International Monetary Fund: Status of Efforts to Strengthen Safeguards
Over Lending (Letter Report, 09/01/2000, GAO/NSIAD-00-211).

Pursuant to a congressional request, GAO provided a status report on
whether the International Monetary Fund's (IMF) policies provide
reasonable assurances that financial resources provided to member
countries are adequately safeguarded, focusing on the: (1) appropriate
use of IMF resources by borrowers; and (2) the accuracy of economic and
financial information reported by borrowers, and upon which the IMF
makes lending decisions.

GAO noted that: (1) IMF's long- standing method for safeguarding its
resources against misuse by borrowers has primarily been to monitor
borrowers' compliance with specific, agreed-upon loan conditions and IMF
management believes that this means of assurance has generally been
adequate; (2) however, according to a study conducted by IMF staff,
IMF's financial resources have been vulnerable to borrower misuse,
because IMF had not typically assessed the control procedures exercised
by its borrowers' monetary authorities over their resources; (3) without
such assessments, IMF did not have reasonable assurance that the
borrowers' systems of internal controls, accounting, reporting, and
auditing were adequate to ensure the integrity of the borrowers'
financial operations; (4) although internal controls can be
circumvented, an assessment as to the adequacy of these controls could
lead to improved financial reporting and detection of the IMF of
resources; (5) IMF has introduced additional measures for safeguarding
its resources; (6) beginning with loans approved after June 30, 2000,
IMF's policy is to assess the control environment of borrowing
countries' central banks, particularly their internal controls and
accounting and reporting systems, to evaluate the integrity of their
operations; (7) as of July 1, 2000, the IMF implemented a policy of
requiring all borrowers to publish financial statements of their central
banks, audited by independent external auditors in accordance with
internationally accepted standards; (8) despite measures to prevent
borrowers' misreporting of information , the internal IMF study
concluded in February 2000 that IMF faced limitations in its ability to
obtain assurances as to the accuracy of information that borrowers
reported; (9) in several instances, borrowers reported inaccurate
information to IMF and received loan funds to which they may not have
been entitled; (10) according to IMF study, IMF remained vulnerable to
borrowers receiving loan funds based on misreported information; (11) to
address these concerns, IMF has taken several steps; and (12) IMF
management has also begun to strengthen its internal operating practices
for monitoring borrowers' compliance with loan conditions and reporting
requirements, but it has not yet completed and reported its plans in
this area.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-211
     TITLE:  International Monetary Fund: Status of Efforts to
	     Strengthen Safeguards Over Lending
      DATE:  09/01/2000
   SUBJECT:  Reporting requirements
	     Internal controls
	     International economic relations
	     Foreign financial assistance
	     International organizations
	     Foreign loans
IDENTIFIER:  International Monetary Fund
	     Heavily Indebted Poor Countries Debt Initiative

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GAO/NSIAD-00-211

Appendix I: The International Monetary Fund's Response to
Recent Cases of Misreporting by Russia

24

Appendix II: The International Monetary Fund's Response to
Recent Cases of Misreporting by Ukraine

26

Appendix III: Comments From the Department of the Treasury

27

Appendix IV: Comments From the International Monetary
Fund

29

Appendix V: GAO Contacts and Staff Acknowledgments

31

Table 1: Cases of Borrower Misreporting of Information to
IMF Brought to the Board of Executive Directors
Since 1984 15

IMF International Monetary Fund

National Security and
International Affairs Division

B-285775

September 1, 2000

The Honorable John R. Kasich
Chairman, Committee on the Budget
House of Representatives

Dear Mr. Chairman:

The International Monetary Fund is a cooperative, intergovernmental,
monetary, and financial institution whose financial resources are provided
by its member countries.1 The Fund provides financing to member countries
that are experiencing or are about to experience balance-of-payments
problems, that is, when they have difficulty obtaining the foreign currency
needed to meet their external financial obligations. The Fund lends to
member countries by providing them with foreign currencies to augment their
international reserves.2 Funds are generally provided in installments that
are linked to the borrower's observance of specific economic and financial
performance criteria. The Fund's Articles of Agreement require borrowers to
provide information the Fund needs to determine whether its borrowers meet
these economic and financial performance criteria. The articles also require
the Fund to adopt policies that will establish adequate safeguards for the
temporary use of its resources. To date, the vast majority of the Fund's
borrowers have repaid their obligations.3

Over the last 2 years, the Fund has called for several investigations by
independent international accounting firms to determine whether allegations
were true that certain borrowers had misappropriated Fund resources and/or
had misreported4 information to the Fund. The accounting firms reported that
they found no evidence that Fund resources were misappropriated; however,
the investigations, which were made publicly available by the Fund,
confirmed that certain borrowers had misreported information to the Fund. In
doing so, they obtained Fund resources they may not have been entitled to.
The Fund and the countries involved have undertaken a number of corrective
steps (see apps. I and II for descriptions of two of these incidents and the
corrective steps undertaken).

In response to these events, beginning in October 1999, the Fund undertook
in-depth studies of its procedures and controls to identify ways to
strengthen safeguards on the use of its funds and its procedures for
assessing the integrity of the financial information reported to the Fund by
its members. For both of these areas, a series of reviews completed in
February 2000, identified a need for the Fund to improve its procedures and
controls. In response to your concerns about whether the Fund's policies
provide reasonable assurances that financial resources provided to member
countries are adequately safeguarded, we are providing a status report on
the Fund's progress in strengthening its policies and procedures relating to
(1) the appropriate use of Fund resources by borrowers and
(2) the accuracy of economic and financial information reported by
borrowers, and upon which the Fund makes lending decisions.

To address these issues, we interviewed Fund officials responsible for
financial management and compliance matters and reviewed and analyzed
information contained in a series of studies on these topics completed by
the Fund in February 2000.5 We did not assess the quality or completeness of
these studies; however, we noted that an external panel of international
experts reviewed one of the studies for the Fund and endorsed its
recommendations. We also interviewed officials from the Department of the
Treasury, which has the lead role within the executive branch regarding U.S.
policy toward the Fund.

The International Monetary Fund's long-standing method for safeguarding its
resources against misuse by borrowers has primarily been to monitor
borrowers' compliance with specific, agreed-upon loan conditions, and Fund
management believes that this means of assurance has generally been
adequate. However, according to a study conducted by Fund staff, the Fund's
financial resources have been vulnerable to borrower misuse because the Fund
had not typically assessed the control procedures exercised by its
borrowers' monetary authorities over their resources. Without such
assessments, the Fund did not have reasonable assurance that the borrowers'
systems of internal controls, accounting, reporting, and auditing were
adequate to ensure the integrity of the borrowers' financial operations.
Although internal controls can be circumvented, an assessment as to the
adequacy of these controls could lead to improved financial reporting and
detection of the misuse of resources. The Fund has introduced additional
measures for safeguarding its resources. Beginning with loans approved after
June 30, 2000, the Fund's policy now is to assess the control environment of
borrowing countries' central banks, particularly their internal controls and
accounting and reporting systems, to evaluate the integrity of their
operations. According to Fund management, the Fund will withhold loan
disbursements until borrowers have corrected any critical deficiencies
discovered in the course of these assessments. Fund management also intends
to assist borrowers in building their capacity to manage funds to help
prevent the misuse of international reserves, including those obtained from
the Fund. This process of assessing the control environment and building
management capacity is still in the experimental phase, and, according to
Fund management, it will take time and resources to implement. Fund
management officials said they cannot estimate the overall magnitude of this
effort until more progress has been made in implementing it. In addition to
these assessments, as of July 1, 2000, the Fund implemented a policy of
requiring all borrowers to publish financial statements of their central
banks, audited by independent external auditors in accordance with
internationally accepted standards.

The Fund had traditionally relied primarily on a relationship of trust with
its members as a basis for assuring the integrity and accuracy of the
information it needs, such as the amount of the country's international
reserves, to effectively design and monitor programs and make lending
decisions. Nonetheless, the Fund has established a number of measures to
help prevent, detect, and address borrower misreporting of key information,
whether unintentional or intentional. For example, according to Fund
management, it checks, to the extent possible, the validity of the
information reported by borrowers; also, in 1984, the Fund's Board of
Executive Directors established guidelines for applying sanctions against
borrowers that receive loan funds based on misreported information. Despite
these measures, the internal Fund study concluded in February 2000 that the
Fund faced limitations in its ability to obtain assurances as to the
accuracy of information that borrowers reported. In several instances,
borrowers reported inaccurate information to the Fund and received loan
funds to which they may not have been entitled. According to the Fund study,
the Fund remained vulnerable to borrowers receiving loan funds based on
misreported information. To address these concerns, the Fund has taken
several steps. In March 2000, for example, Fund management adopted a new
policy of publicizing the identities of countries that obtain Fund resources
based on inaccurate reporting. In July 2000, the Fund's Board of Executive
Directors revised and strengthened its guidelines for addressing cases of
borrower misreporting, and it may levy sanctions in more types of
misreporting cases. According to Fund officials, the Fund's management has
also begun to strengthen its internal operating practices for monitoring
borrowers' compliance with loan conditions and reporting requirements, but
it has not yet completed and reported on its plans in this area. Since some
of the Fund's initiatives are still in the developmental or implementation
stages, the extent to which these actions will be effective in correcting
the weaknesses identified in the Fund studies is as yet unknown.

International reserves are critical for a country's economic well-being.
Holding these reserves helps ensure that a country can meet its
international financial obligations, such as for imports of goods and
services or repayment of foreign debt. International reserves also support
the value of a country's local currency and, thus, its purchasing power in
international markets.6 In times of economic distress, when a country risks
depleting its international reserves, it may obtain financial assistance
from the International Monetary Fund (IMF) in the foreign currency it needs.

Because IMF funds are provided for balance-of-payments support and are not
earmarked for any specific expenditures, it is difficult to track or control
how borrowers use IMF funds. Unlike project funds from other lenders, such
as the World Bank, IMF funds are typically added to and commingled with a
country's international reserves for general use by the country and are
usually under the control of the central bank. Given the fungible nature of
money, tracking the specific use of IMF funds is virtually impossible.

The primary means by which the IMF assures itself that its resources are
safeguarded and that funds are repaid is by establishing specific
agreed-upon conditions and performance criteria for its loans. Often
borrowers must meet certain preconditions7 before the IMF's Board of
Executive Directors will approve a loan arrangement or disbursement.8 After
the loan arrangement has been approved, borrowers must usually adhere to a
host of agreed-upon conditions before IMF funds are released. These
conditions may include general commitments to cooperate with the IMF staff
in formulating and implementing economic policies and meeting specific,
quantitative targets for macroeconomic variables as well as more qualitative
measures involving explicit structural reform policies. Meeting quantitative
performance criteria usually entails staying within prescribed minimum and
maximum levels for various macroeconomic variables, such as international
reserves, domestic credit extended by the central bank, budget expenditures
and revenue, and external debt. Meeting qualitative performance criteria
usually involves implementing agreed-upon policy changes, such as reforming
procedures for conducting fiscal and monetary transactions or operating the
banking system. IMF funds are usually disbursed in installments, with each
installment contingent upon compliance with such agreed-upon quantitative
and qualitative performance criteria. If a country fails to meet performance
criteria, disbursements cease, unless the Board of Executive Directors
issues a waiver.

IMF staff monitors loan arrangements to ensure that borrowers meet the
agreed-upon conditions and performance criteria. It assesses each borrower's
compliance with performance criteria, typically on a quarterly basis, and,
based upon these assessments, the Board of Executive Directors makes
decisions about whether to release additional portions of the loan.9 The
staff relies primarily on information provided by the borrowers in
conducting this monitoring.

The IMF also has several other measures that it believes contribute to
safeguarding its resources. For example, the IMF management has encouraged
member countries to voluntarily adopt internationally accepted codes and
standards of operation with regard to monetary, fiscal, and financial
policy-making; banking supervision; the dissemination of economic and
financial data; and the management of international reserves. In addition,
the IMF supports the proper management of borrowing country resources,
including IMF funds, through its good governance initiatives, which involve
policy advice, loan conditionality, and technical assistance in areas such
as improving public sector accountability. Furthermore, IMF loan
arrangements with borrower countries often contain provisions that the IMF
can use to withhold financial assistance from members engaged in poor
governance or corruption that can be shown to have a macroeconomic impact.
According to the IMF, it has withheld loan disbursements and new resource
commitments in such cases.

Despite these measures for protecting its resources from misuse, a February
2000 internal IMF study indicated that the IMF's existing procedures did not
provide all necessary assurance that its borrowers' management controls were
sufficient to prevent the borrower's misuse of international reserves,
including IMF funds.10 The study noted that the IMF did not conduct
assessments of the control environment of its borrowers' monetary
authorities (typically central banks), including their systems of internal
controls, accounting and reporting, as commercial lenders usually do with
respect to their private borrowers. The IMF's traditional assessments of
countries' fiscal, monetary, financial, and banking operations did not
typically address the capacity of central banks11 to manage funds borrowed
through the IMF.

To better assess the risks in IMF loan programs and to help borrowers
strengthen their management controls, the IMF's Board of Executive Directors
approved a plan in March 2000 for IMF staff to assess the management
controls of borrowing countries' central banks. According to the IMF, these
assessments would evaluate whether the control, accounting, reporting, and
auditing systems within borrowing countries' central banks are adequate to
control and monitor the IMF funds entrusted to them. The assessments are to
determine whether borrowing countries are complying with a series of
desirable practices, rules, and regulations regarding internal control
procedures, financial reporting, and audit mechanisms. The objective of this
approach is for both the country authorities and the IMF to be reasonably
assured that the systems put in place to manage international reserves are
adequate to ensure the proper use of IMF funds. Assessments would also
address the accountability and transparency (openness) of government
policies that affect central bank operations.

These assessments are being conducted, on an experimental basis, for all
countries with new loan programs approved after June 30, 2000, and will be
conducted in one or two stages. In the first stage, borrowers will be asked
to provide information and documents relating to the internal control and
external auditing procedures of their central banks, as well as legislation
and other information concerning the operations of the central banks. If IMF
management, based on the staff's review of the documents, judges a
borrower's management controls to be adequate, it will regard the assessment
as complete. If not, a second stage will follow, including an
on-site assessment. IMF staff will head up the on-site assessment teams,
which will include experts from central banks, multilateral agencies, such
as the World Bank, and private accounting firms. The assessment teams will
then propose actions to address any identified weaknesses in internal
procedures, including any internal control deficiencies. According to the
IMF's Treasurer, if critical vulnerabilities are found in a central bank's
control environment, the IMF will require the borrower to undertake
immediate improvements to address them before any loan funds are disbursed.
This assessment process became operational as of July 1, 2000, and first
stage assessments have been initiated for 33 countries as of August 2000.

Assessments will be more limited for ongoing programs approved before June
30, 2000: Borrowers will be required to publish the financial statements of
their central banks, independently audited in accordance with
internationally accepted standards, and to provide the IMF with the audit
report and management letter. This audit documentation will be required for
all future loan programs as well.

According to the IMF, these assessments will be beneficial because they will

ï¿½ enhance the overall implementation of control, accounting, and reporting
procedures at central banks and raise awareness of internationally
recognized standards and best practices;

ï¿½ provide the IMF with a more comprehensive knowledge of its members'
practices and activities and the opportunity to make practical
recommendations for improvements, based on identified best practices; and

ï¿½ reduce the potential for misuse and misreporting of international reserves
by borrowers.

The IMF intends these assessments to be comparable to procedures followed in
private capital markets, where commercial lenders to private borrowers
follow the universal principle that, in addition to measured risk-taking,
they have a fiduciary duty to protect shareholders' capital. This duty calls
for various safeguard mechanisms to ensure that borrowers have adequate
financial management and internal control systems capable of reliably
recording and reporting all financial transactions. The proposal for
conducting the assessments was endorsed by an international panel of experts
from the public and private sectors, convened by the IMF, who are familiar
with the relevant management, control, and other issues relating to central
bank and treasury operations.

The IMF's Board of Executive Directors approved the assessment program in
April 2000, but achieving tangible and sustained results from the program
may take many years. Conducting these assessments will be a major new
undertaking for the IMF, according to IMF management officials, requiring
additional resources, including specialized staff. IMF officials said that
the necessary resources have been allocated to conduct the assessments that
will be required during the first year of this initiative. However,
conducting these assessments in all borrower countries and implementing all
of the necessary reforms may be a long-term effort. IMF management officials
told us that the IMF is committed to the long-term implementation of this
effort and that resources will be made available for conducting the
assessments and providing member countries with technical assistance to
implement reforms.

Information

As has been the practice for many years, the IMF depends primarily on
borrowers to provide accurate economic and financial data to them. Even so,
the IMF established several procedures and controls for validating borrower
financial and economic information and addressing cases of misreporting.
However, an internal IMF study completed in February 2000 found that these
procedures and controls were limited in their ability to deter and redress
cases of misreporting of key economic and financial information by
borrowers.12 In over a dozen cases, borrowers have obtained IMF funds that
they may not have been entitled to by misreporting such information to the
IMF. Beginning in April 2000, the IMF undertook a number of initiatives to
improve its systems for preventing, detecting, and addressing cases of
misreporting. However, some of these initiatives are still in developmental
or implementation stages; consequently, the extent to which these actions
will be effective in correcting the weaknesses identified in the IMF studies
is as yet unknown.

The IMF, as a cooperative institution, has relied primarily on a
relationship of trust with its members as a basis for assuring the integrity
and accuracy of the information it needs to effectively exercise
surveillance, design and monitor programs, and make lending decisions. IMF
members provide various types of information to IMF, as follows.

ï¿½ Reporting on Preconditions: Before the IMF makes a loan, it may request
borrowing countries to provide certain information demonstrating that the
borrower has met certain preconditions to qualify for IMF assistance.

ï¿½ Mandatory Reporting Under Loan Arrangements: Once a loan arrangement with
a borrowing country has been approved, the country is required to report
data relating to the quantitative and qualitative performance criteria. The
nature and frequency of reporting required of a borrower are normally
detailed in a technical memorandum of understanding between the IMF staff
and the borrower. Typically, certain critical data, such as the net amount
of international reserves, must be reported on a more frequent
basis--usually weekly or daily. The IMF also requires borrowers to report
other financial and economic data not directly related to specific
performance criteria. Such information, such as fiscal data, is essential
for monitoring the borrower's economic performance and policies that may
have a direct bearing on the structure of IMF assistance programs and
lending decisions.

ï¿½ Other Mandatory Reporting of Essential Information: The IMF's Articles of
Agreement also obligate members to provide information that the IMF needs to
carry out its duties. As a minimum, the articles specifically list certain
categories of required information, such as international reserve levels and
balance-of-payments data. In addition to this information, the articles
allow the Board of Executive Directors to require other specific information
from members for the purpose of any IMF activity.

ï¿½ Voluntary Reporting: In addition to the mandatory reporting, borrower
countries are encouraged to adopt a data collection system, called the
Special Data Dissemination Standard, to report on various aspects of their
economic and financial condition. The IMF suggests that such a system
include information, which would be publicly accessible through an IMF
website, on the amount and composition of international reserves, other
foreign exchange assets held by the central bank and the government,
short-term foreign liabilities, and related activities that affect the
usability of reserves. As of March 2000, 47 of the IMF's 182 member
countries had adopted this voluntary standard.

Through its monitoring efforts, the IMF's staff attempts to check the
validity of this reported information to the extent possible, according to
IMF management officials. IMF staff sometimes indirectly cross-check
information received from the borrowers against information from third-party
sources and may assess the validity of the reported information in the light
of common sense and economic principles. However, much of this information
is generated by member government sources, and the IMF does not have the
resources to independently validate it on a routine basis. When there is
particular cause for concern about the accuracy of international reserves
data and the reliability of controls on the use of reserves, the IMF has
required independent investigations or audits of the financial records of
the central bank and, in a few cases, other entities, such as bank
subsidiaries, or public accounts. For example, in 1999, in response to
allegations of misreporting of Russia's international reserves, the IMF
required an independent audit of financial transactions between the Russian
Central Bank and its offshore subsidiaries. (See app. I for a description of
the results of this audit.)

In 1984, the IMF's Board of Executive Directors established guidelines for
addressing instances in which borrowers have provided erroneous or false
information on program performance criteria or other conditions (whether
intentional or not). These misreporting guidelines and other IMF rules
require IMF management to investigate all potential cases of misreporting
and to submit a report to the Board (along with recommendations) in every
case where misreporting has occurred. The IMF can address cases of
misreporting in a variety of ways. Under the misreporting guidelines, the
IMF can call on the borrower to repay, usually within 30 days, funds
obtained from the IMF based on misreported information concerning
performance criteria or other conditions specified by the IMF Board in
approving the loan disbursement. (See table 1 for a summary of cases of
borrower misreporting of information to IMF.) In addition, under the IMF's
Articles of Agreement, the IMF may impose other sanctions on borrowers for
misreporting information required by the Board of Executive Directors or
explicitly required under the articles. These sanctions may include denial
of access to additional funds, declaration of temporary ineligibility to
receive funds, suspension of voting rights in the IMF, and expulsion from
membership in the IMF. In addition, in the recent cases of misreporting by
Russia, the IMF called on Russia to voluntarily hold IMF funds in a special
account to be used only for repayment of Russia's other IMF loans. In some
cases, the IMF may call on borrowers to correct the information and take
steps, such as implementing new data collection and reporting systems, to
ensure more accurate reporting in the future.

Information

According to the February 2000 IMF study on borrower misreporting and other
IMF documents, 17 cases have been brought to the attention of the Board of
Executive Directors since 1984 in which the Board had approved loans or
disbursed funds based on inaccurate information provided by the borrower
(see table 1 for a summary of these cases). However, it is not reasonably
possible to judge the seriousness and pervasiveness of misreporting based on
these 17 cases. The study pointed out that the IMF's Board has approved
hundreds of loans during this period in which misreporting was not raised as
an issue. However, it is not possible to determine whether there were other
cases of misreporting that were not uncovered by IMF staff.

                                         Loan funds
                                         received by the
                                         borrower on the   Early repayment
                                         basis of          of loan funds
                                                           requested by IMF
 Case  Years     Type of information     inaccurate        due to
                 misreported             information
                                         (stated in        inaccurate
                                         millions of year  reporting by
                                         2000 U.S.         borrower
                                         dollarsa)

 1     1985      External credit and     $13.7             No
                 loan guarantees

 2     1985      Credit to the           78.5              No
                 government
 3     1986      External debt           20.0              No
 4     1988      External arrears        3.6               No
                 Monetary and
 5     1988-89   balance-of-payment      267.4             Yes
                 statistics, domestic,
                 and external debt

 6     1990      Net international       274.7             No
                 reserves
 7     1995      External arrears        334.1             No
 8     1995      Loan preconditions      b                 c
                 Loan precondition and
 9     1995-96   operation of foreign    b                 c
                 exchange market
                 International reserves,
 10    1996      domestic assets, credit 2,734.5           No
                 to government, and
                 budget deficit
 11    1996      Loan precondition       b                 c
 12    1996-97   Key transactions        b                 c

 13    1996-97   National income and     b                 c ,d
                 fiscal data
 14    1996-98   International reserves  b                 c
 15e   1998      Fiscal data             26.6              Yes
 16    1999      Budget deficit          52.7              No
 17    1999      Loan guarantees         30.6              No
 Total                                   $3,836.4

aThe IMF originally reported these amounts in special drawing rights (the
IMF's standard unit of account). We converted these amounts to dollars using
a GAO-constructed special drawing rights price deflator and the average
annual exchange rate. We used a U.S. implicit price deflator to express the
figures in year 2000 dollars.

bThe IMF did not state the amount of funds disbursed in these cases in its
February 2000 report to the Board of Executive Directors on misreporting,
which we used as the source for this table. That report, and thus this
table, identifies only those funds disbursed based on misreported data
relating to performance criteria.

cRequirement of early repayment of the loan was not available as a sanction
for misreporting in these cases under the IMF's misreporting guidelines.

dIn this case, the borrower voluntarily repaid a portion of the loan early.

eThis case of misreporting was disclosed by the IMF after the February 2000
study on misreporting was completed.

Source: GAO analysis of IMF data.

As table 1 shows, according to IMF records, borrowers have received over
$3.8 billion in IMF loans13 on the basis of misreported data.14 This does
not necessarily mean that the borrowers would not have received the funds
had they reported the required information accurately. If the discrepancy
were minor or temporary in nature, or if appropriate policy measures could
be agreed with the authorities, a waiver may have been granted, permitting
the country to receive the funds despite the breach of a performance
criterion.

Reasons for misreported data in these 17 cases varied widely, according to
the IMF study. An unspecified number were attributable to weaknesses in the
borrowing country's internal reporting systems and poor coordination among
government agencies within the borrowing country.15 These cases included
misreporting of external debt levels, budget deficits, and international
reserves. Other cases were attributable to borrowers' inexperience and lack
of familiarity with IMF procedures. The IMF study indicates that an
unidentified number of misreporting cases were inadvertent, while some
appeared to be intentional. Some cases were revealed by borrowing country
authorities themselves, some by individuals and organizations within the
country, and some by IMF staff during monitoring. According to the study,
some cases might have been detected earlier if the IMF staff had monitored
available information more closely.

The IMF study on misreporting noted that the IMF has not ensured that
borrowers have adequate systems in place for preparing and verifying key
financial and economic data. There have been instances in which misreporting
has been the result of weaknesses in the administrative systems, reporting
arrangements, and control structures in member countries, according to the
IMF.

The study also found that in some instances, IMF staff procedures for
validating information reported by borrowers did not appear to be effective
in uncovering cases on misreporting. The study identified the following
limitations in these procedures.

ï¿½ Although loan arrangements contain specific conditions that are verifiable
and monitorable, in some instances, the loan documents did not clearly
define how IMF staff would monitor borrower compliance with specific loan
conditions. Therefore, the data reporting requirements may not have been
clearly specified when the Board of Executive Directors approved a loan
arrangement.

ï¿½ Information about known weaknesses and anomalies in reported information
was not always shared among IMF staff and with the Board of Executive
Directors; such information would have indicated the areas in which IMF
staff should have more carefully scrutinized borrower actions and financial
and economic conditions.

ï¿½ The IMF staff did not always use third-party information effectively or
widely enough to cross-check reported information. In particular, IMF staff
had not always obtained information available within a borrowing country
that could have confirmed or contradicted information provided by government
authorities. The IMF staff had not always used resident representatives--IMF
officials posted in member countries--effectively for this purpose.

According to the IMF study on misreporting, the IMF had not consistently
imposed sanctions on borrowers for misreporting. The IMF has requested early
repayments in 2 out of 11 cases where such a remedy was available under IMF
guidelines (see table 1).16 Instead, the IMF has usually called on the
borrower to take corrective action to improve the accuracy of reported
information. According to the IMF's Treasurer, the IMF did not request early
repayment of the loans in many of these cases because the misreporting was
judged to be small and/or did not alter the IMF's view of the member's
performance under a loan arrangement. Also, the IMF had not applied
sanctions available under the provisions in its Articles of Agreement in
cases of misreporting because these sanctions were considered to be
disproportionately severe, according to the IMF's Treasurer.

According to the IMF study on misreporting, the IMF's ability to ensure
accurate reporting may have been hampered in the past by limitations in its
own policies and procedures for addressing cases of misreporting, as
follows:

ï¿½ IMF management did not consider sanctions provided for in the misreporting
guidelines applicable in all cases in which borrowers provided inaccurate
information to the IMF. In particular, these sanctions were not considered
applicable in cases where the Board of Executive Directors approved loan
arrangements or disbursements based on incorrect information from the
borrowers indicating that they had fulfilled the loan's preconditions. In
such cases, the IMF determined that the sanctions did not apply because the
preconditions were not identified in the loan arrangement or other Board
decisions as specific conditions or criteria for receiving IMF funds.

ï¿½ Sanctions for misreporting key information under the IMF's Articles of
Agreement were not available in some cases. The articles do not specifically
require reporting of certain types of critical information such as fiscal
and financial information. Thus, unless this information was specifically
required under a loan arrangement, the sanctions provided for in the
Articles of Agreement did not apply if this information was misreported.

ï¿½ IMF guidelines had provided that, in order to require early loan repayment
or impose certain other sanctions against borrowers for misreporting,
evidence of the misreporting must have been discovered within a 2-year
limitation period. Recent cases of misreporting indicate that 2 years may
not be sufficient time to discover misreporting
(see app. I for one such example of misreporting). The 2-year limitation
period does not apply to sanctions for misreporting provided for in the
Articles of Agreement.

ï¿½ The IMF did not have a general policy on publicizing cases of
misreporting. The threat of adverse publicity in these cases could have
acted as a deterrent to misreporting.

ï¿½ The IMF had not established basic ground rules for investigating cases of
misreporting to ensure that all cases were handled consistently. In most
cases, investigations had been conducted entirely by IMF staff, but in some
cases, other procedures were followed, including the use of outside
consultants engaged by the IMF or by the borrowing country authorities.

The IMF has begun to address most of the limitations identified in its
February 2000 study on misreporting and strengthen its policies and
procedures for preventing misreporting, as follows.

ï¿½ IMF management plans to revise and improve procedures for gathering and
using information on borrowers' economic situations, according to IMF
officials. Changes to these procedures are intended to intensify existing
efforts to cross-check, question, and refine information initially received
from the borrowers.

ï¿½ In July 2000, the Board of Executive Directors revised and strengthened
the IMF's guidelines for addressing misreporting. The IMF's procedures have
been broadened so that the guidelines will now be applied to cases of
misreporting of information relating to preconditions and other essential
information that borrowers are required to provide. The Board has also
lengthened the limitation period for imposing penalties from
2 years to 4 years. These and other modifications to the guidelines give the
IMF greater flexibility and scope to impose penalties on borrowers in cases
of misreporting.

ï¿½ According to IMF management officials, in October 2000, the Board is
scheduled to discuss possible expansion of the list of information that
members are required to provide under the IMF's Articles of Agreement to
include more extensive data reporting requirements, including reporting of
fiscal and financial information. Such modifications could give the IMF
greater authority to impose sanctions against misreporting of these types of
data. In October 2000, the Board also plans to consider procedures to deal
with potential cases of misreporting related to the assistance it provides
under the Highly Indebted Poor Countries Initiative.17

ï¿½ In March 2000, the Board of Executive Directors adopted a policy to
publicize each case of misreporting, suitable to the seriousness of the
misreporting, after the Board has fully reviewed the case and issued its
conclusions. In fact, the IMF has publicized two misreporting cases in April
and May 2000 under this new policy, issuing press releases clearly
identifying the borrowers (Pakistan and Ukraine), details about the
misreporting incidents, and information about the remedial steps that the
IMF and the borrowers have taken.18

The IMF has not yet taken explicit steps to address a few of the limitations
described in the IMF study on misreporting. We could not determine how the
IMF will address the need for clearer monitoring plans for its loan
programs, as described in the study. However, according to the IMF
Treasurer, IMF staff are making greater efforts to ensure that data required
for monitoring of borrower compliance with loan conditions are defined more
clearly. Also, while the IMF has not adopted any new ground rules for
investigating potential cases of misreporting or criteria for sharing
information about known weaknesses and anomalies in reported information
among IMF staff or with the Board of Executive Directors, the Fund's
management is considering whether or not new ground rules are warranted.

We received written comments from the Department of the Treasury, the agency
that represents the United States at the IMF, as well as from the IMF.
Treasury and the Fund's management have agreed with the information
presented and their comments are reprinted as appendixes III and IV. In
addition to their overall comments, the Treasury and the IMF provided
technical comments, which we incorporated in the report as appropriate.

Treasury commented that the report provides, overall, an informative and
useful treatment of an extremely important issue that is central to the
integrity of the IMF. While the Treasury points out that IMF's strengthened
safeguards cannot be absolutely failsafe, they constitute a meaningful
effort in the area of protecting IMF resources and deterring misreporting.
Treasury stated that one of its highest priorities is to ensure that the
IMF's strengthened system of safeguards is vigorously and forcefully
implemented, continuing an effort that the U.S., through the Treasury, has
been working to promote for a considerable period of time. Treasury noted
that, in addition to the new safeguards and misreporting framework, it is
essential that the IMF do a better job in using the existing instruments at
its disposal, particularly with respect to monitoring and cross-checking
data provided by countries, and applying the existing guidelines on
misreporting of data.

The IMF reemphasized the importance placed by its management and Board of
Executive Directors on assuring that IMF resources are used for their
intended purpose and the member countries' economic programs being supported
by these resources are based on accurate information. The IMF stated that
the Board of Executive Directors and management satisfy themselves as far as
is reasonably possible that borrowing member countries comply with their
obligations to use IMF resources as intended and to supply accurate
information to the IMF. The IMF also stated that in the vast majority of
cases it has had--and continues to have--an excellent experience with the
trust-based relationship central to its interaction with individual members.
The IMF noted that significantly strengthened policies are now in effect, in
particular, safeguards assessments of member countries' central banks and
the stronger misreporting guidelines.

To identify the IMF's progress in strengthening its policies and procedures
relating to (1) the appropriate use of Fund resources by borrowers and
(2) the accuracy of economic and financial information reported by
borrowers, we reviewed documents, prepared in 1999 and 2000, relating to
these subjects provided by the IMF and the U.S. Department of the Treasury.
In particular, we reviewed and analyzed a series of internal IMF studies,
issued in February 2000, that specifically addressed the issues of borrower
misuse of international reserves and borrower misreporting. These studies
described the IMF's existing policies and procedures to prevent misuse of
funds and misreporting by borrowers, identified weaknesses in these policies
and procedures, described cases of borrower misreporting and potential
misuse of funds, and outlined recommendations for improvement. We also
interviewed cognizant Treasury officials, the IMF's Treasurer, and officials
in the IMF's Policy Development and Review Department to identify the status
and nature of current IMF efforts to improve its management controls.

We conducted our work in Washington, D.C., from April through July 2000 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the Honorable Lawrence H. Summers,
the Secretary of the Treasury; Horst Kï¿½hler, Managing Director of the IMF;
and interested congressional committees. Copies will be made available to
other interested parties upon request.

Please contact me on (202) 512-4128 if you or your staff have any questions
about this report. Other contacts and key contributors to this report are
listed in appendix V.

Sincerely yours,

Harold J. Johnson, Associate Director
International Relations and Trade Issues

The International Monetary Fund's Response to Recent Cases of Misreporting
by Russia

In 1999, the International Monetary Fund (IMF) became aware of allegations
that the Central Bank of Russia had used offshore subsidiaries during
1994-96 to allocate its international reserves for inappropriate purposes.
Based on these allegations, the IMF required the Central Bank of Russia to
undergo an investigation of its financial transactions with subsidiaries.
The investigation was conducted by an independent, international accounting
firm, which issued four reports on the investigation between July and
December 1999. The primary investigation report, published in August 1999,
revealed that Russia had engaged in transactions that resulted in
misreporting of required information to the IMF. In particular, Russia had
repeatedly misstated total international reserves from 1995 through 1998 by
improperly counting as international reserves funds that the Central Bank of
Russia was using to guarantee loans and Russian government securities
purchases. In addition, Russia had understated net domestic assets, net
credit to the government, and the budget deficit. Funds were made available
to Russia during 1996 that would not have been made available on the basis
of a correct reporting of international reserve data.

The following specific examples of misreporting by Russian authorities were
uncovered in the audit.

ï¿½ In 1996, the Central Bank of Russia deliberately falsified its records and
reported a sale of Russian government securities to its subsidiary, the
Financial Management Company, which did not occur, and reported the proceeds
of the sale as international reserves. As a result, Russian authorities
overstated net international reserves and understated net credit to the
government and net domestic assets by $1.2 billion.

ï¿½ In 1995 and 1996, the Financial Management Company used funds that it had
received from the Central Bank of Russia to guarantee the purchase of
Russian government securities even though the Central Bank of Russia had
reported these funds to the IMF as international reserves. Thus, in addition
to overstating net international reserves, Russian authorities understated
net domestic assets as well as net credit extended to the government.

ï¿½ In 1996, the Central Bank of Russia deposited $300 million with another
subsidiary, Eurobank, to guarantee credits it extended to Russian commercial
banks. In reporting to the IMF, the Central Bank of Russia misclassified
these loans as liquid international reserves, even though they could not be
immediately converted to foreign currency. Thus, the central bank overstated
the total amount of its international reserves.

ï¿½ In 1997 and 1998, the Central Bank of Russia extended as much as
$223 million in credit to another subsidiary, the Ost-West Handelsbank.
However, the central bank continued to report these funds as liquid
international reserves, even though they could not be immediately converted
to foreign currency. Thus, the central bank again overstated its total
amount of international reserves to the IMF.

In 1996, Russia received about $2.7 billion19 on the basis of information
that has been subsequently deemed to be incorrect. The penalties provided by
the IMF's guidelines on misreporting did not apply in these cases because
the 2-year limitation period on imposing penalties had already expired by
the time the IMF had become aware of the misreporting. However, the IMF
determined that the misreporting violated mandatory reporting requirements
established in the IMF's Articles of Agreement, for which there is no
established limitation period. Under a $4.5-billion loan program that the
IMF Board of Executive Directors approved in July 1999, Russia agreed to
hold all new IMF funds in an account at the IMF that may be used only to
repay Russian debt to the IMF. This procedure would apply to any new IMF
program negotiated in 2000. The IMF and Russia agreed on a number of other
remedial actions, including the creation of internal barriers at the central
bank between operations with its foreign subsidiaries and its reserves
management, redefinition of international reserves to exclude deposits with
foreign subsidiaries, an IMF assessment of Russian reporting procedures, and
a further investigation of the operations of the Central Bank of Russia with
other subsidiaries.

The International Monetary Fund's Response to Recent Cases of Misreporting
by Ukraine

Various allegations have been made about the use of Ukraine's international
reserves held by the National Bank of Ukraine, the country's central bank,
in 1996-98, prior to approval of Ukraine's most recent IMF arrangement in
1998. The IMF learned in 1998 about some central bank transactions that gave
the impression that Ukraine's international reserves were larger than was
actually the case. At that time, the IMF required Ukraine to correct its
reporting of these reserves and institute quarterly audits by a reputable
international accounting firm. Based on new allegations this year, the IMF
also required that the National Bank of Ukraine undergo a series of
transactional investigations by an independent, international accounting
firm. The results of the first two investigations (covering July 1997
through January 1998) indicate that Ukraine had engaged in transactions
leading to an overstatement of its international reserves. For example, in
1997, the National Bank of Ukraine deposited some of its international
reserves with a foreign bank, which then lent the funds to a commercial bank
in Ukraine, which redeposited the funds with the National Bank of Ukraine.
This "round tripping" resulted in the same international reserves being
counted twice. IMF management will not know the full extent of the
overstatement until ongoing investigations have been completed. By giving a
misleading impression of the size of Ukraine's international reserves,
Ukraine appeared to meet the performance criteria for its loan program and
obtained IMF funds that it might not otherwise have received.

As of August 2000, the IMF was completing its review of the situation to
determine what sanctions should be levied against Ukraine for its provision
of inaccurate reserve information. Remedial action, which the IMF's Board of
Executive Directors will consider shortly, could include early repayment of
IMF disbursements that Ukraine received on the basis of inaccurate
information it reported to the IMF. According to the IMF, at its request,
the National Bank of Ukraine has taken a number of corrective steps,
including depositing all of its liquid reserves in top-rated international
banks, discontinuing all transactions that had rendered international
reserves liquid, and improving international reserves management practices.
Further, the IMF would expect the Ukrainian authorities to leave possible
future disbursements to the Ukraine in an account in the IMF that may only
be used to repay Ukrainian obligations to the IMF.

Comments From the Department of the Treasury

Comments From the International Monetary Fund

GAO Contacts and Staff Acknowledgments

Harold Johnson (202) 512-4128
Phyllis Anderson (202) 512-7364

In addition to those named above, Patricia Martin, James Michels, Rona
Mendelsohn, Mary Moutsos, Samantha Roberts, and Mark Speight made key
contributions to this report.

(711487)

Table 1: Cases of Borrower Misreporting of Information to
IMF Brought to the Board of Executive Directors
Since 1984 15
  

1. The Fund pays interest to its members for its use of their contributions.

2. With the exception of some financing for low-income countries, the Fund
does not loan funds to a country, per se. Rather, the country "purchases"
the currency it needs from the Fund with an equivalent amount of its own
currency and then later "repurchases" its own currency according to the
terms applicable to the Fund's financing policy. Purchases are usually made
pursuant to "arrangements" that set out the understandings between the Fund
and the borrowing member country. For the purposes of this report, we will
use the terms "borrower" to refer to the country receiving Fund financial
assistance. We use the terms "disbursement" and "loan" to refer to
"purchases" and "repay" to refer to "repurchase."

3. As of January 2000, 7 of the Fund's 93 active borrowers were in arrears
for more than
6 months. These arrears, totaling $1.5 billion, represent about 2 percent of
the Fund's total outstanding credit.

4. "Misreporting" is defined by the Fund to denote inaccurate information
provided intentionally or unintentionally to the Fund by a member country in
breach of the Fund's rules for mandatory information, in particular to
ascertain compliance with the agreed conditionality for disbursement of Fund
resources.

5. Although these studies are classified and not publicly available, the
Fund has published some information contained in them in the "Report of the
Acting Managing Director to the International Monetary and Financial
Committee on Strengthening Safeguards on the Use of Fund Resources and
Misreporting of Information," dated April 10, 2000.

6. International reserves give people confidence to hold a local currency,
thus supporting its value, because these reserves represent the ability of
the government to readily convert local currency to major currencies.

7. These preconditions, called "prior actions," are policy measures that the
IMF management views as key to the effectiveness of the assistance program
to a country. They may include such things as reforming the operations of
the country's foreign exchange market or lowering its level of foreign debt
arrearages.

8. The Board of Executive Directors consists of 24 members, including a U.S.
Executive Director.

9. For more information on this process, see International Monetary Fund:
Approach Used to Establish and Monitor Conditions for Financial Assistance
(GAO/GGD/NSIAD-99-168 , June 22, 1999).

10. See footnote 6.

11. The central bank of a country is usually the fiscal agent for IMF loans.

12. See footnote 6.

13. Loan funds provided to Russia represent over 70 percent of this total.

14. This total includes only funds disbursed based on inaccurate information
relating to performance criteria, not on information on preconditions or
other essential information.

15. The IMF study on misreporting did not enumerate each type of
misreporting case.

16. As noted in table 1, in one additional case a borrower voluntarily
repaid loan funds that had been obtained on the basis of misreported
information.

17. The goal of the Highly Indebted Poor Countries Initiative is to bring
heavily indebted countries' debt loads to a level where they can make debt
payments on time and without rescheduling. Resources to reduce the level of
debt are provided by the IMF, the World Bank, and other multilateral and
bilateral creditors.

18. The Fund had also publicized two earlier cases of misreporting--by
Russia, in August 1999, and by Jordan, in October 1999.

19. This amount is stated in year 2000 dollars. The IMF originally reported
the amount as
1.9 billion special drawing rights (the IMF's standard unit of account). We
converted special drawing rights to dollars using a GAO-constructed special
drawing rights price deflator based on the average annual exchange rate. We
used a U.S. implicit price deflator to express the figure in year 2000
dollars.
*** End of document. ***