical Commission at its Special Session of 11-15 April 1994 adopted the same principles-with a revised preamble-as the U.N. Fundamental Principles of Official Statistics.

The General Assembly, in its resolution 68/261 of 29 January 2014, endorsed the Fundamental Principles of Official Statistics.

Fundamental Principles of Official Statistics

Principle 1. Official statistics provide an indispensable element in the information system of a democratic society, serving governments, the economies and the public with data on the economic, demographic, social and environmental situation. To this end, official statistics that meet the test of practical utility are to be compiled and made available on an impartial basis by official statistical agencies to ensure access to public information.

Principle 2. To retain trust in official statistics, the statistical agencies need to operate based on strictly professional considerations, including scientific principles and professional ethics, on the methods and procedures for the collection, processing, storage and presentation of statistical data.

Principle 3. To facilitate a correct interpretation of the data, the statistical agencies are to present information according to scientific standards on the sources, methods and procedures of the statistics.

Principle 4. The statistical agencies are entitled to comment on erroneous interpretation and misuse of statistics.

Principle 5. Data for statistical purposes may be drawn from all types of sources, be they statistical surveys or administrative records. Statistical agencies are to choose the source based on quality, timeliness, costs and the burden on respondents.

Principle 6. Individual data collected by statistical agencies for statistical compilation, whether they refer to natural or legal persons, are to be strictly confidential and used exclusively for statistical purposes.

Principle 7. The laws, regulations and measures under which the statistical systems operate are to be made public.

Principle 8. Coordination among statistical agencies within countries is essential to achieve consistency and efficiency in the statistical system.

Principle 9. The use by statistical agencies in each country of international concepts, classifications and methods promotes the consistency and efficiency of statistical systems at all official levels.

Principle 10. Bilateral and multilateral cooperation in statistics contributes to the improvement of systems of official statistics in all countries.

II. The Fiscal Transparency Code1

A. Background

1. This paper is a background reference to the 2017 Joint Review of the Standards and Codes Initiative (the Initiative). The paper discusses changes to the fiscal transparency standards since the Initiative’s last review in 2011 and the use made of these standards in Fund’s work.

2. Fiscal transparency is a critical element of effective fiscal management. It enables governments’ economic decisions to be informed by a shared and accurate assessment of the current fiscal position, the analysis of the social and distributional impact of any policy changes, and the potential risks to the fiscal outlook. Fiscal transparency also provides legislatures, markets, and citizens with the information they need to make appropriate financial decisions and to hold governments to account for their fiscal performance and the utilization of public resources. Fiscal transparency facilitates international surveillance of fiscal developments and helps mitigate the risk of transmission of fiscal spillovers between countries. Finally, greater transparency can also help underpin credibility and market confidence. Empirical evidence points to a positive relationship between the degree of fiscal transparency and sovereign credit ratings (IMF, 2012a).

3. The IMF’s Fiscal Transparency Code (hereafter, the Code) is the international standard for disclosure of information about public finances and is the centerpiece of the global architecture on fiscal transparency. The Code is part of the IMF’s efforts to strengthen fiscal surveillance, support policymaking and capacity building, and improve fiscal accountability in its member countries.

4. The Code was first published in 1998 and updated in 2007 to provide the framework for conducting assessments of countries’ fiscal transparency, as part of the IMF’s Reports on the Observance of Standards and Codes (ROSC) initiative.

  • In 1998, the IMF introduced the Code,2 which led to a voluntary program of fiscal transparency assessments called fiscal transparency modules of ROSCs (fiscal ROSCs) that were the first comprehensive fiscal transparency diagnostics at the international level.3 To expand and explain the principles of the Code, and to help guide the conduct of fiscal ROSCs, the first version of the Manual on Fiscal Transparency was also issued the same year.

  • In 2007, the Code (Code of Good Practices on Fiscal Transparency) was updated to reflect some new good practices and broaden the coverage of others, but retained the original four pillars of fiscal transparency: (i) clarity of roles and responsibilities; (ii) open budget processes; (iii) public availability of information; and (iv) assurances of integrity. The Manual on Fiscal Transparency was also revised in 2007.

  • Reflecting the unique set of problems faced by countries that derive a significant share of revenues from natural resources, the IMF also issued a companion Guide on Resource Revenue Transparency in 2005, which was further updated in 2007. This provided a summary overview of generally recognized good practices for transparency of resource revenue management consistent with the principles of the Code, and formed the basis for the resource revenue transparency ROSC that would accompany the fiscal ROSC where relevant.

5. The 2011 Standards and Codes (S&C) Review recommended renewed attention to fiscal transparency, including a possible review of the 2007 Code. While the aftermath of the 1990s’ Asian crisis resulted in standards being developed to encourage minimum levels of adherence across all countries, issues surrounding fiscal sustainability increasingly came into focus by the time of the 2011 S&C Review. In particular, the 2008 global financial crisis highlighted the importance of transparency in communicating medium-term fiscal strategies, by specifying the measures and timetable for implementing them, and thereby reassuring markets and restoring confidence in countries’ ability to deliver. The greater attention to public sector and longer term fiscal sustainability issues also renewed the relevance of fiscal transparency and called for a review of the Code. Accordingly, the 2011 S&C Review recommended a revamp of the Code and Fiscal ROSC.4

6. The 2011 S&C Review also recommended a targeted approach to ROSCs and prioritization of recommendations in accordance with countries’ needs. In particular, the review proposed that:

  • more targeted assessments be undertaken when other analysis indicates that particular weaknesses are of more critical importance or could have larger systemic repercussions;

  • the Fund ROSCs could be more systematically included in area departments’ Regional Strategy Notes (RSNs) to promote consideration of standards in the context of their overall surveillance and TA priorities; and

  • consideration could be given to establishing one or more topical trust funds to provide external financing for follow up technical assistance (TA), linked explicitly to each type of ROSC and modeled on the topical trust fund for TA for AML/CFT.

7. In a 2012 policy paper,5 the IMF reviewed the state of fiscal transparency and proposed a series of improvements to international fiscal transparency standards and monitoring arrangements.

  • First, the global financial crisis revealed that, even among advanced economies: (i) governments’ understanding of their current fiscal position and the risks to that position was often inadequate, leading to the emergence of previously unrecognized fiscal deficits and debts and the crystallization of large, mainly implicit, government liabilities; and (ii) in many cases, countries had substantially underestimated the risks to their fiscal prospects, especially those emanating from the financial sector (Box 1). An improved fiscal transparency standard was, therefore, critical both to reflect the lessons of the crisis itself and to prevent a resurgence of fiscal opacity in its wake.

  • Second, the fiscal ROSC’s record in identifying problems that contributed to or exacerbated the fiscal impact of the crisis was mixed. Of the ten countries that experienced the largest increase in government liabilities during the crisis, nine had undergone a fiscal ROSC within the previous eight years. These reports identified some but not all the key transparency problems revealed by the crisis.6 The ROSCs were most effective in identifying inadequate coverage of fiscal reports, lack of medium-term fiscal forecasts, and weak controls over budget execution. However, issues such as the need for fiscal risk analysis to explore a broader range of output scenarios or better surveillance of exposure to financial sector risks were generally not explored. Even where shortcomings were identified, their relative magnitude was generally not quantified and they were not always given due prominence in the summary recommendations.

8. The 2012 policy paper laid the groundwork for the revised Fiscal Transparency Code and Evaluation that replaced the 2007 Code and the related fiscal ROSC. The revised Code, described in the 2014 Update on the Fiscal Transparency Initiative addresses the shortcomings of the 2007 version. The revised Code reflects the lessons of the global financial crisis, incorporates developments in international standards, and builds on feedback from stakeholder consultations. Following an extensive consultation exercise in two rounds between December 2012 and August 2013, the first three pillars of the revised Code were finalized and approved by the IMF Board in August 2014, while the fourth pillar on natural resource management is currently under development. New Fiscal Transparency Evaluation (FTE) reports have replaced fiscal ROSCs. FTEs are carried out at the request of countries and (similar to fiscal ROSCs) FTE results are included in a formal report prepared by a staff team of the IMF. FTE reports are published upon consent by the authorities.

Sources of Fiscal Shocks During the Crisis

For the ten countries that experienced the largest unanticipated increase in general government gross debt between 2007 and 2010, the deviations from forecast were due to three main factors:

  • Incomplete understanding of the country’s underlying fiscal position on the eve of the crisis as revealed by (a) revisions in the general government deficit and debt in 2007, (b) revisions due to the inclusion of hidden or implicit obligations to public corporations, public private partnerships (PPPs), and other public entities that were previously outside the general government perimeter, and (c) cash-to-accrual accounting adjustments to capture arrears and other net payables that were not captured in initial cash-based forecasts of revenue and expenditure;

  • Insufficient appreciation of the scale and likelihood of exogenous shocks to the government’s fiscal position including (d) unexpected changes in macroeconomic conditions (including output, interest payments, and the exchange rate), and (e) crystallization of implicit contingent liabilities to the financial sector; and

  • Endogenous shocks to the government’s fiscal position in the form of (f) unforecasted policy measures either to stimulate output or consolidate the fiscal position in the wake of the crisis.

Source: 2012 policy paper (Fiscal Transparency, Accountability, and Risk).

B. Revised Fiscal Transparency

Code Architecture of the Revised Fiscal Transparency Code

9. The revised Code comprises a set of principles built around four “pillars” (Figure 1 that reflect the IMF’s focus on macro-critical issues:

  • Pillar 1: Fiscal Reporting, to offer relevant, comprehensive, timely, and reliable information on the government’s financial position and performance.

  • Pillar II: Fiscal Forecasting and Budgeting, to provide a clear statement of the government’s budgetary objectives and policy intentions, together with comprehensive, timely, and credible projections of the evolution of public finances.

  • Pillar III: Fiscal Risk Analysis and Management, to ensure that risks to the public finances are disclosed, analyzed, and managed, and that fiscal decision-making across the public sector is effectively coordinated.

  • Pillar IV: Resource Revenue Management, to provide a transparent framework for the ownership, contracting, taxation, and utilization of natural resource endowments.7 The fourth pillar draws out transparency considerations specific to resource-rich countries, which are not already covered by the other three pillars.

Figure II.1.
Figure II.1.

Architecture of the Revised Fiscal Transparency Code

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Changes from the 2007 Code

10. Compared to the 2007 Code, the revised Code focuses more on information needed for good fiscal management and decision-making (Box 2). Specifically, the revised Code:

  • Focuses on outputs rather than processes. The 2007 Code had a procedural focus, and lacked in analysis of the quality and adequacy of reported outputs. The revised Code puts greater emphasis on the quality of published information as a more objective basis for evaluating the degree of effective fiscal transparency;8

  • Takes account of different levels of countries’ capacity. The 2007 Code provided a single best practice standard for each principle. In contrast, the revised Code differentiates between basic, good, and advanced practice. This allows countries to develop a sequenced path for reform by providing them with a clear set of milestones toward full compliance with international standards. The new approach also facilitates cross-country benchmarking. In particular, (i) basic practice would be viewed as a minimum standard that should be achievable by all IMF member countries; (ii) good practice provides an intermediate goal post that would require stronger institutional capacities; and (iii) advanced practice reflects relevant international standards, and is in line with the current “state-of-the-art”;

  • Places greater emphasis on fiscal risk. The 2007 Code devoted relatively little attention to disclosure and management of fiscal risks.9 The revised Code devotes a full pillar (with 12 principles) to the analysis and management of fiscal risks. This includes risks arising from macroeconomic shocks, guarantees and other contingent liabilities, fiscal pressures from demographic and other long-term trends, budgetary contingencies, changes in asset and liability values, public-private partnerships, the financial sector, natural resources, environmental factors, sub-national governments, and public corporations;

  • Includes transparency principles for natural resource-rich countries in a unified framework. While the 2007 Guide on Resource Revenue Transparency used the broad framework of the 2007 Code in setting out a separate set of transparency practices for resource-rich countries, the revised Code allows for a more structured approach which consolidates resource-specific principles into a single unified framework. Pillar IV completes the Code by stating unique principles and practices applicable to resource rich countries not covered under Pillars I-III. These principles and practices address transparency issues associated with the legal and fiscal regime governing the extraction of natural resources, the allocation of resource rights holdings, reporting by companies engaged in resource extraction activity, and the governance and operation of natural resource funds. They also reflect the changes in commodity markets and the structure of the extractive industries in recent years, and consider the development of new natural resource transparency standards and initiatives since 2007; and

  • Captures recent advances in fiscal management and international standards.10 Several new “advanced” practices were included in the revised Code (see Box 2), which now more systematically refers to relevant international reporting standards where they exist. In particular, the revised Code’s principles relating to fiscal statistics and presentation/classification of data in fiscal reports are fully aligned with the IMF’s Government Finance Statistics Manual (GFSM) 2014, which is the international standard for compiling and disseminating government finance statistics, including for publication in the IMF GFS Yearbook. This ensures synergy and consistency between these two international standards issued by the IMF. The revised Code also includes a new principle on public participation in budget deliberations, which was included in response to consultations with key stakeholders.

Highlights of the Revised Fiscal Transparency Code

Places greater emphasis on the consolidated public sector as the broadest unit of fiscal analysis.

Encourages the publication of a full set of accounts, including comprehensive balance sheets covering the full range of financial and, eventually, nonfinancial assets and liabilities.

Incorporates new standards for fiscal forecasting, budgeting, and fiscal risks reporting.

Promotes monthly reporting on general government finances, especially for countries with a general government fiscal rule, and the publication of audited year-end financial statements within six months.

Promotes the alignment of reporting standards used in budgets, statistics, and accounts with any remaining discrepancies explained in reconciliation table.

Ensures that external oversight institutions and citizens have the information they need to hold governments to account.

C. Application of the Revised Code

New Fiscal Transparency Evaluations

11. The revised Code forms the basis of new fiscal transparency evaluations (FTEs) which have replaced fiscal ROSCs as the Fund’s tool for assessing country fiscal transparency practices. FTEs provide countries with a comprehensive assessment of their fiscal transparency practices against the differentiated standards set by the revised Code.

12. The FTEs improve upon the fiscal ROSCs by:

  • providing rigorous and quantified analyses of the scale and sources of fiscal vulnerabilities. The analysis focuses on the comprehensiveness and quality of published fiscal data and key sources of fiscal risks. This includes, for example, measures of the coverage of fiscal reports, quality of fiscal forecasts, and size of unreported contingent liabilities. These quantitative measures help to identify shortcomings in fiscal transparency practices that are critical for macro and fiscal outcomes;

  • including an accessible summary of the strengths and weaknesses of country practices related to fiscal transparency, and their relative importance. This is achieved through a set of heat maps (Annex 1),11 which facilitate benchmarking against comparator countries and different levels of practice, identification of reform needs, and prioritization of recommendations;

  • offering an option to specify a sequenced fiscal transparency action plan to help define reform priorities. This identifies the concrete sequence of steps involved in implementing the FTE recommendations and identification of TA follow-up;12

  • allowing for modular assessments of the revised Code’s individual pillars. Modular FTEs would meet the need for more targeted evaluations aimed at addressing the most pressing transparency issues; and

  • offering a more flexible approach to the assessment of transparency issues in resource-rich countries. Resource-rich countries have the option to include Pillar IV in their FTEs to assess resource-specific transparency considerations. The new framework, therefore, allows for assessment of natural resource transparency issues either to be integrated into a broader evaluation of fiscal transparency, or to be conducted as a standalone exercise.

Some Findings of the Fiscal Transparency Evaluations

13. As of February 2017, 21 FTEs have been conducted of which 15 have been published.13 Of these, ten FTEs have been carried out in Europe, four in Africa, five in Latin America, one in Asia and one in the Middle-East. In terms of income level, five FTEs have been done in advanced economies, 11 in emerging markets, and five in low-income countries. Of the six FTEs that have not yet been published, most are being finalized and only one country to date has not consented to publication.

14. An initial analysis of FTEs completed to date reveals that fiscal transparency levels vary both across and within countries, and are positively correlated with the level of income (Figure 2. While low-income countries have had relatively lower scores than emerging and advanced countries, there is scope for countries at all income levels to improve practices, particularly in the areas of fiscal reporting and fiscal risk analysis and management which remains an area of institutional weakness in many countries (Figure 2.

Figure II.2.
Figure II.2.

Summary Results of FTEs Conducted to Date

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Note: As of February 2017, 20 FTEs had been completed of which 15 have been published.

15. Fiscal reporting is not as comprehensive as would be expected. Although some advanced and emerging economies have scored well in this area, a more granular analysis of the scoring reveals that a significant number of countries have achieved only basic ratings in terms of the coverage of fiscal activity (see Figure 3). For example, information on the liabilities of large public corporations are sometimes not included in published fiscal reports. Information on tax expenditures is also frequently absent or incomplete, making it difficult to determine the amount of revenue foregone through exemptions and other reliefs and dedications in the tax code, which in many countries can be a significant proportion of the overall tax code. Another area in need of strengthening concerns systematic reporting or explanation of revisions to historical data on fiscal aggregates. Many countries do not systematically do so, while most others either provide limited explanations or do not publish details.

A significant share of government assets and liabilities is often not disclosed. For example, government balance sheets sometimes exclude large oil and gas assets as well as public pension liabilities. In addition, in many EU countries, fiscal statistics make some accrual adjustments to reported government revenues to account for timing discrepancies but other non-exchange transactions are not included, including the annual net accrual of public service pension liabilities, thereby offering an incomplete picture of the state’s balance sheet. Finally, some countries produce little or no balance sheet information in its fiscal accounts.

Figure II.3.
Figure II.3.

FTE Pillar I - Fiscal Reporting

Percent of total scores

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

16. Country practices in relation to the Fiscal Forecasting and Budgeting Pillar are mixed (Figure 4. Countries have appeared to put an emphasis on improving the institutional frameworks and processes required for budgetary transparency with strong scores for areas such as having comprehensive fiscal legislation in place and establishment of agencies for independent evaluation of fiscal policy, especially but not limited to EU member States. However, the scoring is often not as strong in terms of the transparency of: public investment projects, where lack of information on the full lifetime costs of projects is compounded by weaknesses in project appraisal, selection, and implementation; public participation in the budget; and the finding that many countries still have problems in allowing adequate time for the public and the legislature to scrutinize the budget before it is voted and approved.

Figure II.4.
Figure II.4.

FTE Pillar II - Fiscal Forecasting and Budgeting

(Percent of total scores)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

17. Disclosure of contingent liabilities and other fiscal risks is improving but remains incomplete (Figure 5. Of the 15 countries with published FTEs, only two produced a comprehensive fiscal risk statement at end-2016. In addition, few countries analyze and disclose their implicit contingent liabilities to the financial sector, although one has begun to comment on this in their annual fiscal risk statements. Worryingly, most countries have only made progress at the basic level in their oversight of risks emanating from public private partnerships (PPPs), public corporations, and natural resources. And few countries do any significant analysis of their long-term fiscal sustainability, despite the rising concerns over the fiscal costs associated with ageing populations and climate change.

In general, FTE scores against the fiscal risk pillar of the Code have proven to be the lowest ranking. This perhaps reflects the fact that in many countries awareness of the need to strengthen fiscal risk analysis and management has only taken root since the great recession when countries realized how serious was the impact of poorly understood or quantified risks on the economy in general and public finances in particular.

Figure II.5.
Figure II.5.

FTE Pillar III - Fiscal Risk Analysis and Management

(Percent of total scores)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

18. Although an in-depth analysis of country practices related to the fourth pillar (on natural resource revenues) is premature at this stage, the pilot assessments undertaken so far demonstrate the relevance and usefulness of this pillar. The initial FTE pilots in three countries, which included an assessment of resource revenue transparency, have demonstrated that these principles of the Code are both useful and relevant to countries at varying degrees of resource development and resource revenue dependence.14 The pilots have also demonstrated the flexibility of the Code in adapting to different categories of resource-rich countries. Conducting a pilot in the UK, a country that has been extracting petroleum for several decades and has established many advanced transparency practices, helped to provide important inputs to ensure that the Code was appropriately calibrated.

Linkages with Other Fund Activities and with Other Agencies

19. FTEs have an important part to play in providing input to the Fund’s surveillance through exposing weaknesses in institutional public finance management frameworks. In several cases, findings and recommendations from FTEs have fed into area departments’ policy notes (PNs) in the context of Article IV or other surveillance related missions (Table 1).

20. Even within the short time-frame involved, there have been direct linkages between Fund program design and the findings and recommendations from the FTEs carried out since 2013. For example, the PRGT lending program for one member included a structural benchmark on producing a fiscal risk statement in its budget document as a direct result of the findings of the FTE, while in another member country several structural benchmarks to improve the coverage of fiscal reports, quantify the assets and liabilities of sub-national governments and improve debt management capacity were all informed by the findings of the FTE. While GRA financial programs were, or are in place in several countries that have undertaken an FTE since 2013, the respective FTEs took place towards the tail end of many of the programs. However, one member’s FTE was directly informed by technical assistance that had been carried out during the program to assist the government in managing its payment arrears, developing its budget capacity, and improving controls over sub-national government finances.

21. There is a clear linkage between FTEs and demand for Fund’s TA.

  • Demand for TA from FAD to help implement recommendations contained in FTEs has been noticeable (Table 1). For example, one member has requested significant help in developing its medium-term budget framework, development of a credible fiscal rule, and enhancement of independent evaluation of fiscal policy, all areas that were identified in the FTE. Another member has requested and received substantial TA to help in its efforts to strengthen its budget management and reporting framework, which were identified as in need of improvement in the 2015 FTE. A third member has benefited from Fund TA following the FTE to improve its budget preparation, including the development of a multi-annual budget framework. A fourth member, following the FTE, was also supported by the Fund in strengthening its fiscal risk management and fiscal reporting frameworks. In addition, the authorities of that member country have recently requested a resident advisor to assist with capacity building of the Risk Management Unit in the ministry of finance.

  • FTE indicators are being increasingly used to monitor progress in reforms supported through Fund TA. In particular, the Fund’s new Results Based Management (RBM) framework includes several indicators drawn from the Fiscal Transparency Code and FTE.

Table II.1.

FTE Inputs to Country Specific Policy Notes and TA Programs

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22. There has been a sustained effort to ensure coordination and complementarity between FTEs and the initiatives of other agencies working on fiscal transparency. Fund staff has worked closely with other organizations—in particular, the Global Initiative for Fiscal Transparency (GIFT), International Budget Partnership (IBP), OECD and the World Bank—to ensure that the revised fiscal transparency code helps to anchor their work in this area and better complements other fiscal standards and evaluation tools, e.g., the Public Expenditure and Financial Accountability (PEFA) framework and the Open Budget Index. More recently, at the request of the G20 Anti-Corruption Working Group, Fund staff have contributed to the OECD and the GIFT’s work, at the request of the G7 in developing a “Practical Toolkit on Budget Transparency”, which provides a gateway to main diagnostic tools on budget and fiscal transparency including the FTE.

D. Feedback from the Survey

23. A recent survey conducted for countries that had an FTE shows that the majority of respondents value the revamped Code and FTE. 15 The authorities of beneficiary countries believe that the new Code and FTE have been instrumental in identifying their relative strengths and weaknesses in ensuring the transparency of public finances and prioritizing their future reform agendas in this area.

24. Some key themes emerging from the survey findings are as follows:

  • The increased emphasis on fiscal risks in the revised Code has been a welcome addition. The survey results indicate that the fiscal risks pillar of the revised Code is regarded as the most important of the four pillars (Figure 6. This lends credence to the view that countries are focusing more on the need to identify and manage the fiscal risks that they face, especially following the realization of these risks during the global financial crisis. The fiscal forecasting and budgeting pillar was ranked as the second-most important pillar, with the fiscal reporting pillar ranked in third place. However, each of the three pillars were regarded as important by the majority of respondents. Understandably, as the Resource Revenue Pillar is more recent and many of the surveyed countries are not resource rich and did not conduct a Pillar IV module, it was ranked as the least relevant of the four.

  • Countries responded favorably to the graduated approach to evaluating their fiscal transparency practices. About 90 percent of countries agreed that the graduated approach was, to a great or large extent, valuable in assessing their scores against comparator countries and setting milestones as they seek to implement reforms as part of their capacity building efforts (Figure 7.

  • All countries agreed that, to a great or large extent, that all the main elements of fiscal policy transparency were captured by the revised Code (Figure 7. This appears to suggest that the revised Code has largely succeeded in developing a framework that accurately assesses the level of transparency inherent to countries’ design and implementation of fiscal policy.

  • FTEs were viewed as extremely useful in identifying key fiscal institutional strengths and weaknesses, shaping reform programs, and prioritizing technical assistance needs. Most respondents indicated that the FTE has been instrumental in helping the authorities identify areas of relative strength and weakness and develop prioritized reform strategies. All respondents also believe, at least to a certain extent, that FTEs provide new information that was not previously available to policy makers (Figure 8. This would suggest that while governments often have a good grasp of data requirements to shape fiscal policy, they did not necessarily use all the tools at their disposal to ensure that information is transparently presented and explained.

  • Countries welcome the idea of strengthening the linkage between the FTE and Fund surveillance. Over 80 percent of respondents believed that, at least to some extent, the FTE could usefully contribute to surveillance (Figure 9. The FTE is a technical assistance instrument but a more systematic integration of its findings into surveillance, including for countries that have potential to enter into a financial arrangement with the IMF, would be useful in assessing the capacity of countries to design and implement fiscal policy.

  • Most survey respondents (80 percent) also believe that repeat FTEs should be considered to help countries assess their progress in meeting the standards of the Code (Figure 10. On average the respondents believed that a three-year timeframe for a repeat assessment would be appropriate (Figure 11.

Figure II.6.
Figure II.6.

Relative Importance of Pillars

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure II.7.
Figure II.7.

Comprehensiveness of the FTC

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure II.8.
Figure II.8.

Identifying and Prioritizing Reform Needs

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure II.9.
Figure II.9.

Should the FTE Become a Surveillance Instrument?

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure II.10.
Figure II.10.

Should a Repeat FTE Be Considered?

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure II.11.
Figure II.11.

Appropriate Time Frame for a Repeat FTE

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

E. Concluding Observations and the Way Forward

25. Next steps in the Fund’s fiscal transparency initiative include:

  • Completing the Code’s fourth pillar on natural resource transparency and submitting it for Board approval (Q3 FY 2018). Reflecting feedback received from two rounds of public consultation and comments received from a range of extractive industry stakeholders, the final draft of Pillar IV of the Code is expected to be submitted to the Board in Q2/Q3 FY 2018;

  • Finalizing a two-volume Fiscal Transparency Manual, which will provide more detailed guidance on the implementation of the Code’s principles and practices (Q4 FY 2018); Volume I of the Manual will cover Pillars I, II, and III, and Volume II will focus on Pillar IV and integrate the previously separate Guide on Resource Revenue Transparency. The Manual will systematically set out why each principle in the Code is important, and describe recent trends in implementation of the principle, noting also relevant international standards. In addition, selected country examples will be cited for each level of practice. The Manual will aim to inform a range of different audiences: country authorities with an interest in enhancing fiscal transparency; Fund staff assigned to undertake FTEs and country surveillance work in the fiscal area; civil society organizations engaged in promoting fiscal transparency; and academia, which may find it a useful reference document;

  • Carrying out additional FTEs on the basis of the revised Code, at the request of countries (ongoing). The current FAD resource allocation plan provides for five FTEs per year. A further scaling up of FTEs in response to country demand is not contemplated at this stage and would require additional resources; and

  • Developing and maintaining a database of FTE findings, including selected fiscal transparency indicators, for countries (ongoing). This will be used as an input to future research on developments in fiscal transparency practices across the Fund’s member countries and for benchmarking FTE scores of countries against their relevant peers.

26. As pointed out in the recent Anti-Corruption Summit in London attended by the IMF’s Managing Director, fiscal transparency is a powerful tool in the fight against corruption.16 While the FT Code and FTEs are not (nor do they claim to be) a complete corruption diagnostic, they help countries to target improvements in disclosure of fiscal information to the public and contribute to tackling corruption and improving public financial management.

27. To keep abreast of developments in related standards17 and reflect emerging good country practices on fiscal transparency, the Code and FTE will periodically be reviewed and updated as necessary. The next review could be undertaken in FY2020/FY2021 to take stock of country feedback on the usefulness of the revised Code and FTE and identify the scope for further improvement or innovation. This review would take account of practical experience of applying the revised Code in different country contexts, progress in the implementation of fiscal transparency standards, the Code’s relevance for fiscal policy makers, the work of other stakeholders and standard setters in this area, and the relevance of FTE as a fiscal transparency diagnostic tool. It will report on the allocation of outputs across the membership, and will identify the scope for making modifications to assessments to further improve the linkages to surveillance and integration with capacity development efforts. Finally, it will assess the accessibility of assessments and, if necessary, make recommendations on how this can be improved.

28. The FTE framework will be further leveraged to support FAD’s capacity building efforts, including the prioritization and delivery of technical assistance. In addition to including several FTE indicators in the Fund’s RBM framework, countries and the international donor community will be encouraged to use the FTE as an overarching diagnostic tool to identify key sources of fiscal vulnerability and set out reform priorities that could be supported through TA.18

29. Opportunities for closer link between FTE and Fund’s surveillance activities will be explored. The results from FTEs could be more systematically used to guide the policy dialogue with countries. Area departments country teams could also play a catalytic role in encouraging countries to undertake FTEs with a view to identifying key risks and vulnerabilities in the fiscal area.

30. Enhanced outreach by FAD and RTACs to foster greater understanding of the revised Code’s principles and practices will be helpful. In addition to countries’ central fiscal authorities, these outreach events could target national oversight and accountability institutions19 to strengthen their fiscal transparency and hold governments accountable for the use of public resources. Relevant TA missions and other capacity-building activities in the fiscal area can aid in engaging more fully with those institutions. Regional seminars/workshops, including those organized by RTACs, would also provide useful fora for outreach to those institutions and raise their awareness for effective monitoring of compliance with the fiscal transparency standards.

31. Resources permitting, efforts will be made to increase the diversity of coverage of FTEs across the Fund membership. So far, it has been difficult to find an uptake of FTEs in some regions. It is expected that enhanced outreach (as proposed above), support of area department country teams, and enhanced engagement with regional bodies will help facilitate expanding the coverage of FTE.

32. FAD will consider further expanding its institutional relationship and engagement with other international standard setters and professional bodies on fiscal transparency.20 FAD staff will also continue active engagement in multi-stakeholder initiatives and civil society groups on fiscal transparency.21 The aim of such engagement would be to promote the alignment of international reporting standards; identify and address any gaps in the normative architecture for fiscal transparency; review progress in the implementation of those standards; and identify priorities for technical assistance and opportunities for mutual assistance.

III. Financial Sector Standards and Codes1

Introduction

1. This note is a background reference to the 2017 Joint Review of the Standards and Codes Initiative (the Initiative). It focuses on six policy areas relevant for financial sector stability: the Basel Core Principles for Effective Banking Supervision (BCP), the Insurance Core Principles (ICP), the Objectives and Principles of Securities Regulation (IOSCO Principles), the Principles for Financial Market Infrastructures (PFMI), the Core Principles for Effective Deposit Insurance Systems (DICP), and the Key Attributes of Effective Resolution Regimes for Financial Institutions (KA). The note discusses changes to the international standards since the Initiative’s last review in 2011 and the use made of financial sector standards in Fund’s work.

2. The financial sector standards underpin the integration of internationally agreed benchmarks into financial stability surveillance accountability mechanisms, and technical assistance (TA) at the Fund and World Bank. Because the Standard Setting Bodies (SSBs)2 are composed of expert agencies (central banks and prudential authorities) that develop standards through extensive international peer consultation, the standards represent an international consensus. There is a high level of recognition, credibility, and “buy in” of the financial sector standards by country authorities. The Fund and World Bank are therefore able to rely on them as evaluative tools and benchmarks to support financial sector policy recommendations. In turn, the Fund (along with the World Bank) acts as impartial arbiters in evaluating compliance with these standards, providing a valuable service to member countries and other stakeholders.

3. Financial sector standards have been strengthened following the Global Financial Crisis (GFC). Lessons from the crisis have had a profound influence on the post-2011 evolution of financial sector standards, as well as on their use by the Fund and others. Standards have been expanded in scope and improved to account for pre-crisis gaps. The most significant changes were made to BCP, PFMI, ICP, and DICP. In addition, a new financial sector standard was developed in 2011—the KA by the Financial Stability Board (FSB). Fund and Bank staff contributed to the development of these standards, incorporating lessons from their experience in assessing standards, and providing policy advice to the membership.

4. The use of financial sector standards has also been influenced by the increased focus on systemic risk following the GFC. Specifically, following the 2014 Review by the IMF Board, the Financial Sector Assessment Program (FSAP) has placed primacy on systemic risks and vulnerabilities that could lead to financial system instability. This has required a broader macrofinancial orientation in Fund surveillance and FSAPs, to provide integrated assessments of systemic risk.

5. The combination of the increase in scope and complexity of financial sector standards alongside a greater focus on systemic risk has coincided with the flexible use of standards. Full, graded, and detailed assessments continue to be used to benchmark oversight frameworks where warranted. Staff has also intensified the use of financial sector standards for deeper reviews of select topics, and produced technical notes (TN) based on these standards. TNs drafted with references to financial sector standards are also used to help benchmark financial sector institutional frameworks and their reform, and to guide recommendations to foster financial stability and financial sector development. TNs have lent additional operational flexibility and allowed expert resources to be focused on prioritized risks and financial sector developmental challenges. Experience with this multifaceted approach shows that it has been helpful in supporting the Fund’s focus on systemic risk and the Bank’s on deeper and more inclusive financial systems.

6. The remainder of the paper is organized along the following lines. Section B discusses the evolution of financial sector standards since the Initiative’s last review in 2011. Section C outlines how financial sector standards have been used in different work areas of the Fund and discusses current issues faced in the use of financial sector standards and codes. Section D makes some concluding observations.

B. Changes to Financial Sector Standards Since 2011

Basel Core Principles (BCP)

7. The revision of the BCP in 2012 reflected not only market and regulatory developments—such as the introduction of Basel III—but also lessons from the GFC. The Fund was a member of the drafting team and experience gleaned from FSAPs and TA was reflected in the 2012 BCP (see Box 1 for more details on the relationship between the IMF and SSBs). Building on the key elements of the previous version published in 2006, the updated BCP strengthens the focus on: (i) effective supervision of systemically important banks; (ii) application of a system-wide, macro perspective to microprudential supervision; (iii) effective crisis preparation and management, recovery, and resolution measures; and (iv) sound corporate governance, disclosure, and transparency. For the standards to be applicable to a broad spectrum of banks and jurisdictions, the concept of proportionality was also reinforced throughout the principles, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. The 2012 update strengthened requirements by adding 35 new subprinciples (Table 1).

8. The 2012 BCP strengthen the financial stability focus of bank regulation and supervision, which is significant for the Fund’s mandate. The updated BCP includes a greater focus on risk-based supervision and the capacity for early intervention and timely supervisory actions. Supervisors are now required to assess the profile of banks not only in terms of their risks and the efficacy of risk management, but also in terms of the threats they may pose to banking and the financial systems. In addition, supervisors need to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risks faced by individual banks. While the BCP sets out the powers that supervisors should have in addressing safety and soundness concerns, there is a heightened focus on the actual use of these powers, in a forward-looking approach through early intervention.

Fund’s and World Bank’s Relationship with Standard Setting Bodies (SSBs)

Fund and World Bank staff are closely involved with the financial sector standard setters. Staff and standard setters enjoy a robust dialogue on the content of the financial sector standards and their implementation. Staff participates on the main committees and subcommittees tasked with the development and implementation of financial sector standards. Fund and Bank staff were also involved at working level in the development of the 2010 revised IOSCO Principles, the 2011 revised ICP, the 2011 FSB-KA, the 2012 revised BCP, the 2012 revised PFMI, the 2014 revised DICP, as well as in the preparation of the (revised) assessment methodologies (or in the case of the DICP, the “handbook”) that accompany these standards. The World Bank has been active with both the Organization for Economic Co-operation and Development (OECD) and International Organization of Pension Supervisors who together produce international standards on pensions. The OECD recently published revised standards on private pensions on which the World Bank provided extensive input. Fund and Bank staff are also engaged with the FSB on its implementation monitoring work. Most recently, staff has worked with the BCBS, IAIS, and IOSCO on ways to enhance integration of supervisory principles in FSAP financial stability analysis.1/ Standard setting bodies have welcomed Fund and Bank staff participation and rely on staff’s technical expertise and country experience.

The role of SSBs has increased in certain policy areas. Some SSBs have embarked on their own implementation monitoring exercises. The FSB’s peer reviews have been used to assess the degree of implementation of the DICP (2012, which also made recommendations to strength the standard) and KA (two thematic peer reviews in 2013 and 2016). In banking supervision, the Basel Committee on Banking Supervision has strengthened the coverage of supervisory issues, many of which further articulate the standards expected in the BCP, through the work of the Supervisory and Implementation Group (SIG). In securities regulation, IOSCO has begun country reviews, involving members’ self-assessments of the implementation of principles in this area. In addition, CPMI-IOSCO has started monitoring the implementation of financial market infrastructure practices. Similar efforts are also underway by the IAIS for its members implementing the ICP. Another encouraging trend relates to implementation monitoring of the post GFC reforms by the SSBs and the FSB to ensure consistency and completeness of implementation (such as the Regulatory Consistency Assessment Program of the BCBS on Basel III implementation).

The enhanced self-monitoring by SSBs is a welcome step to improve traction of standards across a range of countries. Self-monitoring assessments and peer reviews are not comparable to an independent assessment by a third party. Therefore, self-monitoring by SSBs is complementary to, rather than a duplication of the Fund’s work. To address assessment fatigue, the FSB has decided to increase the cycle for country peer reviews from five years to eight years.

1/ Board paper on MoUs with SSBs.
Table III.1.

Changes in Supervisory Principles and Sub-Principles in Numbers

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“-” means not applicable

Insurance Core Principles (ICP)

9. The 2011 ICP update incorporated lessons from the GFC by adding an enhanced risk-based solvency regime. The update also introduced additional principles related to macro-prudential surveillance and cross-border crisis management. These principles require insurers to adopt appropriate valuation techniques for assets and liabilities, as well as improved enterprise risk-management methods for solvency purposes. The ICP was significantly expanded in scope by assessing insurers both at the legal entity level and the group level, and by introducing more rigorous group-wide regulatory requirements. These changes reflect the weakness of group supervision revealed by the GFC.

10. The ICP was restructured to reflect ongoing shifts in the insurance market and to incorporate new work completed by the IAIS. These developments have led to a revision of the ICP almost every year. Of the 26 principles, 8 principles have been partially amended since 2011. While not all changes to the ICP and to the accompanying assessment methodology are significant, the frequency of changes presents a challenge to country authorities trying to meet international standards, as well as to assessment teams who must constantly refresh an understanding of the ICP. The number of changes has also made the ease of comparability across assessments problematic.

International Organization of Securities Commissions (IOSCO) Principles

11. The IOSCO Principles were revised in 2010 and the related assessment methodology was published in 2011. The update enhanced the role of securities regulators in managing systemic risk and brought new entities into the scope of regulation. The revised Principles require securities regulators to contribute to monitoring, mitigating, and managing systemic risk and have processes to identify and address regulatory gaps and conflicts of interest. In addition, the Principles require hedge funds/hedge fund managers and credit rating agencies be supervised and strengthen the oversight regime for auditors. Finally, the assessment methodology was reformed to strengthen requirements on internal controls, risk management, and governance practices were made in the assessment methodology in relation to the Principles for Collective Investment Schemes (CIS) and securities intermediaries. IOSCO recently released a new update to its assessment methodology to incorporate new policies developed in the past six years in key areas, particularly CIS and derivatives markets.

Principles for Financial Market Infrastructures (PFMI)

12. New and revised international standards for safe and efficient FMIs were published in April 2012.3 The Committee for Payment and Settlement Systems (CPSS)4 and IOSCO reviewed three existing sets of standards for FMIs and replaced them with a new set of Principles for Financial Market Infrastructures (PFMI). The PFMI reflects market and regulatory developments since 2000, considering the lessons learned from the GFC. It also accommodates the G20/FSB recommendations to strengthen core financial market infrastructure, not least to support the G20 central clearing mandate for standardized OTC derivatives. Although collectively FMIs performed well during the global financial crisis, certain events highlighted important lessons for effective risk management. The revised set of standards offers harmonized and, where appropriate, new and stronger standards for FMIs, in areas of risk management, such as credit and liquidity risk, recovery and orderly winding-down, and interdependencies and interoperability.

Deposit Insurance Core Principles (DICP) and Key Attributes (KA)

13. The GFC underscored the need to develop effective frameworks to resolve financial institutions and to strengthen financial safety nets. The absence of regimes capable of resolving large, complex financial institutions meant that national authorities were left with little alternative but to commit public resources to support failing institutions during the crisis. Moreover, poorly designed deposit insurance schemes failed to prevent financial contagion. “Crisis Resolution and Deposit Insurance” was added as a new policy area under the list of key standards relevant for financial stability in 2011, and initially included the DICP. A key milestone was the 2011 adoption of the Key Attributes of Effective Resolution Regimes for Financial Institutions by the FSB. The KA were further revised in 2014. The DICP was revised in 2014 to enhance guidance in several areas, including governance, coverage, funding, and payouts. In 2014, the FSB also published additional guidance on the application of the KA for insurers, FMIs (essentially, central counterparties), and the protection of client assets in resolution. The KA is a multi-sectoral standard with a modular assessment methodology (by sector). The first module, for the banking sector, was finalized in October 2016. The assessment methodology for insurance will be completed tentatively by end-2017, but possibly later given the need to pilot the draft methodology. FMIs will take longer still.

C. Use of Financial Sector Standards in Fund and Bank Work

14. Financial sector standards are used across the Fund’s and Bank’s key work areas. They assist in FSAPs, TA, Article IV surveillance and Fund and Bank supported programs (see Box 2 for some examples of how financial sector standards are used in Fund’s and Bank’s work).

15. Financial sector standards are the benchmark for Detailed Assessment Reports (DARs). DARs are typically produced in the context of FSAPs. The decision of whether to undertake a DAR is made through an agreement between Fund and Bank staff, and the national authorities.5 BCP DARs are done in many countries; ICP, IOSCO, and PFMI DARs are done in countries where insurance, securities markets or financial market infrastructures are critical to systemic factors or risks to financial stability. DICP DARs have been conducted where strengthening deposit insurance featured as one of the authorities’ high priorities.

16. The resource intensity of undertaking a full, graded DAR has increased for both the member country that undergoes the assessment and the assessors (Figure 1. As set out above, financial sector standards have been enhanced to address gaps exposed by the GFC. These revisions have increased the depth and breadth of each of the standards.6 Furthermore, the implementation of the financial sector standards as an accountability mechanism has raised expectations from country authorities who have become more aware of financial sector standards. Several reforms have been undertaken to revise existing systems of oversight, regulation, and supervision to meet them. Third party assessments are now more likely to be published and scrutinized. Before the GFC, a BCP DAR was considered long at around 60 pages, whereas now, even in mid-sized countries, a full graded assessment is typically more than 200 hundred pages in length, involving significant research, writing, and review by the assessment team, peer reviewers, and the country authorities. 7

Utilization of Standards in Fund’s and Bank’s Work: Some Examples

Basel Core Principles

The BCP have been used in a wide range of Fund surveillance and technical assistance activities. Detailed BCP assessments are typically conducted as part of FSAPs, although stand-alone assessments are also possible. Even when detailed assessments are not conducted, the BCP is still used as the international benchmark to substantiate FSAP recommendations on banking regulation and supervision. The BCP utilized as a source for Fund/Bank advice related to banking supervision and regulation, particularly in assisting the mainstreaming of financial sector issues in program countries and in TA. Examples of recent use of standards in Fund programs include Ukraine, Iceland, Ireland, Myanmar, Moldova, and Sao Tome and Principe. Many TA missions (more than 400 a year) on banking supervision and regulation issues are also underpinned by the standards and principles. For the Bank, country examples of the use of standards in loan and TA in some recent operations include Mozambique, Papua New Guinea, and Colombia.

Deposit Insurance Core Principles and Key Attributes

The assessment of crisis management frameworks has become a key building block for FSAPs, and demand for TA in this area has soared, despite few full, graded DARs to date. The 2009 FSAP Review highlighted crisis management as one of three key elements of an FSAP, effectively establishing that every FSAP would include a technical note on this topic. Requests for TA on strengthening resolution and financial safety net frameworks also materially increased, reflecting the increased international emphasis on crisis preparedness frameworks post-GFC. Financial standards guide not only TA but also FSAP Technical Notes, usually without a full, graded DAR—partly because the assessment methodology for the KA was not yet finalized. Since 2012, seven full DICP DARs have been conducted and six TNs produced on deposit insurance. Three pilot assessments/reviews of the KA were carried out—two of them jointly with the FSB and the World Bank—as part of efforts to develop an assessment methodology. All three-covered bank resolution and one covered insurance resolution. No pilot assessment of resolution for central counterparties has been conducted. The KA assessment methodology for the banking sector was completed in October 2016, incorporating lessons from the pilot assessments/reviews. Fund and Bank staff have been involved in the development of the assessment methodology from the outset, participating in the FSB’s drafting committee and providing substantial feedback to the committee based on the three pilot assessments, including on issues of relevance to the broader membership of the Fund and Bank (notably proportionality).

Insurance Core Principles

Through technical assistance projects, the World Bank provides support and guidance to clients to conduct ICP self-assessments (as recently undertaken by the West African regional insurance supervisory authority). Analytical research into the potential impact of International Capital Standards on insurers’ ability to invest in emerging market infrastructure projects is due to be launched shortly. On pensions, the World Bank provided extensive input on the revised standards on private pensions recently published by the OECD. The Bank drew on its work on achieving long-run outcomes (Stewart 2014, Price and others 2016) and an assessment framework it has developed that incorporates the pension standards along with other areas to review on which no standards exist. As a result, the new OECD standards incorporates the outcomes used by the Bank when assessing countries, stating that “private pension systems should have clear and well-defined objectives regarding coverage, adequacy, security, efficiency and sustainability.” Assessments of supervisory capacity using international standards were recently conducted in client engagements including in Uganda and Zambia.

Figure III.1.
Figure III.1.

Illustrative Examples of Increased Resource Requirements in Standard Assessments1/

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

* The BCP Assessment was done as a stand-alone assessment in 2010.1/ Please note that general conclusions should not be drawn from this chart since this is a limited sample which was selected for illustrative purposes. Days spent on mission is only one element of the overall resource input.

17. Even when detailed assessments are not conducted, the financial sector standards are actively used as the international benchmark. This helps to substantiate financial policy recommendations on regulation, supervision, risk management, resolution, financial market infrastructure, and financial safety nets. BCP assessments (and the resulting recommendations) are also sometimes used as benchmarks in Fund programs where the failure of supervision or regulatory gaps has contributed to distress in the banking system (see Box 3 for an overview of country compliance with financial sector standards). BCP recommendations have also been used to set up policy conditionally in Policy Development Loan operations of the Bank.

18. The flexible approach to the Fund’s use of financial sector standards is proving beneficial. Flexibility is appropriate when an FSAP focuses on risks that are particularly important in a jurisdiction, or on a high priority topic.

19. Technical notes on supervision, crisis management and resolution, and financial market infrastructure are frequently produced. These draw on financial sector standards to frame the evaluation and recommendations. Technical notes on crisis management and resolution have been an expectation of the FSAP since 2010, and now incorporate elements set out in the KA. These have developed over time to cover a consistent set of topics, while maintaining a flexibility to focus on issues of concern in greater depth. Since 2012, financial sector oversight has been covered via 122 DARs and 54 TNs (Figure 2.

Figure III.2.
Figure III.2.

Number of DARs and TNs Conducted 2005-2016

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

1BCP, ICP, IOSCO and PFMIs

20. Technical notes allow staff to delve more deeply into issues where important vulnerabilities exist. A focused approach is particularly useful in jurisdictions where compliance with financial sector standards has been established (based on earlier DARs) but where specific areas of systemic risk warrant deeper coverage. For example, the recent FSAP for one member conducted an evaluation of conglomerate supervision, resulting in a TN. Another member’s recent FSAP included a deep-dive on oversight of asset management companies drawing on the IOSCO standard but not leading to another full, graded DAR.

21. A focused approach is also used in the case of a nascent or a developing financial system and oversight function. In such instances, it is often more suitable to discuss priority areas for reform and suggest plans for capacity development. Some recent examples are TNs on banking supervision in FSAPs for one low income member and another emerging market member. In all cases, the work draws heavily on the financial sector standards as internationally agreed benchmarks for findings and recommendations, but focuses on a subset of relevant standards.

22. Assisted self-assessments of financial sector standards are becoming a useful platform for developing TA action plans. Standards also offer essential guidance in particularly technical areas of financial oversight, the largest individual component of the extensive TA provided on financial sector issues.8 This includes TA on capital and liquidity for banks, governance of banks, regulation of collective investment schemes and legal powers and the independence of supervisors are a few examples.

23. Standard assessments, or self-assessments, are increasingly being used as a source of verifiable indicators for reporting progress to external donors. There have been many requests, particularly in the past several years, for technical assistance in the form of a full detailed BCP to serve as the basis for a medium or long term action plan for supervisory agencies. In all these cases, the agreed international financial sector standards provide Fund staff with credibility and authorities with a level of comfort, in both the process of diagnosis and in generating recommendations. In the case of the other financial sector standards, such as PFMI, KA, and DICP, regional workshops are often used as a platform to build capacity at central banks and other authorities implementing these standards.

24. Financial sector standard assessments are also informing bank and insurance stress testing done in FSAPs. The risks addressed in the BCP or the ICP are closely connected to the risk analysis in stress tests. Although these exercises approach risk from different perspectives, combining observations helps FSAP teams form a holistic view of the extent of risks in a jurisdiction. If a standard assessment finds a member country to be non-compliant with respect to the BCP on credit risk (CP 17), then this analysis can help improve the risk identification process and vulnerability analysis. Both exercises inform each other, thereby enhancing the financial stability risk analysis in FSAPs.

25. Survey results show that country authorities value standard assessments but see room for streamlining (Figure 3. The survey conducted in the context of the 2014 IMF FSAP Review showed that about 75 percent of respondents either strongly agreed or agreed that standards assessments adequately identify the main risks to the financial system, provide robust evaluations of the regulatory and supervisory framework, and are well aligned with other parts of the FSAP. However, more than 50 percent of respondents also saw room for streamlining standards assessments and focusing on those principles most relevant to the country.

Cross-Country Experience with Compliance in Standards and Codes

Basel Core Principles

A look across BCP assessments reveals common strengths and key weaknesses across jurisdictions. A high degree of compliance has been observed in some areas, such as cooperation and collaboration between domestic and foreign authorities. But supervisory independence has often been inadequate, due to weak governance and institutional arrangements, as well as insufficient legal safeguards. Exposures to related parties is another common area of weakness, with supervisors failing to set appropriate definitions and upper limits, or failing to obtain the necessary information for strict enforcement, such as ultimate beneficial ownership. A high degree of compliance is observed in some risk categories—including credit and liquidity risk—but country and transfer risk remains challenging in many jurisdictions.

A02ufig1

BCP Compliance

Average across 31 countries (2013-2016)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Insurance Core Principles

An analysis of ICP assessments demonstrates that compliance with the ICP has improved over time.

Assessments continue to find material shortcomings in key prudential requirements such as group supervision, capital adequacy, disclosure, and crisis management. Compliance is generally stronger in advanced countries but even home supervisors of large and globally active insurers have been found to be materially non-compliant against key prudential requirements. Emerging market supervisors face even greater challenges, as detailed in the assessments, raising concerns about the oversight of rapidly growing markets. Lack of supervisory independence and resource constraints are areas of concern, and insurance supervisors face challenges in attracting and retaining staff with specialized skills, such as actuarial experience.

A02ufig2

ICP Compliance

Average across 18 countries (2012-2016)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

International Organization of Securities Commissions Principles

Overall, the level of implementation of the IOSCO Principles is reasonably good when assessing the content of regulatory requirements and powers available to the regulator. Notable gaps affecting both emerging and advanced economies have been identified in supervisory independence, adequacy of resources, and effectiveness of supervisory and enforcement programs. In general terms, low income countries fare significantly worse in the implementation of many of the Principles when compared to high and upper middle income jurisdictions.

A02ufig3

IOSCO Compliance

Average across 19 countries (2012-2016)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Principles for Financial Market Infrastructures

Findings show broad compliance with the PFMI. Weaker compliance is often found in newer areas of the PFMI, such as recovery planning of FMIs, the management of interdependencies, and the adoption of a holistic approach to risk management. With respect to the supervision and oversight of FMIs, FSAP findings show that authorities could improve their cooperation and coordination with foreign authorities in the supervision and crisis management of FMIs operating internationally. Finally, most FSAP reports recommend that authorities increase their staff resources dedicated to FMI supervision and oversight.

Figure III.3.
Figure III.3.

Survey Results from the 2014 FSAP Review

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Source: FSAP Survey and IMF Staff Calculations

D. Concluding Observations and the Way Forward

26. Financial sector standards are an integral component of Fund’s financial stability surveillance and technical assistance work. They are used extensively to evaluate and guide enhancements to financial sector institutional and oversight frameworks and are a key source of policy advice. Developed in international expert fora by well recognized Standard Setting Bodies (SSBs), these standards enjoy strong support among country authorities and carry credibility that lends effectiveness to the Fund’s work.

27. Following the Global Financial Crisis (GFC), financial sector standards have been enhanced in coverage and depth, in some cases significantly. These improvements are welcome and have benefitted from Fund staff inputs and participation. The technical complexity of the financial sector standards has also increased. The implementation and assessment of these standards now require greater specialized skills, resources, and time.

28. Fund staff continue to use financial sector standards in carrying out full, detailed assessments of compliance as well as in focused analytical reviews. In a focused review, the financial sector standard is used as the basis for a deeper analysis of selected elements of the oversight framework for financial stability, adding flexibility to the way financial sector standards are used and helping to focus attention on priority risks. This multifaceted mode of using financial sector standards has been instrumental in supporting the Fund’s work on financial surveillance while managing its other post crisis responsibilities.

29. Going forward, staff will continue to keep the standards up to date, including through ongoing cooperation with the SSBs. Staff will also continue to promote the implementation of financial sector standards. In addition, more formalized ways will continue to be developed to integrate outcomes based on standards with the Fund analysis of risks and vulnerabilities. Staff plans to assess the use of financial sector standards in the context of the FSAP Review planned for 2019. The review will report on the allocation of outputs across the membership, and will consider and report on whether there is scope for making modifications to standards assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of standards assessments and, if necessary, make recommendations on how this can be improved going forward.

IV. Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT)1

A. Background

1. This note is a background reference to the 2017 joint review of the standards and codes initiative (the initiative). It focuses on the international standard on combating money laundering and the financing of terrorism and proliferation (the AML/CFT standard) and the associated assessment methodology. The note provides background information on AML/CFT and the Fund’s role in this context, explains the unique burden sharing arrangement with respect to AML/CFT assessments, and describes the main changes that have occurred since the initiative’s last review in 2011, as well as the different Fund work streams that address AML/CFT issues. It also discusses some preliminary findings of the implementation of the current assessment methodology, and outlines some of the issues that may be discussed in the next review of the Fund’s AML/CFT strategy.

Money Laundering and Terrorist Financing

2. Money laundering and terrorist financing2 are both financial crimes with economic effects. They can threaten the integrity and stability of a country’s financial sector or its external stability more generally. Effective AML/CFT regimes are essential to protect the integrity of markets and the global financial framework as they help mitigate factors that facilitate financial abuse. Action to prevent and combat money laundering and terrorist financing thus responds not only to a moral imperative, but also to an economic need.

3. For these reasons, the international community has made the fight against money laundering and terrorist financing a priority.

The Fund and AML/CFT

4. In response to a call from the international community, the Fund expanded its work in the area of AML in 2000, and to CFT in 2001. Since then, the Fund has been providing advice to its members on AML/CFT issues in a number of work streams (detailed below).

5. The Fund’s Executive Board has reiterated the importance of AML/CFT on several occasions. Most recently, in March 2014, the IMF’s Executive Board notably reviewed the Fund’s AML/CFT strategy and gave strategic direction for the work ahead (see below). In May 2014, the Fund started the second five-year phase of a donor-supported trust fund that complements existing accounts financing AML/CFT capacity development activities in its member countries.

The AML/CFT Standard and the Financial Action Task Force (FATF)

6. The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of the G7. Its objectives are to set standards on AML/CFT and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. It currently comprises 37 members3 and a range of observers, including the IMF.

7. The FATF standard is multi-disciplinary and broad ranging. First issued in 1990, the FATF Recommendations (the AML/CFT standard) were revised in 1996, 2001, 2003, and most recently in 2012, and are intended to be of universal application. They cover a range of authorities and private sector professional. They focus on the necessary measures to prevent money laundering, terrorist financing, and to some extent, the financing of proliferation of weapons of mass destruction, and on ensuring that the authorities have the necessary tools to effectively combat money laundering and terrorist financing.

8. A key criterion for countries’ membership in FATF is a commitment to undergo regular assessments against the FATF Recommendations. The FATF monitors the progress of its members in implementing the standard through mutual evaluation (peer reviews) and follow-up processes. It also reviews money laundering and terrorist financing trends and typologies, and promotes the adoption and implementation of AML/CFT measures globally, notably through its International Cooperation Review Group (ICRG).

The FATF Network

9. Nine FATF-style regional bodies (FSRBs) have been established.4 Like the FATF, they conduct peer reviews of their members’ level of compliance with the standard.

10. Together, the membership of FATF and the FSRBs includes some 198 countries. Through this network, the vast majority of the Fund’s membership has committed to implementing the FATF standard and undergoing regular mutual evaluations against that standard.

B. A Unique Burden Sharing Arrangement

11. In addition to the FATF and FSRBs, both the Fund and the World Bank also conduct assessments against the FATF standard, thus bringing the total number of AML/CFT assessor bodies to 12. All assessor bodies conduct their assessments on the basis of the same assessment methodology.

12. Arrangements are in place to share the assessment burden and avoid unnecessary duplication. Pursuant to these arrangements, assessments conducted by the FATF and FSRBs may generate IMF AML/CFT Reports on the Observance of Standards and Codes (ROSCs), and assessments conducted by the Fund/World Bank may be adopted as a FATF or FSRB mutual evaluation through the peer review process. AML/CFT ROSCs consist of the executive summary of the detailed assessment report (if prepared by Fund or Bank staff), or of the mutual evaluation report (if prepared by the FATF or FSRBs), supplemented, where relevant, by the authorities’ response. The ROSCs that are produced by other assessor bodies are subject to a pro forma review by Fund staff. These burden sharing agreements have been in place since July 2002, when the Fund began its 12-month pilot program of AML/CFT assessments.

13. The burden sharing arrangements enable a significant leveraging of the Fund’s resources. Since 2014, the Fund has a mandate to conduct two to three AML/CFT assessments per year - in practice, however, due to resource constraints, Fund staff conducts one to two assessments per year. The FATF and FSRBs conduct a total of 17 to 20 mutual evaluations per year, and it is anticipated that these numbers will increase to up to 25 evaluations per year. All of these evaluations may result in an IMF AML/CFT ROSC if the assessed country requests it.

14. The multiplicity of assessor bodies raised issues of quality and consistency of assessment reports, as well as coordination challenges. Concerns were notably raised in the past by the Fund Board with respect to the quality of some reports produced by some FSRBs under the previous round of assessments. These concerns led to the establishment of stronger review mechanisms by the FATF and FSRBs (described below). The coordination challenges, however, could not be addressed, mainly due (i) to the different planning horizons of the FATF/FSRBs mutual evaluation schedules and the FSAP schedule, and (ii) differing priorities under the FSAP and the mutual evaluations programs. As a result, the previous mandatory link between FSAPs and comprehensive AML/CFT assessments was replaced in March 2014 by a more flexible approach to the discussion of AML/CFT issues in the context of FSAPs, whereby Fund staff may derive key findings on AML/CFT from other available sources of information.

C. Changes Since 2011

15. Important changes occurred in 2012 and 2013, especially with respect to the content and modalities of AML/CFT assessments.

The 2012 FATF Recommendations

16. The 2012 review of the FATF Recommendations was driven by the need to ensure that the standard remained up-to-date and addressed relevant threats to the international financial system. It introduced an enhanced focus on the risk-based application of AML/CFT measures (i.e., the risk-based approach), strengthened parts of the previous standard (e.g., on transparency of legal persons and arrangements, inclusion of tax crimes as predicate offenses to ML, strong anti-corruption tools), and included measures to combat the financing of the proliferation of weapons of mass destruction.

The 2013 Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems

17. The 2013 methodology introduced a focus on the effectiveness of AML/CFT measures. Prior to 2013, AML/CFT assessments focused on the level of compliance of countries’ laws, legal, regulatory and institutional framework with the standard (i.e., assessing technical compliance with the standard), and, to a limited extent, implementation. The 2013 assessment methodology added a new dimension, namely the systematic assessment of the effectiveness of national AML/CFT systems—to establish how well countries achieve the objectives set out in the methodology. This change was introduced to respond to concerns that, with most countries now having AML/CFT laws in place, there was a need to concentrate on an informed discussion of the effective implementation of the standard. Sound laws and regulations remain essential, and it is equally important that they are used effectively to deliver results to protect the financial system, detecting and helping to prevent money laundering and terrorist financing.

18. The 2013 assessment methodology therefore comprises two inter-linked components:

  • The technical compliance component, which addresses the specific requirements of the FATF Recommendations, principally as they relate to the relevant legal and institutional framework and the powers and procedures of competent authorities. The level of compliance with each Recommendation is indicated with ratings (from Compliant to Non-compliant).

  • The effectiveness component, which addresses the extent to which a country achieves a defined set of 11 outcomes that are central to a robust AML/CFT system. The effectiveness ratings range from High level of effectiveness to Low level of effectiveness. This component is now the main focus of AML/CFT assessments.

19. The new focus on effectiveness constitutes a fundamental change in the way assessments are conducted. It requires a greater understanding of the country’s specific ML and TF risks, and of its general context—the results obtained by countries under each of the outcomes set out in the methodology are assessed against the backdrop of those risks and that context. The assessment of effectiveness, therefore, also entails a greater level of subjectivity than the assessment of technical compliance.

20. The 2013 methodology comprises two sets of ratings. There are four ratings for both technical and effectiveness compliance (Compliant / Largely Compliant /partially compliant /non-compliant (technical) and high / substantial/ moderate / low (level of effectiveness)).

Quality and Consistency Review

21. During the previous rounds of assessments, the IMF Executive Board, as well as the FATF, expressed concerns about the varying quality of assessment reports, especially those produced by some of the FSRBs. To address these concerns, the FATF strengthened the review mechanisms for assessments conducted under the 2013 methodology by requiring, in the universal procedures, that all assessor bodies must adhere to (i) a mandatory involvement of external reviewers (including, at a minimum, one reviewer from another assessor body) during the assessment, and (ii) an ex-post review that immediately follows the adoption by the FATF or FSRB of a mutual evaluation report and through which major quality and consistency problems may be raised (Global Quality and Consistency Review).

22. In line with the Executive Board’s conclusion of the 2014 discussion of the Fund’s AML/CFT strategy, Fund staff actively participates in the review mechanisms, as resources permit. Similarly, the Fund’s draft assessments reports are reviewed by external reviewers, as well as by delegations to the FATF or relevant FSRB prior to being discussed and adopted by the relevant plenary as mutual evaluation reports.

2014 Review of the Fund’s Strategy on AML/CFT

23. In March 2014, the Board reviewed the Fund’s AML/CFT strategy. It notably (i) endorsed the revised FATF AML/CFT standard and assessment methodology, (ii) encouraged staff to continue its efforts to integrate financial integrity issues into its surveillance and in the context of Fund-supported programs, and (iii) decided that AML/CFT issues should continue to be addressed in all FSAPs albeit on a more flexible basis. It was also agreed that reports adopted by the FATF and FSRBs would continue to be converted into AML/CFT ROSCs following a pro forma review by staff. ROSCs essentially replicate the Executive Summary of reports published by the FATF, FSRBs, Fund and World Bank.5 Directors reaffirmed the usefulness of AML/CFT ROSCs (whether based on a Fund-led assessment or on a FATF/FSRB mutual evaluation), and some mentioned that the membership remains interested in the issuance of an AML/CFT ROSC in addition to the publication of their respective assessment or mutual evaluation reports.

AML/CFT in Other Work Streams Assessments

24. Fund staff conducts one to two AML/CFT assessments per year, mainly as part of its burden sharing with other assessors. As encouraged by the Executive Board in 2014, staff also participates in the review of the quality and consistency of FATF and FSRB reports. In determining what jurisdictions to assess, Fund staff generally focuses on jurisdictions with systemically important financial sectors or unique ML/TF risks. Through May 2017, Fund staff has completed, under the new methodology, the assessments of Italy and Canada, and is in the process of assessing Mexico and Colombia. Upcoming Fund-led assessments include China (2018) and Iran (2018/2019).

25. Fund policies allow for the possibility of targeted AML/CFT ROSCs based on the FATF/FSRBs fifth year follow-up assessments. The first follow-up assessments are planned to take place in 2019. The FATF is currently discussing the scope and modalities of these follow-up assessments to ensure that they remain feasible in light of the increased resources required by the assessment round (which, until all members have been assessed against the prevailing standard, will continue to run in parallel to the follow-up assessments).

FSAPs

26. Every FSAP must include an update on AML/CFT. Since April 2014, that input varies in depth and scope: While a comprehensive or targeted assessment against the prevailing standard is preferred, when such an assessment is not available, staff may derive key findings from other available material. It is therefore no longer necessary for every FSAP to be accompanied by a comprehensive AML/CFT assessment. As directed by the Executive Board, Fund staff provides AML/CFT input on a flexible basis: key findings are derived from a recent assessment against the 2012 standard, an analysis of written material provided by the authorities, or more in-depth discussions with the authorities of a selected number of AML/CFT issues reflected in a technical note.

Surveillance

27. Staff addresses financial integrity issues in Article IV consultations on a mandatory basis when they threaten a country’s balance of payments, domestic stability, or the effective operation of the international monetary system. In this context, AML/CFT policy recommendations have been provided to address underlying financial integrity issues in recent Article IV discussions. In addition, even where domestic or balance of payments stability or global stability are not at risk, it is possible for staff and the member to agree to discuss these issues on a voluntary basis in the Article IV consultation. This has been the case in the 2016 Article IV consultations with the United States and the United Kingdom on correspondent banking and the transparency of legal persons and arrangements.

Fund-Supported Programs

28. Staff addresses financial integrity issues in Fund-supported programs when they are critical to financing assurances or to achieve program objectives. In this context, AML/CFT measures have been included as conditionality in recent Fund-supported program on issues such as corruption and terrorism financing, AML/CFT compliance, and corruption.

Capacity Development (CD)

29. Staff provides technical assistance and training on a range of AML/CFT issues. Most CD activities are funded by donor-supported accounts, mainly through the AML/CFT Topical Trust Fund (TTF), which was launched in 2009. A new five-year phase of the TTF started in May 2014. Donors (France, Japan, Luxembourg, the Netherlands, Norway, Qatar, Saudi Arabia, Switzerland, and the UK) pledged more than $27 million to support this second phase. The TTF complements existing accounts that finance the IMF’s AML/CFT CD activities in member countries, bringing the number of countries assisted each year to over 30 and totaling over $6.5 million annually in direct technical assistance and training. Recently completed projects include the enhancement of the financial intelligence and risk-based supervisory capacity of Afghanistan (2013-2017), Nepal (2014-2017), and Mongolia (2014-2017).

Policy

30. Fund staff addresses AML/CFT issues when they are relevant to current key issues, such as the withdrawal of correspondent banking relationships,6 Islamic financing,7 and virtual currencies.8

D. Concluding Observations and the Way Forward

31. The next review of the AML/CFT program is expected in 2018. Staff will report on its AML/CFT program in all work streams, including assessments. The review will report on the allocation of outputs across the membership, and will consider and report on whether there is scope for making modifications to standards assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of standards assessments and, if necessary, make recommendations on how this can be improved going forward.

32. The review will delve more deeply into experience with the 2013 assessment methodology. It is anticipated it will report on the number of assessments conducted by the Fund, Bank, and FATF network and main challenges faced by countries and assessors. It will also discuss the resources implications of the current methodology and of the enhanced review mechanisms.

33. While it is still early in this round, some preliminary conclusions can be drawn:

  • The new focus on the effectiveness of AML/CFT systems is a challenging but necessary change. This change is welcome, as it ensures that AML/CFT assessments focus on the results obtained by countries in protecting their financial systems from abuse, and in preventing money laundering and terrorist financing. This new focus is useful for the assessed country, as well as the AML/CFT community at large. The new standard is also challenging due to requirements regarding transparency of legal persons and arrangements.

  • AML/CFT assessments now appear more useful, but are also more resource intensive. This is due to the effectiveness component, which requires an in-depth understanding of the countries’ ML/TF risks, and an assessment of the results of efforts to mitigate those risks. Assessed countries must provide assessors with appropriate information to demonstrate their effectiveness, and assessors must draw on expert judgement to evaluate the performance of countries considering their specific risks and context. The combination of the technical compliance and effectiveness components renders assessments resource intensive for all assessor bodies. FATF members recently decided to increase their minimum contribution of assessors and similar discussions may need to be held in the FSRBs.

  • Burden sharing arrangements among assessors ensures the Fund can leverage its assessment resources and avoid duplication of assessment efforts. Evaluation reports prepared by FATF and the FSRBs may result in AML/CFT ROSCs, and Fund-led assessments are adopted by the FATF and FSRBs for their respective mutual evaluation programs.

  • While a detailed review of the quality and consistency of assessment reports from the current round has not been conducted, the strengthened review mechanisms appear to work. They generate discussion and debate prior to the adoption of the reports, and in two cases, the publication of an FSRB report was pushed back while the assessors addressed the significant quality and consistency issues raised in the context of the ex-post review.

  • AML/CFT assessment reports—whether produced by the Fund or by other assessor bodies —continue to play an important role in the Fund’s work. While no longer a mandatory for all FSAPs, assessments continue to inform the discussions of AML/CFT in the FSAP and in several other work streams, including Fund surveillance, programs, and CD.

  • Experience with the modular approach will be forthcoming. According to FATF guidance, countries should have a comprehensive assessment using the new methodology before a targeted approach is applied. Staff expect the second round of assessments to start in 2020.

V. Accounting and Auditing1

A. Introduction

1. This note describes the World Bank’s Accounting and Auditing (A&A) ROSC program, which is led by teams from the Governance Global Practice within the Equitable Growth, Finance, and Institutions Vice-Presidency (EFI) of the World Bank Group. The note reviews the standards used in the assessment program, key changes following the global financial crisis (GFC), recent developments including the overhaul of the assessment methodology and the results of a survey of authorities.

Table V.1.

Standard Setting Bodies and Standards2

article image

B. The A&A Standards

2. High quality corporate financial reporting and robust A&A frameworks are critical elements underpinning corporate governance, financial market stability, and private sector development. Financial reports are prepared in accordance with internationally recognized financial reporting and auditing standards which are sound legal, regulatory, and quality assurances frameworks; and properly trained and supervised professional accountants and auditors help provide unbiased, transparent, and relevant information on the condition of businesses (including financial intermediaries). Such reports support investors’ and other market participants’ resource allocation decisions, the development of financial markets, and the effective oversight of markets and financial intermediaries. They aid in cross-border markets integration because reports are prepared using the same standards. Furthermore, they are an essential input for the effective discharge of risks management and corporate governance functions for public and private sector firms.

3. Since the start of the standards and code initiative the World Bank has been tasked with assessing the extent to which local standards and practices in accounting and auditing meet international standards and best practices. Such assessments support adoption of the standards and inform World Bank financial and private sector development work. The A&A ROSC program initially focused almost exclusively on public interest entities (PIE),3 benchmarking rules and practices for PIEs against the International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISA) (Table 1). Overtime the focus of the program widened taking a more development-oriented approach by also covering small and medium enterprises (SMEs) and state-owned enterprises (SOEs). These companies represent a significant portion of the economy in many partner countries.

4. The A&A program assessment methodology (AM) focuses on the enabling environment that underpins effective implementation of the standards, including the education and training of professional accountants and the overall enforcement framework, such as audit quality assurance mechanisms (Table 1). The AM inter-alia draws on the Code of Ethics for Professional Accountants issued by the IESBA on the work and conduct of accountants and auditors to benchmark countries. It also draws on the 2011 Core Principles for Independent Audit Regulators issued by the IFIAR to identify the most relevant issues for countries’ quality assurance review frameworks, particularly for PIEs. As of September 2015, the number of jurisdictions that require listed companies and financial institutions to prepare IFRS-based financial statements has grown to 116. Another 14 jurisdictions permit the use of IFRS.

Changes following the Global Financial Crisis

5. The global financial crisis underscored shortcomings with fair value accounting and its application among other A&A-related matters.4 For example, under U.S. accounting standards companies in the U.S. subprime mortgage market could report certain gains on loan securitization products using historical performance. This distorted risk-taking incentives and delayed recognition of impairments. In July 2009, the Financial Crisis Advisory Group (FCAG), convened at the behest of the IASB and the U.S. FSAB, put forward recommendations to address shortcomings and boost investor confidence. It also highlighted the need for global accounting standards to converge. The GFC also raised concerns regarding the effectiveness of corporate governance and the quality of financial and other information provided by companies. Investors called for greater transparency in auditing and the judgments underpinning auditors’ pass/fail opinions.

6. The IASB and to a lesser extent IAASB have introduced significant changes to the standards since the GFC.

  • The IASB took steps to improve accounting and reporting on financial instruments (e.g., derivatives, collateralized debt obligations), off-balance sheet items, and very recently insurance contracts. The IFRS revised standards regarding fair-value measurement, financial instruments, consolidated financial statements, revenue recognition, and leases. Regarding the standard setting process, the IASB revamped its international consultation process to foster transparency, providing opportunity for ample public consultation and comment. Follow up is supported by regular meetings of the IASB with interested parties.

  • A revised accounting standard for SMEs will become effective in 2017. The SMEs standard is based on IFRS but requires substantially fewer disclosures. The need for simplified standards for SMEs is apparent given that 95 percent of private companies worldwide are SMEs and that preparing financial reports using high quality standards may improve access to credit. As of December 2016, IFRS for SMEs was required or permitted in 84 jurisdictions.

  • IAASB sought to improve the structure and content of the auditor’s report. To that end it revised standards on auditor reporting and introduced a new standard on communicating key audit matters (KAM). The KAM are those that the auditors judged to be the most significant during the audit of financial statements. Whereas previously such issues were brought to the attention of the Board of Directors or Audit Committee, they will now be made public for PIEs.

C. A&A Assessments

A&A ROSC Objectives

7. Assessment of A&A standards aims to help countries identify vulnerabilities, benchmark their policies, strengthen domestic institutions, and bolster policy frameworks and transparency. More broadly, A&A assessments aim to improve prospects for inclusive growth and development, as well as greater resilience to shocks by supporting better risk assessment and investment decisions.5

8. The A&A ROSCs are prepared in modular form with two main objectives:

  • Analyzing the robustness of a country’s legal and institutional framework in accounting and auditing, including: (i) assessing key differences between national accounting and auditing standards and international standards; (ii) gauging the quality of implementation and enforcement of applicable accounting and auditing requirements; and (iii) assessing strengths and weaknesses of the overall enabling environment, e.g., capacity of the accounting profession, quality of accounting education; and

  • Assisting the country in developing and implementing reform plans based on the recommendations of the ROSC and improving institutional capacity to strengthen the country’s financial reporting regime.

9. A&A assessments are conducted under the presumption that IFRS should be mandatory for PIEs. They also presume that a simplified financial reporting regime is in place for the small and medium size enterprises (SMEs).

10. Since its inception, the A&A ROSC program has emphasized the importance of adequate statutory frameworks, and the institutional framework supporting implementation and enforcement of standards.6 Legal requirements for the preparation and disclosure of financial statements and regarding the appointment of statutory auditors are key foundations of a strong A&A framework. The lack of an effective mechanism to ensure compliance with established standards weakens the financial reporting environment, even when national standards conform with internationally recognized standards.7

11. A&A ROSCs are designed for a wide range of stakeholders. These include policymakers, regulatory authorities (e.g., financial sector supervisors), professional bodies that oversee the industry, educational institutions that train accountants and auditors, investment professionals, and credit rating agencies. A&A ROSCs also assist World Bank country management units and private and financial sector specialists who use the findings in technical assistance activities and as inputs into country-engagement documents. In lending operations, A&A ROSC recommendations have featured as triggers and prior actions. Overall, recommendations lead to many policy level reforms to strengthen financial architecture.

Country Participation

12. Since the A&A ROSC program was launched in 2000, 155 assessment reports have been prepared covering 119 countries. These include 118 initial assessments and 37 reassessments, and relate to countries of all income levels (Figure 1. Notwithstanding the IMF Executive Board’s encouragement during the 2011 Review, only a few high-income countries have participated. The A&A ROSC program has a high publication rate. Of the 155 assessment reports, 141 were published and are available on the World Bank’s ROSC website.

Figure V.1.
Figure V.1.

A&A ROSCs: Initial Assessment and Reassessments by Country Income

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

13. The annual number of assessments in the aftermath of the GFC has been on a declining trend (Figure 2. After reaching a peak of 16 assessments in 2009, the number declined despite the use of focused reviews of selected A&A issues. The decline in the number of assessments reflects that many countries had already undertaken an initial assessment before the GFC, the standards were being revised, and the budgetary reallocation within the World Bank.

Figure V.2.
Figure V.2.

A&A ROSCs—Yearly Number of Assessments, 2000-16 (Q2)

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

14. To assist in the implementation of ROSC recommendations, the World Bank has supported countries’ policy efforts to strengthen their A&A frameworks through TA. This has focused in particular on: (i) strengthening the institutional capacity of the government, regulators, professional organizations; (ii) developing A&A legislative frameworks; (iii) preparing detailed mappings of standards gaps and support to IFRS and ISA adoption; (iv) institutional strengthening for professional accountancy organizations; (v) aligning academic curricula for tertiary education institutions; (vi) capacity building in IFRS for financial regulators; and (vi) developing audit quality assurance and public oversight systems. While this follow-up assistance is much appreciated by countries mobilizing sufficient funding has been an important challenge for the program especially for middle-income countries.8

15. The A&A ROSC program has been a springboard for the development of several regional knowledge programs on corporate financial reporting. One of these is the CReCER conference, launched in 2007, which provides a platform for Latin American and Caribbean policymakers, regulators and practitioners to review current international and regional trends in A&A. In Europe and Central Asia, the “Road to Europe Program of Accounting Reform and Institutional Strengthening” (REPARIS) has supported reforms and capacity development in A&A through a combination of knowledge sharing, peer learning and country-level TA interventions. In Sub-Saharan Africa, the Bank has supported seventeen Francophone-area countries in their efforts to modernize their financial reporting and adopt IFRS in the context of the Organization for the Harmonization of Company Law in Africa (“OHADA”).

Results of a Survey

16. Staff asked 101 authorities in 31 countries to participate in the survey, including most of the countries that had undergone an assessment since the 2011 Review of the Initiative. Two-thirds of the countries and one third of the authorities responded to the survey. Questions covered the quality of the assessment, the efficiency of the assessment process, and its impact. Respondents were asked to select the extent of agreement/satisfaction with various statements for each question of the survey.

17. Survey results indicated that country authorities generally have a positive view of the A&A ROSC and technical note program, and its impact on their A&A framework (Figures 3-8):

Quality

  • Almost all respondents agreed that the A&A ROSC reports were clear, well-structured, comprehensive and written at an appropriate level for technical and non-technical audiences;

  • Most respondents agreed that the ROSCs and TNs highlighted the most relevant issues and presented them in an accurate and balanced manner;

  • Most respondents were satisfied with the overall assessment, conclusions, and various components of the assessments;

  • All respondents were satisfied with the results in general; and

  • A majority of respondents agreed to undertake a reassessment or update to assess progress, and an even higher share considered that a TN covering specific topics would be beneficial. The primary reason for not agreeing to a reassessment was that reforms were still being implemented.

Process

  • A large majority of respondents agreed that key stakeholders were actively engaged and participation was broad. Further, a majority agreed that communication with the World Bank team was adequate, sufficient time was provided for comments and suggestions, and the assessment was completed in a timely manner.

  • A small minority reported that more time was needed for the process, and a few raised concerns about resource demands associated with the assessment.

Impact

  • Large majority of the respondents agreed the priorities and policy recommendations in the ROSCs and technical notes were relevant and tailored to country circumstances. In addition, most of the survey participants reported implementation support was available.

  • Respondents were, however, less enthusiastic regarding the impact of the ROSC on establishing priorities for policy actions and reforms, and enhancement of education, the audit quality system, and oversight. 9

Figure V.3.
Figure V.3.

Structure

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure V.4.
Figure V.4.

Presentation

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure V.5.
Figure V.5.

Topics

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure V.6.
Figure V.6.

Process

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure V.7.
Figure V.7.

Impact

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

Figure V.8.
Figure V.8.

Repeat?

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

D. Recent Reforms to the A&A ROSC Program

18. After fifteen years, a wealth of experience has been accumulated regarding critical dimensions of countries’ A&A frameworks and the assessment methodology. Over time, application of the AM became more ad-hoc. The AM had very limited flexibility in country application. For example, the AM questionnaire required a range of information and level of detail that was not relevant to countries at an early stage of A&A framework development. This unnecessarily taxed the authorities’ resources. Assessment teams sought to overcome such rigidities by carving out sections of the AM not deemed relevant to country circumstances. At the same time, some teams developed and used ad-hoc questionnaires covering accountancy education and perceptions of the demand for financial reporting for some (but not all) countries. Such ad hoc approaches reduced cross country consistency.

19. As it had not been updated, the AM did not assess some key elements of a modern corporate financial reporting framework which had evolved since 2001, when the S&C initiative was launched. For example, the issue of quality assurance and public oversight of the audit profession evolved significantly (e.g., IFIAR was founded in 2006); IFRS for SMEs were introduced in 2009.

20. In addition, the World Bank changed the way it allocates resources for the ROSC program. In the past, ROSCs were funded with earmarked resources over which assessment teams and program managers had direct control. As a result of recent budget restructuring of the World Bank, funding now comes from country engagement budgets, and assessment decisions are subject to wider considerations. This shift offers the opportunity to more seamlessly integrate the A&A ROSCs findings and output into World Bank country work, but there is less certainty that resources are available for ROSCs.

21. These developments provided an impetus for a substantial review of the AM, which was introduced in 2016. The revisions to the AM seek to address issues noted above by revising questionnaires to reflect current international standards and good practices and the implementation guidelines for assessors. The guidelines seek to sharpen the materiality of the findings, provide flexibility within modules, and ensure consistency and cross country comparability.

22. The 2016 AM tool comprises three modules:

  • Module A (Accounting and Auditing Standards) seeks to document significant differences between IFRS/ISA and national standards and encourages assessors to focus on key standards/areas where differences are more likely to arise;

  • Module B (Institutional Framework for Corporate Financial Reporting) has nine thematic sub-modules covering the key components of a country’s A&A framework (commercial enterprises, including SMEs; listed companies; PSCs, banks; insurance; accountancy profession; accountancy education; audit regulation, quality assurance and public oversight; accounting standard-setting; and auditing standard-setting).

  • Module C (Observed Reporting Practices and Perceptions) aims to gauge the quality of corporate financial information that is produced in the jurisdiction. It surveys perceptions of the demand for and quality of financial information from users of financial statements. The module also includes a review of the quality of a sample of financial statements prepared by companies, as well as an analysis of reports from financial sector, audit and other regulators. It comprises three sub-modules (a review of financial statements; a review of regulatory findings; and a survey of perceptions).

23. The modular approach and guidelines introduced by the 2016 AM are expected to:

  • Sharpen the focus of assessments on the most relevant areas and help provide country authorities with concrete suggestions for improving the overall corporate financial reporting framework;

  • Right-size the assessments, as they would include only those sub-modules that are relevant to country’s A&A framework. For example, if there is no active securities market, then assessors would not cover the sub-module for listed companies. In the case of updates, the modular approach also allows teams to apply only those modules where changes have occurred since the previous assessment;

  • Focus more systematically and comprehensively on actual implementation of standards in Module C, with two new sources of evidence complementing the teams’ review of a sample of financial statements;

  • Better support the value-added, while reducing the costs of A&A assessments for both country stakeholders and the World Bank; and

  • Foster consistency among World Bank assessment teams

E. Concluding Observations and the Way Forward

24. The World Bank will seek to continue improving implementation of the A&A ROSC program including by developing a suite of performance indicators as a complement to the recently revised A&A diagnostic tool. These indicators would provide a snapshot of a country’s position with respect to corporate financial reporting frameworks and an objective way to measure and track progress.10 The World Bank will continue to support the implementation of the 2016 AM and update/introduce new modules as needed, provided that funding is made available. For example, to assess the capacity of a country’s standard setters to address financial reporting challenges arising from emerging trends, such as financial reporting for Islamic Finance.

25. As discussed in the main report, the World Bank plans to adopt a new mechanism to review developments for standards that it assesses, including A&A. The review will report on the allocation of outputs across the membership, and will consider and report on whether there is scope for making modifications to standard assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of standards assessments and, if necessary, make recommendations on how this can be improved going forward. Other issues that may arise include:

  • An overview of future changes in the standards;

  • How countries are progressing based on summary of scores, key weaknesses, and areas of improvement;

  • Assessment issues, such as integration of the results with FSAPs and other ROSC modules and evaluation of A&A ROSCs based on surveys of stakeholders and Bank staff; and

  • The design and implementation of a stand-alone diagnostic toolkit for “mini” or “quick” ROSCs, including for low income countries where the institutional framework for A&A is generally much less developed.

VI. Corporate Governance1

A. Description of the Code and Methodology

1. Corporate governance (CG) refers to the structures and processes for the direction and control of companies. It concerns the relationships among the management, the board of directors, the controlling and minority shareholders, and other stakeholders. Over the past ten years, and especially since the global financial crisis, energy and attention has been focused on improving the ability of boards, managers, and owners to prudently steer their companies through rapidly changing and volatile market conditions.

2. A large body of academic evidence attests to the benefits of good corporate governance, including higher valuation, better access to finance, and lower cost of capital.2 Corporate governance also directly impacts financial stability; the IMF’s October 2016 Global Financial Stability Report (GFSR) finds that improvements in corporate governance make emerging markets more resilient to financial downturns and foster deeper and more liquid capital markets, which allow them to absorb shocks better.3 More robust corporate governance also enhances stock market efficiency, by making equity prices less sensitive to external shocks and less prone to crashes. Poorly-governed firms experience sharper declines in their stock prices when financial markets are in turmoil. The GFSR finds that moving from the lower to the upper end of the firm-level governance index reduces the impact of global shocks by an average of 50 percent for emerging-market firms. Emerging markets with better corporate governance and investor protection generally have stronger corporate balance sheets. And better-governed firms typically have lower short-term debt ratios and default probabilities and can borrow at longer maturities.

3. The OECD Principles are the recognized international benchmark for corporate governance, and for corporate governance ROSCs.4 The Principles are “intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability.” They focus on publicly traded (listed) companies, both financial and non-financial. The Principles are presented in six chapters: i) ensuring the basis for an effective corporate governance framework; ii) the rights and equitable treatment of shareholders and key ownership functions; iii) institutional investors, stock markets, and other intermediaries; iv) the role of stakeholders; v) disclosure and transparency; and vi) the responsibilities of the board. The Principles also serve as the basis for the guidelines on corporate governance for banks issued by the Basel Committee on Banking Supervision and the OECD Guidelines on Insurer and Pension Fund Governance5 and for insurance companies under the Insurance Core Principles issued by the IAIS.

4. The Bank’s corporate governance S&C work focuses on listed companies and benchmarks against the recognized international standards. It has been mainstreamed in a wide range of World Bank activities, such as assessment of and technical assistance for private or state-owned companies, financial institutions, and other enterprises. In addition, the World Bank’s Doing Business indicators benchmark corporate governance for more than 180 countries.

5. The Corporate Governance Committee of the OECD, which is responsible for the Principles, includes representatives from all OECD member countries, as well as “enhanced engagement” countries (e.g., Brazil, South Africa, or Indonesia). As an observer on the committee, the World Bank comments on documents, and participates in revisions to the Principles and the assessment methodology. The Bank also cooperates with the OECD on corporate governance matters in general, including the Global Corporate Governance Forum, the OECD’s regional corporate governance roundtables, and the FSB’s 2016 Thematic Review of Corporate Governance.

B. Changes in the Code and Assessment Methodology Since 2011

6. The Principles were issued in 1999, revised in 2004, and again in 2015. The 2015 revisions included a new chapter on the role of shareholders (especially institutional investors). The revisions were more evolutionary than revolutionary; significant reorganization resulted in improved clarity and focus. In a few areas (related party transactions, board evaluations, and board training) the revisions focused on key topics important for emerging market countries (see Table 1).

7. The revisions also incorporated lessons from the GFC, based on the OECD’s 2009 report on Corporate Governance and the Financial Crisis. The main finding was that the crisis highlighted the need for an increased focus on governance, namely, “... the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements ... when they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies”. The key issues identified in the report included: (i) effective implementation of risk governance and management, (ii) governance of the management remuneration process, (iii) board practices, including board evaluation and training, and (iv) the role of institutional investors.

Table VI.1.

2015 Revisions to the OECD Principles of Corporate Governance

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Changes in the Assessment Methodology

9. Like the other standard setters, the Corporate Governance Committee has developed an assessment methodology that, together with the standards, forms the basis for voluntary assessments undertaken by the Bank. The Methodology for Assessing the Implementation of the OECD Principles of Corporate Governance was first issued in 2007. Following revisions of the OECD Principles in 2015, and their endorsement by the G20, the OECD updated the assessment methodology in 2016.

10. The World Bank played a major role in drafting and revising the original methodology. World Bank comments included: (i) highlighting elements that required improvement, (ii) requesting clarifications, and (iii) identifying elements that could be overly complex.

11. In 2016, the FSB organized a peer review of its members to take stock of how they apply the Principles to publicly listed financial institutions (e.g., banks, insurers, asset managers, or financial holding companies) and to identify effective practices and gaps. The peer review also influenced the update of the assessment methodology and governance-related aspects of the FSB’s work. Lastly, the peer review helped identify areas of follow-up or where more work could be undertaken to promote effective governance within financial institutions. The World Bank participated and a report was issued in April 2017.

Experience with Implementation and Practical Considerations

12. The CG ROSC program is the World Bank’s main product for assessing CG frameworks for listed companies. The goals are to: (i) benchmark corporate governance frameworks against international standards, (ii) identify strengths and weaknesses in CG frameworks and current practices, (iii) recommend policies and foster policy dialogue, and (iv) inform markets (especially international investors).

13. The audience for reports has been corporate governance policymakers, especially securities market regulators. However, evidence suggests that the reports are also useful to the private sector, international investors, information vendors (especially proxy service firms), academics, and World Bank teams delivering technical assistance. In several instances, CG ROSCs have been used to monitor and evaluate frameworks for IFC advisory services projects.

14. The CG ROSC program was launched in 2000. As of today, a total of 84 ROSCs have been undertaken in 59 countries, including 25 reassessments (Figure 1. Since 2011, 10 reports have been completed (including a reassessment underway in Pakistan).6 The demand for reassessments has remained strong, especially in middle income countries considering reforms. Demand for new assessments has been less, as most countries with active capital markets have been assessed.

15. The World Bank’s ability to respond to country requests has been significantly constrained recently. The number of CG ROSCs has declined due to: (i) changes in the assessment methodology that increased the resources needed to complete an assessment, (ii) prioritizing implementation over new diagnostics, (iii) reducing the number of staff able to complete a CG ROSC, and (iv) elimination of central budgetary support for the CG ROSC program.

Figure VI.1.
Figure VI.1.

CG ROSCs Completed Since 2000

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

16. CG ROSCs are carried out at the invitation of country authorities and most are published. In about a quarter of cases, the CG ROSC was part of an FSAP. The CG ROSC is published separately, with the conclusions usually included in the FSAP. Of the 84 completed reports, 72 have been published and the proportion has increased over time.

17. The CG assessment methodology includes three key tools: (i) an international benchmark (the OECD Principles) and its assessment methodology, (ii) a detailed questionnaire on the country framework and practices for corporate governance (now called the “Detailed Country Assessment” (DCA)), and (iii) a standard report. The DCA collects basic information and serves as a “calculator” to score each of the OECD Principles. Given the complexity of the DCA, the World Bank usually engages a local consultant to assist with drafting and whose local knowledge is essential.

18. For each of the 70 Principles, the ROSCs present an implementation score (from 0-100) and a summary assessment (“fully implemented”, “broadly implemented”, “partially implemented,” or “not implemented”). The implementation scores are used to give a broad picture of a country’s implementation of the Principles, and to make cross-country comparisons. Reassessments can be used to measure progress over time.

19. The CG ROSC program traditionally applied the methodology to a wide variety of countries without much tailoring. For some small countries with limited capital markets, this resulted in inappropriately complex reports and limited impact. As part of recent reforms, the World Bank only carries out CG ROSCs for countries with large capital markets and sophisticated corporate governance frameworks. Other tools (which are not considered ROSCs) have been developed for smaller countries.

20. Over time, CG ROSCs have increased in length, scope, and cost, while the number of ROSCs per year has declined. For example, reports increased in length from an average of five pages in 2000-01, to 15 pages in 2001-05, to 15 pages with a 30-40-page annex in 2005-09, to a 60-80-page report plus published DCA since 2009.

Figure VI.2.
Figure VI.2.

Evolution of the CG ROSC Methodology Over Time

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

21. Standard setters and assessors continue to reflect on the value of benchmarking. Under the current approach, assigning ratings to approximately 500 questions drives much of the complexity of the DCA and increases the time required to carry out the work and review the report with counterparts. ROSCs under some standards (e.g., the B-ROSCs, A&A, and ICR) do not give ratings. As the OECD Principles were not designed for diagnostic work, they are not conducive to benchmarking. For example, principles are not equally important, although they are given equal weight. And some countries (especially lower, and lower-middle income countries) express little interest in benchmarking and do not pay much attention to it.

22. However, there are also strong arguments for continuing to benchmark. It usefully summarizes the overall framework and allows cross-country comparisons. Advanced countries expect benchmarking and pay close attention to the results.

23. The World Bank traditionally centralized both financial and human resources for CG ROSCs. ROSCs were drafted by a dedicated team of around five staff. However, for the past five years ROSCs have been financed by countries or trust funds, which has reduced demand. In addition, the CG team has been reduced to three staff, while its responsibilities have expanded beyond ROSCs to a variety of advisory and operational work on other types of companies (especially financial institutions and state-owned enterprises).

24. As shown in Figure 2, the resources required to complete a CG ROSC has increased several fold. For a major middle income country, ROSCs cost upwards of $150,000. The combination of a decline in budget resources, reduction in available staff, and increase in costs of compiling a ROSC has resulted in a significant reduction in the annual number of ROSCs produced.

Reforms in CG ROSCs: Country Focus, Methodology, and Benchmarking

25. In 2016, the World Bank CG team made significant changes to the assessment methodology including: (i) country focus, (ii) methodology, and (iii) benchmarking. The revised approach is now being piloted as part of an assessment in Pakistan. In line with limited resources, the AM has also been tailored to the size and sophistication of the country. For purposes of determining the appropriate CG intervention, countries have been placed into one of three tiers (see Table VI. 2). It is expected that this tailoring will lead to assessments having greater impact while being more closely tied to other World Bank country activities.

26. In addition to tiering, the World Bank has refocused the CG ROSC to better integrate with existing advisory services projects. The overall goal is to build a robust CG practice across the World Bank that leverages and is highly linked to other interventions. The highest priority for CG ROSC diagnostics will, therefore, be Tier 2 countries with existing advisory and technical assistance programs, and where significant outside funding is available. The second priority will be strategic work in Tier 1 countries where corporate governance issues are an important policy concern. The third priority will be Tier 3 countries. In each case, a differentiated report will be produced that responds to the needs of the country.

27. Other revisions to the World Bank’s assessment methodology are: (i) incorporating the 2015 revisions to the CG Principles, (ii) streamlining DCAs and the benchmarking process to lower costs and the burden for assessors, and (iii) shortening and simplifying the presentation of the standard report format. To streamline DCAs, the total number of questions for Tier 1 and Tier 2 countries has been reduced to about 500 questions (from more than 700). For Tier 3 countries, the World Bank has developed a simplified DCA with about 115 questions that focus on company law reforms.

28. The revised methodology also introduces differentiated benchmarking by tier. For Tier 1 countries, assessments will continue to benchmark but use data from the simplified DCA. This will streamline assessments at the expense of deviating somewhat from the OECD methodology. For Tier 2 countries, benchmarking will be optional based on a discussion between the assessment team and their counterparts. The World Bank will only collect data and complete the DCA for principles addressed in the main report and will not benchmark against the optional principles. For Tier 3 countries, the World Bank will not benchmark but will provide extensive examples on how CG issues are regulated in different countries.

Table VI.2.

CG ROSC Goals and Approach by Country Tier

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C. Concluding Observations and the Way Forward

29. A review of the CG program will report on the allocation of outputs across the membership, and will consider and report on whether there is scope for making modifications to standard assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of standards assessments and, if necessary, make recommendations on how this can be improved going forward. Additionally, it could cover the: (i) impact of previous assessments, (ii) experience with the revised 2017 assessment methodology, the tiered approach, and informal assessments and TNs, (iii) integration of CG ROSC capacity building and TA projects with other World Bank operations; (iv) collaboration on standards with the OECD; and (v) other challenges, such as budgetary and staffing issues and the demand for assessments.

VII. Insolvency and Creditor Rights1

A. Background

1. From the beginning of the standards and codes initiative, it was recognized that effective creditor/debtor rights and insolvency systems are important for financial system stability. The G20 (through the Financial Stability Board) mandated that the World Bank assume the role of standard setter and assessor for Insolvency and Creditor/Debtor Rights (ICR), and thus began a broad consultative process to develop a framework for assessing key aspects of any country’s ICR system. This framework was eventually contained in a paper entitled Principles for Effective Insolvency and Creditor/Debtor Regimes (The Principles). In 2005, the United Nations’ Commission on International Trade Law (UNCITRAL) produced the Legislative Guide on Insolvency Law, which offers a blueprint for implementing best practices. As the Principles and Legislative Guide are complementary, it was agreed that they should form the Unified Insolvency and Creditor Rights Standard.

2. The Principles are divided into four sections: (i) The relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A); (ii) Key features related to the legal framework for risk management and informal corporate workout systems (Part B); (iii) Formal commercial insolvency law frameworks (Part C); and (iv) The implementation of these systems through sound institutional and regulatory frameworks (Part D). The Principles thus present a broad-spectrum assessment framework to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems that are fundamental to a sound investment climate and the promotion of economic growth.

3. Assessments are completed as standalone exercises, and as part of FSAPs (both of which would result in a full ROSC), or as a focused review (which results in a Technical Note summarizing the findings and recommendations). In each case, the evaluation demands extensive preparatory work, including a detailed due diligence report by a local legal expert and one or more missions by a World Bank-led team. The detailed assessment is then submitted to a peer review. It remains confidential, unless the recipient country consents to a waiver. As reflected in their low publication rate (19 percent), most reports remain confidential since much of the information is sensitive and publication may hinder dialogue between the authorities and the World Bank. The findings are normally disseminated via seminars and workshops for private and public sector stakeholders. As of December 2016, 70 full ICR ROSCs and 11 TNs had been completed, covering 67 countries (Figure 1.

Figure VII.1.
Figure VII.1.

Number of ICR Assessments Since 2011

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A002

B. Recent Developments

4. Based on practical experience and following extensive consultations with stakeholders and partners, the ICR standard has been periodically revised. In 2005, amendments were adopted to streamline and in 2011, the Principles were revised to incorporate updates to the Legislative Guide. In particular, two Principles were added to reflect international best practice on insolvency of enterprise groups (domestic and international). Changes in 2015 amended the principles dealing with credit registries, the enforcement of claims, the institutional framework for risk management, and substantive aspects of formal insolvency proceedings. The revised 2015 Principles now contain more details regarding director liability and adopt a more nuanced approach to the treatment of financial contracts in insolvency.

5. Additional steps are required before the ICR standard can be finalized. The 2015 changes were endorsed by Bank Management (the Office of the Legal Counsel). The next step, currently underway, is for UNCITRAL to undertake revisions to its Legislative Guide on Insolvency Law. Once this step in the process of revising the ICR standard is concluded, UNCITRAL and the Bank will jointly undertake revisions to the Unified Insolvency and Creditor Rights Standards. This last step is expected to be finalized in FY 2018 followed by Bank Management endorsement, while the Bank Board will be informed about the revisions to the Unified ICR Standards.

Applications to other World Bank Activities

6. In 2017, the IFC launched a new Investment Risk Platform (IRP) designed to serve as the primary risk assessment tool for IFC investments. The ICR standard is seen an effective guidance tool to help determine the extent of loss given default in commercial lending transactions. As such, the IRP contains a loss-given default methodology that, among other things, uses a high-level measurement of a country’s insolvency regime and its consistency with the ICR standard. While this measurement is less robust than an ICR ROSC or TN, it influences IFC risk ratings for countries which, in turn, influence the pricing of loans to the private sector.

7. The World Bank’s annual Doing Business Report benchmarks 10 dimensions of the legal and regulatory regime for private and financial sector development across 187 countries. The “Resolving Insolvency” indicator reflects a survey of practitioners regarding the time and cost of an insolvency. In 2014, an “offline” pilot was conducted, using 16 different aspects of the ICR standard as a proxy for the measurement of the quality of an insolvency law. This legal index was found to correct many of the anomalies associated with the original case-study methodology. It was introduced in 2015 to complement the case-study and represents the single largest change to the Doing Business methodology since its inception.

C. Challenges

8. In 2014, the World Bank undertook a budget restructuring, including the transfer of ROSC budgets to World Bank regional groups. This impacted ROSCs by co-mingling ROSC budgets with Country Engagement (CE) funds. ROSCs must now compete with other country priorities. Not surprisingly, there has been a significant reduction in the number of ICR ROSCs. For ICR, the budget restructuring also resulted in the de facto transfer of the standard-setting budget to CE with a reduced level of activities financed through the central Global Engagement budget.

9. As the ICR Standard has become more sophisticated and expanded, ICR assessments have become more complicated, lengthy, and costly. Authorities have indicated they believe ROSCs are too academic, repetitive, and some recommendations are impractical. This adversely affects ROSCs as a tool to facilitate policy dialog and support meaningful reforms.

D. Concluding Observations and the Way Forward

10. The World Bank and its partners periodically review the ICR standard to ensure it remains current, effectively addresses relevant issues, and supports the World Bank’s development work. One area of special need is the impact of insolvency regimes on micro, small and medium enterprises (MSMEs).

11. MSMEs are key drivers of growth and employment in most economies. An IFC study of 132 countries found that, on average, there were 31 MSMEs per 1,000 people. Additionally, between 2000 and 2009, the number of MSMEs per 1,000 people grew at 6 percent per annum.2 An estimated 60 percent of private sector employment, or one-third of the world’s labor force, is attributable to MSMEs. MSMEs are key topic in the G20 agenda, as reaffirmed at the 2015 G20 Antalya Summit where leaders placed a “special focus” on promoting programs that contribute to MSME growth and employment.

12. MSMEs comprise the vast majority of business failures across the world and the legal and regulatory regimes for MSME insolvency are generally underdeveloped. Since insolvency regimes are frequently designed with large corporate insolvencies in mind, they are not effective at dealing with specific issues raised by the failure of an MSME. These relate to the personal nature and varying formality of these businesses. For example, they may be financed with a mix of personal and corporate debt. Hence, the failure of an enterprise could lead to severe consequences for the entrepreneur and his/her family. If a country does not have personal insolvency laws or no/delayed discharge, entrepreneurs may not be willing to re-enter the market. In addition, MSMEs often lack liquidity so that a temporary or minor problem can result in liquidation. Finally, MSMEs may lack good record keeping systems, which hampers the efficiency and fairness of the insolvency process.

13. Good insolvency procedures for MSMEs should be rapid, simple to follow (e.g., with easy to use forms), require minimal court involvement, improve debt recovery, and enable entrepreneurs to get back to productive activities faster. An ICR Task Force comprised of experts in insolvency law from around the world provides guidance to the World Bank with respect to updating the Principles and issued a Report on the Treatment of MSME Insolvency in January 2017.

14. To improve their use as a tool to facilitate dissemination of international best practices, the content, format, and structure of ICR ROSCs should be improved. Changes should include streamlining to emphasize specific issues affecting the country and to provide practical and actionable recommendations (while maintaining the high level of technical analysis that has proven successful in the past). While commercial insolvency law (Part C of the Principles) should be the central component of every ROSC, lengthy analysis of theory and compliance should be avoided.

15. The planned 2019 FSAP review will report on the allocation of CG outputs across the membership, and will consider and report on whether there is scope for making modifications to standard assessments to improve the linkages to surveillance and integration with capacity development efforts. It also will assess the accessibility of standards assessments and, if necessary, make recommendations on how this can be improved going forward. Other issues for consideration include: (i) amending ICR standards to address MSME insolvency3 (ii) taking stock of recent experience with ROSCs and TNs, (iii) developing a strategy to revise the assessment methodology, (iv) reducing the length of, and repetition in, ROSCs and making the findings more user-friendly, and (v) and refocusing ICR ROSCs on practical issues.

1

Prepared by the Statistics Department under the supervision of Patrizia Tumbarello and by Xiuzhen Zhao with contributions from Ethan Weisman.

2

The DQAFs for these datasets are publicly available.

3

SDMX is a global standard open format that offers push/pull capabilities to facilitate internal and external data sharing and coordination in a machine-readable format that is easily accessible for users.

4

As of end-2016, 111 Data ROSC reports have been published.

5

The data ROSC consists of three parts: (i) a Summary Assessment by the IMF, (ii) Response by the Authorities, and (iii) Detailed Assessments of specific datasets, using the DQAF. The data ROSC assesses how data compilation and dissemination practices compare to international best practices.

1

Prepared by the Fiscal Affairs Department (FAD) under the supervision of Manal Fouad and Carolina Renteria by an FAD team led by Sailendra Pattanayak and comprising Brian Olden, Ramon Hurtado, and Alpa Shah. Research assistance was provided by Rohini Ray and production assistance was provided by Sasha Pitrof.

2

The emerging market crises of the late 1990s highlighted shortcomings in financial reporting in both the public and private sectors and regarding the linkages between the two (Lane and others, 1999). This lead to the introduction of the IMF Code of Good Practices on Fiscal Transparency in 1998 as one of twelve new international standards and codes designed to improve the functioning of the international financial system.

3

After peaking in 2002, the annual number of fiscal ROSCs dropped significantly by 2012.

4

See 2011 Review of the Standards and Codes Initiative, February 2011, IMF and World Bank.

5

See “Fiscal Transparency, Accountability, and Risk.”

6

See Appendix II of the 2012 policy paper for a summary.

7

This pillar is still under development. An initial draft of the fourth pillar was released for public consultation in December 2014. Many outreach events allowed for constructive debates of the framework’s principles and practices with government, civil society and industry representatives. Extensive comments were received from a range of extractive industry stakeholders. Reflecting feedback from the consultations, the IMF released a revised draft of the entire Fiscal Transparency Code for further discussion and comment in April 2016. The final draft is expected to be submitted to the IMF Board in Q2/Q3 FY2018.

8

Whereas 30 of the 45 principles under the 2007 Code were primarily procedural in nature or related to managerial issues, 31 of the new Code’s 36 principles under its first three pillars relate to quality and content of available fiscal information.

9

The 2007 Code had only one principle devoted to fiscal risk disclosure with other dimensions of risk partially picked up in another five. Risks arising from the financial sector, public-private-partnerships PPPs), sub-national governments and public corporations—some of which contributed to, or exacerbated, the fiscal impact of the recent crisis—were not adequately covered in the 2007 Code.

10

Other relevant international standards in this area include the IMF’s Government Finance Statistics Manual (GFSM) in the area of fiscal statistics, International Public Sector Accounting Standards (IPSAS) in the area of government accounting, International Standards of Supreme Audit Institutions (ISSAI) in the area of external audit, and OECD Best Practices for Budget Transparency in the budget area.

11

In contrast, Fiscal ROSCs tended to be qualitative in presenting the results of an evaluation, and they lacked an accessible summary of a country’s strengths and weaknesses both relative to the absolute standard of the Code and comparable countries.

12

A separate action plan may not be called for where FTE recommendations can easily be incorporated into existing PFM reform strategies or where countries need time to reflect on the FTE findings and recommendations. It can be useful, however, where such reform strategies have not yet been elaborated and/or where countries want to request follow-up TA.

13

See Fiscal Transparency.

14

In conducting FTEs for resource-rich countries, all four pillars are used. Relevant Pillar I-III principles are applied in the context of natural resources to allow for consideration of important natural resource transparency issues such as those associated with national resource companies, resource revenue forecasting, commodity price risk analysis, allocation of resource revenues to sub-national governments, and public participation in the resource revenue management process. The amount of detail included for each issue depends on the level of resource revenue dependence, and the extent to which they are important for fiscal transparency.

15

A survey questionnaire on the revised Code and FTE was sent to the authorities of 20 countries who have conducted FTEs of which 11 countries responded to the survey.

16

The Anti-Corruption Summit held in London in May 2016, was an initiative spearheaded by the former British Prime Minister, Mr. David Cameron, with high level participation from 17 countries and with the objective of galvanizing a global response to tackle corruption.

17

While the Code sets out high level international standards on fiscal transparency, individual principles under the Code are linked/referenced to specific operational standards and norms in respective areas, e.g., International Public Sector Accounting Standards (IPSAS) for financial reporting in the public sector, and the IMF’s Government Finance Statistics Manual (GFSM) and the United Nations’ Classification of Functions of Government (COFOG) for classification/presentation of information in budgets and fiscal reports.

18

Since the FTE exercise is voluntary, countries will need to request the diagnostic assessment.

19

These include parliaments/legislatures, supreme audit institutions (SAIs), parliamentary budget offices, national statistics agencies, and independent fiscal agencies.

20

For example, the IPSASB.

21

For example, the GIFT and IBP.

1

Prepared by the Monetary and Capital Markets Department under the leadership of Udaibir Das with contributions from Veronica Bacalu, Cristina Cuervo, Karl Driessen, Jennifer Elliott, Jana Gieck Bricco, Tommaso Mancini Griffoli, Dong He, Eija Holttinen, Nigel Jenkinson, Lidija Joseph, Moses Kitonga, Fabiana Melo, Marina Moretti; Erlend Nier, Felipe Nierhoff, Alvaro Piris, Katherine Seal, Lilly Siblesz de Doldan, Ghiath Shabsigh, Nobuyasu Sugimoto, and Froukelien Wendt, in consultation with the World Bank.

2

Standard Setting Bodies include BCBS, CPMI, IADI, IAIS, IOSCO, Islamic Finance Service Board (IFSB), and the FSB. Apart from its role as an assessor, the IMF is also a standard setter for transparency codes.

3

A difference between an FMI assessment and other standard assessments is FMI assessments not only cover the regulatory and supervisory structure, but also the risk management framework and governance of individual FMIs.

4

The name of the CPSS was changed into CPMI in September 2014.

5

Factors that are typically taken into consideration in the decision-making process are the importance of the specific sub-sector vis-à-vis the jurisdiction’s financial sector, the extent of changes in the sub-sector since the last DAR, the degree of vulnerabilities, and the overall priorities of the FSAP.

6

For example, with the increase in the number of BCPs from 25 to 29, the document setting out the Principles has gone up from 48 pages to 85 pages. The number of essential criteria that assessors need to review to determine whether a jurisdiction is compliant with the principles has expanded from 196 to 231.

7

The revised methodology and more emphasis on actual implementation have increased workload in preparing self-assessments of the BCP and other technical material which are usually prepared by authorities as an important input into the assessment and other FSAP work streams. These were once around 50 pages in length, but are now are on average 200 pages long, and for large financial systems, run into several hundreds of pages of detailed technical material that must be prepared by the authorities and reviewed and discussed by the assessment team.

8

TA on regulation and supervision forms around 40 percent of the TA on financial sector issues. The Fund employs 18 full-time long term experts in these areas on the ground, across the globe in regional technical assistance centers as well as some member jurisdictions.

1

Prepared by the Legal Department under the leadership of Nadim Kyriakos-Saad with contributions from Richard Lalonde and Nadine Schwarz (LEG). Further information on the Fund’s AML/CFT program can be found here.

2

Money laundering is a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity. Terrorist financing involves the raising and processing of assets to supply terrorists with resources to pursue their activities. While these two phenomena differ in many ways, they often exploit the same vulnerabilities in financial systems that allow for an inappropriate level of anonymity and non-transparency in the execution of financial transactions.

3

Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, the European Commission, Finland, France, Germany, Greece, the Gulf Cooperation Council, Hong Kong SAR, Iceland, India, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, Malaysia, Mexico, the Kingdom of the Netherlands, New Zealand, Norway, Portugal, the Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the U.K., and the U.S.

4

The FSRBs are: the Asia/Pacific Group on Money Laundering (APG); the Caribbean Financial Action Task Force (CFATF); the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL); the Eurasian Group (EAG); the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG); the Financial Action Task Force of Latin America (GAFILAT); the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA); the Middle East and North Africa Financial Action Task Force (MENAFATF); and the Task Force on Money Laundering in Central Africa (GABAC).

5

See press release and board paper.

6

This was notably the case in the context of a recent conference on the risks that the withdrawal of correspondent banks pose to the Caribbean, See also Staff’s Discussion Note on The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action.

7

See for example Islamic financing.

8

See for example Staff’s Discussion Note reflecting initial considerations on virtual currencies.

1

Prepared by the World Bank’s Financial Markets Global Practice (F&M GP) unit under the supervision of Aurora Ferrari by an F&M GP team led by Mariano Cortes and comprising Henry Fortin, and Jael Billy (both Governance GP), and with contribution from Zsuzsa Munkacsi (IMF).

2

Section D below presents Modules A and B referenced in this table as part of the revised A&A ROSC program assessment methodology.

3

Public interest entities are defined by the nature of their business, their size, their number of employees, or their corporate status with a wide range of stakeholders. Examples of include credit institutions, insurance companies, investment firms, pension firms, listed companies, and other economically significant business entities.

4

See for example “the 2008 FSB Enhancing Market and Institutional Resilience”, at the policy level, and Kothari and Lester (2012) (“The Role of Accounting in the Financial Crisis: Lessons for the Future”, Accounting Horizons: June 2012, Vol. 26, No. 2, pp. 335-351).

5

The quality of a country’s A&A practices is relevant to the new Sustainable Development Goals (SDGs). For example, Goal 8 promotes inclusive and sustainable economic growth, employment and decent work for all, and Goal 9 promotes building resilient infrastructure, promote sustainable industrialization and foster innovation.

6

The institutional framework includes (i) the legislative framework, (ii) accounting profession, (iii) accounting education and training, (iv) the A&A standard setting process, and (v) the arrangements for ensuring compliance.

7

By providing a snapshot of the A&A practices and its publication, the A&A ROSCs may exert pressure on stakeholders to implement reform.

8

This was not always the case. In 2009, the OPCS Department carried out a survey covering the 62 countries for which an A&A ROSC had been completed, which found that 65 percent of the countries had received follow-on support from the Bank. Funding was provided by the Bank’s Institutional Development Fund, the FIRST Initiative, and other trust fund- or Bank-funded programs.

9

While the share of respondents that were at least satisfied with the aspects of the review covered in the first two sentences ranged between 75 and 90 percent, that share drops to between 60 and 70 percent for the rest of the issues. Furthermore, those respondents that were not in agreement with the survey statements were driven by issues of inadequate follow-up resource support, inaction by professional bodies, and reforms that were already ongoing at the time of the assessment.

10

Some survey participants raised concerns about the adequacy of tracking progress and impact which could be addressed by those indicators.

1

Prepared by the World Bank’s Financial Markets Global Practice (F&M GP) unit under the supervision of Aurora Ferrari by an F&M GP team led by Mariano Cortes and comprising Alexander S. Berg.

2

For a review of recent literature and a summary on the impact of corporate governance on development, see Corporate Governance and Development— An Update, Global Corporate Governance Forum, 2012.

3

Chapter on corporate governance in the IMF’s October 2016 GFSR.

4

The OECD also produces separate standards for state-owned enterprises (OECD Guidelines on Corporate Governance of State-Owned Enterprises). State-owned enterprise corporate governance is sometimes discussed in specific ROSCs, but all benchmarking is carried out using private sector standards.

5

See OECD Guidelines on Insurer Governance, OECD, 2011, and OECD Guidelines for Pension Fund Governance, OECD, 2009.

6

El Salvador, Ghana, Mauritius, Brazil, Malaysia, Thailand, Russian Federation, Vietnam, Cote d’Ivoire, and Pakistan (underway).

1

Prepared by the World Bank’s Financial Markets Global Practice (F&M GP) unit under the supervision of Aurora Ferrari by an F&M GP team led by Mariano Cortes and comprising Mahesh Uttamchandani.

2

Khrystyna Kushnir, Melina Laura Mirmulstein, and Rita Ramalho. 2016. Micro, Small, and Medium Enterprises Around the World: How Many Are There, and What Affects the Count?,” The World Bank/IFC.

3

The World Bank presented a preliminary background paper at the 51st session of UNCITRAL Working Group V on May 10, 2017.

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Cover Policy Papers
The 2017 Joint Review of the Standards and Codes Initiative
Author:
International Monetary Fund
Volume/Issue:
Volume 2017: Issue 009
Publisher:
International Monetary Fund
ISBN:
9781498346450
ISSN:
2663-3493
Pages:
168
DOI:
https://doi.org/10.5089/9781498346450.007
Figure I.1a.

Data Module ROSC Breakdown of Missions by Region

(In percent of total)

Figure I.1b.

Data Module ROSC Number of Missions by Year

(as of end-2016)

Figure I.2.

Country Membership of IMF Data Standards Initiatives
Figure II.1.

Architecture of the Revised Fiscal Transparency Code
Figure II.2.

Summary Results of FTEs Conducted to Date
Figure II.3.

FTE Pillar I - Fiscal Reporting

Percent of total scores

Figure II.4.

FTE Pillar II - Fiscal Forecasting and Budgeting

(Percent of total scores)

Figure II.5.

FTE Pillar III - Fiscal Risk Analysis and Management

(Percent of total scores)

Figure II.6.

Relative Importance of Pillars
Figure II.7.

Comprehensiveness of the FTC
Figure II.8.

Identifying and Prioritizing Reform Needs
Figure II.9.

Should the FTE Become a Surveillance Instrument?
Figure II.10.

Should a Repeat FTE Be Considered?
Figure II.11.

Appropriate Time Frame for a Repeat FTE
Figure III.1.

Illustrative Examples of Increased Resource Requirements in Standard Assessments1/
Figure III.2.

Number of DARs and TNs Conducted 2005-2016

BCP Compliance

Average across 31 countries (2013-2016)

ICP Compliance

Average across 18 countries (2012-2016)

IOSCO Compliance

Average across 19 countries (2012-2016)

Figure III.3.

Survey Results from the 2014 FSAP Review
Figure V.1.

A&A ROSCs: Initial Assessment and Reassessments by Country Income