FOREWORD
FOREWORD
It is an honour for me to present this compendium which includes papers, practical information and proposals for combating fraud and corruption based on experience of the Supreme Audit Institutions (SAIs) in Central, Eastern Europe and Asia. The book was prepared upon the results of the EUROSAI International Conference “The Role of Supreme Audit Institutions in Fighting Against Fraud and Corruption” hosted by the Accounting Chamber of Ukraine on September 19 21, 2006 in Kyiv. The EUROSAI event was attended by 61 participants from 24 SAIs among which were present Presidents of 16 SAIs. The participants discussed the following sub themes: • Sub theme I: The Role of SAIs in the National System Development of Fighting Against Fraud and Corruption; • Sub theme II: Peculiarities of SAIs Cooperation with the Law Enforcement Bodies during Exposure and Prevention of Fraud and Corruption; • Sub theme III: The Practice of SAIs in Implementation Transparency and Publicity in the Field of Fighting Against Fraud and Corruption. The Conference was supported by the Parliament of Ukraine, the Cabinet of Ministries of Ukraine and by the number of Ukrainian government authorities which participated in this event. I would like to pass special thanks to all of my colleagues, Heads of the SAIs for their interest in the Conference and willingness to share experience and modern techniques in fighting against fraud and corruption. I am very pleased that the initiative of the Accounting Chamber of Ukraine received great feedback among the EUROSAI community. I am deeply convinced that this event stimulated and consolidated efficient collaboration between SAIs and that approved Recommendations will further facilitate applying common actions towards combating such negative phenomena as fraud and corruption.
Dr. Valentyn Symonenko Chairman of the Accounting Chamber Ukraine
1 THE ACCOUNTING CHAMBER OF UKRAINE
OPENING STATEMENT OF THE CHAIRMAN OF THE ACCOUNTING CHAMBER OF UKRAINE DR. VALENTYN SYMONENKO
Dear Ladies and Gentlemen, Dear colleagues, Dear friends, Let me as the Chairman of the Accounting Chamber of Ukraine welcome you on the ancient Kyiv´s land in the Ukrainian House with the Saint Prince Volodymyr soaring up nearby. I would like to express my sincere greetings to you, delegates of the International Conference “The Role of Supreme Audit Institutions in Fighting Against Fraud and Corruption” held under auspices of the European Organization of Supreme Audit Institutions (EUROSAI) with direct involvement of INTOSAI. This conference has already become important event for the Ukrainian social and political life. Representatives of different countries pay much interest and attention to it. I am glad to welcome and express gratitude to the Chairman of the Verkhovna Rada of Ukraine Mr. Oleksandr Moroz for his participation in our conference. I would also like to express sincere gratitude to the Chairman of the INTOSAI Governing Board, the President of the State Audit Office of Hungary Dr. Árpád Kovács; Vice President of EUROSAI, the President of the Supreme Chamber of Control of Poland Mr. Mirosław Sekuła for their contribution to the organization of the conference; and the Chairman of the Accounts Chamber of the Russian Federation Mr. Sergey Stepashin, who was at the forefront of our conference. On behalf of the Accounting Chamber of Ukraine let me greet the delegations of Supreme Audit Institutions that arrived to participate in the conference: • delegation of the Chamber of Accounts of the Republic of Azerbaijan; • delegation of the State Supreme Audit of Albania; • delegation of the Chamber of Control of the National Assembly of the Republic of Armenia;
2 OPENING STATEMENT
• delegation of the Committee of State Control of the Republic of Belarus; • delegation of the National Audit Office of Bulgaria; • delegation of the National Audit Office of the United Kingdom; • delegation of the State Audit Office of Hungary; • delegation of the Chamber of Control of Georgia; • delegation of the National Audit Office of Denmark; • delegation of the European Court of Auditors; • delegation of the Accounts Committee for Control over Execution of the Republican Budget of the Republic of Kazakhstan; • delegation of the Accounts Chamber of the Kyrgyz Republic; • delegation of the Sate Audit Office of Latvia; • delegation of the State Control of Lithuania; • delegation of the Court of Audit of the Republic of Moldova; • delegation of the Netherlands Court of Audit ; • delegation of the Office of the Auditor General of Norway; • delegation of the Supreme Chamber of Control of Poland; • delegation of the Accounts Chamber of the Russian Federation; • delegation of the Supreme Audit Office of the Slovak Republic; • delegation of the Committee of the State Financial Control of the Republic of Tajikistan; • delegation of the Supreme Audit Office of the Czech Republic; • delegation of the National Audit Office of Sweden; • delegation of the State Audit Office of Estonia; • delegation of the Accounting Chamber of Ukraine.
3 THE ACCOUNTING CHAMBER OF UKRAINE
Among the delegates of our conference are also People´s Deputies of the Verkhovna Rada of Ukraine, representatives of the Secretariat of the President of Ukraine, the National Security and Defense Council of Ukraine, the Security Service of Ukraine, the General Prosecutor´s Office of Ukraine, the State Committee for Financial Monitoring, officials of the ministries and institutions, law enforcement bodies. Wide range of delegates and level of representation prove the undisputable urgency of the problem discussed today. We have to discuss important and urgent issues regarding detection and prevention of fraud and corruption within the system of state financial resources administration, to share knowledge and accumulated experience, to define the role and place of Supreme Audit Institutions in this process and to elaborate specific constructive proposals and recommenda tions aimed at strengthening the fight against this social and political evil. We have prepared draft recommendations taking into account materials and proposals presented in your conference reports. They will be disseminated tomorrow morning for the discussion and adoption. I hope that free communication and atmosphere of trust that we will try to ensure at the conference will contribute to the fruitful cooperation and task solving. I wish successful work to all the delegates of the conference and to all of us.
4 THE PARLIAMENT OF UKRAINE
OPENING STATEMENT OF THE CHAIRMAN OF THE PARLIAMENT OF UKRAINE MR. OLEKSANDR MOROZ
Dear participants of the Conference! Let me warmly greet you, representatives of Supreme Audit Institutions of the coun tries, which supported the initiative of the Accounting Chamber of Ukraine and agreed to participate in active discussion of the problems connected with organization of fighting with such anti social phenomenon as corruption and fraud. In current conditions of the society development together with such progressive trends of development as implementation of the advanced innovative technologies in various sectors of economy, unfortunately there are malign manifestations, among which corruption and fraud have the most deep roots and important negative social and political results. Today the problem of corruption exists almost in all countries of the world, and it’s par ticularly apparent in the countries where economy, social relations and political structure of the society are deeply reformed. In such case it has various manifestations and influences state and public institutions in the most harmful way. Supreme Audit Institutions, which have to supervise application of state funds strictly, today have the important mission. The central place among them belongs to the Accounting Chamber as one of the effective instruments of parliament control over public finances. For Ukraine question of creation and support of activity of the Accounting Chamber has its own peculiarities and prehistory. It was not easy to take decision concerning the law on establishing of the Accounting Chamber. Immediately after adoption of the Constitution, where the necessity of formation of such institution was determined, it was found out that the authoritarian government formed at that time didn’t want to let the Parliament control application of budgetary funds and tried to dilute possibilities of the Accounting Chamber for performance of control. Moreover, when institution of the Parliament or parliament control can’t achieve implemen tation of its offers, the function of the Accounting Chamber deteriorates. It turns into some formal body because power is usurped by the authoritarian regime and proposals of the Accounting Chamber are perceived only for score settling with those who actually exercise
5 OPENING STATEMENT power, but don’t work for the good of society and law observance. We performed rather keen struggle, which finished with imposing of the President’s veto to amendments even to the Constitution, which were adopted by more than 300 votes, but nevertheless, under dictation of the Administration and the President Constitutional Court took its verdict and acknowl edged this decision the dependent one. Till the moment of adoption of the new version of the Constitution at the end of 2004 we restored rights of the Accounting Chamber for control over not only utilization, but also over revenues of budget funds, and you understand that this is the sector of economy, where corruption arises. After passing to the parliamentary presidential form of government we think that it’s necessary to cease the former practice, according to which, for instance, report of the Accounting Chamber on any question with resolution “for application in work” is perceived only as the informational material and not more. We practice and implement the procedure, according to which each research, each study of the issue by the Accounting Chamber is con tinued in the profile committee within the process of hearings concerning this issue with involvement of all structures, which are responsible for one or another direction, with con clusions, which should be implemented through involvement of the prosecutor’s office and other government bodies in order to make everybody understand, that control is not the form word in the Constitution of Ukraine, but the practice of activity not only of the Accounting Chamber, but first of all of the Parliament and other government institutions. In this case the Accounting Chamber becomes the instrument, the original detector, which proves verity in one or another direction. In situation, when all government bodies begin to work in this direction, the evil, of course, retreats, and I am sure that here there is a great prospect. Taking into account social, economic and political conditions, we intend to continue development of legislative maintenance of activity of the Accounting Chamber, considering this the main task in fighting against corruption and imposing of order in the country. Due to these all proposals submitted by the Accounting Chamber after implementation of the polit ical reform and correlation of the functions of the Parliament, the President and the Government today will receive “green light” in order to let the Accounting Chamber and its structures, created also at the local level, work efficiently. Now the situation changed. The Government and the Parliament, and therefore exec utive and legislative bodies work in conditions of mutual dependence and mutual responsibil ity. It means that today we can give the new content to the activity of the Accounting Chamber and to the function of control in general. For this reason we have taken the deci sion and will support it with some regulatory provisions or even with legislation regarding the fact that in case, if conclusion of the Accounting Chamber on the results of audit of any link of the government, structure, economic entity, which use budget funds, is delivered, now this conclusion is submitted to the profile committee for comprehensive analysis of the content of the Accounting Chamber document, and in case of necessity for hearing in the committee. After this the results should be not only taken into consideration, but the conclusions, includ ing the amendments to the laws and the appeals to the General Prosecutor’s Office or other structures should be made. It means that there should be the response in order to show the people that the Accounting Chamber is the control body on behalf of the Verkhovna Rada. It means control on behalf of the nation over observance of the budgetary and another discipline for the appropriate economic application of all people’s funds.
6 THE PARLIAMENT OF UKRAINE
The result of such approach became the initiative of the Accounting Chamber of Ukraine, which according to the amendments to the Constitution of Ukraine performs con trol over revenues of funds to the state budget and their expenditures on behalf of the Verkhovna Rada of Ukraine, in holding of such important international forum. It is even more important due to the fact that it appeared on the eve of the 10th Anniversary of activi ty of the Accounting Chamber of Ukraine, which always maintained its distinct attitude to these questions and expressed intention to approach to the solution of the problem of organ ization of the fighting against corruption and fraud seriously. In Ukraine there are all possible levers, instruments and means for effective opposi tion to the facts of corruption in order not to allow its unification and growth on the inter national level. The Parliament of Ukraine performs the considerable work on creation of the neces sary legal framework, extension of the legal environment of the corresponding bodies con cerning provision of their appropriate highly effective work in this direction. It’s very important that all political forces irrespective of the existing political contro versies are solidary in these questions. Currently the Parliament considers the package of draft laws, introduced by the President of Ukraine and directed to fulfillment of international obli gations in sphere of opposition to corruption, exactly “On Ratification of Convention of the United Nations Organization against Corruption”, “On Ratification of Criminal Convention on Struggle with Corruption”, “On Ratification of the Additional Protocol to Criminal Convention on Struggle with Corruption”. In addition, he adopted the Concept of overcom ing of corruption in Ukraine “On the Way to High Moral”. The draft laws of the President “On Fundamentals of Prevention and Opposition to Corruption” and “On Introduction of Amendments to Some Legislative Acts of Ukraine Concerning Responsibility for the Corruption Related Offences” introduced by the President also are directed to implementation of the above mentioned documents. After adoption by the Parliament, and I am sure that it will happen in the nearest future, these draft laws together with the already existing laws should become the base for realization of anti corruption policy at all levels of power. Reforming of activity of law enforcement authorities and court system has already started. Today on the agenda there is the construction of activity of government bodies of inter nal and external financial control, creation of the transparent uniform state system of finan cial control, in which the Accounting Chamber with its independent functions and authori ties will play the leading role. The Ukrainian Parliament, in its turn, will provide the compre hensive assistance and support to its chief control body. Intention of the relevant international institutions to active actions and cooperation in this direction is also worth attention and support. Holding of this conference within the framework of EUROSAI – The European Organization of Supreme Audit Institutions – is the evidence of systematic approach and intention to oppose these negative anti social phe nomena by joint efforts at the international level. I wish you sincerely the fruitful work and taking of the informed decisions, new suc cesses and achievements in noble deeds, strengthening of financial discipline and increase of prosperity of the citizens of our countries.
7 EUROSAI
WELCOMING ADDRESS OF THE SECRETARY GENERAL OF EUROSAI, PRESIDENT OF THE SPANISH COURT OF AUDIT DR. UBALDO NIETO DE ALBA
Chairman of the Accounting Chamber of Ukraine Dr. Symonenko, Colleagues and Representatives of the SAIs members of EUROSAI, Ladies and Gentlemen, Let begin these words expressing my cordial congratulations to Chairman Dr. Symonenko and the Accounting Chamber of Ukraine for the organisation of this Conference, as well as my gratefulness for inviting me to participate in it. Regrettably I am not able to participate personally, but, nevertheless, I still wanted to participate somehow in its development as Secretary General of EUROSAI and President of the Spanish Court of Audit. The Conference that now begins takes place under the auspices of EUROSAI and it has counted on the cooperation of the EUROSAI Training Committee and the Secretariat of the Organisation. The EUROSAI Common Training Strategy approved in the VI Congress, held in Bonn (Germany) from 30 May to 2 June 2005, settles down among its objectives the performance of its own training activities; manifestation of which this Conference constitutes a clear expression. This Strategy also highlights the importance that for the promotion of training has the cooperation with other Entities and Organisations, especially with those ones that EUROSAI shares initiatives and interests; the use of the synergies derived of any training activity that can affect to its performance scope; as well as the support to the strengthen of the internal train ing strategies of each SAI and the mutual enrichment by means of the exchange of experi ences. All these actions, with full respect to the independence of each SAI to design its own strategy and to put it into practice. The Theme that this Conference will deal with, “The Role of the SAIs in Fighting Against Fraud and Corruption” was identified as one of the high priority topics for the SAIs Members of EURO SAI, fundamentally for those countries of Central and Eastern Europe. That way the Conference will contribute in great measure to the execution of the essential training objectives of EUROSAI.
8 WELCOMING ADDRESS
It is to the governmental authorities, to the Bodies and Forces of the State Security, to the Attorney General’s Office and the judges, as well as to the Parliaments in the implementation of their legislative function to whom corresponds to confront in a direct way, from their respec tive competence area, the fight against corruption and fraud in its different modalities, with the purpose of preventing it, reducing it and prosecuting it. The public financial entities, the organs supervising the markets; those responsible for the Financial, Tax, Customs Administrations and those ones in charge of External Transactions, as entities that corresponds to control in first instance the good operation of the system, must also collaborate in this process. Although it is true that most SAIs don’t perform a direct action in the planning and execution of the strategies and actions used in the fight against corruption and fraud, one can not ignore their important role as a support for that one. Indeed, SAIs are constituted in con trollers of second level in charge of verifying the adequacy, the effectiveness and the efficien cy of the organisation and the management developed by the authorities implied in the referred direct action. In the same way, they have to examine the sufficiency, coherence and degree of coordination of the internal or first level controls, and the effectiveness of their operating capacity. In the performance of their functions, SAIs will be able to detect concrete cases that reveal corrupt or fraudulent actions or plots developed in the framework of the management of the public funds or those cases that are detrimental for these funds, or that have been caused as a consequence of mismanagement or an inadequate supervision of the organisa tions or a wrong operation of the net of internal controls. The SAIs will direct its perform ance, likewise, to identify especially sensitive areas or sectors, facilitating this way the antic ipation of moral hazard that impacts negatively in the management, and impelling the assumption of responsibilities. It also corresponds to SAIs to inform Parliaments, Governments or Authorities to whom in each case the legislation establishes, on the irregularities and frauds detected in the course of the audit; on the shortcomings identified in the organisation, in the operation or the coordination of the management and internal control bodies; on the inadequacies or limita tions contained in the regulations themselves or in the practices developed that aid or harbour elements or stimuli that impact negatively in the management or that don’t eliminate the social or economic conditions that make these frauds possible. It is also the function of those ones to promote measures, regulations and practices aimed at the improvement and updating of the systems; aspect in which new technologies can play an important role. The coordination, the effectiveness of the action, joint performances and the interac tion of the managing and auditing entities, at regional, national and international level, become a key piece of the system; being the effectiveness, the efficiency and the economic rationality of the management of the control itself, a basic element given the multiplicity of entities that develop it as consequence of the integration and decentralization processes. There is not doubt that cooperation and the exchange of experiences are also essential to guide the performance of the SAIs at this point, as it is about to approach a phenomenon that frequently takes place without considering borders and that requires a joint action. I would just like to say thank you for you attention, advancing the success of the Conference, and to reiterate my congratulations to the Dr. Symonenko for its impetus and organisation.
9 INTOSAI
WELCOMING SPEECH THE CHAIRMAN OF THE INTOSAI GOVERNING BOARD, PRESIDENT OF THE STATE AUDIT OFFICE OF HUNGARY DR. ÁRPÁD KOVÁCS
Dr. Symonenko, Ladies and Gentlemen, Dear Colleagues, It is a great honor to have been invited to attend this prestigious international confere nce on the topical issues of the fight against corruption and the celebration that highlights the 10th Anniversary of the establishment of the Accounting Chamber of Ukraine. Dear Colleagues, As President of the State Audit Office of Hungary I would like to take the opportunity and lead up briefly to the universal issue that is in the focus of this meeting of audit professionals. I would also like to tell you that corruption is a key concern in Hungarian society and in the EU. The SAO of Hungary has a major role in tackling the scourge. Supreme Audit Institutions’ duties are not limited to safeguarding the economics of public finance. A more recent and increasingly decisive task is to investigate the effectiveness and expediency of public services in a broader sense, by taking into account longer term social and public finance interests, and not simply crude economic efficiency calculations. Based on this, it will be possible in addition to taking steps against corrupt practices, errors and actual felony to make prognoses, and to draw attention to harmful phenomena and the possibilities of ‘tapping’ the resources of public finance. I am convinced that we will have the opportunity to follow the different approaches SAIs are employing in fighting the corruption as watchdogs of our respective societies in the course of this meeting and I would like to wish you all success in this endeavour. As Chairman of the INTOSAI Governing Board and President of the State Audit Office of Hungary I would like to take the opportunity and briefly outline for you the accomplish ments INTOSAI has delivered in keeping up with the changes and challenges of our world.
10 WELCOMING SPEECH
As member of the international community of national SAIs you all are aware that INTOSAI, when established in 1953 provided an institutional framework for the work of national audit institutions. As a non governmental advisory organization of the UN, INTOSAI has already 186 members. As I have mentioned several times and on different occasion, I am convinced that the token of our success lays in co operation. This was the leading motive of the first INCOSAI 53 years ago, and the organization has been continuously promoting the exchange of experi ences and the strength of arguments, instead of using power ever since. The Accounting Chamber of Ukraine is proudly celebrating the 10th anniversary of the foundation of their institution. Having in mind this festive event you will understand that 50 years in the history of an organization also represents an important milestone. An anniversary prompts analyzing the accomplished results and serves as a starting point to look into the future. The significant changes going on in the world called for some necessary adjustments and transformation to make the International Organization of Supreme Audit Institutions fit to adequately respond to the challenges presented. I cannot deny that I am feeling especially proud, because the endorsement of the INTOSAI Strategic Plan 2005 2010 took place at the XVIII INCOSAI held in Budapest, in October 2004. The Strategic Plan reflects our core values: independence, integrity, professionalism, credibility, inclusiveness, cooperation and innovation. The Strategic Plan set goals, which constitute as the most important elements of the renewal of an organization. Although I believe that in the course of your daily work you may have met already with some aspects of the INTOSAI Strategic Plan 2005 2010, I would like to sum up the most important steps done in the course of implementing this plan. The most important proposals aimed at defining the goals that serve as the outstand ingly significant elements of the modernizing process. These were the following: Goal 1 is the elaboration and development of the Accounting and Professional Standards; Goal 2 includes the encouragement of the Institutional Capacity Building; Goal 3 is dealing with knowledge Sharing amongst the member organisations; and Goal 4 is designed to help not only to accomplish the objectives of the first three but to make INTOSAI a Model International Organisation. To ensure the necessary personnel and structural conditions to promote the implemen tation of the reforms we firstly created the Finance and Administration Committee that is now the coordinat ing body of INTOSAI’s reform process and its advisory organization in financial matters; secondly elected the Goal Liaisons responsible for the coordination of the aforemen tioned main goals; thirdly elected the chairmen of the Capacity Building Committee and the Professional Standards Committee; and finally elected the Director of Strategic Planning.
11 INTOSAI
As part of creating the structural framework of the new Strategic Plan our community also adopted the Terms of References of the Professional Standards Committee and the Capacity Building Committee. At the 56th Governing Board meeting to be held in Mexico City this November we will have the opportunity to summarize the activities of the new committees as well as their pro fessional plans for the immediate future. The XIX INCOSAI will serve as a forum to take into account the progress of the Strategic Plan and will also offer an opportunity to discuss togeth er the further directions we should concentrate in keeping our international organization flexible and responsive to the new challenges we all are facing.
Ladies and Gentlemen, Dear Colleagues, Although the purpose of my address was to tell you about the importance of successful ly adjusting INTOSAI to the challenges posed by the 21st century, I cannot avoid saying a few, appreciating words on the occasion of the 10th anniversary of the establishment of the Accounting Chamber of Ukraine. As Chairman of INTOSAI Governing Board I would like to assure you that the inter national auditing community is familiar with, and recognizes your professional activities. The Accounting Chamber of Ukraine has done an exemplary work in the course of pursuing its declared aim that is to assist the audited organizations and give a reliable and true picture for the public about the utilization of public funds. The INTOSAI community recognizes your active participation and contribution to both the world organization as well as its regional working group, EUROSAI. Reverting to my role as President of the State Audit Office of Hungary I should also mention the successful and effective cooperation between our SAIs in the field of parallel audit. Having the privilege of addressing this prestigious forum I would like to wish you, Dr. Symonenko, as well as your excellent staff further successes for the future.
Thank you for your attention.
12 EUROSAI
WELCOMING SPEECH THE VICE PRESIDENT OF THE EUROSAI GOVERNING BOARD, PRESIDENT OF THE SUPREME CHAMBER OF CONTROL OF POLAND MR. MIROSłAW SEKUłA
Chairman Dr. Symonenko, Ladies and Gentlemen, Participants of the Conference, Dear Guests, It is a great honour for me to be here today. During the meeting of the EUROSAI Governing Board in Reykjavik which took place last week, Professor Dieter Engels, President of the German SAI, who unfortunately cannot be with us today, asked me to forward his warmest regards to Chairman Dr. Symonenko and all the colleagues, and to tell you a few words on his behalf. We have met today in Kyiv for two important reasons. The first is the International Conference dedicated to the Role of Supreme Audit Institutions in fight against fraud and corruption. The theme of the Conference is extremely important, as it is one of the main tasks of our institutions, and, at the same time, it is one of the topics that are most intriguing to public opinion. As we should not only audit public spending, but we should also try to pre vent situations that may encourage illegal activities. The societies of our countries have con fidence in their Supreme Audit Institutions, thus great responsibility rests with us in this respect. But we will be discussing this matter over the next two days. I hope that the Conference will allow us to exchange experiences and opinions, and that it will provoke many stormy discussions resulting in conclusions that may be used in the future. I would like to take this opportunity to thank the hosts of the Conference, the Accounting Chamber of Ukraine, Chairman Dr. Symonenko and his collaborators, for the invitation to Kiev and for the effort they have made to organize this fantastic event. Let me once again, on behalf of the EUROSAI President and on my behalf, wish all of us many fruitful discussions, as well as new, interesting experiences which we will be able to use in our audit work.
Thank you for your attention.
13 THE ACCOUNTING CHAMBER OF UKRAINE
ROLE OF THE ACCOUNTING CHAMBER OF UKRAINE IN FIGHTING AGAINST FRAUD AND CORRUPTION
DR. VALENTYN SYMONENKO CHAIRMAN OF THE ACCOUNTING CHAMBER OF UKRAINE
Dear participants of the Conference! Dear guests, colleagues, friends! I am honored to speak before you and represent for discussion a number of ideas related to the problem of corruption and the role of Supreme Audit Institutions in fighting against this negative phenomenon. Increasing comprehension of this problem (which is witnessed by the number of confer ences held worldwide) by the independent public financial control in modern democratic socie ty is induced by the new content of basic dominants of the modern world financial and econom ic system and understanding that corruption is one of the major obstacles for its development. Corruption exists in all regiments, both at the level of government and in all spheres of social life. It is a social phenomenon of a global character. It is more or less inherent to most countries of the world and becomes quite general. This was addressed in the resolution of VIII UN Congress on “Corruption in the State Management” in 1990. However historic development testifies that the most awful forms of violations in the sphere of finance take place in those countries, which undergo political, economic and social changes. Ukrainian society over the last 15 years undergoes such development. Evolution of this process resulted in the fact that in various international surveys Ukraine is repeatedly men tioned as one of the most corrupt country in the world. According to our assessments, nowa days corruption represents a real threat to the national security of Ukraine. Surveys of the Accounting Chamber of Ukraine, based on its expert examinations, analyses, audits reveal consolidation of different types of relations which are burdensome or do not comply with the principles of competitive market economy and legal community.
14 ROLE OF THE ACCOUNTING CHAMBER OF UKRAINE IN FIGHTING AGAINST FRAUD AND CORRUPTION
There are gaps in actual practice between the effective legislation and real economic environ ment. “The rule of law” is still observed to the extent where it is politically and economical ly convenient. An active part of the population continues to operate in “conventional” econ omy, disregarding laws and official regulations and governed by dealings with those, who posses real power and authority. In our opinion the main problem here consists in the necessity to create and main tain in our country the socially responsible and oriented on public objectives state admi nistration mechanism. Today it is not clear who and in what manner is responsible for resolving key issues of social and economic development. There is still overlapping of functions for different bodies of executive power, whose activity is characterized by weak responsibility, executive discipline in exercising of their obligations, legal regulations and resolutions. Furthermore we should also take into consideration the constant fluctuation of eco nomic course, seeking new ways to achieve vaguely defined objectives. In confirmation of these conclusions I would like to quote the Nobel laureate in eco nomics Mr. J. Tobin: “Unfortunately, professional advisers in administration of transition of post communist countries to market capitalism economists, financial experts, business managers, politicians encouraged the emergence of false expectations. The advices simply suggested: dismount instruments of communist control and regulation, privatize enterprises, stabilize finances, remove governments and watch market economy grow from ashes. This turned out to be more complicated. In euphoria these advisors often disregarded that eco nomic victory in a war of systems was achieved not by ideologically pure free market regimes, but by “mixed economies”, where state played the significant if not the decisive role. They also left out of account that rather complicated structure of legislation, institutions and cus toms, which were formed through many ages in the capitalist states provide most firm grounds for modern economic systems”. We believe that in these specific conditions the objective of the Accounting Chamber of Ukraine in approaching the whole complex of issues to fight fraud and corruption is to pro vide total financial control in all spheres and at all stages of budgetary processes and applica tion of public funds, public property, which should significantly scale down opportunities for unlawful activities of officials in the process of public financial resources disbursement; ensure maximum transparency in the process of formation and application of public funds, due informing of public and respective governmental authorities concerning proper and effective usage of public property as well as inefficient administrative decisions. Resolving objectives assigned the Accounting Chamber of Ukraine, in our vision, quite effi ciently interacts with governmental agencies in two directions regulatory and organizational. Ukraine de jure has the system of anti corruption legislation. It contains a number of regulations both basic, for all spheres of social life, and those dealing with specific spheres of economy or public relations. However all of them were adopted in different times by differ ent authorities, in some cases unsystematically, without proper scientific substantiation resulting in conflicts and inconsistencies. Taking this fact into consideration in each our report based on the results audit we make proposals to our Parliament and the Cabinet of
15 THE ACCOUNTING CHAMBER OF UKRAINE
Ministers suggesting the necessity of more balanced approach to this issue and reconsidera tion of certain provisions of the effective national anti corruption legislation in accordance with the norms of the international law and bringing into practice the compulsory mechanism of anti corruption expert examination of legal instruments and their projects. Besides, our analysis of the regulatory framework taking into account the results of control measures testifies that many legal acts are focused on the elimination of corruption and shadow economy consequences instead of its causes prevention. Among basic factors impeding to resolve the problem of corruption we deem necessary to point out the following: 1. Unclear, inconsistent, contradictory legislation and bylaws, regulating economic relations. In most cases it provides fertile ground for corruption both in relations within gov ernmental agencies and between them and business environment, as well as within business environment itself. 2. The lack of the unified, approved anti corruption strategy. 3. Incomplete system of taxation for both physical and legal entities, inducing shadow economy and corruption. 4. Actual lack of real political will in determined and overall fight against corruption. Mostly it results in declarations, slogans and small, unsystematic actions against separate cases of bribery. 5. Actual lack of real measures and actions taken by mass media, government agencies, reputable nation representatives towards establishment of irreconcilable public attitude to the very phenomenon of corruption, towards normal attitude to corruption as unavoidable occurrence of everyday life existent on the level of mentality. These factors are systematic and therefore require comprehensive resolution. Still there is one if not the main, fundamental, inherent to the very human nature and mentality, personal factor. Its occurrence depends on the historic and economic customs of each country. In countries with transitional economy personal factor plays almost dominant role in the system of state government. This occurs when officials provide benefits to the commer cial entities in order to obtain personal profit; use their official status to “pump” public funds to commercial entities using counterfeiters and relatives. In this case corruption cases at the level of governmental agencies are “measured” by the authority of an official in accordance with duties regulating management of public funds. Such opportunities appear predominantly when “encountering” most potentially profitable from the point of view of corruption privatization services, licensing and assignment of quo tas for export transactions, budget transfers in regions, bank crediting, granting of govern ment subsidies and government procurements. I hope you will agree that this determines the nature of the integrated phenomenon for the countries with transitional economy: use of public funds and property as one of the ways for accumulation of initial capital by civil servants and related commercial entities. In order to address this problem a number of all national measures were elaborated, a number of laws were adopted providing advanced training of civil servants; delimitation of functions, updating
16 ROLE OF THE ACCOUNTING CHAMBER OF UKRAINE IN FIGHTING AGAINST FRAUD AND CORRUPTION the range of duties and decreasing the influence of personal, subjective factor; enforcing inter nal financial control, which mainly became the instrument of pressure at business and citizens; increasing the role of public control over civil servants´ activities. This work is absolutely cru cial. However we see the resolving of this problem in establishment and maintenance of the unified system of public financial and economic control, as a subsystem of government. And the key role here should rest upon the constitutional, independent external supervising agency. In terms of the place and role of the Supreme Audit Institutions, we think that the main task for us should not consist in detecting general violations of specific agencies (having their own intra departmental control) but study of state mechanism penalties character in the course of implementation of all national programs, resolving of nationwide problems through effective usage of all public resources. This task requires determination of fundamental, causal factors resulting in violations, infringements and inconsistencies of the national legislation. An important sphere of cooperation of the Verkhovna Rada of Ukraine and the Accounting Chamber of Ukraine is the improvement of legislation. Provisions of the acting Law of Ukraine On the Accounting Chamber of Ukraine empowers the Accounting Chamber, exercising which, under commission of the Verkhovna Rada of Ukraine, to per form expert examination and provide conclusions on various draft laws, for instance, cover ing fiscal and monetary spheres, specific all nation programs. This function is essential espe cially in the period of formation of the unified public financial audit system. In our proposi tions to the Parliament we reflect our vision of ways for improvement of fiscal and monetary legislation, placing emphasis onto specific updates to the legislation related to fighting against fraud and corruption. New positive impulse in this effort became the decree of the Chairman of the Verkhovna Rada of Ukraine Mr. Oleksandr Moroz recently adopted by the Parliament, stating that reports of the Accounting Chamber based upon the results of control measures uncovering significant violations of law and improper resource management, suggestions on the updating the legislative base should be considered by the relevant Committees of the Verkhovna Rada of Ukraine, and most urgent ones at sessions of the Parliament of Ukraine including mandatory hearings of the chief executives from ministries and agencies, being the subject of such control measures. In our opinion this should increase the productivity and efficiency of work of the Accounting Chamber. An integral part of conclusions and propositions implementation process based on audit results is close collaboration with law enforcement bodies. Prompt remuneration of damages inflicted to the nation, prevention of corruption related crimes, misappropriations and “money laundering”, as well as implementation of other conclusions of the audit insti tution based on the results of specific inspections, fully depends on the reaction to the mate rials provided by the Accounting Chamber. According to the Law of Ukraine On the Accounting Chamber of Ukraine we are enti tled to refer the results of audits, expert examinations and investigations uncovering cases of embezzlement or other law infringements to law enforcement bodies. In 2006 33 cases based on the results of control and analysis measures, and 17 cases of them by the decision of the Collegium of the Accounting Chamber, were referred to the
17 THE ACCOUNTING CHAMBER OF UKRAINE
General Prosecutor´s Office of Ukraine. Most uncovered violations in these cases clearly had facts of corruption. This concerns the audits of the application of public funds from the State Budget of Ukraine for replenishment of tangible assets in the state material reserve; construc tion of housing for military staff; audit of the Ministry of Defence of Ukraine covering issues of usage and management of real estate property as well as application of public funds obtained from its disposal; audit of the efficiency of application of funds from the State Budget of Ukraine appropriated to the Ministry of Health of Ukraine for the centralized pro curement of equipment, medical products and ambulance vehicles etc. At the same time quite often the referred cases were lost when processed by such agen cies, or we were receiving mere formal answers. In order to avoid such situations and to enforce supervision by the Accounting Chamber over implementation of referred cases it was agreed and adopted proper Procedure of collaboration between the General Prosecutor´s Office of Ukraine, the Ministry of Internal Affairs, the Security Service and the Accounting Chamber, regulating the referral and processing of cases based on the results of audits and detected violations. Adoption of this document somewhat improved the situation with execution efficien cy. However it did not solve the problem fundamentally. We are confident that this issue should be resolved in a lawful way. We need law instead of bylaws. Only this approach may insure the unavoidable prosecution of corruption, in full measure implement the conclusion of the Accounting Chamber. We have to break the existing stereotype that corruption exists while no one is corrupted. And here, in the first place, we require, complete openness, transparency at all stages of performed audits, complete change of the public conscience towards uncompromising attitude to all cases of corruption. And in conclusion I would like to emphasize that such conferences, which took place and will be held in future are supposed to determine the correct operational methods for the Supreme Audit Institutions in regard of prevention and eliciting cases of fraud and corrup tion as it was figuratively written about the importance of right choice by famous philosopher of XVI century Francis Bacon: “Lame cripple following the right path can outfoot a steed running in wrong direction. Moreover the faster gallops the steed astray the further is he left behind by the cripple”. So let me express my confidence that we will manage to choose cor rect system of measures and recommend to apply them in our practical activities. I once again wish all the participants of our forum fruitful and successful work for improvement of public funds´ supervision system in order to fight against fraud and corruption.
Thank you for your attention!
18 SUB THEME I THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION ACCOUNTS CHAMBER OF THE RUSSIAN FEDERATION
DR. SERGEY STEPASHIN CHAIRMAN OF THE ACCOUNTS CHAMBER OF THE RUSSIAN FEDERATION, CHAIR ON THE I PLENARY SESSION
Dear colleagues! Please, allow me cordially congratulate our Ukrainian colleagues and also our good friend Valentyn Symonenko with first round anniversary in their history. I have to say that in Ukraine, the Accounting Chamber was founded just one year later than in Russia, and the problems in formation of independent external government audit institutions in our countries are very much alike. Therefore, it is natural that all these years we were actively working together, helped each other in difficult times, and participated in resolving key issues of coop eration between our nations. And despite not always unclouded political relationships between Russia and Ukraine lately, cooperation between our audit institutions was always based on principles of mutual trust and respect of each other’s interests. Positive experience of cooperation between SAIs of the Russian Federation and Ukraine confirms yet another time one simple truth. Sister nations who for centuries lived together are very close in their culture, language, and mentality and therefore can and should find constructive solution of any problem no matter how acute it is. And I believe that today there are all preconditions for further strengthening of coop eration between Accounting Chambers of Russia and Ukraine. Creation of the system of power based on principles of parliamentarism and respect of interests of all layers of society creates basis for the increased role and significance of independent external government audit institutions. So, our Ukrainian colleagues now have possibility both for more active partici pation in solution of important social and economic tasks of their country and for even more fruitful cooperation with their foreign colleagues including those from the CIS countries. Accounting Chambers in the post Soviet countries are still very young. Last year, the Accounts Chamber of Russia commemorated its tenth anniversary. In April of this year we commemorated the similar anniversary in Kazakhstan. At the same time, we know examples of countries where history of independent audit institutions goes back for centuries. As for
20 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Ukraine, it managed to create virtually from the scratch, during very small time negligible from historical point of view a working system of independent government financial control which meets main criteria of the Lima Declaration of INTOSAI. This undoubtedly should be credited to our hero of the day, Valentyn Symonenko who was the pioneer of creating Accounting Chamber in Ukraine and headed it from the very beginning. But life doesn’t stand still. The CIS countries have for most part already overcome the phase of extensive development of market relations. Today, the main task is to increase glob al competitiveness of our economies, and also increase the role and significance of social component of economic policy. After all, any transformations make sense only if in the end they can improve the life of our people. In Russia, this role is played by national projects whose main task is the improvement of quality of life, creation of conditions for increasing the level of medical and educational services provided to population, mass construction of affordable housing, and improvement of situation in the agriculture. But at the same time, it’s also a some sort of testing ground for use of modern “management by objectives” methods of budget financing and development of technologies of efficient utilization of budget funds in the highest priority directions. Having developed appropriate mechanisms and created the system which ensures not only target but first of all really efficient utilization of budget funds, one could bring up the issue of further increase of government expenditures on the solution of the most significant tasks of the country’s development. As a matter of fact, national projects serve as a test site for new approaches which in the perspective will allow transition to substantially more efficient budget and financial policy and manage results, not expenses. Main obstacle on the way towards solution of this task is the problem common for all post Soviet states: insufficiently high quality of state management caused by corruption among the other reasons. To large extend all this is a consequence of breakdown of once com mon for all us state and system of centralized management of economy and followed after that initial accumulation of capital due to redistribution of state owned property in favor of private individuals. During this period, a quite unique model of interaction between the state and business was formed in the post Soviet countries, which to a large degree was based on merger of corrupted officials and dishonest businessmen. World experience shows that corruption can be defeated only by painstaking, planned for many years work on development of transparent budget and financial system. One of the most important aspects here is creation of efficiently functioning system of independent gov ernment financial control which would’ve covered the entire territory of the country, as well as all levels of budget system. Corruption occurs first of all in zones inaccessible for external government control. At the same time, the task of reducing administrative pressure on the economy from the very audit institutions has to be solved as well. Unfortunately, these problems weren’t completely solved neither in Russia nor, as far as I know, in Ukraine. We are yet to adopt the Concept of creating the single government audit system and also the appropriate base law. Accordingly, there is no clear division of func tions and responsibilities between internal and external government audit institutions which often results in doubling of their activity. As a result, a situation occurs when certain budget
21 ACCOUNTS CHAMBER OF THE RUSSIAN FEDERATION receivers are constantly finding themselves under the pressure of different controlling author ities while the others are de facto left outside the zone of government audit. To resolve this situation, we in Russia are working together with the Parliament and executive authorities on the new edition of Budget Code which should clearly divide the sphere of responsibility and authority of different audit institutions. The next important aspect is improvement of legislation in order to increase efficiency of the institute of punishment for perpetrated offenses in budget and financial sphere. For example, because of the loopholes in Budget Code and Code of Administrative Offenses in Russia the number of offenses do not supported with real sanctions. As a result, fundamental principle of law, inevitability of punishment for perpetrated offenses, is not being observed. We take this aspect into consideration as well in our work on the new edition of the Budget Code. By the way, at the same time we will also change the procedure of imposing adminis trative responsibility for such widespread offense as utilization of funds for not intended pur pose. According to practice adopted in many European countries, responsibility for it will be borne not by organizations as a whole but by managers who allowed that to happen. Our experience shows that in many cases financial violations are caused not by neg ligence of certain individuals but the imperfect legislation, collision of different laws which allow for misuse of budget funds with impunity. That’s exactly why lately we give significant attention to development of proposals concerning improvement of tax and budget/finan cial laws. Thanks to our efforts, the Russian law was changed by introducing amendments which allowed us “close” domestic offshore zones using which the taxpayers underpaid tens of bil lions of rubles to the budget. But the problem of using foreign offshore zones for the purpose of the so called optimization of taxation remains acute. During our audits we discovered numerous facts when the largest exporters concluded export contracts with affiliated persons located in foreign offshore zones on obviously understated customs value. All this results in the reduced taxed base and “grey” export of capital abroad.
22 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
In Russia, as well as the other post Soviet countries, the law which regulates market rela tions remains to a large degree “raw” and insufficiently designed from the point of view of its potential amenability to corrup tion. That’s why we in Russia give significant attention to analysis of our laws on their compliance with anti corruption standards. For that purpose, State Research and Development Institute of Systemic Analysis of the Accounts Chamber had devel oped a special method based on the system of most typical and formal manifestations of the corruptibility of legal norms. It may include, for example, the presence of referring legal norms in legislative acts, broad possibilities for departmental rule making, collision of legis lation, unreasonable requirements to individuals when they exercise their rights, and other factors. This method was tested on a number of legislations and is already used (not quite widely, though) by both law makers and the expert community to improve effective laws. Corruption is often caused not by imperfect laws only but by the absence of clearly established system which regulates and monitors their fulfillment determined by subordinate legislation. For example, our audits showed that numerous violations discovered in sphere of procurements for the Ministry of Defense and other security agencies were caused above all by systemic reasons. They include first of all the absence of unified order system and separate, preferably civil body of state power which could’ve organized it. It is of no accident, there fore, that the President of the Russian Federation Vladimir Putin noted in his Address to the Federal Assembly an urgent need in implementation of these measures to fight against cor ruption in military environment. At the same time, it is well known that even the best laws and perfect legal mechanisms bring results only when they’re used in efficient manner. To increase effectiveness of audits and eliminate discovered facts of financial violations the Accounts Chamber gives significant attention to the development of its cooperation with law enforcement authorities. During last year alone, we conducted 48 audits as part of the joint plan of controlling measures with par ticipation of law enforcement officers from the Federal Security Service, the Ministry of Internal Affairs, the Office of General Military Prosecutor, and the Federal Customs Service. In total, in 2005 we sent 93 materials to the law enforcement authorities upon which they opened 257 criminal cases. In addition, prosecuting authorities initiated 1129 cases of admin istrative violations. To increase the efficiency of fight against corruption, it is also necessary to improve measures on combating the accompanying violations, first of all money laundering.
23 ACCOUNTS CHAMBER OF THE RUSSIAN FEDERATION
Considering transnational nature of this type of financial violations, the Accounts Chamber gives significant attention to the development of international cooperation in this sphere. Thus, at the beginning of June the Accounts Chamber of the Russian Federation held repre sentative international symposium with participation of representatives of Supreme Audit Institutions from the number of countries, as well as the UN Commission on fight against illegal drug trade and crime, the World Bank, and Interpol. We believe that further improve ment of legislation is required in this sphere as well. For example, it could’ve been provided for banks’ mandatory notification of competent authorities about movement of funds on bank accounts of officials from group A. The issue of fight against corruption is many sided and quite complex. But at the same time we shouldn’t forget that its fundamental cause if often insufficient degree of develop ment of civil society institutions and the absence of public interest in how the politicians they elected are working and how carefully the funds people pay to budget as taxes are spent. That’s why it’s important for independent government audit institutions to work in full com pliance with fundamental norms of the Lima Declaration: maximally openly and publicly, and inform the society about facts of corruption that they discovered. We have to make sure that we overcame public apathy and show them on specific examples that fight against cor ruption in our country is indeed waged. In conclusion, I would like congratulate our Ukrainian colleagues one more time with the jubilee and wish them further success in fight against corruption and other acute problems for the benefit of civil peace and prosperity of Ukraine.
Thank you for your attention.
24 NATIONAL SECURITY AND DEFENSE COUNCIL OF UKRAINE
FORMATION AND IMPLEMENTATION OF NATIONAL ANTI CORRUPTION POLICY IN UKRAINE TODAY
MR. YURIY PETROCHENKO DEPUTY SECRETARY OF THE NATIONAL SECURITY AND DEFENSE COUNCIL OF UKRAINE
Dear participants and guests!
First of all, please allow me on behalf of the Acting Secretary of the National Security and Defense Council of Ukraine Volodymyr Horbulin, the NSDCU staff and me personally join congratulations with the 10th Anniversary of the Accounting Chamber of Ukraine. 1. Considering the topic of our conference: ”The Role of Supreme Audit Institutions in Fighting Against Fraud and Corruption,” I have to note that the impact made by these bodies, in particular, the Accounting Chamber of Ukraine, on overcoming corruption in Ukraine is hard to overestimate. There is a widespread opinion among the professionals who combat the criminals that any offense committed for lucri causa shall leave a “financial trace.” It is especially true in case of offenses committed by government officials, in particular on issues of spending budg et funds. Often the inefficiency of this activity borders the blatant plundering of the state. Not every expert can find out where ends the mismanagement and begins the crime – embezzle ment of state funds under the cover of inventive schemes. An independent Supreme Audit Institution, the Accounting Chamber, is able to provide impartial and objective evaluation of acts of state authorities based on the audit results and pro pose the ways to overcome certain negative processes and phenomena which abet corruption. In its work, the NSDCU staff many times had used materials provided by the Accounting Chamber to examine issues which threatened or challenged national interests of Ukraine. Thus, the analysis performed by the Accounting Chamber regarding expediency of creating the Uniform State Automated Passport System (USAPS);
25 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
activity of criminal executive system (State Department of Ukraine for the Enforcement of Punishment); issues of the efficiency of state authorities when performing operations with confiscat ed and ownerless property, etc. became the base for materials prepared for discussion at the NSDCU meeting. It’s worth noting that high expert level of this research allows discover and terminate criminal schemes of laundering government funds. All this points to the fact that as of today, the Accounting Chamber of Ukraine is an efficient factor of formation and implementation of national anti corruption policy. 2. Considering the competence of the government authority which I represent, I will try to describe in general terms the issues of formation and implementation of national anti corruption policy in Ukraine today, and also express my views of the role of Supreme Audit Institutions in these processes. Currently, formation and implementation of efficient national anti corruption policy is an acute problem related, among the other things, with the need in ensuring national secu rity. In Ukraine, we long abandoned the stereotypes that corruption may be countered with coercive methods only, by law enforcement authorities. Back in 1997, decrees of the President of Ukraine approved appropriate concepts of fight against corruption which were implemented by adoption of annual plans by the Cabinet of Ministers. Nevertheless, despite local successes all these measures couldn’t change the sit uation in principle. Nevertheless, we can maintain that today, political will of the country’s leadership – the President, the Verkhovna Rada, and the Cabinet of Ministers of Ukraine allowed us make significant steps towards creation of conditions for systemic decrease of the level of this phe nomenon. Implementation of efficient anti corruption policy was recognized as the priority direction in gaining people’s trust in the government. It’s worth mentioning that carrying out of efficient anti corruption policy was helped by significant strengthening of real democratic institutions: freedom of mass media, active participation of civil society, and creation of uncompromising atmosphere in the country towards corruption. And all this already brought first results. It’s seems appropriate to present internation al evaluations of the state of fight against corruption in Ukraine. On international level Ukraine has reputation of a country which experiences substantial problems in overcoming corruption. At the same time, foreign institutions (Transparency International) noted posi tive trend in growth of the so called ”corruption index” (from 2.2 in 2004 to 2.6 in 2006) which nevertheless points at the correctness of direction we chose. Today, Ukraine undertakes real steps towards fulfillment of its international obligations regarding ratification of main international conventions in sphere of fight against corruption and introduction of their norms in national laws. Thus, in September the President of Ukraine sent appropriate draft legislations to the Verkhovna Rada of Ukraine, and we hope that they will be reviewed in the nearest future.
26 NATIONAL SECURITY AND DEFENSE COUNCIL OF UKRAINE
In support of legislative initiatives of the President of Ukraine in this sphere, different political forces reached agreement during signing of the Universal of National Unity (para graph 11). It creates powerful political support of the chosen course. 3. We hope that the NSDCU staff was to a certain degree involved in this process as well. During 2005, an Interdepartmental Commission of the NSDC of Ukraine on Complex Solution of Issues in Sphere of Fighting Against Corruption was created and showed efficient performance. In particular, during its meeting held on February 27, 2006 the Commission reviewed the issue of state of preparation of the draft National Strategy and Action Plan on Fight Against Corruption. Also, the NSDCU staff worked on the issue of creation of specialized anti corruption body within the framework of Interdepartmental Commission on Reformation of Law Enforcement Authorities. We studied international experience, engaged different experts and scientists, and worked together with the Ministry of Justice. We devised a draft of Conceptual Principles of Reforming Law Enforcement Authorities examined during meetings of the National Security and Defense Council. It became the basis for the document which the President of Ukraine approved by his Decree on September 11, 2006. The concept of overcoming corruption in Ukraine “On the Way Towards Honesty” shall be regarded as systemic political document which forms the foundation of national anti corruption policy. The goal of this strategic document devised considering international standards is determination of main directions in activity of state authorities and civil society in order to diminish negative influence of corruption. In fact, the Concept is a methodological basis for the anti corruption activities of the state. This document covers the following areas: legislative reform which provides for clear division of authority between bodies of power, improvement of elective procedures and state service, separation of business from power, specification of definition of “corruption” and “corruption related activity” and inevitability of punishment for corruption related offenses; cooperation of law enforcement authorities with government institutions and insti tutes of civil society; involvement of broad public in monitoring of the state of corruption in the country and prevention of corruption. As of today, our main task is the efficient implementation of this document, namely: adoption of appropriate action plan by the Government and creation of specialized anti cor ruption body which would’ve ensured coordination of activity of law enforcement authori ties, criminal prosecution of corrupted related offenses (especially in part pertaining to cor ruption of high ranked officials), and also prevention of corruption in all its forms. In the nearest future, the issue of implementation of the concept of overcoming corrup tion in Ukraine, adoption of the action plan, and creation of specialized anti corruption body will be discussed at the meeting of the National Security and Defense Council of Ukraine.
27 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Although the Concept of combating corruption “On the Way Towards Honesty” is designed first of all for its implementation by bodies of executive branch of power, I believe that the Accounting Chamber of Ukraine shall be involved into implementation of the national anti corruption policy. The Verkhovna Rada of Ukraine represented by this institu tion has a unique mechanism of detecting corruption related risks which should be used to the fullest extent possible in combating this contemptible phenomenon. Let me express opinion that mechanisms of participation of Supreme Audit Institutions in the fight against corruption and the practical aspects of this activity should become the subject of study and discussion at this representative conference.
Thank you for your attention.
28 SECURITY SERVICE OF UKRAINE
IMPORTANT ISSUES OF FIGHTING AGAINST CORRUPTION AND WAYS TO RESOLVE THEM
MR. VALERIY PIDBOLIACHNY DEPUTY CHAIRMAN OF THE SECURITY SERVICE OF UKRAINE
Today, Ukraine undergoes social and political changes and experiences fundamental reconstruction of social, state, and economical foundations which results in the scale, specifics, and dynamics of corruption in the country, level of which, according to expert estimates, is already threatening the national security and democratic development of our country. Said negative phenomenon poses substantial obstacle to the development of our soci ety including integration of Ukraine into European and Euro Atlantic community. Therefore, the country’s leadership named uprooting of corruption on all levels of state power and administration as one of the top priorities in its activity, and is fully determined to carry out this task. Today, people in Ukraine understand that fight against corruption requires a complex of actions on the national scale in which law enforcement component plays important role. According to Ukrainian law, direct fight against corruption is waged by specialized divi sions of the Ministry of Internal Affairs, tax militia (police) of the State Tax Administration, the Security Service, and prosecuting authorities, and also military law enforcement services of the Armed Forces of Ukraine. Lately, these institutions have significantly intensified their activities in counteracting corruption in all spheres of social life. Thus, in 2004 Ukrainian law enforcement authorities have discovered over 4.5 thou sand facts of administrative corruption in total, in 2005 – over 6 thousand, and during first eight months of the current year this index had already exceeded the 2004 level. The Security Service of Ukraine as a special task law enforcement authority is also involved into implementation of measures aimed at prevention of corruption, restoration of lawful rights and interests of individuals and legal entities, and liquidation of consequences of
29 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION corruption related actions. The President of Ukraine named fight against corruption as one of the priority tasks of the Security Service. Every year, special units of the Security Service of Ukraine discover about one third of corruption related offenses (from the total number of such offenses committed in Ukraine) and arrest hundreds of government officials and other persons authorized to perform func tions of the state at the crime scene when they were receiving bribes. At the same time, more and more often the public asks this question – what does this trend mean: growth of corruption or improvement in work of law enforcement authorities? And if the indices are growing, why the scale of corruption still remains substantial? Indeed, the experts believe that the level of corruption is not decreasing yet despite intensification of activity of law enforcement authorities. Moreover, in addition to classic cases of corruption, such as bribe and receipt of other material benefits, new and more elab orated forms are constantly appearing. For example, facts of blatant lobbying of interests of certain private structures by the offi cials and provision of assistance in their commercial activity became quite widespread today. As of today, this form became dominant and hard to detect for law enforcement authorities. Ukrainian law enforcement authorities counteract constant improvement by criminals of mechanisms of their illegal activity and their adaptation to changes in law with the offen sive position, close cooperation, constant monitoring of situation, and informing the coun try’s leadership about the most important issues in this sphere. At the same time, I’d like to emphasize (and the expert conclusions and international experience prove it) that coercive measures of overcoming corruption alone cannot ensure cardinal decrease of its level. Despite being an important component, activity of law enforce ment authorities is aimed first of all at solution of local tasks related to detection and bring ing to responsibility persons who committed corruption related offenses. Fight against corruption will be successful only if it has complex nature, clear set of pri orities, covers as many spheres of the country’s functioning as possible, is being waged with out interruption, and remains in the center of attention of not only the state but the broad public as well. At the same time, given the scale of corruption, the emphasis should be made on liquidating the reasons that cause corruption and not on the one off actions against its specific manifestations. To uproot the main sources of corruption, it is necessary to systematically engage all state and public institutions, because corruption isn’t the problem of crime but the problem of rela tions in the society. The state must combat corruption with support of efficient system of pre venting such manifestations based on detection and liquidation of their social preconditions and consequences and ensuring criminal responsibility regardless of official rank or social status. The experts of the Security Service and other Ukrainian law enforcement structures believe that this system should be based on the most important factors which ensure success ful fight against corruption – development of efficient and transparent state service; separa tion of business from power; improvement of national anti corruption laws; increasing effi ciency of activity of law enforcement authorities, audit institutions, and judicial system; broad involvement of the society in active fight against corruption.
30 SECURITY SERVICE OF UKRAINE
We think that in order to wage such fight, first of all it is necessary to accelerate the process of reviewing and approving the system creating documents in this sphere. The appropriate work is already being done. In particular, Decree of the President of Ukraine dated September 11th of this year approved the Concept of overcoming corruption in Ukraine “On the Way Towards Honesty” which determines main directions of overcoming corruption. Experts of the Security Service of Ukraine took an active part in preparation of proposals to the aforementioned Concept. Also, there are several draft legislations initiated by the President of Ukraine currently pending their consideration by the Parliament; these legislations are aimed at combating this phenomena which in particular provide for the fol lowing: introduction of punishment for legal entities for corruption related offenses commit ted by their employees, broader interpretation of the meaning “bribe,” increased responsibil ity for bribe taking by the officials starting from the Deputy Minister and up, i.e. the officials who thanks to their official position may cause substantial damage to the interests of the country and the society. But all this is just a beginning of the extremely important for both the state and the soci ety process of improvement of anti corruption law. Today, the appropriate normative legal base is comprised of over 100 Laws of Ukraine, decrees and directives of the President of Ukraine, resolutions of the Cabinet of Ministers, and sectoral normative documents. At the same time, the law does not provide even defini tion of the very meaning of criminally punished corruption related offense. As a result, the law provides only administrative responsibility for corruption related actions of state officials according to the Law of Ukraine “On Fight Against Corruption,” which is an inadequate response to committed offense or damage caused by it. There is a need in introduction of legislative innovations, first of all in part pertaining to bringing national law into conformity with international standards in sphere of fight against corruption as determined in Strasbourg conventions of the Council of Europe on cor ruption in context of criminal and civil laws and the UN Convention against corruption (which Ukraine, by the way, had already signed). In our opinion, implementation of provi sions of these Conventions has to be done gradually and carefully, harmoniously combining national laws with international. At the same time, after appropriate documents will be prepared it seems expedient to combine them and create a single basic normative legal act – an Anti Corruption Code of Ukraine. As previously mentioned, goal of the activity of law enforcement authorities is solution of local tasks pertaining to detection and bringing to responsibility the persons who committed corruption related offenses. At the same time, it remains an important component of the national anti corruption strategy which has to be more efficient and meet today’s requirements. Currently, there is one issue being keenly discussed: how Ukrainian law enforcement system should be reformed, in what direction, and what will it give to each individual and the country on the whole? Experts of the Security Service of Ukraine believe that the main objective of this reform should be creation of efficient organizational structure of bodies fighting against corruption
31 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION in Ukraine with clear division of their functions and authority. It is important that there is a body which would’ve performed a coordinating role and would’ve been a leading authority on issues of fighting against corruption and official crimes. It’s not necessarily should be the Security Service or the Ministry of Internal Affairs. Perhaps it is expedient to create even an independent body of executive power with special status. Creation of such specialized agency will allow concentrate all directions of anti corruption measures within one institution, clearly define responsibilities of this agency and its head for the state of affairs in this area, ensure real possibility of conducting independent investigations, and eliminate unhealthy competition and doubling in work of different law enforcement bodies which is corroborated by the experience of other countries. An important component of our activity is expansion of international cooperation in fight against corruption. The Security Service is trying to add new impulse to this process. In particular, today we work quite fruitfully with foreign partners and appropriate international structures on issues of fighting transnational crime, international drug trade, human trafficking, and terrorism. In our opinion, it is important to also include fight against corruption in sphere of cooperation. Next step in this direction was preparation and beginning of implementation by the Security Service of Ukraine of an Action Plan on improvement of international cooperation in fight against corruption which will allow not only decrease its level but also show the part ners our offensive position. In the end, I would like to stress one more time that consistent implementation of the aforementioned measures will ensure successful fulfillment of task that the President of Ukraine has charged us with of overcoming corruption in Ukraine which today challenges our democratic society. Implementation of this plan will actually draw Ukraine closer to level of developed European countries and eliminate obstacles to integration of our country into European community.
32 STATE SUPREME AUDIT OF ALBANIA
THE ROLE OF ALBANIAN SAI IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
MR. ROBERT ÇEKU CHAIRMAN OF THE STATE SUPREME AUDIT OF ALBANIA
I. Background information about Albanian SAI The Supreme State Audit of Albania is relatively a new institution. The historical cir cumstances of development, the battles and foreign invasions for a long time didn’t permit the creation of a national state, therefore in Albania acted laws and rules, which were dictat ed by the invader’s interests. In the 1925, the National Assembly approved the first Basic Statute of Albanian State (Constitution). In that period such document was a great historical achievement which sanc tioned the main features of the state and its legitimate institutions. In this Constitution, among other provisions, was defined also the institution charged with the state audit of the public finance, which was the Deputy’s Chamber During the communist regime, State Audit was reorganized in the form a State Inspection and later on re founded as the State Audit Commission, which continued to oper ate until 1991. The demolition of communist dictatorship and establishment of the political pluralism in Albania at the end of 1991 was accompanied with cardinal political and democratic reforms. The similarity with international standards in the public administration field required the setting up of the institutions according to the principles and schemes of the states of western democracy. Also, the institutional reform in the state audit field had the same characteristic with that of the public administration. In the 1992, by a specific law, was set up the Supreme Audit Institution, which was named State Audit Service. In December 23 1997, in order to perfect the legal and institution al base of the State Audit, with the support of SIGMA it was adopted by the Parliament the Law No.8270 “On the Supreme State Audit”. This law, after the approval of the Constitution of the Republic of Albania in November 1998, brought some supplementary amendments in June 2000. The institution was named “Supreme State Audit” (SAI). The institution actually
33 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION operates in conformity with Albanian Legislation and the basic principles of the management (organization) stated by the Lima Declaration, audit standards of INTOSAI and European Implementing Guidelines, providing further steps to its integration way in European Union. II. Perception of Fraud and Corruption by the Albanian SAI Public sector audit is changing. In the public sector, changes in the way in which serv ices are delivered are bringing changing expectations from public service managers in the kind of relationship they want and need with their auditors. It is now recognized that the SAI should become an active supporting ‘change agent’ and in particular to become a powerful instrument to promote accountability in the public sector. New financial management and financial control frameworks, supported by a new reinforced SAI of Albania will contribute to increased public sector productivity and better services for the citizens. During the transi tion phase Albania has faced several problems concerning the institutional strengthening and legislative reforms. Unfortunately, weak and not well developed political and administrative institutions, combined other factors have caused a high level of corruption. Corruption is by law prescribed as the “abuse of public office for private gain”. It can be explained with this formula: Corruption = Monopoly power + Discretion Accountability. The concept of corruption refers to a much wider array of conduct that manifests itself differently around the world and is influenced by the cultural and moral history, economic development, bureaucratic traditions of each society and government. In broad terms, cor ruption is the abuse of public office for private gain. Corruption involves a number of dishonest actions with intent to acquire financial or other benefits including power, counting the offering, giving, or acceptance of an inducement or reward which may influence the action of any person. It includes abuses by government officials such as embezzlement and nepotism, as well as abuses linking public and private acts such as bribery, extortion, and fraud. “The State in a Changing World, World Development Report 1997” of the World Bank, refines that in quantitative terms an analysis of 94 countries suggests that: A reduction in corruption of 23.8% would increase a country’s annual investment by 4 % of gross domes tic product (GDP), and would increase annual growth of GDP per capita by 0.5 %. Corruption has been proved dangerous. It destroys moral and other values, degrades human dignity, damages democracy and good governance by weakening formal processes. In elections and in legislative bodies it reduces accountability and representation in policymak ing. In the judiciary it suspends the rule of law In public administration it results in the unequal provision of services. Fraud is a legal concept representing a specific manifestation of corruption. The most common definition of fraud is “...an act of false representation that was made knowingly, which would result in the loss of a valuable resource.” Corruption and fraud may involve manipulation, falsification, or alternation of accounting records or supporting documents from which financial statements are prepared, misappropriation / misapplication of assets, suppression or omission of the events, transac tions, or other significant information, recording of transaction without substance, misap
34 STATE SUPREME AUDIT OF ALBANIA plication of accounting principles relating to amounts, classification, manner of presenta tion, or disclosure. Albanian SAI findings indicate that major indicators of corruption are complaint received; an article in the newspaper; defiance of competitive bidding; favor to particular ven dors; excess of materials; inferior quality of materials; expenses of unnecessary functions; small gifts to employees in the purchasing functions; dramatic increases in the employee’s lifestyle; missing documentation; the management is not knowledgeable of the subject area; not a stable management team; significant lack of internal controls; unexplained adjustments in inventory or accounts receivable balances; unusual endorsements on cancelled checks or unusual patterns in deposits in transit; when does not exist a code of ethics, when documen tation is provided to the auditor with unreasonable delays. Factors inductive to Fraud and corruption are Motivation, Environment and Rationalization. Motivational factors include: 1. Economic motivation (financial need and financial gain) 2. Prestige, recognition, greed 3. Moral superiority Rationalizations for Fraud and Corruption are: Others (our bosses) are doing it, so what’s the big deal” “The government is so big that what I take will never be missed” “I only wanted to make the department look good” “I was only using the money on a temporary basis and I intended to repay it” “I was doing the job of my superior” Major functional areas are revenue generation, revenue collection, expenditure and contracting, product and service outputs and deliverables, operational areas and locations, asset acquisition and disposition and record division. Methods of fighting corruption are: • Reducing the role of government in economic activities (to limit authority) • Strengthening transparency, oversight and sanctions (to improve accountability) • Redesigning terms of employment in public service (to improve incentives) Fraud and corruption are phenomena that can only be confirmed and determined by a court of law. Auditors can only determine that the matters appearing are suspected or are sus pected of being fraudulent. It is much easier to prevent than to detect fraud and corruption. Preventing such phenomena, is not the sole responsibility of the SAI, but the SAI should through its audits, contribute to prevention. To deal effectively with the problem, it is impor tant that the auditor: • Understands corruption, fraud and its elements • Identifies Fraud and Other Types of Irregularities • Is able to recognize “red flags” or indicators of corruption and fraud • Lists and explains the steps of evaluating management control • Follows procedures on collecting evidence and reporting when fraud is suspected.
35 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
III. The Role of Albanian SAI in Preventing Fraud and Corruption, Public external auditors are seeking to add value to their work by analyzing and report ing what has happened in the past as a mean of learning and disseminating lessons for the future. This way they can have a positive and direct influence on the way organizations and people working in the public sector discharge their responsibilities for, and stewardship of, public money. They can help to promote better management and decision making and there fore a more effective use of taxpayers’ money. Such developments require significant changes in the ways in which public auditors work. These changes impact on the people working for the SAI, communications and rela tions with stakeholders, audit processes and information technology used in public sector audit, as well as a requirement for more sophisticated technical skills, improved management, leadership and communication skills are required. The SAI needs to expand the range of its work and introduce improved audit processes aimed at making itself more efficient and effec tive in carrying out its work, which in turn will lead to more constructive, fair and balanced reports which are more readable and relevant for the various stakeholders. Albanian SAI contributes to the prevention of fraud and irregularities, through: 1 Detecting fraud and corruption. 2 Reporting fraud and corruption Detecting Fraud and Corruption Two of the most effective methods involved in detecting fraud and corruption include: • review of programs to determine vulnerability and identification of fraud indicators through examinations of internal controls. • Identification of fraud indicators through examination of internal controls How to organize the process of fraud and irregularities detection? Planning an audit is carried out after allegations have been received. These allegations should be reviewed to establish clear basis for the fraud and corruption detection. Issues should be clearly defined, potential problems identified, and appropriate laws and regulations researched. Also background information (complaints, notifications) gleaned from public and private sources should be gathered and reviewed immediately to provide a basic understanding of the issues or areas to be examined. The main purpose of planning is to establish and main tain the focus of the fraud detection. By stating the objectives and the scope of the fraud detec tion, a written plan helps the auditors maintain the proper focus of the inquiry and helps the supervisor to ensure that the objectives are achieved within the established time frame. During the audits, auditors analyze the susceptibility to noncompliance and indicators of potential fraud and corruption. They draw their attention to complexity and decentraliza tion of agency transactions. Additionally it is determined what is to know about control effec tiveness, key system controls, test control procedures, and if transactions are properly docu mented. During the audit, auditors should select and use the appropriate legally authorized and approved techniques. Auditors may have in particular the right to: (1) have free access to the premises of audited units, (2) collect and analyze documents, records, or other evidence from either manual or computer based files, (3) summon witnesses and receive their evi dence, interview complaints, witnesses, and suspects to obtain appropriate information, (4)
36 STATE SUPREME AUDIT OF ALBANIA request oral or written explanations from employees of audited units, (5) call experts and spe cialists. The auditors determine facts on the basis of evidence gathered during the proceed ings. Evidence includes in particular documents, secured objects, observation evidence, wit nesses’ statements, opinion of experts and written explanations. Auditors determine the cause, scope and effect of noncompliance, and identify the persons responsible for wrongdo ing. Auditors document the progress and results of audit activities in working papers, an all the process is finalized with the audit report. Fraud detection is more a matter of mind set than of routinely applied methodology, and a matter of auditor’s inventiveness and involvement. However, certain levels of supervi sion and review are required, particularly in the case of a well founded suspicion of a crime or an offence, the SAI notifies the body called upon to investigate crimes and offences. Supervisors should ensure that case tasks are completed and properly documented. In carry ing out their responsibilities, supervisors: (1) review case files periodically, to ensure efficient continuation of the work, and avoid disruption, (2) inform managers of serious problems, and (3) provide continuous on the job training and feedback to auditors. Auditors can carry out compliance audits using a systematic framework to identify and assess compliance issues in their assignments. The SAI can use indicators to identify and monitor high risk program areas. In this way, it may focus its efforts on programs that are particularly vulnerable to fraud or corruption. Given the increasing demands upon limited resources, the SAI may choose to develop a strategic plan for identifying and focusing on high risk areas. Some of commonly perceived high risk areas are contracts of service/procurement; inventory management; sanctions/clearances; revenue receipt; cash management; general expenditure and privatization. SAI can contribute to the prevention of fraud and corruption through identification of fraud indicators, training the auditors in order to improve their knowledge, qualifications and skills to identify the indicators of fraud and irregularities. Reporting fraud and irregularities and its recommendations. The SAI mandate will determine its role once indicators of fraud are discovered. Albanian SAI makes public reports on weaknesses or conditions that are contributing to a program risk and effectiveness of measures to mitigate the risk. We also report suspicion of fraud to the proper authorities, give the recommendations and request to take appropriate remedy actions in accordance with them, and to take indemnifying measures and disciplinary actions in accordance with relevant laws towards. In some cases we have advised the govern ment with regards to the development of standards of conduct and can promote a method whereby public employees’ personal assets are subject to scrutiny. By means of reporting the conclusions, organizational and legislative recommenda tions to the audited entities, SAI aims at urging these entities to undertake concrete actions in order to limit or avoid the emersion of corruptive mechanisms. Furthermore, the propos als for amendment and improvement of the legislation into force, recommending the neces sary organizational and legal solutions, aim at specifying and supplementing the legal acts or by acts into effect as well as eliminating the gaps which favor the emersion of fraud and cor
37 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION ruptive phenomenon. Thus, It is by means of reporting and presenting case by case to the audited entities the financial irregularities, causes and elements that favor them, recommen dations for amendments and improvements that SAI demands and proposes to the responsi ble actors to take the preventive measures for corruptive phenomena. To be more concrete, I would like to state that the findings with regard to violation of financial discipline which have resulted in a general economic damage of 5 billion lekë (50 millions US $) during 2005, are verified in: taxation sector at the amount of 24 million US $; customs sector at the amount of 10 million US $; in the field of public procurement, over 5 million US $; in the field of salaries and remunerations, approximately 4 million US $; in renting and leasing the state property, over 1.3 millions US $; and in data entry “others” the amount reaches to 5.7 mil lion US $, out of which I would like to point out the allocation of undue funds for subsidies as well as the appropriation of monetary values by means of fake documents. It is worth mentioning that the above damage value recommended to be reimbursed, covers 2.5% of the budget revenues which, compared with a year ago, 2005 were estimated at the amount of 201 billion lekë (2 billion US $). During 2005, SAI has prepared and submitted 29 recommendations (1 recommenda tion corresponds to one act) to be examined and approved by the responsible bodies in order to amend and improve the legal acts and by acts into effect, out of which 9 are implemented; also SAI has prepared and sent to the Prosecutor’s Office 27 penal denunciations for 74 impli cated persons who has caused a financial damage of 17 million US $ to the state budget. Our SAI does the above mentioned, by focusing on the following areas: strengthening financial management systems, evaluating internal controls to identify and correct weakness es, and increasing the public awareness of the SAI findings. Strong Financial Management Systems. Strengthening the financial management system by actively seeking to provide ongoing accountability within the government, a pre ventive environment that does not favor fraud and corruption will be created. An effective sys tem imposes accountability by presenting complete and accurate information in a timely manner, thus is limiting the opportunities for irregularities, including fraud and corruption. A strong financial management system incorporates the following: accurate, complete, and timely financial reporting includes financial statements audited by the SAI and reports on internal controls and compliance with laws and regulations; a reliable system of internal con trols; and cost accounting capabilities. A strong financial management system also con tributes to and provides a basis for effective performance measurement. Performance meas urement will assist the SAI in carrying out program evaluations that highlight the impact of funds spent to further program objectives. Internal Controls. Evaluating internal controls to identify control weaknesses making recommendations to strengthen the weaknesses identified, and following up on the imple mentation of these recommendations are the main line of defense in preventing fraud and corruption. Historically, control weaknesses have been identified as a major contributing cause in many significant cases of fraud and corruption. In conjunction with its audit and oversight responsibilities, the SAI comments on the effectiveness of internal controls and
38 STATE SUPREME AUDIT OF ALBANIA make recommendations for improvement. The recommendations made by the SAI to strengthen controls can result in or contribute to improvements in the effectiveness and effi ciency of government programs. The SAI follows up on recommendations to determine if they have been implemented and to evaluate the results. The organization and appropriate functioning of internal audit units will make possi ble to reduce the risk that leads to corruption and will help us to use the public expenditures effectively. Public Awareness. Heightening public awareness of fraud and corruption through timely public disclosure of audit findings will bring about accountability. Timely public dis closure of the SAI audits and findings makes everyone (the government and the public) aware that the SAI is actively seeking out information and working to prevent fraud and corruption. If the audit findings and recommendations are properly reported and appropriate action is initiated by the legal authorities, an environment is created that does not favor fraud and cor ruption. In addition, informing the public and civil servants that effective internal controls are in place, deters fraud because internal control’s existence is known by those who have the potential to commit the fraud. Further, mechanisms that provide the public and the civil ser vants with a process to report fraud and corruption contribute significantly to the prevention. If the availability of these mechanisms is well publicized, individuals will have an opportuni ty to provide information anonymously and without the fear of reprisal. Cooperation with the main partners in the field of fighting fraud and corruption through reporting is presented as follows: 1. Assembly a. The Economic, Finance, and Privatisation Committee, informs the Assembly regu larly with the main issues and concerns that arise from Albanian SAI audit reports. b. Albanian SAI annual reports. c. Recommendations for the improvement of legislation. 2. Council of Ministers Relationships are held continuously in institutional bases and within constitutional rules. Collaboration is related mainly regarding significant problems coming out from audits, reciprocal informing, inclusion and implementation of audit recommendations regarding the problems that are cognisable to the Prime Minister. The permanent participation of our insti tution in the Special Committee for the fight against corruption is considered a significant contribution. By the other hand the understanding and support that government has given for the implementation of our recommendations, in order to improve the legal and sub legal acts issued by monitoring and auditing process for avoiding misuses of legal acts. It is worth men tioning the fact that the Prime Ministry and Ministry of Finance has taken into consideration and assessed the SAI recommendations for amendments and improvements in the field of public procurement, city planning, collection of revenues, documentation and circulation of monetary and material values, privatization of state property, etc. The constructive attitude of Government towards the problems that arise by our audits, encouragement and support for the implementation of recommendations, the assessment it made to reorganisation and construction of Financial Internal Audit as well as predisposition
39 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION for correcting deficiencies, promises the enhancement of collaboration in the future with regard to the fight against corruption. 3. Judicial Bodies Currently, it is showing an increased involvement of the Albanian SAI in bringing fraud and corruption cases to the Courts. When such cases are suspected as a result of audits, the specialized agencies, particularly the Prosecution Office is informed. With the purpose to offer the highest and the most qualitative contribution possible to the fight against illegal activities that have brought considerable damage in the public property, the State Supreme Audit has required collaboration with the General Prosecution Office. In broader terms the aim of such collaboration is not only to punish the responsible persons implicated in corrup tive activities or misuse of state property, but also to offer to the taxpayers insurance that all public bodies are functioning properly and serving their interests. This way of cooperation has also shown to help preventing fraud and corruption. 4. Press Bodies and Media The Press Bodies and media are powerful instruments of information and communica tion with public. They ensure the transparency and support results, audit conclusions and recommendations. These bodies are provided constantly with reports and materials as result of audit, disclosures that have affected the opinion of public, and made possible the recogni tion of administration field of public finance. The press and media influence in the verifying and denunciating processes against the illegal activities is an important aspect of the preven tion fight against corruption and comprises an indispensable aspect in the institution strate gy for increasing the audit efficiency. An important aspect is also the opening of web site for publicising audit reports that are provided from quarter bulletins, special information, the direct communication with journalists and television operators, press conferences etc.
40 STATE SUPREME AUDIT OF ALBANIA
Concerning the role of Albanian SAI in preventing fraud and corruption the main issues to be addressed are: • Has the SAI identified high risk program areas based on inherent control weaknesses, prior history of abuse, and inadequate management? • What has the SAI experience been in auditing these high risk areas? • Does the SAI allocate resources to focus on these high risk areas? • Does the SAI make public reports on weaknesses or conditions that are contributing to a program risks and the effectiveness of measures to mitigate the risks? • Does the SAI have the training and the expertise to recognize fraud indicators in the programs it audits? • Do audit standards and methods followed provide sufficient guidance for the auditors to pursue fraud indicators and promote an effective environment of auditor skepticism? • Does the SAI have the resources, expertise, and necessary fraud training to pursue the questions raised by the fraud indicators? • What sources are available to the SAI for obtaining this expertise? • Once fraud indicators are identified, how does the SAI pursue and resolve the ques tions raised? • If the SAI does not pursue these questions, what does the SAI do with the information? • Does the SAI refer fraud investigations to another department for investigation? If so, how is the information referred and is there a reporting mechanism in place so that the SAI is informed of the results? • When should the SAI report suspicion of fraud to the proper authorities?
41 COMMITTEE OF STATE CONTROL OF THE REPUBLIC OF BELARUS
MR. SEMEN SOTS DEPUTY CHAIRMAN OF THE COMMITTEE OF STATE CONTROL OF THE REPUBLIC OF BELARUS
Dear colleagues! First of all, on behalf of the Committee of State Control of the Republic of Belarus please allow me to welcome all participants of the EUROSAI International Conference devoted to pressing issues of fighting against corruption. Supreme Audit Institutions make substantial contribution in the development of meas ures aimed at combating corruption. At the same time, we believe that their potential and experience they already gained aren’t used to the fullest extend. In the current phase of development of world community, implementation of complex of measures on fighting against corruption on the national level only seems to be insufficient. Due to the need in determining new approaches and instruments of efficient fight against corruption on regional and international levels, such international organizations as EURO SAI and INTOSAI may become active international subjects capable of combining and coor dinating the SAI’s efforts on devising efficient mechanism of fighting against corruption. There is no doubt that studying and spreading of constructive experience gained by our colleagues from different countries will help further intensification of our activity on sup pressing corruption. Being a global problem for the entire system of government relations, corruption undermines the principles of government management, equality of all before the law, and social justice. Fight against corruption is one of the key tasks faced by all civilized states and world community in general, while devising of the appropriate combating mechanism is a high pri ority task of cooperation between Supreme Audit Institutions. The urgent need in addressing the problem of fighting corruption is caused first of all by certain intensification of corruption related activities which became a destabilizing factor for each country, relations within the society, and economic security.
42 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
The aforementioned circumstances require serious understanding of current corruption related processes, especially since this phenomenon is characterized by the variety of forms and types, high adaptability to countermeasures, and ignoring of norms and principles of law. According to its national interests each state tries to create the efficient system of meas ures of both legislative and practical nature to combat corruption related violation of law. In the Republic of Belarus, system of measures aimed at suppression of corruption related offences is implemented in strict compliance with the Constitution of the Republic of Belarus, the Law on Combating Organized Crime and Corruption, Criminal and Criminal Procedure Codes of the Republic of Belarus, and also international legal treaties to which our country is a participant. The Law on Fight Against Corruption recently approved by the Council of the Republic, National Assembly, provides for complex system of measures aimed at combating corruption. In our opinion, this step became the next appropriate phase of already imple mented measures which undoubtedly will give an additional anti corruption impulse to the performance of all government authorities. The increasing role of Supreme Audit Institutions in creation of the system of measures on fighting against corruption on national, regional, and international levels is a quite logical process. Thus, according to the Law of the Republic of Belarus on Combating Organized Crime and Corruption, the Committee of State Control of the Republic of Belarus as the Supreme Audit Institution actively participates, along with other government authorities, within the limits of its competence in the national system of measures on suppressing corrup tion activity, implementation of government program on intensification of fight against cor ruption, and also plan of measures on combating corruption in government bodies. Today, law enforcement and controlling authorities of the Republic of Belarus set on the task of organizing their activity on suppressing corruption related offenses on the new quality level! Because of that, all law enforcement and controlling authorities are undertak ing appropriate measures – legal, organizational, and personnel related. Today, with suffi cient legal base already in place, it becomes important to ensure efficient and coordinated work of all government bodies in this extremely important direction. Importance of the issue of fighting corruption is also caused by the need in understanding pre conditions and factors which affect the nature and manifestation of corruption related activity in the context of development of state system. In addition, we believe that studying of the society’s opinion has important significance in determining social spheres which present the most favorable envi ronment for corruption.
43 COMMITTEE OF STATE CONTROL OF THE REPUBLIC OF BELARUS
Analyzing factors and conditions which cause corruption, we have to note that one of its preconditions is the loopholes in law. Due to the fact that use of budget funds for not intended purpose often becomes a breeding ground for corruption, one of the most important priorities in the activity of the Committee of State Control of the Republic of Belarus is detection and suppression of all forms of corruption in spheres under its jurisdiction, especially those where budget resources are involved, and also measures of preventive nature. Experience suggests that the most dangerous is the situation when schemes are created based on the loopholes in law which allow either evade taxation or commit direct embezzle ment of budget funds. To increase the efficiency of corruption suppression measures, it is necessary to emphasize on the improvement of work not only on the law enforcement level but also on the legislative level where the most important significance will be attached to measures on pre vention of corruption related offenses. Government official should not act as an interpreter of Law because as the practice suggests, he may not only interpret legislative norms in his favor but also create certain con ditions under which a corrupted deal becomes the only one possible. The most important condition for combating corruption is creation of moral principles of the society. There is only one method against corruption which could’ve completely uprooted it — its absolute aversion by all categories of the society. Undoubtedly, in order to form such public opinion it is necessary to ensure real fulfillment of principle of inevitable punishment for any committed offense including that of corruption related nature. Determination of the essence and main sources of corruption, factors which help cre ate favorable conditions for its development, reasons which cause the growth of this phenom enon, improvement of legislative basis, and also studying of main conceptual approaches and experience of Supreme Audit Institutions of other countries in formation of anti corruption mechanism will assist in devising efficient measures to combat corruption. Therefore, fight against corruption will become successful only if it will be waged systematically and consid ering the complex approach, if it will become comprehensive. The Committee of State Control conducts practical and preventive work on detection and elimination of violations in budget sphere; it also makes proposals on amendment of anti corruption laws. Among the measures which in our opinion prevent the growth of corruption I’d like to note a “one window” principle which currently is being implemented in the government bodies of the Republic of Belarus (procedure which regulates response of government authorities and other state organizations to the inquiries of private persons requesting refer ence letters and other documents). The Committee of State Control is monitoring situation within institutions operating pursuant to this principle. Said principle not only makes issuance of documents easier but also significantly narrows down the sphere of possibilities for corruption of state officials. One of the most important moments in activity of the Committee on Fighting Against Corruption is monitoring of tenders purchases on which are made using budget funds. Often ten
44 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION ders are conducted formally, there are cases when, despite the fulfillment of all necessary tender procedures, commodity is delivered at prices which exceed the average market prices. Most often, such cases result from the corruptness of officials who deal with conducting tenders. Speaking about mechanism of fighting against corruption and organized crime, it’s worth noting that the existence of the Department of Financial Investigation and the Department of Financial Monitoring within the structure of the Committee of State Control allows fully use the potential of financial police and financial intelligence when conducting auditing measures and to prevent corruption. Criminal investigation is being initiated upon facts of discovered violations of law, and officials who committed offenses are brought to criminal and disciplinary responsibility. During six months of 2006 only, 151 criminal cases were opened against managers of business subjects and other officials upon facts of corruption discovered as a result of inves tigative and monitoring measures; administrative authorities of different levels and business subjects were sent 299 warnings demanding elimination of discovered violations, reasons that caused them, and conditions which helped perpetrate offenses. An important component of efficient fight against corruption is counteraction to legal ization (laundering) of criminal proceeds. The Committee of State Control had initiated introduction of amendments and additions to legislation; in particular, new edition of the Law of the Republic of Belarus “On Measures Aimed at Prevention of Legalization of Illegal
45 COMMITTEE OF STATE CONTROL OF THE REPUBLIC OF BELARUS
Proceeds and Financing of Terrorist Activity” was adopted, which establishes and specifies legal and organizational measures aimed at prevention of legalization of illegal proceeds. In our opinion, measures on improving anti corruption law and a number of other organizational measures undertaken in the Republic of Belarus allowed significantly restrict the influence of organized crime on the dynamics of development of criminogenic processes in sphere of economy. Measures designed as part of activity of the Supreme Audit Institutions allow improve a forming mechanism of fighting against corruption both on national and international lev els. The prospects of creating an efficient mechanism of fighting against corruption will depend first of all on the uniformity of approaches of competent authorities to this problem when making decisions and their appropriate practical implementation. At the same time, discussions in sphere of fight against corruption are still limited main ly to discussion of conceptual, one could say strategic methods of such fight. At the same time, there is already a need in shifting positions to the epicenter of studying specific issues and cre ation of appropriate mechanisms of fighting against corruption. Their solution requires rethinking of the role of international cooperation in sphere of fight against corruption. In this regard, we believe that the prospects of successful fight against corruption depend on both implementation of adopted decisions and designing of new approaches and principles within the framework of international organizations of Supreme Audit Institutions.
Thank you for your attention!
46 THE CHAMBER OF ACCOUNTS OF THE REPUBLIC OF AZERBAIJAN
ANTICORRUPTION COMPONENTS OF EXTERNAL FINANCIAL CONTROL IN THE REPUBLIC OF AZERBAIJAN
MR. NAMIQ NASRULLAYEV CHAIRMAN OF THE CHAMBER OF ACCOUNTS OF THE REPUBLIC OF AZERBAIJAN
Dear Dr. Valentyn Symonenko! Dear Ukrainian colleagues!
I’m very pleased to congratulate you on this occasion of the 10th Anniversary of the Accounting Chamber of Ukraine, to wish you good health, wealth and every success in your professional activities for the sake of your country. I’m glad to note that the Accounting Chamber of Ukraine from year to year strength ens its important role in enhancing the economic safety of the country and proves itself a competent and highly professional institution, one of the key elements of the state manage ment and regulation system. I would like to point out the leading role of the Accounting Chamber of Ukraine in the formation and development of the Governing Board of CIS Supreme Audit Institutions. The declaration of general principles of the CIS Supreme Audit Institutions adopted in Kyiv is based on principles of the Lima Declaration and incorporates the principal rules of activities of our institutions. We are very happy to return to Kyiv, a beautiful city with a unique spirit. I think, most of the participants here have a lot of pleasant memories connected with your city.
Dear colleagues! I would like to start my presentation here, at this conference, with one famous exam ple. One expert from Japan’s Sasakawa Fund said that in many developing countries bribes and corruption became a sort of lubricant, or something like it, to speed up bureaucratic pro cedures and to minimize time for making decisions by government authorities and, as a result, to promote business development. The problem is how far this corruption goes…
47 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
This opinion shows that when we try to combat this negative phenomenon, the corrup tion, we should take into account the fact that corruption infringes strategic components of economic relations. Corruption is a global problem of present day reality. Today, it is inherent in many countries irrespective of political regime or geographic location, it is the subject the world community is focused on. The responsible political figures and statesmen consider corruption to be a corrosive factor that undermines the foundations of the state system and generates a lot of problems for the future development of any country. When we discussed the topic “The Role of the Supreme Audit Institutions in Ensuring Transparency and Efficiency of State Financial Resources Management” in Astana, in April 2006, we noted that the mission of any Supreme Audit Institution as one of the key regula tors of state management acting for the sake of harmonic social development is based on inverse proportionality of corruption and transparency. That is why, I consider the topic of this conference to be very important for the purpose of improving and strengthening state financial control. In connection therewith, I would like to share with you some opinions and to tell about the practical solutions of these problems in Azerbaijan. Azerbaijan has joined international conventions, including the UN Convention against Corruption, and harmonized the national legislation with these conventions. Since January 1, 2005, the Combating Corruption Act came into effect. It is implemented through the State Program on Combating Corruption. The above documents deal with the revelation, prevention and removal of effects of corruption and similar deeds, as well as with the protection of social justice, human rights and freedoms, creation of favorable conditions for economic development, ensuring legality, transparency and efficiency of activities of Government and self governing bodies. Requirements thereof are still being met. For the purpose of implementing the above documents the Government Commission on Combating Corruption has been established and our institution is involved. In Azerbaijan, as in other countries, the reality makes us study and develop new ways of combating corruption and to join our efforts in this sphere. As you know, corruption is rooted in the defects of the economic and administrative system and fed with imperfect legislation, low transparency of economic relations. It is spreading due to the absence of efficient supervision over the activities of public officials and government bodies. I would like to pay special attention to the legislative ‘feeding’ of corruption. Some experts still consider that it is inadvisable to incorporate a definition of corruption in the leg islation along with definitions of its manifestations (for instance, bribing), inasmuch as any attempts to give a clear and strict definition of corruption will result in the fact that some cor ruption deeds will be beyond the scope of the law. Indeed, corruption is not only a legislative category despite having legislative defini tion. Anyway, a large group of immoral corruption deeds which, as a rule, cannot be identi fied, revealed and defined legislatively, are not covered by legislation.
48 THE CHAMBER OF ACCOUNTS OF THE REPUBLIC OF AZERBAIJAN
In my experience, whenever I met facts of fraud and corruption in the budget sphere I often saw gaps in the laws regulating economic relations. These gaps are interpreted differ ently in the so called ‘border zones’. It is very important that the laws and acts should incor porate clear definition of ‘border zones’ for preventing each party from interpreting the law or act in its own way. The parties agree due to these gaps in the legislation. It is just there where corruption arises. Because of the uncertainty in interpretation of the laws a risk of supervisory system transformation into a corrupted element arises. In connection therewith, on the initiative of the Chamber of Accounts, the President’s order on the elaboration of the draft State Financial Control Act of Azerbaijan was issued. The Act’s conception is based on the following principles: the Act shall have constitutional status; it is necessary to create a functional system of state financial control covering all lev els of management of state funds; the system of state financial control shall be clearly divided into external and internal levels of control; the external control shall incorporate supervision over internal control; the external audit institution shall have a supreme status and be subordinated to the President of the state. I would like to note that our country today is transiting to the international standards of accounting and financial reports. A new Act on Accounting has been adopted and respective standards are being developed. I think that the consolidation of the joint efforts of audit insti tutions will facilitate a solution to these problems and stimulate financial transparency in the budget process. As regards Azerbaijan, the discussed problem becomes especially urgent because of a large growth in capital movement provoked by the intensification of the use of natural resources.
49 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Azerbaijan began operations to prospect the oil field in Azerbaijan’s Caspian Sea sector and, in June 2006, launched the Baku Tbilisi Dzheikhan oil pipeline. In the near future it will launch the Baku Tbilisi Erzerum gas pipeline. This is a huge step forward on the path towards transformation into one of countries which ensure the power safety of the global economy. According to the forecasts, in the next 20 years Azerbaijan will gain, depending on oil and gas world price dynamics, about USD 200 billion revenues. Such a large capital inflow will provoke an increase in budget expenditures, and, as a result, requires improvement of the financial control system. Dear colleagues! Taking into account the fact that we are in hospitable Ukraine I would like to say some words about our interrelations. Today, relations between Azerbaijan and Ukraine are a good example of mutually ben eficial cooperation in all spheres. More than 70 bilateral intergovernmental and interdepart mental agreements have been signed between Ukraine and Azerbaijan, the most important of them is Intergovernmental program for long term economic cooperation between Republic of Azerbaijan and Ukraine for 2000 2009. The fact that our countries are involved in regional and interstate projects becomes more and more important. They cooperate in regional and international projects such as Commonwealth of Independent States (CIS), GUAM, TPASEKA, the Organization of Black Sea Economic Cooperation, etc. Within the framework of these projects Azerbaijan and Ukraine have signed many multilateral economic agreements which result in enhanced cooperation between them. The developing processes of interstate cooperation require from us, as from the Supreme Audit Institutions of Azerbaijan and Ukraine, to assume the responsibility for facil itating their implementation. I’m sure that the Agreement on Cooperation between Azerbaijan and Ukraine SAIs signed in May 2006, will boost this process. Today, when developing the joint strategy of cooperation of our institutions we believe that it will promote not only a strengthening, but also an improvement of the quality of economic relations between Azerbaijan and Ukraine for the sake of our two countries.
Dear colleagues! I shared with you our opinion on the role of the Supreme Audit Institutions in combat ing corruption and fraud on behalf of Azerbaijan’s Chamber of Accounts. I’m sure that the anticorruption component of activities of our institutions based on the principles of the Lima Declaration, in accordance with INTOSAI Conception of the Strategic Development Plan for 2005 2010, will be the key factor of the joint strategy for combating corruption and fraud in our countries. I’m sure that in your presentations you will talk over the interesting aspects of the sub ject discussed and share your experiences for the sake of all the participants.
Thank you for your attention.
50 THE CHAMBER OF CONTROL OF THE NATIONAL ASSEMBLY OF THE REPUBLIC OF ARMENIA
PLACE AND ROLE OF SAIs IN THE DEVELOPMENT OF THE NATIONAL SYSTEM OF FIGHTING AGAINST CORRUPTION AND FRAUD
MR. GAGIK VOSKANYAN CHAIRMAN OF THE CHAMBER OF CONTROL OF THE NATIONAL ASSEMBLY OF THE REPUBLIC OF ARMENIA
Dear Ladies and Gentlemen! Colleagues! We know that corruption as a social phenomenon is inherent in all countries, irrespec tive of their form of government. The United Nations defines corruption as an abuse of state power for personal gains and characterizes it as an action of an official pro domo sua which is connected with the use of public resources. Favorable conditions for its existence are created due to an absence of strict legal accountability and control of officials. Unfortunately, corruption is widely spread even in our Republic. Thus, it is evident that the Chamber of Control should play an important role in the disclosure and prevention of cor ruption phenomena, as well as the elucidation of factors and conditions favoring corruption. It concerns, in the first place, the budget process, which is one of the most important in the sphere of power. Corruption in the budget sphere is characterized by clear frequency, which cannot be said about corruption in other spheres. Our studies show that corruption risks are appearing in the first place where public resources are used inefficiently and not for the planned purpose. Thus, only in 2005 the amount of budget funds which were used inefficiently and not for the planned purpose was equal to 3.5 billion Drams, other violations 650 million Drams. Our observations show that “medium” and “lower” corruption is as dangerous as “upper” corruption according to their scale, because society itself participates in the corrup tion actions at these levels. Besides, the studies show that, strangely enough, officials at the said level are mostly bribed by representatives of the poor.
51 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Huge risks are also inherent in the privatization process of state property and public purchase, as well as in credit programs with an element of sub credit. Proceeding from the need to stir up a fight against corruption in the Republic of Armenia, the Council for the Fight against Corruption was formed in 2004, which was headed by the Prime Minister and composed of Heads of competent public authorities, including the Chairman of the Chamber of Control of the National Assembly of the Republic of Armenia. In our point of view, the best way to fight against corruption is to ensure the so called “rule of law”, namely the equal protection of the law for everybody, in order to liquidate sources and other factors contributing to the occurrence and spreading of corruption. That is why we take measures for improving legislative acts, in compliance with the requirements of the renewed Constitution of the Republic of Armenia. The new wording of the Constitution of the Republic of Armenia proclaims the Chamber of Control of the National Assembly of the Republic of Armenia as an independ ent body, in connection with which it was renamed as the Chamber of Control of the Republic of Armenia. The Action Program of the Chamber of Control is approved, according to the Constitution of the Republic of Armenia, by the National Assembly. The Chamber of Control submits to the National Assembly a report on its activity at least once a year. Thus, it clearly determines the status of the Chamber of Control as a body which is independent and at the same time accountable to the National Assembly. The Constitution also stipulates that the order of functioning of the Chamber of Control and its competence are established by law. I would like to note that the Republic has a Commission which works on bringing the effective Law on the Chamber of Control in line with the Constitution of the Republic of Armenia. The Commission recognizes the importance of international experience and closely cooperates with different international consultative and 1086 organizations, including the World Bank, USA Treasury, respective experts of the German Agency for Technical Cooperation.
52 THE CHAMBER OF CONTROL OF THE NATIONAL ASSEMBLY OF THE REPUBLIC OF ARMENIA
The new draft Law on the Chamber of Control of the Republic of Armenia clearly dif ferentiates the concepts of internal and external audit, determines the order of their conduct ing, conditions and objects of control, as well as containing a separate provision which regu lates the fight against corruption on the part of the Chamber of Control. We think that the adoption of a new law, which would comprehensively determine the control functions and status of the Chamber of Control as an independent body, will con tribute to more efficient activity. Amendments in legislation related to the Chamber of Control comply with the international legal instruments. The Action Program of the Chamber of Control is included in the Republican Program “Anti Corruption Strategy and Measures for its Implementation.” In the fight against corruption, it is very important to unite efforts and the interaction of the Chamber of Control with law enforcement bodies. Thus, our materials served as a basis last year for the Prosecutor’s Office of the Republic in 63 warnings to officials as regards inadmissibility of law violations. The Prosecutor’s Office of the Republic of Armenia forwarded 35 written applications, including – to five ministers with a demand to take measures to prevent reoccurrence of the causes leading to violations. Besides, it instituted more than 10 administrative proceedings and imposed corresponding penalties. 3 criminal proceedings were also instituted, which lead to compensation of the damage to the state which was equal to nearly 100 million Drams. The most important elements in the fight against corruption include, in my point of view, improving the methods of an performance audit. It should supplement the traditional financial audit in the part of the assessment of effectiveness and efficiency of the budget pro grams. Here, it is important that the presented state budget was orientated at the final result. Our Government now takes steps in this direction. We pay special attention to the fight against such dangerous phenomenon as corruption to the implementation of principles of publicity and openness in our work, which would allow ensuring continuous interaction and feedback with the public.
Dear colleagues! I am thankful to all the organizers of today’s conference, the materials of which will surely contribute to further improving of our work. Availing myself of the opportunity, I would also like to congratulate the Accounting Chamber of Ukraine on its 10th Anniversary and to wish all the personnel of the Accounting Chamber and the Chairman in person, Dr. Valentyn Symonenko, success in work, strong health and a happy private life.
53 STATE AUDIT OFFICE OF ESTONIA
CORRUPTION AND THE NAO OF ESTONIA
MR. MIHKEL OVIIR AUDITOR GENERAL OF ESTONIA
Dear Chairman Dr. Symonenko, Dear Chairman Dr. Kovacs, Dear Colleagues and Friends, In the last ten years a number of international organisations have made attempts to evaluate the amount of corruption in different countries and establish rankings. The most known of such exploits is the corruption perception index that an international organisation Transparency International issues once a year and that attempts to cover the whole world. Estonia has been included in the index list of the Transparency International since 1998 and the score it has received has been from 5.5 (in 2003) to 6.4 (in 2005). In all these years, the score of Estonia has been approximately the same, ranking from 25th to 33rd place in the world. This high place cannot be taken for granted. Some of the reasons for the high ranking, I would like to point out here, are the following: Firstly geographical and cultural proximity to Scandinavia, especially Finland We all know that all the Scandinavian states are at the top ten or top twenty of the Corruption Perception Index ranking list. Those are perceived as countries of least corrup tion and are used as a point of comparison. This has had an impact of raising our scores of the Corruption Perception Index. Secondly methods of privatisation used It has been proven by scientific research that the amount of corruption in post com munist countries is in correlation with the methods used in privatising former state property. Privatisation in Estonia took place in early 1990’s and three main methods were used for this. The main method was general restitution of property. Then there was the well functioning apartment housing privatisation to the inhabitants using vouchers issued on the basis of work ing years. Big and medium enterprises were sold on international biddings, where the major
54 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION ity of buyers came from Finland and Sweden and brought along the business standards of their countries. Thirdly – the changes in the corps of public servants The corps of public servants of Estonia has gone through great changes. New and younger employees with a different higher educational background came to work in the public sector. It gave a new and very motivating perspective to all public service, which was very valuable. Fourthly – our state’s policy towards corruption There have been a number of state policies that have influenced the occurence of cor ruption in Estonia. In mid 90’s, a rather radical reform of business legislation took place, including the system of legal persons, their registration and accountability. All details regard ing legal persons are publicly available in the registries that can also be accessed by everybody on the Internet. Also, the introduction of flat income tax made tax paying more popular and led to the diminution of tax evasion. Estonia made all necessary contacts of businesses relatively easy and rapid. Decisions by public servants such as granting or refusing various licences, public biddings and supply contracts etc. are made publicly and can be (and often are) sued relatively easily. Other policies have also worked well. An active policy of catching and punishing peo ple accepting and giving bribes has given very good results; among the police force, for exam ple. Independent media has had a great influence both on state authorities and the general public. The media has aroused a number of important corruption suspicions, followed by cases of prosecution, and has step by step widened the concepts of what can be considered corruption in our society. All in all it can be said that everything that has been done has given good results but there is still a lot to do. As you all know, fight against corruption is a continuous process and
55 STATE AUDIT OFFICE OF ESTONIA supreme audit institutions have a significant role to play in it. Many of us (representatives of Estonia among them) have declared that the identifica tion and processing of corruption cases is not the main duty of supreme audit institutions. But this does not mean that we do not engage in fighting corruption at all. Looking back at our past activities it can be seen that we have actually been quite successful in that sphere. It can be said that two of the biggest corruption cases in Estonia have been identified by the National Audit Office. Although we are not carrying out audits regarding merely corruption, we have supplied the police with materials concerning some twenty cases of corruption in the past 5 years. The role of the National Audit Office of Estonia in fighting corruption has been a pre ventive rather than an identifying one. To succeed in it, we have based our activities on four main principles: Firstly – knowledge of corruption, its existence and characteristics It is very important for the auditors to perceive the nature and extent of problems. It is not possible to ignore corruption but at the same time it is not easy to identify it either. Professional training on corruption cases, their characteristics and possible handling meth ods are unavoidably necessary for auditors, irrespective of the fact that we do not carry out separate corruption audits. Secondly – tools and aids and skills to use them The most important of these is access to information. Today, the employees of the National Audit Office have electronic access to almost all information databases and registers in the public sector. Practice has shown that in case of suspicion the comparison of the com mercial register, central register of securities and registers of the Tax Board has given very revealing results. Auditors have independently made very interesting analytical discoveries. For example, a simple and quick comparison of the register of recipients of subsistence benefit and motor vehicle register showed that quite a lot of people living on state support owned several relatively expensive vehicles. Everyday life offers many similar discoveries and examples. Thirdly – in depth knowledge of internal audit systems and their functioning
56 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Every auditor of the National Audit Office has to understand the principles for the functioning of the internal audit system. The first stage of risk assessment includes checking whether the auditee is aware of the elementary internal audit systems, such as recording of decisions, separation of duties, restricted access etc, whether he has implemented them and whether those systems really function. Along with this, the internal auditors’ activities and competence in risk assessment as well as in carrying out audits is also critically assessed. Fourthly – and this is the most relevant – the NAO’s own values and attitude towards corruption. As heads of supreme audit institutions we have a unique position to use our activities to affect corruption in the entire state. We are part of the state and in addition to conveying its values we also possess the influence to change them. On the one hand, the National Audit Office must be a model organisation. I have clearly expressed my attitude both in words and by actions to my employees and I am glad to admit that we share an intolerant attitude towards corruption. On the other hand, the outside perception of our attitude towards cor ruption is extremely important. I have to admit that I have not been able to keep myself from expressing my opinion regarding the cases and areas of activity we have not directly audited, but which are important from the viewpoint of expressing the attitude of the NAO.
Dear Colleagues, Regardless of the fact that the role of the supreme audit institutions in fighting corrup tion is to a great extent indirect, our most important duty here is to be one of the cornerstones of public sector’s morals and ethics. In addition to the constant development of knowledge, methods and “tools”, the most important thing is to communicate our values and attitude towards corruption and do that not only in words but by actions as well.
Thank you for your attention!
57 EUROPEAN COURT OF AUDITORS
THE ROLE OF THE EUROPEAN COURT OF AUDITORS IN THE FIGHT AGAINST FRAUD AND CORRUPTION IN THE EUROPEAN UNION
DR. IGORS LUDBORŽS MEMBER OF THE EUROPEAN COURT OF AUDITORS
1. Fraud and corruption in the European Union: 1.1 Cases of fraud and other irregularities reported by the Member States In 2005, in the areas of the own resources, agriculture, structural and pre accession aid policies Member States reported EUR 1 042 m as the amount of cases of fraud and other irreg ularities (2004: EUR 982.3 m; 2003: EUR 922 m; 2002: EUR 1 150 m). These figures forward ed to the European Commission by the Member States can be broken down as follows: • own resources: EUR 322 m (2004: EUR 205.7 m; 2003: EUR 269.9 m; 2002: EUR 341.9 m); guaranties under the European Agricultural Guidance and Guarantee Fund (EAGGF): EUR 102 m (2004: EUR 82.1 m; 2003: EUR 169.7 m; 2002: EUR 198.1 m); • structural funds and cohesion fund: EUR 601 m (2004: EUR 694.5 m; 2003: EUR 482.2 m; 2002: EUR 614.1 m); • pre accession funds: EUR 16.8 m (2004: EUR 7.6 m; 2003: EUR 5.5 m; 2002: EUR 0.04 m). At the same time number of cases of irregularities reported by the Member States, as defined by the structural regulations, have reached 12 076 (2004: 9 463; 2003: 8 177; 2002: 10 185). The sectoral breakdown of irregularities reported in 2005 is following • own resources: 4 982 (2004: 2 735 ; 2003: 2 453; 2002: 2 335); • guaranties under the European Agricultural Guidance and Guarantee Fund (EAGGF): 3 193; (2004: 3 401; 2003: 3 237; 2002: 3 285); • structural funds and cohesion fund: 3 570 (2004: 3 327; 2003: 2 487; 2002: 4 656); • pre accession funds: 331 (2004: 227; 2003: 104; 2002: 7). In the field of own resources, the number of cases of fraud and irregularities detected and reported (cases concerning more than EUR 10 000) increased by 55% compared with
58 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
2004, as did their financial impact. Cigarettes and sugar (export volumes) and textiles (origin declarations) remain the products most affected. For agricultural expenditure, the number of irregularities reported declined slightly compared with 2004 (3 193 cases in 2005 against 3 401 in 2004) but their financial impact increased. The highest number of irregularities reported and the largest amounts concerned are in the rural development sector. The average amount per irregularity is highest in the fruit and vegetable sector. The number of irregularities reported in 2005 concerning structural measures increased compared with 2004, although their financial impact declined. The highest number of irreg ularities and amounts reported concerned the European Regional Development Fund, but irregularities in the European Social Fund also increased significantly compared with 2004. The number and quality of communications regarding pre accession funds increased. For PHARE and ISPA the financial impact is greater for 2005. The sum concerned by reported SAPARD irregularities decreased. PHARE is the fund with the highest rate of sus pected fraud.
1.2. Cases opened in area of direct expenditure and external aid As in 2004 (53 out of 219 cases), direct expenditure and external aid cases represents significant portion of the new cases opened: 65 out of 215 opened by the OLAF in 2005 (2004: 53; 2003: 79; 2002: 134). Activities shifting towards areas where the Member States do not exercise specific responsibility and the OLAF is the principal player, or only administrative authority engaged in fight against fraud.
2. Actors involved in the fight against fraud and corruption 2.1. At the European Union level The European Union (EU) budget is financed by the taxpaying citizens’ money. It is adopted, on a proposal from the European Commission, by the budgetary authority (the European Parliament and the Council of Ministers). EU policies, financed in this way, are intended for the realisation of projects of general interest. The act of evading the duties and levies which supply the EU budget or using EU financing wrongfully results therefore in harm to the taxpayer of the EU. The EU institutions therefore have the duty to guarantee, with regard to the taxpayer, the best use of their money and in particular to fight as effectively as possible against fraud. This is the reason for which the protection of the financial interests of the European Union has become one of the major priorities for the European Institutions. This covers activities concerning the detection and monitoring of frauds in the customs field, misappropriation of subsidies and tax evasion, insofar as the EU budget is affected by it, as well as the fight against corruption and any other illegal activity harmful to the financial interests of the EU. The European Court of Auditors was created as response to the perceived weakness of its precursors (European Communities Audit Office and the Auditor of the European Coal and Steel Community) as well as broader changes in the EU as a whole. The provision for the
59 EUROPEAN COURT OF AUDITORS
European Court of Auditors in the Treaty of Brussels was directly related to the transition from national contributions to a system based on “own resources”, independent revenue base. In addition, granting the power of the purse to the European Parliament was seen to require a related shift in the focus of financial audit. It was argued that a more supranational EU budget necessitated an independent EU external audit institution that would supply the European Parliament with the information necessary for it to execute the powers it had acquired to vet the annual budget. The argument was reinforced by the series of well publi cized frauds against the EU budget. Under the Treaty of Maastricht, the European Court of Auditors (ECA) became the fifth institution of the EU. Its primary tasks are to examine the accounts of all revenue and all expenditure of the EU; to establish whether all revenue and all expenditure has been received or incurred in a lawful and regular matter; and whether the financial management has been sound. After the close of each financial year, the ECA draws up an annual report, which is forwarded to the other institutions and published in the Official Journal of the European Communities. In addition, the Court must be consulted by the Council of Ministers on any proposals for financial regulations or for measures in the fight against fraud. The ECA can also comment on any draft legislation that is likely to have a significant financial effect. It can at any time submit observations on its own initiative (special reports) and deliver opinions at the request of other institutions. The court assists the European Parliament and the Council of Ministers in exercising their powers of control over implementation of the budget. The ECA works independently of the other institutions, organises its own work, plans its audits, decides how best to present its observations and the extent to which it publicises its findings. The scope of the ECA’s audit covers the general budget of the EU, loans and borrow ings by the Communities, and the accounts of all bodies set up by the Communities where the Court examination is not specifically excluded by the relevant instruments. It audits the European Development Funds the European schools and the range of other European bod ies. The Court also audits the operational efficiency of the European Central Bank. On other hand establishment of OLAF (Office de la Lutte Anti Fraude) in 1999 can be tracked back to 1988 when the Delors Commission felt compelled to establish UCLAF (Unite de Coordination de la Lutte Anti Fraude) in response, notably, to repeated requests from the European Parliament to the European Commission (EC) to enhance its fight against fraud. UCLAF was part of the EC’s Secretariat General rather than the Directorate General (DG) for Financial Control. For many years, it was a largely symbolic response to the problem of fraud, rather than a serious anti fraud unit. With initial staff of ten in addition to temporary agents from the Member States, UCLAF could do little more than coordinate the anti fraud units in the big spending DGs – Agriculture, Customs Union and Structural Funds. The need to go beyond was heightened by the repeated reports of fraud against the EU budget in the media, in the European Court of Auditors reports and in UCLAF’s own annual reports. In 1993, direct responsibility for combating fraud was given to the one Commissioner of the EC. The European Parliament (EP) insisted in the same year that all anti fraud divi sions in the EC should be integrated into UCLAF rather than dispersed throughout the insti tution. After 1994, consolidation took place alongside an increase in the number of staff in
60 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
UCLAF up to 122 persons, with the effect that all those with responsibility for combating fraud in the EC were finally within one chain of command. In 1998, in anticipation of the coming into force of article 280 of the Treaty of Amsterdam on the protecting the EU’s financial interests, the EC proposed that an inde pendent anti fraud office should replace UCLAF. However, the real impetus for creating OLAF came from continuing criticisms of the European Commission’s financial manage ment and a very critical report by the ECA of UCLAF itself (Special Report 8/98). The Court report acknowledged that the EC had made a major effort in its fight against fraud, but con cluded that the organisational arrangements, including those in relation to the Member States, are not always clear and are often complicates and cumbersome. Among the problems identified were: • over 50 percent of the ULCLAF staff were on temporary contract with a consequent lack of continuity; • its databases were not fully operational or effective; • monies that were fraudulently paid were not being recovered; • procedures and responsibilities concerning the fight against internal corruption and breaches of discipline were unclear and incomplete. After the Santer Commission resigned in March 1999, the Prodi Commission imme diately identified OLAF as a central plank in its response to the criticisms of the EC ability to combat fraud. The key difference between UCLAF and OLAF is that the latter was given a special independent status in the regulations that led to its establishment. It remains, howev er, a part of the EC. Its independence is clear in its investigative powers.
2.2. At the Member States level There are the different actors in the Member States, which are involved in the fight against fraud: national parliaments, Supreme Audit Institutions (SAI), government and its agencies, the courts, etc. Under the Treaty of Maastricht, the Member States shall take the same measures to counter fraud affecting the financial interest of the Community as they take to counter fraud affecting their own financial interests. Furthermore, the Member State shall co ordinate their actions aimed at protecting the financial interests of the Community against fraud. To this end they shall organise, with the help of the European Commission, close and regular co operation between the competent departments of their administration.
3. Recent contributions of the ECA in fight against the fraud and corruption 3.1. Opinion No 9/2001 In terms of the legislative framework it was still necessary to resolve problem of crimi nalisation of financial fraud and corruption after the Convention of 1995 when the addition al protocols had still not yet entered into force. In order to substitute the third pillar instru ments (PIF Convention) that had not yet entered into force, the EC, on 23 May 2001 pre sented a draft Directive on the penal protection of the financial interests of the Communities.
61 EUROPEAN COURT OF AUDITORS
In its Opinion No 9/2001 the ECA welcomed this initiative and noted that this initia tive is in line with its previous recommendation. In the Court’s view more detail must be pro vided at the some points, such as: • definition of some of the offences; • certain aspects of the penalties to be imposed by the Member States. The legislative procedure of this Directive is still in progress, despite the repeated requests of the European Parliament to the European Commission of the urgent need to con clude this process. 3.2. Special Report No 3/2004 As it stated in the Court’s Special Report No 3/2004, at the end of 2002 total irregular payments reported under the Common Agriculture Policy (CAP) since 1971 totalled EUR 3,1 billion. Of this sum EUR 537 million had been recovered from beneficiaries and EUR 252 mil lion written off at the expense either of the Communities or the Member States concerned. The remaining 75% of reported irregular payments were still “pending”, neither recovered nor written off. Most reported irregular payments relate to interventions in markets: expenditure in the fruit and vegetable sector and on export refunds accounts for over half of the total. The Court found that the Member States provide information about irregularities as required but do so with varying delays. There are discrepancies between the data supplied by the Member States and the figures in the database drawn from them. The Commission’s data base on reported irregularities is not complete and accurate. The low rate of recovery of irregular payments is in the part due to national adminis trative delays and practices and to the European Commission’s reluctance to accept offers of partial settlement. Only 10% of reported irregular payments have been written off, partly because the Member States have put forward few cases as irrecoverable, partly because the EC has been slow to take action on long standing irregular payments. The European Commission had no adequate criteria for deciding whether sums written off should be charged to the Member States or borne by the Communities and has inadequate information on whether decisions written off are carried out correctly. Responsibilities for irregular CAP payments are shared between OLAF and the Directorate General for Agriculture: formal and effective responsibilities differ; misunder standings occur. The EC does not make systematic use of the information it obtains about irregularities when managing and proposing changes in the CAP. The Court recommended to consider changes in the arrangements for the reporting. recovery and writing off of irregular CAP payments to remedy the weaknesses mentioned above , and in the division of responsibilities between OLAG and the Directorate General for Agriculture; and to consult the Member States on the future of the “blacklist”. 3.3. Special Report No 1/2005 Setting up the OLAF was a laborious process, in particular because of the disorganised nature of the files that it inherited. It was only towards the end of 2003 that the effects of its restructuring began to make themselves felt. A at mid 2004, however, improvements were still necessary in many areas of the management of investigations.
62 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
The hybrid status of the OLAF, which has investigative independence but reports to the EC for its other duties, has not adversely affected the independence of its investigative func tions. Being part of the European Commission, the OLAF has been able not only to benefit from substantial administrative and logistical support, but also to take advantage of the anti fraud legislation that is available to the EC. Consequently it does not appear appropriate to consider amending the OLAF’s status. The OLAF has sufficient resources to deal with all justified denunciations that it receives. This being so, the priorities that it establishes as part of its investigation policy con tinue to be theoretical ones. The OLAF makes too little distinction between investigations (internal and external) on the one hand, and assistance and coordination operations on the other. As the nature of the work in each case is markedly different, lumping them together hinders the management of resources. Managerial supervision has remained inadequate and results in serious delays in the processing of the files, lodging of inconclusive reports and results that are difficult to identi fy. In order to eliminate unnecessary delays, imperative deadlines should be set when investi gations are open. Information reported on the OLAF’s work relates to the volume of the operations undertaken rather than to the results actually achieved. There is no independent guarantee of the legality of investigative procedures in progress or that the fundamental rights of persons under investigation are safeguarded. The relevant regulatory provisions of a clear codification of investigative procedures have been proved unsatisfactory. Relations between the OLAF and its Supervisory Committee are difficult. There is a need a serious re examination of the regulatory provisions concerning the governance of the OLAF. In order to guarantee that all OLAF resources directed towards effectively combating fraud detrimental to the European Union’s financial interests, the tasks assigned to the OLAF ought to be re examined in detail. 3.4. Annual Report 2004 On the basis of its audit results, the Court is of the opinion that in areas where the supervisory and control systems are implemented and allow for an adequate risk manage ment, i.e. revenue, commitments, administrative expenditure and pre accession strategy, the transactions underlying the consolidated annual accounts of the European Communities, taken as a whole, are legal and regular. Moreover, for Common Agriculture Policy expendi ture the Court’s audit shows that, where properly applied, the integrated administration and control system (IACS) is an effective system to limit the risk of irregular expenditure. Without calling into question the opinion expressed in the paragraph above, the Court emphasizes that, in the area of pre accession strategy, risks of varying degrees still exist at the level of implementing organisations in the candidate countries for all pro grammes and instruments.
63 EUROPEAN COURT OF AUDITORS
A greater effort is needed to effectively implement the supervisory and control systems and to address their weaknesses, so as to improve the handling of the attendant risks in the following areas, where payments are still materially affected by errors: (a) In the case of CAP expenditure, the Court found recurrent evidence that expendi ture which is not subject to IACS, or where IACS has been inadequately applied, poses greater risk because control systems are not as effective. Post payment checks for CAP subsi dies not covered by IACS do not provide reasonable assurance as to compliance with Community legislation. The Court concluded that CAP expenditure, viewed as a whole, was still materially affected by errors. (b) In the case of structural measures, the Court again found weaknesses in the man agement and control systems, which show the need, in varying degrees, for improvement in order to fully comply with the regulatory requirements for effective day to day management checks and/or independent sample checks of operations for the 2000 2006 programming period. For both programming periods (1994 1999 and 2000 2006), numerous errors of legality and regularity were detected in the expenditure included in the declarations leading to payments by the Commission. (c) In the case of internal policies, despite the progress made in certain areas, the Court’s audit findings related to the supervisory and control systems and the underlying transactions do not provide sufficient assurance as regards the legality and regularity of pay ments. It is likely that the risk of errors will persist unless the legal framework is changed so as to simplify cost reimbursement systems and clarify the procedures and instructions govern ing the different programmes. (d) In the case of external actions, the improvements of the Commission’s supervisory and control systems have not yet had an impact at implementing organisation level, where a relatively high number of errors at the level of payments in terms of frequency and financial impact were detected which were linked to the lack of a comprehensive approach to the supervision, control and audit of these organisations.
64 GENERAL PROSECUTOR'S OFFICE OF UKRAINE
FIGHTING AGAINST CORRUPTION IN UKRAINE, COOPERATION OF SUPREME AUDIT INSTITUTIONS AND LAW ENFORCEMENT AUTHORITIES IN DISCOVERING AND PREVENTING CORRUPTION: GENERAL OVERVIEW, SPECIFIC ASPECTS, AND INTERNATIONAL COOPERATION
MR. VITALIY SCHOTKIN DEPUTY PROSECUTOR GENERAL OF UKRAINE
In terms of the level of danger, spreading, and methods of activity corruption exceeds all other types of crime. Being aimed at undermining of economic, legal, and social founda tions of the society, it poses real threat not only to each separate democratic institution but also the constitutional system of the country on the whole. Today, one single country finds it difficult to combat this evil. The problem attains international importance and requires development of joint concept of combating, especial ly corruption related crime. Considering these aspects, the topic of this Forum is undoubtedly of great importance to the majority of countries in which there is a tendency towards growth of crime, especially such dangerous forms of it as fraud and corruption. This topic is important for Ukraine as well since this country, being a component part of world society, experiences the same negative effects of development as the other countries. In March 2005, Ukrainian Parliament ratified Convention on Corruption in the con text of civil law of the Council of Europe. As of today, Ukraine is in the process of joining Convention on Corruption in the context of criminal law. During the entire period of Ukraine’s existence as an independent state (15 years), criminogenic situation remains serious. With insignificant decrease of the level of general crime, number of serious offences and felonies comprises about half of all offenses while the organized crime claims 1.5 percent.
65 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Fight against corruption in Ukraine is conducted on the basis of strict legal regulation of the activity of government bodies, services, and officials authorized to perform the function of the state, ensuring that rights and interests of individuals and legal entities are guaranteed. In 1995, in Ukraine was adopted the Law “On Combating Corruption” which deter mines legal and organizational foundations of combating and preventing corruption and the system and authority of government bodies which combat it. According to provisions of the Law, the following agencies are involved in combating corruption: the Ministry of Internal Affairs (MIA) of Ukraine, the Security Service of Ukraine (SSU), of the Prosecutor’s Offices of Ukraine, military police of the Armed Forces of Ukraine, and other agencies and departments created to combat corruption in accordance with Ukrainian law. Compliance with legal norms in sphere of fight against corruption is a constant subject of consideration at the meetings of boards of the General Prosecutor’s Office of Ukraine and regional Prosecutor’s Offices, coordinating and interdepartmental meetings with participa tion of heads of SSU, MIA of Ukraine, and other government law enforcement and monitor ing authorities. Law enforcement and financial monitoring authorities have intensified their activity on detecting corruption related offenses. Last year, courts brought over 3.8 thousand officials to administrative responsibility for committing corruption related offences. During first eight months of 2006, almost 4500 protocols about committing corruption related offences were sent to court for consideration. Out of this number, Prosecutor’s Offices discovered over 1250 offenses, police – 1450, Security Service – 1350, tax police – 300. As a result of court consideration of these protocols, over 3000 officials were brought to responsibility, which is 10 percent more than during the corresponding period of last year. Among the persons penalized by courts in accordance with law there are 420 govern ment officials of 1st 4th class, 715 local government officials, 231 officials of district state administrations, 28 officials of regional state administrations, 6 court officials, 273 officials of state tax administration, 267 law enforcement officers, 29 customs officials, 248 of military personnel, 18 of border protection service. The most dangerous type of corruption related offences is criminally punishable offences. Analysis of statistical data for the last six years which characterizes dynamics of investigation of corruption related criminal cases showed that the number of offenses of this category is significant. Thus, last year there were over 1300 criminal corruption related cases against 1.5 thousand persons sent to courts, discovered 567 organized groups and criminal organizations numbering over 2.2 thousand persons. Among them: 26 were with corrupted and 44 with international contacts, 47 – within banking and credit/financial systems, 30 – within fuel and energy complex. Ukrainian prosecuting authorities work in close contact with other law enforcement and monitoring authorities in their fight against corruption and organized crime. Thus, substantial number of bribery cases is being opened upon materials gathered by special units of MIA and SSU. Cases on abuse of official position and fraud, especially
66 GENERAL PROSECUTOR'S OFFICE OF UKRAINE involving budget funds, were opened upon materials forwarded by financial monitoring authorities including the Accounting Chamber. For example, in 2006 the Accounting Chamber of Ukraine sent four materials to the General Prosecutor’s Office pertaining to verification of compliance with law when the budg et funds were utilized by the Ministry of Defense, the Ministry of Healthcare of Ukraine, the State Mortgage Institution, and State Company “61 Communard Shipbuilding Factory.” After reviewing these materials, the General Prosecutor’s Office of Ukraine opened two criminal cases prejudicial investigation upon which still continues, while the other materials were sent to subordinated Prosecutor’s Offices for appropriate verification. The State Committee for Financial Monitoring of Ukraine sent 17 materials on financial operations which may be related to laundering of criminal proceeds. The amount of funds involved in suspicious financial transactions was approximately 500 million Ukrainian hryvnas. After reviewing these materials, 6 criminal cases were opened, 7 were merged with previously opened cases, and in 3 cases initiation of criminal investigation was denied. In February of this year, criminal investigation was ordered after Renons 2003, LLC performed illegal financial transactions and laundered money for the total amount of 101.7 million Ukrainian hryvnas. The investigation in this case continues. In addition, prejudicial investigation continues in the criminal case opened upon mate rials of audit conducted by Supreme Audit Institution of Ukraine against Deputy Head of the State Tax Inspectorate in Kherson; as a result of his illegal actions, private company Dilon was illegally reimbursed value added tax from the state budget in the amount of 1.6 Million Ukrainian hryvnas. Ukrainian prosecuting authorities have accumulated substantial experience in investi gating criminal cases of the aforementioned category. Lately, this work has attained distinc tively offensive features. In this year, the most number of criminal cases sent to court were cases related to abuse of power or official position – 245 (or 32%), and bribery – 226 cases (or 28% of the total number). In particular, investigators of matters of extraordinary importance of the General Prosecutor’s Office of Ukraine have investigated and sent to court a criminal case opened against former top officials of Crimean Regional Customs Office and customs port Theodosia who were brought to responsibility for receiving bribes in the total amount exceeding 1.5 mil lion US dollars. Nevertheless, work in this direction requires improvement and the law – appropriate changes. Annual growth of the number of individuals brought to criminal responsibility for cor ruption related offenses reveals insufficient efficiency of combating this phenomenon using repressive means only. This negative provision was reflected in the Law of Ukraine “On Combating Corruption” which has a one sided nature since it provides for repressive means of combat ing corruption only, whereas the issue of state policy in bodies of legislative, executive, and judicial power and creation of corruption preventing system were left without attention.
67 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
In our opinion, the system of civil control over performance of executive authorities and state officials is insufficiently efficient, especially when it comes to their making arbitrary decisions which create favorable conditions for corruption. We regard as sound proposal to pass the law on state financial control over declaration and spending of income by individuals authorized to perform functions of the state, and also introduction of increased responsibility in form of ban on holding certain positions or being in government service or state authority bodies by persons who committed corruption rela ted offenses. Efficiency of normatively determined mechanisms of combating corruption may be increased in case of politically informed society with high level of law conscience which may control the actions of state officials and persons authorized to perform functions of the state. Developed civil society creates an uncompromising atmosphere towards corruption and performs independent monitoring of such abuse. President of Ukraine Viktor Yuschenko introduced to the Verkhovna Rada of Ukraine a number of draft legislations on intensification of fight against corruption in Ukraine. To coordinate the efforts in fight against corruption including the highest structures of state power, the issue of creating an independent structure (National Bureau of Investigation) is being considered; this structure will be charged with investigation of the most resonant cases and corruption related crimes. Significant attention is given to issues related to improvement of the normative base of fight against corruption. The General Prosecutor’s Office made proposals regarding draft leg islations and other normative documents including Laws of Ukraine “On Organizational and Legal Foundations of Fight Against Organized Crime”, “On Operative Investigative Activity”, “On Combating Corruption”. In fulfillment of Decree of the President of Ukraine dated 27.12.05 we prepared and submitted proposals for joint action plan on combating cor ruption and organized crime within fuel and energy complex. We prepared proposals for draft TACIS program “Helping Independent Governing: Project Against Corruption”, draft Concept of Overcoming Corruption in Ukraine “On the Way Towards Honesty”, Complex Program on Preventing Law Offenses for 2006 2008, etc. The transnational nature of organized crime and corruption provides for need in estab lishing efficient cooperation of law enforcement authorities both on the national and the international levels. The law provides for establishing and maintaining contacts between law enforcement and controlling authorities and appropriate authorities of foreign countries and cooperation between them to resolve the problem of fighting against corruption. As of today, Ukraine participates in more than 150 inter government treaties and agreements related to fight against organized crime and corruption. One of the main factors of successful work on improvement of anti corruption laws is clear definition of guidelines and international legal standards which they should meet. It will enable us put in proper order a legislative activity of state authorities and attach to it a sys temic nature and orientation towards reaching specific end results. Ratification and implementation of the aforementioned Conventions in our legal field will help increase the efficiency of combating corruption in Ukraine.
68 GENERAL PROSECUTOR'S OFFICE OF UKRAINE
It also worth noting that the law enforcement authorities, in coordination with Ukrainian audit authorities, undertake a number of organizational/practical and operative/investigative measures aimed at discovering and blocking the flow of financial and material resources intended for support of shadow economy and corruption schemes. In addition, state of compliance with laws on fight against corruption and organized crime including laundering of criminal proceeds shows the urgent need in reforming law enforcement and controlling agencies. However, reformation should start with systemic research involving practical experts and development of necessary legal base. Ukraine is interested and ready to join the process of further working out of new com mon approaches in resolving main organizational and practical issues of combating organized crime and corruption. Study, on one hand, of political and economic and on the other hand, criminogenic sit uation in Ukraine allows us make conclusion that protection of democracy and creation of legal state in Ukraine are objectively possible. This point may be corroborated by the follow ing circumstances: 1. Desire of our society to wage uncompromising fight against these phenomena. 2. Availability of necessary normative and legal acts and improvement of existing legis lation considering international experience and their legislative base. 3. Political will of all branches of power to establish legal regime in our society aimed at further development of democracy and the state’s desire to create an integral system of measures aimed at fighting organized crime and corruption. 4. Our country equally protects the interests of all business entities regardless of their form of ownership against criminal attempts. All this allows us look into future with optimism.
Thank you for your attention.
69 STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE
FINANCIAL MONITORING AS THE METHOD OF COMBATING MONEY LAUNDERING
MR. SERGIY GURZHIY CHAIRMAN OF THE STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE
I sincerely greet all participants of the international conference. First of all, I would like to thank the organizers and personally Chairman of the Accounting Chamber of Ukraine Dr. Valentyn Symonenko for the invitation, and look forward to further close and fruitful coop eration, mutual understanding, and efficient work. Since the issue of money laundering is a global problem, efficient fight against this evil may be waged only with joint consolidated efforts. Respected representation of the partici pants of today’s meeting confirms understanding of these problems and will comprehensive ly and professionally discuss the key topics included into agenda of this conference. Stable development of Ukrainian society provides for availability of transparent and efficient financial and credit system protected from its abuse by criminals trying to use it to launder, legalize “dirty” money and those financing terrorism. Money laundering is one of the most dangerous financial crimes faced by market economies of all countries of the world. Crimes related to money laundering pose real threat to the country’s national security and the society on the whole. Money laundering means certain fraudulent financial transactions with “dirty” pro ceeds performed with the purpose of hiding the sources of their origin. In it no accident that these proceeds are called “dirty” – they were received in a criminal manner as a result of trade in drugs, psychotropic substances, and arms, human trafficking, terrorist activity, etc. We define the following main reasons which prompt the subjects of shadow economy resort to legalization of their capitals: the need in proving the origin of funds used for their own consumption; the need in replenishing legal circulating funds for cashless transactions;
70 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
the need in receiving official credit and investment resources; participation in privatization; neutralization of prosecution of shadow activity by government authorities; creation and support of functioning of company – subject of official economy. Today, the entire world community is dealing with the issues of combating laundering of proceeds from crime. Especially important aspect of this problem is improvement of coop eration between institutions charged with tasks of combating money laundering and financ ing of terrorism. It is worth noting that modern world practice is already featuring perfected efficient mechanisms of combating laundering of proceeds from crime and schemes of cooperation of state authorities which may be used in our country as well. International organizations make emphasis on the efficiency of cooperation between all agencies involved in fight against money laundering, first of all law enforcement authorities. In the modern phase of development of our society, laundering of proceeds from crime and financing of terrorism are no longer the problem of certain individual country. Fight against this evil is an international problem which requires use of modern and efficient methods. By undertaking obligation to bring the national system of combating laundering of pro ceeds from crime and financing of terrorism into compliance with international norms and standards, Ukraine had actively joined the development of single world network of fight against money laundering. Today, our country has proved to the rest of the world that the system of combating laun dering of proceeds from crime and financing of terrorism works. Ukraine proved it, first of all, by its active position both in the domestic economic policy and on the international arena. Considering the foregoing, we undertake active steps aimed at bringing different sec tors of economy into compliance with requirements of international standards. Especial importance is attached to maintenance of proper level of transparency of the financial sys tem. Obviously, trust and reliability are the key components of successfully functioning mar ket economy. Lately, more and more attention in the world is given to the problem of legalization of proceeds from crime and the adverse impact of this activity on the macroeconomic indices, distribution of financial resources, and also solvency of financial sector. According to estimate by the Organization for Economic Cooperation and Development, corruption, organized crime, and money laundering are closely connected with each other. Desire to gain profit serves as motivation for entering into corruptive relations both for individuals receiving bribes and individuals or companies offering them. Before receiving any benefit from corruptive payments, the criminal which receives it usually has to “launder” this money. Therefore, fight against laundering of proceeds from crime and also increase of transparency of financial flows is one of the most efficient means in fight against corruption. Counteraction to laundering of proceeds from crime and financing of terrorist activity through financial organizations is an important part of the system of measures undertaken by Ukrainian state authorities.
71 STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE
Following the results of work performed by Ukraine on improving its national legisla tion pertaining to issues of combating legalization of proceeds from crime and financing of terrorism and bringing it into compliance with international norms and standards and con sidering successful development of national system of combating proceeds from crime, on February 1, 2006 the FATF decided to cease the procedure of active monitoring of Ukraine after appropriate discussions, consultations, and negotiations. Termination of monitoring procedure applied to Ukraine on part of the FATF signified recognition of efforts and constant progress of Ukraine in implementation of efficient mech anism of combating legalization of proceeds from crime. The FATF recognized our country as honest and responsible member of the world community, reliable and active partner of the global network of counteracting money laundering which takes the most active part in fight against laundering of proceeds from crime and also works closely with the FATF member countries in fighting such crimes as terrorism, human trafficking, organized crime and cor ruption which in turn opens for Ukraine a new role and place in international community. Today we can say that the system created in Ukraine meets all main requirements of the FATF. Ukrainian system of counteracting laundering of proceeds from crime is constantly developing and improving considering Ukraine’s international responsibilities. Our country acts in accordance with worldwide trends and takes into account main international stan dards and requirements using successful experience of other countries of the world in sphere of fight against laundering of proceeds from crime and financing of terrorism. The Law of Ukraine “On Preventing and Combating Legalization (Laundering) of Proceeds from Crime” became the legal foundation of the national system of fight against laundering of proceeds from crime. In addition, today’s activity of the subjects of financial monitoring is regulated by the number of normative legal acts: joint resolution of the Cabinet of Ministers of Ukraine and the National Bank of Ukraine, 15 resolutions and 9 directives of the Cabinet of Ministers of Ukraine, 1 resolution of the Board of Directors of the National Bank of Ukraine, 1 resolu tion of the Plenum of the Supreme Court of Ukraine, 31 directives of the State Committee for Financial Monitoring of Ukraine. Financial monitoring is a complex of preventive measures aimed at barring the use of country’s financial system to launder proceeds from crime. National system of combating legalization (laundering) of proceeds from crime has two levels. First level is comprised of financial intermediaries: banks, insurance institutions, pro fessional participants of the securities market, investment funds, stock exchanges, etc. They must identify those of their clients who perform suspicious transactions, detect and register such transactions, and also immediately notify the appropriate authorities about them. Second level is comprised of regulators of financial services markets: the National Bank of Ukraine and the State Commission for Regulation of Financial Services Markets of Ukraine which regulate and monitor how financial intermediaries comply with requirements of Ukrainian law in sphere of fight against money laundering.
72 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
The State Committee for Financial Monitoring of Ukraine is appointed the center which ensures accumulation, storage, and analysis of information about suspicious financial transactions. If there are sufficient reasons pertaining to legalization (laundering) of proceeds from crime and financing of terrorism, the appropriate generalized materials shall be for warded to law enforcement authorities. The State Committee for Financial Monitoring of Ukraine gathers, processes, and analyzes information received from financial intermediaries, exchanges information with financial intelligence units of other countries, and also develops methodology for detecting schemes of laundering of proceeds from crime. During the entire period of its activity (as of July of this year), the State Committee for Financial Monitoring of Ukraine received more than 2.1 million notifications from financial intermediaries regarding financial transactions that should be subjected to financial monitor ing. Out of this number, 372.5 thousand notifications were received in 2006. More than 2.0 million notifications about financial transactions for the total amount exceeding 1.5 trillion UAH were uploaded to the database for further analysis. The following law enforcement authorities also take an active part in combating “dirty” money: the General Prosecutor’s Office of Ukraine, the Ministry of Internal Affairs of Ukraine, the Security Service of Ukraine, and the State Tax Administration of Ukraine. These structures have created special units and have been allocated material, financial, and human resources. Procedure for provision of generalized materials pertaining to doubtful financial trans actions by the State Committee for Financial Monitoring of Ukraine and receipt of informa tion about their processing is regulated by joint directives of the State Committee for Financial Monitoring of Ukraine and law enforcement authorities. All materials submitted by the State Committee for Financial Monitoring of Ukraine are forwarded to law enforcement authorities after their preliminary review and approval by the Expert Commission on Review of Generalized Materials Forwarded to Law Enforcement Authorities which includes representatives of all law enforcement bodies. Generalized materials contain the following typical groups of financial transactions: transactions related to illegal transfer of funds abroad; pseudo export (customs freight declarations with signs of forgery, export upon over stated prices or to non existing companies); nonresident transactions with securities; transactions related to converting of cashless funds into cash; insurance and reinsurance transactions; privatization related transactions; transactions upon lost passports; transactions with banking metals. As of July of this year, the State Committee for Financial Monitoring of Ukraine for warded to law enforcement authorities 1,119 generalized materials (668 primary and 451 additional materials) on 232,653 transactions which may be related to laundering of 82.5 bil
73 STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE lion UAH, including 11 materials related to suspected financing of terrorism. Out of this number, we forwarded to: General Prosecutor’s Office of Ukraine – 204 materials for the total amount of 17.3 billion UAH; Security Service of Ukraine – 378 materials for the total amount of 44.2 billion UAH; State Tax Administration of Ukraine – 231 materials for the total amount of 9.9 bil lion UAH; Ministry of Internal Affairs of Ukraine – 306 materials for the total amount of 11.0 billion UAH. During the entire period of our activity (as of July of this year), 220 criminal cases are investigated upon 259 generalized materials, 17 criminal cases were forwarded to court, and there have been 3 sentences. To improve and develop the system of combating legalization (laundering) of proceeds from crime and financing of terrorism, and also intensification of Ukraine’s participation in the development of international cooperation in this sphere, we created an Interdepartmental Work Group on Studying Methods and Trends in Laundering Proceeds from crime (resolution of the Cabinet of Ministers of Ukraine N 1565 dated October 2, 2003 “On Creation of Interdepartmental Work Group on Studying Methods and Trends in Laundering Proceeds from crime”). This group includes representatives of the State Committee for Financial Monitoring of Ukraine, the State Tax Administration of Ukraine, the Ministry of Internal Affairs of Ukraine, the State Commission for Regulation of Financial Services Markets of Ukraine, the State Securities and Stock Market Commission, the Security Service of Ukraine, the Ministry of Justice of Ukraine, the Ministry of Foreign Affairs of Ukraine, the Ministry of Economy of Ukraine, the State Customs Service of Ukraine, and the Secretariat of the President of Ukraine with participation of representatives of the National Bank of Ukraine and the General Prosecutor’s Office of Ukraine, People’s Deputies of Ukraine, and experts on financial issues. During the entire period of its work the Interdepartmental Work Group held 31 meet ing; activity of this group is aimed at implementation of tasks this group is charged with and based on coordination of activity of government institutions and guiding their work in the fol lowing directions: analysis of the efficiency of measures undertaken by state authorities in sphere of combating legalization (laundering) of proceeds from crime; implementation of Forty Recommendations of Financial Action Task Force (FATF) and other international standards in this sphere; preparation of normative acts on issues related to organization of cooperation among bodies of executive power in sphere of combating legalization (laundering) of proceeds from crime and financing of terrorism; creation of efficient cooperation among government agencies involved in sphere of combating money laundering including those on the regional level.
74 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
With support of the Interdepartmental Work Group, the State Committee for Financial Monitoring of Ukraine together with other government institutions have devised the Concept of development of system preventing and combating legalization (laundering) of proceeds from crime and financing of terrorism for 2005 – 2010, which in August 2005 was approved by the Government of Ukraine. The Concept determines strategic directions in work of government institutions on the improvement of the National System according to world standards of fight against money laundering and financing of terrorism. The Concept establishes a complex of priority tasks pertaining to: • prevention of the occurrence of preconditions for legalization of illegal proceeds and financing of terrorism; • improvement of the mechanism of regulation and monitoring of financial intermediaries; • improvement of performance of law enforcement authorities; • creation of efficient system of cooperation among government institutions; • improvement of skills of specialists and the level of their technical support; • participation in international cooperation; • formation of awareness in population about the need in counteracting legalization of illegal proceeds and financing of terrorism. An important factor in implementation of the Concept is establishment of cooperation among bodies of executive power on all levels. Today, there are 10 regional offices of the State Committee for Financial Monitoring of Ukraine. The regional offices are facing quite diffi cult tasks. First of all, it’s a methodological support of financial intermediaries on site and establishment of cooperation with local authorities in the regions. One of the directions in strengthening interdepartmental cooperation in this sphere and main priority for the implementation of the aforementioned Concept is the Plan of measures on preventing and combating legalization (laundering) of proceeds from crime and financing of terrorism for 2006 approved pursuant to resolution of the Cabinet of Ministers of Ukraine and the National Bank of Ukraine N 359 dated March 18, 2006. One of the priorities in development of the national system of combating laundering of pro ceeds from crime is expansion of the geography of Ukraine’s cooperation with other countries. Cooperation between the State Committee for Financial Monitoring of Ukraine and financial intelligence units of different countries of the world becomes more comprehensive. This cooperation extends onto many areas; main areas of it include exchange of information regarding possible cases of money laundering or financing of terrorism. Information exchange is based on international standards and recommendations of the Egmont Group. Main principles of handling inquiries are the speed of processing informa tion and confidentiality. To improve qualitative and quantitative indices of information exchange, in 2005 the State Committee for Financial Monitoring of Ukraine was connected to the information exchange network FIU.NET. These modern means of communication help in establishing convenient and secure channels of multilateral automatic exchange of information among financial intelligence units of European countries.
75 STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE
Connection to the information exchange network FIU.NET helps the State Committee for Financial Monitoring of Ukraine in preparation of generalized materials. Answers sent by financial intelligence units to our inquiries constitute important element in preparation of materials, improving not only their quality but the quantity as well. In partic ular, in certain cases information from other financial intelligence units forms main argument regarding presence of reasonable suspicions in money laundering and, accordingly, conduct ing investigation by law enforcement authorities. Today, the State Committee for Financial Monitoring of Ukraine works with more than 70 financial intelligence units of different countries of the world. During the entire period of its activity (as of July of this year): we sent 951 inquiries to 70 foreign financial intelligence units, and out of this num ber received replies to 779 inquiries; we received 369 inquiries from 46 foreign financial intelligence units (and sent replies to all of them). The State Committee for Financial Monitoring of Ukraine actively works with the fol lowing international institutions and organizations: • Financial Action Task Force (FATF); • The Egmont Group of financial intelligence units; • Council of Europe/European Commission; • Council of Europe Select Committee of Experts on the Evaluation of Anti Money Laundering Measures (MONEYVAL); • Eurasian Group on Fight Against Legalization of Proceeds from Crime and Financing of Terrorism (EAG); • International Monetary Fund and the World Bank. An extremely important task which our country faces today is implementation in Ukrainian law of provisions of Forty Recommendations of Financial Action Task Force (FATF), 9 special recommendations by FATF on combating financing of terrorism, International Convention on Fight Against Financing of Terrorism, and Resolution of the UN Security Council N 1373 (2001). To implement this task, the State Committee for Financial Monitoring of Ukraine pre pared a draft Law of Ukraine “On Iintroduction of Changes into the Law of Ukraine “On Preventing and Combating Legalization (Laundering) of Proceeds from Crime.” This draft legislation: • extends the list of financial intermediaries and regulators of financial services markets; • obliges financial intermediaries to take precautionary measures against clients whose activity implies heightened risk. • introduces mechanism of stopping financial transactions related to legalization (laundering) of proceeds from crime. • provides for distribution of confiscated assets received as a result of legalization (laun dering) of proceeds from crime or financing of terrorism according to which funds which Ukraine received pursuant to agreement on distribution of confiscated assets shall be posted to state budget.
76 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
Adoption of the aforementioned legislation will be a real step on the way of integration of Ukraine into worldwide system of combating laundering of proceeds from crime and financing of terrorism. In addition, one of the priority tasks for Ukraine in this sphere is implementation of measures on ratification of the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime and Financing of Terrorism (signed on 29.11.2005) and the Council of Europe Convention on the Prevention of Terrorism (signed on 16.05.2005). In conclusion, I would like to inform you that after detailed study of Directive 3 of the European Parliament and the EU Council “On Prevention of Use of Financial System for the Purposes of Money Laundering and Financing of Terrorism” the State Committee for Financial Monitoring of Ukraine took its provisions into consideration when preparing the aforementioned draft legislation. If this Law will be adopted, it will become yet another important contribution of the State Committee for Financial Monitoring of Ukraine on the way of Ukraine’s integration into European community. I wish all participants of the international conference fruitful cooperation, constructive dialogue, and gaining advanced experience in this sphere.
Thank you for your attention.
77 ACCOUNTS COMMITTEE FOR CONTROL OVER EXECUTION OF THE REPUBLICAN BUDGET OF THE REPUBLIC OF KAZAKHSTAN
SUPREME AUDIT INSTITUTIONS AND THEIR CONTRIBUTION TO ANTI CORRUPTION ACTIVITIES OF THE STATE
MR. OMARKHAN OKSIKBAYEV CHAIRMAN OF THE ACCOUNTS COMMITTEE FOR CONTROL OVER EXECUTION OF THE REPUBLICAN BUDGET OF THE REPUBLIC OF KAZAKHSTAN
Dear Dr. Symonenko, Dr. Kovach, Dr. Stepashin! Dear colleagues and friends! I would like to welcome you to this important event and thank the EUROSAI Management and the Secretariat, Chairman of the Accounting Chamber of Ukraine Dr. Valentyn Symonenko, for organizing this International Conference at such a high profes sional level. I’d also like to take the opportunity to congratulate the Ukrainian colleagues on their 10th Anniversary and wish them further success. I am sure that the Accounting Chamber of Ukraine, headed by its Chairman Dr. Valentyn Symonenko, a devoted person, will win the summit and, in fact, reach the high standards that they have set for themselves. We have another wonderful opportunity to discuss the issues that are of interest to us, find the answers to them and improve the work of the Supreme Audit Institutions of our countries. The subject of the discussion at our meeting is a vital problem – and it is our common problem. Today there are virtually no countries where the problems of bribery, protectionism, unlawful distribution and appropriation of public resources do not exist. Many countries of the world, including some developed countries, have to deal with these, as well as other, man ifestations of corruption. According to the data of “Transparency International (Anti Corruption Coalition)” published on the web site of this international social movement, over two thirds of 159 coun tries of the world, included in the Corruption Perceptions Index for 2005, had 5 out of 10 pos sible points, which is an indication of a high level corruption in the majority of the world’s
78 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION countries. Here it is also noted that all countries, with no exception, must take efforts to sup port an anti corruption environment. This is because the presence and reinforcement of corruption, as a rule, leads to inten tional impact upon the development of such laws and norms, which grant advantages to sep arate persons (often to the detriment of national interests). As corruption, in fact, is nothing but the use of state functions in someone’s own interests, which are usually in conflict with the interests of the society and of national security. And the main point is the existence of such indisputably negative consequences of cor ruption, as lowering standards of public services, creation of prerequisites for the growth of shadow economy, reinforcement of criminal entities, international terrorism and extremism. Overcoming corruption is a principal direction of state policy for Kazakhstan, and the Head of the state, Nursultan Abishevich Nazarbaev, clearly pointed to its priority. Recently had held 15th plenary meeting of the Foreign Investors’ Council the President of our country noted: «… we have the political will to eradicate corruption, and we have practical efficient methods to overcome it. We intend to continue our purposeful efforts to build the rule of law, democratic and open society, which, in itself, is the principal “medicine” for corruption.” The fact that we do not turn a blind eye to corruption and consider anti corruption activities as our priority, has a positive impact upon the actions taken, which can be justly characterized as systemic actions. A legal framework was formed in the Republic, in particular, the Law on Combating Corruption, the Presidential Edict on Measures for Reinforcement of Anti Corruption Activities, Strengthening of Discipline and Order in the Activity of Government Agencies and Officials etc. The implementation of the second Government Programme of Anti Corruption Activities for 2006 2010, which was preceded by the Government Programme for 2001 2005, has been started this year. In 1998 the State Commission for Combating Corruption was established. The Presidential Commission on anti corruption issues and the adherence of public servants to professional ethics has been working since 2002. The Commission (a consultative and advi sory body) is headed by the State Secretary of the Republic of Kazakhstan. Its members are deputies of the Parliament, Heads of the Presidential Administration’s key departments, the Prime Minister’s office and a number of public agencies. The Accounting Chamber repre sented by myself is also involved in the activities of this Commission. The key objective of the Commission is to elaborate and take concerted actions aimed at the reinforcement of the fight against corruption and against violations of professional ethics by public servants. The Commission undertakes monitoring and analysis of the state of anti corruption efforts, considers applications of individuals and legal entities, provides rec ommendations on official investigations and the imposition of disciplinary penalties, based upon the facts of corruption crimes. It should be noted that the process of combating corruption related offences undertak en in the Republic is based upon the principle of publicity and transparency. For example, the disciplinary councils established at the Agency for Civil Service Affairs are guided in their work
79 ACCOUNTS COMMITTEE FOR CONTROL OVER EXECUTION OF THE REPUBLICAN BUDGET OF THE REPUBLIC OF KAZAKHSTAN by the principles of publicity, regularity and preventive nature of activities. The Agency for Combating Economic and Corruption related Crime (financial police) must ensure the trans parency of anti corruption activities through informing the applicants and the general public of the results of the review of applications based upon the facts of corruption related offences. The results of the control of compliance with anti corruption laws of central and local executive agencies’ heads must also be communicated to the public at large. We are also checking the effective bylaws for the existence of norms that give rise to con ditions favourable for corruption related offences. In the course of the latest revision, which comprised over 5 thousand of the Republic’s subordinate acts adopted in 1991 2004, over 200 acts were identified, which contained some prerequisites for corruption related offences. Since the establishment of international cooperation is of special importance, great emphasis is placed on the strengthening of cooperation and interaction with respective insti tutions of foreign states, and also with international anti corruption organizations. In 2004 the Republic of Kazakhstan was included in the Istanbul action plan for com bating corruption by the unilateral decision of the Consultative Group of the Organization for Economic Cooperation and Development. Efforts for the accession to international conven tions are continued (Strasbourg conventions On Criminal Liability for Corruption Offences, On Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; the UN anti corruption convention). As other positive factors, we should also note the exclusion of Kazakhstan from the list of countries that do not have adequate protection of intellectual property rights, and the dis continuance of the proceedings on the withdrawal of the country’s preferential status in the General System of Preferences in trade with the United States. While evaluating the actual results of implementing the policy for overcoming corrup tion in the Republic, we should also note that we were able to make significant progress dur ing the latest years with the following tasks:
80 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
decentralization of government agencies’ functions and the transfer of separate func tions to the private sector; development of competition in the sphere of public services; implementation of the «single window» principle for the rendering of services to the population (in the cities of Astana and Almaty centres for public services were opened, where more than 10 types of public services are rendered to people); enhancing transparency and objectivity in competitive selection of civil servants; in particular, the norm was implemented in the Republic, which prohibits entry to the civil service persons who have committed corruption related crimes; efforts were intensified to establish e government, which is aimed at reducing the number of contacts of organisations and of the population with civil servants. All these actions had an overall positive impact upon the improvement of our Republic’s position in the list of countries in the Corruption Perceptions Index. According to the latest evaluation by the Anti Corruption Coalition that I already mentioned about, in 2004 2005 there was a significant progress in Kazakhstan, that is, the level of corruption recorded based upon evaluations dropped. However, we must not rest on our laurels. We still have to solve a number of problems, such as: the unreasonably broad authorities of some officials, the complexity of customs and tax procedures, as well as the procedures for obtaining licenses and permits, low efficiency of human resource management (and, to a greater degree, in the system of state agencies), inad equacy of penalties imposed for corruption related offences etc. Another serious problem for our Republic is the “import” of corruption. As many of you know, Kazakhstan has rich resources of raw materials, takes a leading position in terms of resources and the extraction of a wide range of mineral resources. In the transition period we staked on attracting foreign investments. And it is an open secret today that many investors bribe the officials to get some special privileges. The import of corruption is a phenomenon, which is also characteristic of the privati sation processes. In this case the corruption poses a real threat to the interests of the coun try’s economic security, because, in addition to possible losses due to the understated value of privatised objects, there are also risks of the unlawful transfer of strategically important objects into private ownership. These facts demonstrate the necessity to carry on the efforts aimed at the improvement of the state policy for overcoming corruption. As the President noted in his message to the people of Kazakhstan, «we are making continuous efforts to overcome corruption and improve the situation. However, the lack of transparency in the cash flow of some financial industrial groups and their unlawful enrich ment through the concealment of their profit, export of finances and property abroad, tax evasion, and also shadow economy becomes a serious obstacle for our development…It is time to start acting». Today all government agencies and the officials in our Republic, in compliance with the Law On Combating Corruption must be taking appropriate actions, which are within their competence, to fight against corruption.
81 ACCOUNTS COMMITTEE FOR CONTROL OVER EXECUTION OF THE REPUBLICAN BUDGET OF THE REPUBLIC OF KAZAKHSTAN
At the same time, external control institutions and especially the Supreme Audit Institutions, which present independent and impartial opinions on the transparency and effi ciency of the process of managing common property resources, must play a special part in over coming corruption, which poses a real and serious threat to national security. The Accounts Committee, which is the Supreme Audit Institution of the Republic of Kazakhstan, is currently taking an active part in anti corruption activities. Following the instructions of the Presidential Administration, the Accounts Committee, acting as a coordinator, together with the Agency for Combating Economic and Corruption Related Crime (financial police), Ministry of Justice, and General Prosecutor’s Office undertook the measures of control to evaluate the efficiency of the implementation of the Law on Combating Corruption. Pursuant to the recommendation adopted at the meeting of the Presidential Commission on anti corruption issues and the adherence of public servants to professional ethics, the audit of the use of budget funds allocated for the implementation of the National Agricultural and Food Programme was undertaken. While implementing the Government Programme of Anti Corruption Activities for 2006 2010, we are working over the establishment of the Centre for the Investigation of Financial Offences at the Accounts Committee. The activities of this Centre will be aimed at the minimisation and prevention of conditions, which lead to corruption related offences and crimes, through the investigation of causes of financial offences and making the recom mendations regarding their elimination. We also take an active part in the activities that are aimed at streamlining government measures for minimisation of corruption, through the following ways: Making the proposals for the improvement of accounting in the economy branches where cash settlements are predominantly used; Monitoring of the legality and efficiency of the use of funds by national companies, mega holding companies and joint stock companies; Checking the compliance with requirements of laws on state purchases. Here I would like to emphasize that the role of the Accounts Committee, especially in anti corruption activities of the state, clearly manifests itself in control and analytical activities. Today we are carrying out control activities to evaluate the effectiveness and efficiency of the use of budget funds, their use in strict compliance with their designated purpose, and we often face such problems as violation of the requirements of laws on state purchases. A government order may be placed groundlessly, when a “single source” method is used (in prejudice of the honest competition principle), and organisations that do not have corre sponding licenses may be contracted to perform construction work (damaging the quality of government order, and this damage is done by organisations that I would characterize as «cre ated to government order»). We often come across this, when we perform audits of the con struction of highways, railroads, public dwellings, health care and educational objects. And the shortcomings in laws, negligence and intents of state officials create favourable environ ment for corruption related offences.
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It is hard to say that corruption related offences are not the reasons for the establish ment of front firms, fly by night companies that evade the payment of required taxes. It was more than once that the Accounts Committee detected some front firms, which were estab lished due to the negligence of tax authorities, bankers, and weakness of the legal framework. Or, there is another thing. Huge amounts of money for the implementation of large scale programmes can be “knocked out” from the budget funds through unlawful lobbying. And such programmes are later found to be: firstly, uncalled for (in this case, alternative costs increase significantly for the state; these funds could have been used for some other, more important social purposes); secondly, implemented inefficiently, because the budget funds are not used in accordance with intended purpose or used unreasonably (in this case the state treasury incurs actual losses). We preclude all such actions. And in this case the Accounting Chamber has real and rather efficient controls to solve the problems in a quick and effective manner. Our independ ent opinion, which is substantiated by proof, reflects our viewpoint on the ways to improve the situation, is presented to the attention of governing bodies, the country’s parliamentari ans and the public at large. And this is already a guarantee of an adequate reaction of govern ment agencies in our opinion. And the evidence of corruption related offences that were detected and publicized cannot be ignored in a rule of law and democratic society. This is the reason why the Accounts Committee provides to the Government, corre sponding authorized agencies and the audited entities recommendations on enhancing the transparency of the process of formation, distribution and use of budget funds and state owned assets. Just on the basis of the results for 2005, the Accounts Committee submitted 29 recommendations to the Government on due compliance with the budget law, improvement of some norms, and the elimination of violations detected. As an example, I can cite some recommendations of the Accounts Committee addressed to the Government and reflected in our annual report that we submitted to the Parliament recently. In particular, we recommended the initiation of amendments to applicable regulatory
83 ACCOUNTS COMMITTEE FOR CONTROL OVER EXECUTION OF THE REPUBLICAN BUDGET OF THE REPUBLIC OF KAZAKHSTAN legal acts regarding the establishment of procedures for the use of property, which is in the own ership of joint stock companies with the participation of the state, and also gaining the consent of a respective authorized agency upon property divestiture issues in the economy branches that are of strategic importance. If this recommendation is followed, this, in our opinion, will elim inate the prerequisites for corruption related offences in the sphere of state owned asset man agement by enhancing the transparency in the activity of joint stock companies. Defining the role of the Accounts Committee in anti corruption activity of the state, we should note that we have the legal authority to take control measures of access to any information that is of interest to us. These authorities entail respective obligations, including the obligation to preclude and prevent corruption related offences. Our work must be per formed in a high quality and efficient manner. We must be able to provide to the Head of the State, Parliament and mass media objective information on the transparency of the work of state machinery regarding public resources management. It is my firm belief that the Supreme Audit Institutions must be continually enhancing their institutional capabilities and increasing their potential in the light of the anti corruption work undertaken. Here I would like to note that for the purpose of active involvement in the process of fighting against corruption we elaborated the action plan for the implementation of the Government Programme of Anti Corruption Activities for 2006 2010. One of these actions is the creation of measures for cooperation with Supreme Audit Institutions for the exchange of information on the audited entities involved in corruption related offences, and on viola tions of the anti corruption law. I would like to emphasize that the Conference considerably enhances not only the opportunities to establish information exchange for each participant, but also the opportuni ty to arrange actual joint actions, including control. In conclusion, as a proposal, I would like to mention the necessity to continue our efforts for combating corruption, both at the level of EUROSAI, and at the bilateral and mul tilateral cooperation level. Since there is need to train our personnel in the skills of identifi cation, preclusion and prevention of corruption related offences, we can initiate the inclu sion of workshops on the issues of anti corruption activities in the Programme. Joint efforts of Supreme Audit institutions of the international community enable suc cess in overcoming corruption, and this also means success in the improvement of our nations’ well being. And for this purpose we must be guided by the following principle: The stronger the Supreme Audit Institution and the more transparent the system of public resource management the less corruption exists!
Thanks for your attention!
84 STATE AUDIT OFFICE OF LATVIA
THE ROLE OF SUPREME AUDIT INSTITUTIONS IN FIGHTING AGAINST FRAUD AND CORRUPTION
MS. INGUNA SUDRABA AUDITOR GENERAL OF LATVIA
I would like to start by thanking our host, the Chairman of the Accounting Chamber of Ukraine for giving me the opportunity to say a few words at this important event. The chosen theme for the conference – the role of SAIs in the fight against Fraud and Corruption – is an important one, and one that impacts, to a greater or lesser extent all SAIs. I would like to spend a few minutes to inform you of how the Latvian State Audit Office is playing its part in tackling fraud and corruption in the public sector. When working to International Auditing Standards, we have an obligation to take into consideration the risk of fraud when planning and undertaking individual audits of financial statements. However I would like to spend this time talking about what the SAO does, at an institutional level, to counter fraud and corruption. Historically, Latvia faced a significant problem in this area, with fraud and corruption being almost accepted practice. This involved the direct misappropriation of State money or assets, and the receipt of inducements by public officials for delivering routine public servi ces. Although the situation has clearly improved, there still remains a perception within soci ety, that the speed or quality of public services or a favourable decision cannot be guaranteed without some form of inducement to the public officials involved. As an institution, the SAO can try to influence things for the better through two main routes: • Our working relations with other public sector bodies; and • In our choice of audit subjects. Dealing firstly with how we operate with other institutions. While our financial audits do not directly involve the SAO actively looking for actual instances of fraud or corruption, they will fairly often encounter cases of irregularity, and in some cases a suspicion of fraudulent activity.
85 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
We would report such findings in a number of ways. All significant audit reports are submitted to the Latvian Parliaments’ Public Expenditure and Audit Committee. The Committee will use our audit report to interview the Minister or senior official responsible for the audited entity. In the reports we would highlight all significant breaches of procedures or legislation, and we would encourage the Committee to ensure that appropriate action is taken by the Ministry involved. From our financial audit work on the State accounts for 2005, some degree of irregu larity was found in most audits. In some significant cases these clearly involved deliberate breaches of legislation or procedures, rather than simply through negligence. In general, the audited bodies’ reactions to our findings has been disappointing, and in some cases, the atti tude has been almost one of indifference. I have been working with our Committee to get senior public officials to regard any breach of legislation as a serious matter. Without an over riding respect for the Law, which after all represents ‘Parliamentary intention’, real financial control and accountability in the public sector will be impossible to achieve. For the more blatant cases of irregularity, the SAO has reported the results directly to another Parliamentary Committee – on the Prevention of Corruption and Contraband and Organised Crime. This clearly raises the profile of the more serious cases, and with it, the expectation that appropriate action will be taken. The SAO has recently reviewed it’s working operations with two other public sector bodies – Latvia’s Anti Corruption Bureau and the Prosecutor General. Where our audits have uncovered possible cases of fraud or corruption, we would pass on the details to the Anti Corruption Bureau, which would then decide whether or not to investigate the case further. And in the case of the Prosecutor General, we send them a summary of all irregularities and illegal acts found during our financial audits. Again, it is up to the Prosecutor General’s Office to decide on what further action to take.
86 STATE AUDIT OFFICE OF LATVIA
In summary, much of my time is spent with politicians (via the two committees men tioned previously) and the media, to convince them that primary legislation and the under lying procedures and regulations are designed to safeguard public money and assets, and that any breaches by public officials, should not be tolerated. I acknowledge that the SAO cannot tackle such issues on its own. Success here will depend on all the key players in the public sec tor working together. It is this legislative framework which underpins the system of financial control in the pub lic sector. And, as public sector auditors, in common with many other SAIs, we have a legal responsibility, as part of our financial audits, to check that the transactions included in the accounts are ‘lawful, and have been used in accordance with Parliamentary intention’. To give more recognition to this aspect of public sector auditing, for the next financial year, we are con sidering splitting our audit opinion into two parts: the first on whether ‘the accounts present a true and fair view’; and the second on the legality of the transactions included in the account. This may seem like a relatively minor change, but it would give a much higher profile to the regularity aspect of our financial audit. Secondly, it will give us more flexibility when reporting the results of our work. For example, it gives us the option of qualifying the ‘regu larity’ part of our audit opinion, when material irregularities have been found, but the accounts are still deemed to give a ‘true and fair’ view. The other aspect of our work that I would like to cover briefly is the SAO’s role in pro moting fairness and transparency in the delivery of public services and in decision making generally. There should be an expectation within the general public and business that the sys tems in the public sector are robust enough to produce fair decisions on the use of public money, without the need to have to influence in some way the public officials involved. When auditors are asked to identify audits to undertake, in addition to our statutory financial audits, one of the selection criteria we use is the delivery of public services. Two recent audits have been on the applications procedure for certain EU grants, and on the pay ments of benefits by Riga City Council to low income households. These audits would nor mally involve looking at the accessibility to the public of the application process. This would be both in terms of the awareness of potential beneficiaries of the grant schemes and benefits available, and secondly of the ease with which potential claimants can apply. The audits would then focus on the appraisal process itself, looking for adherence to procedures and the use of pre determined criteria. Finally, the audits would check that there was a fair and transparent appeals process in place. Such audits, from a practical point of view, are easy to undertake by auditors coming from a largely regularity/ legality audit background, but who may not have the skills yet to tackle pure performance audits. And looking at the systems in this way, normally results in audit recommendations designed to improve the system as a whole, therefore reducing their vulnerability to potential corruption. Finally, a largely positive audit report on a particular grant or benefit scheme will increase public confidence that the process is a fair one. In summary, the SAO is working hard on two fronts in the fight against fraud and cor ruption. Firstly to convince the elected politicians and the media that all breaches of laws, or laid down procedures should be treated seriously. Over time, all officials should be working
87 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION in the public sector for what they can contribute to that sector, rather what they think they can gain from the position. Secondly, by focussing our audits on aspects of public service delivery that have tradition ally been vulnerable to fraud or corruption. By securing improvements to such systems is more effective than reporting one off cases of poor or suspect decision making. Also by promoting public confidence in public sector systems, over time, we will reduce the perception that these systems cannot deliver fair decisions. Often this perception among both the public and business is just as damaging to the image of the public sector, as actual fraud and corruption. I acknowledge that in both areas, tangible results will take some time to achieve – but the SAO is here for the long term.
Thank you for your attention.
88 COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA
THE ROLE AND FUNCTIONS OF THE COURT OF AUDIT AS THE SUPREME AUDIT INSTITUTION IN THE DEVELOPMENT OF THE NATIONAL SYSTEM OF ANTI CORRUPTION AND ANTI FRAUD WORK
MRS. ALLA POPESKU PRESIDENT OF THE COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA
Dear colleagues, Ladies and gentlemen, The prevention and fighting against corruption are one of the top priorities of the eco nomic, political and social reforms in the Republic of Moldova. Providing an unprejudiced evaluation of the political, economic and social changes taking place after gaining independ ence, one could not keep from paying attention to the destructive impact of these changes on public administration and the development of the country, specifically in the context of the corruption phenomenon. The large scale of corruption and importance of the spheres affect ed by it imperatively require us to apply a strategic approach to combat it. The Court of Audit of Moldova plays an important role in the fighting, and since the adoption of the Law On Fighting Agaisnt Corruption and Protectionism dated June 27, 1996, Nr. 900, the Audit has become one of the specialized bodies on corruption prevention and fighting. There is no doubt that the problems of corrupt government officials and the legaliza tion of money laundering, including the damage that corrupted practice does to the econo my, causes serious concern among both the government and the public at large. The legaliza tion of criminal or illegal proceeds has a destructive impact on the financial system and the economic stability of the country, negatively influences the national budget and society; it promotes the flourishing of corruption in the public sector and violations of law in the finan cial system. Thus, combating this phenomenon is one of the most important factors of the national economic growth and economic security.
89 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
In 2002 an independent law enforcement body, the Center on Fighting against Economic Crimes and Corruption, was established. The Court of Audit forwards its audit reports about considerable financial offences and corruption in the public sector to the Center. An important step on the way to anti corruption work was made with the adoption of the National Anti Corruption Strategy and Action Plan on the Strategy implementation; the Strategy was adopted by the Parliament in December 2004. For the successful implementa tion of the Action Plan, the Monitoring Group was established within a Center on Fighting against Corruption; it was organized in pursuance of the Decree of the President in April 2005. A representative from the Court of Audit is a member of this Group. Every three months at its meetings the Group reviews the implementation of the Action Plan on the National Anti Corruption Strategy implementation, listens to the reports of the ministries and agencies responsible for its implementation. Within the Prosecutor General’s Office the Anti Corruption Office was established, which is focused on the eradi cation of corruption in the public sector. The results of the poll held by Transparency International Moldova show considerable progress in the prevention and combating corruption and the efficiency of the National Anti Corruption Strategy implementation. The perception of the rate of corruption in the country amounts to 2.9 from possible 10 points, and Moldova occupies 95th place in the list of 159 countries participating in the poll. In 2004 the same rate amounted to 2.3, and Moldova occupied the 117th place from 146 countries in the list.
Dear participants of the Conference, Despite the available legal base for anti corruption work the law enforcement bodies experience difficulties in applying effective measures against suspicious financial transac tions. An issue about the role and functions of the Court of Audit as a Supreme Audit Institution becomes very important in this context. It becomes even more important today when the government has been implementing reform on strengthening the public administra tion, ensuring publicity, transparency and an improvement of finance management. In line with the Constitution and Law of the Court of Audit, and also in pursuance of the Lima
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Declaration, the effective control over legitimacy, reliability, timely use, targeting and effi ciency of budget funds spending, it remains the top priority of the Supreme Audit Institution of the country. In Moldova all government bodies, including central line public administration bodies and tax administration bodies, are subject to financial audit. The National Bank of Moldova and commercial banks, where the public share in statutory capital amounts to more than 50%, and also all the enterprises supported by the budget are also subject to audit. As the audit findings, the Court of Audit takes decisions, where it puts forward a num ber of requirements and recommendations to remove the shortcomings discovered as the audit findings and establishes sanctions against the officials responsible for the shortcomings; those requirements and recommendations are of an official nature and are obligatory for the implementation by all monitored subjects. In 2005 some 560 requirements were forwarded to the monitored subjects. In response to the audit findings the monitored subjects have to elaborate a list of meas ures to remove the discovered shortcomings and inform the Court of Audit about the imple mented measures. All shortcomings revealed in the course of the audits shall be reported to the higher bodies and other related institutions. In 2005 the Court of Audit’s decisions were forwarded for information to the following bodies: to financial bodies – 8 decisions, to the President of Moldova 22 decisions, to the Parliament 29 decisions, to the Government 13, to the Office of Prosecutor General – 15. The result of the Court of Audit’s instructions was that the State Budget was recompensed with 37.0 million lei (some 241,000 lei per one work er in average) and public property to an amount of 31.2 million lei was made up, which is a 600% increase to the budget funds allocated for the Court of Audit in 2005. Annually the Court of Audit undertakes around 600 financial audits. The results obtained show shortcomings in the management of State Budget funds and public property. Usually the shortcomings are of the following nature: breaching of budget and tax discipline; deficit of transparency and non compliance with the procedure of government purchases; all types of shortcomings in management of public property; and non compliance with the prin ciple of economic efficiency in spending of public funds’. Government purchases are the most vulnerable issue from the corruption and money laundering point of view, as the established procedures and legislation in force are most fre quently violated in the course of government purchases, and these result in the inefficient spending of budget funds. Nevertheless, these violations can not always be classified by audi tors as facts of corruption or money laundering due to the absence of unambiguous legal reg ulations. That is the reason why the drafting and adoption of a new law on government pur chases is envisaged in the National Anti Corruption Strategy for 2006. Thus, the development of special tools for financial audits to reveal fraud and monitor corruption in government purchases, as well as the training of personnel, should become the most important activities. The experience gained by the Supreme Audit Institutions, which carry out the audits, may become very helpful in this context. Speaking about the interrelations between the Court of Audit and the interested organ izations at the national level, it is worth mentioning its cooperation with the Parliament. 91 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION
The Court plays an important role in providing the Parliament and civil society with the necessary information about the spending of public funds and revealed violations of the exist ing rules or inefficient spending. Annually by July 15, in line with legislation, the Court of Audit shall submit to the Parliament a report about the management of public funds in the previous financial year; the report includes the discovered shortcomings and measures taken, describes the weaknesses and gaps in the regulatory documents. The Court report is presented by its Chairman at a spe cial meeting of the Parliament. Also, the Court takes an active participation in the discussion and approval of the draft State Budget, providing the Parliament with forecasts on revenues and expenses of the State Budget both at the national and local levels: it checks all the assumptions of the Ministry of Finance and in the course of implementation of the law on local public funds it reviews prospective inter budget relations with the budgets of the territorial and administrative units. It is worth mentioning the close and efficient cooperation between the Court of Audit and the Government of Moldova, the Parliament, Ministry of Finance and the Main State Tax Administration at the stage of the implementation of the Court’s recommendations and requirements by the monitored subjects; the Court’s recommendations deal with tax and budget discipline, which directly influence the national economy and eventually improve the living standards of people. The performance output of the Court of Audit in 2005 proves the necessity of further increasing its efficiency through: increased quality of audits carried out by the Court on the one hand, and a tightened implementation of the criminal and procedural legislation by law enforcement agencies, on the other hand; broader application of the experience of international SAI; carrying out joint audits with all the stakeholders aimed at revealing financial short comings and economic offences.
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The work of the Court of Audit will become much more efficient as a result of the installation of a computer informational system ‘Court of Audit’, which is now under devel opment; the system will become a part of the integral government system of gathering, pro cessing and analyzing of information. This will facilitate an increased quality of analytical work when carrying out audit and monitoring of budgets at all levels, and will facilitate the discovery of offences related to corruption. The Court of Audit of Moldova actively cooperates with INTOSAI and EUROSAI, and also with GRECO, of which Moldova is a member country. In April, 2006, a group of experts from GRECO visited Moldova and its SAI; the experts positively assessed the progress in anti corruption work.
Dear colleagues, A requirement to increase the quality and efficiency of the Court of Audit’s perform ance outputs forward new objectives on the optimization of auditing work. Moldova’s goal of European integration requires us to undertake a reform of the budget and taxation system and of public finance management. Financial control is an important component of this reform. The reform includes the reorganization of internal financial control into internal financial audit on the one hand, and reorganization of the external financial control into external financial audit, on the other hand. To implement this objective Strategic Development Plan of the Court of Audit for 2006 2010 was developed with assistance provided by the Department of Foreign International Development (UK). The main goal of the Strategic Plan is to shift from the reg ular financial control of government bodies to annual audit of accounts, and the application of the efficiency audit. The key advantages of this approach will include: first, the independ ence of auditors, and, second, an annual audit of the implementation of the Law on State Budget and the submission of the Audit Report to the Parliament. The main objectives in the implementation of the Plan are as follows: strengthening of institutional development, reorganization of the institution in line with European standards; professional growth of the personnel capable of applying advanced methods of audit and efficiency evaluation; developing the competence and qualities of the personnel, including the improve ment of personnel management; increasing the efficiency of the Court and its role as an agency of high quality audit. The implementation of the Strategic Development Plan will bring many benefits both to the state and the people, who will play a decisive role in transparent and responsi ble public administration. Increasing the efficiency of financial control will reveal weak nesses and the areas of increased potential risk of corruption and money laundering, and thus make it possible to prevent offences in the financial and economic areas and establish an anti corruption climate.
Thanks for your attention!
93 OFFICE OF THE AUDITOR GENERAL OF NORWAY
MR. PER. A. ENGESETH DIRECTOR GENERAL OF THE OFFICE OF THE AUDITOR GENERAL OF NORWAY MS. TORA JARLSBY DEPUTY DIRECTOR GENERAL OF THE OFFICE OF THE AUDITOR GENERAL OF NORWAY MS. GUNN SKJØLSVIK SENIOR ADVISOR OF THE OFFICE OF THE AUDITOR GENERAL OF NORWAY
1. Background Traditionally the Office of the Auditor General (OAG) has not had a specific role or clear mandate for combating economic crime and irregularities. However, during the past few years there has been an obvious change in attitude in this area, and the role of the auditor in the fight against economic crime has become a subject for discussion. As a result, expectations of the role of external auditors in combating economic crime have undergone considerable change. For external auditors working in private enterprises this is clearly expressed in the Norwegian Act of 15 January 1999 relating to auditing and auditors (the Auditors Act) which states that by way of audits the auditor must not only help to pre vent irregularities and errors, but must also bring them to light. This provision is reinforced by the auditing standards for private sector auditing which include a standard relating to irreg ularities and errors – RS 240 – that corresponds to ISA 240 (IFAC). A proposal has been sub mitted to the effect that in compliance with the Norwegian Auditors Act, auditors should not only be entitled but should also be obliged to report to the police any suspicion they may have that a criminal act has been committed. The considerations of this proposal have not yet been completed. One of the provisions in the Norwegian Money Laundering Act of 20 June 2003, an Act that has already been adopted, puts auditors under the obligation to report cases of money laundering.
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The OAG has had its own standard for irregularities since 1998. Changes in this area in the OAG have meant that from being assigned relatively little attention the subject is now being increasingly discussed. This is in line with the development within a number of other SAIs – institutions that can appropriately be compared with the OAG. In January 2001 Norway joined GRECO (Groupe d’états contre la corruption) under the Council of Europe. GRECO puts together evaluation teams that survey and assess the si tuation in each member state with regard to the fight against corruption in particular and against economic crime in general. One such survey was conducted for Norway in 2002. The report from GRECO pointed out that the OAG should be granted the right to report findings and suspicions to the police or to other supervisory bodies – for example to the authorities that deal with the various types of taxes or to Customs and Excise.
2. The Office of the Auditor General’s mandate for auditing irregularities Through the introduction in 2004 of the new Act and instructions relating to the Office of the Auditor General, the Storting (the Norwegian parliament) assigned the OAG a more active role in the fight against economic crime and irregularities. Section 9, paragraph 4 of the Act of 7 May 2004 (the Auditor General Act) states: The Office of the Auditor General shall through auditing contribute to the prevention and detection of irregularities and errors. This provision entails two significant changes compared to previous practice: it estab lishes by law that the OAG has a role to play in economic crime and irregularities, and that this role includes both preventing and detecting irregularities and errors. This constitutes an extension of the mandate of the former standard for the OAG which stipulated that the role encompassed preventing irregularities through auditing but not detecting them. Section 15, paragraph 4 of the Act of 7 May 2004 (the Auditor General Act) states: …. The Office of the Auditor General can also make a report to the police if an audit reveals circumstances that give cause to suspect that a criminal offence has been committed. The Office of the Auditor General can also cooperate whenever relevant with other public supervisory author ities. Information may be provided even if the audit has not been completed and without reporting the matter to the audited entity or the supervisory ministry. The right to inform and cooperate with the police and other supervisory authorities is new compared with former practice. In its consideration of the Act, the Storting pointed out that the OAG has a significant role in the fight against irregularities and corruption, and therefore gave its support to the OAG’s proposal to follow up GRECO’s recommendation.
3. Auditing standards On the basis of the legislative amendments, three auditing standards relating to irregu larities have been established: Standard 5 Through auditing, the Office of the Auditor General shall contribute to preventing and iden tifying irregularities.
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Standard 6 When planning and performing audit procedures and assessing and reporting the results of these, auditors shall assess the risk that there may be irregularities. Standard 7 Auditors shall consider gathering information in the audited entity about detected cases of irregularities and about any consequences these may have entailed. The purpose of the above standards includes laying down requirements regarding the assessment of the risk of irregularities on the performance of all types of audit undertaken by the OAG. The explanations accompanying the standards state: Section 9, paragraph 4 of the Auditor General Act states that through auditing the Office of the Auditor General shall contribute to preventing and identifying irregularities and errors. During consideration of the Act it was pointed out that the Office of the Auditor General has an important role in the fight against irregularities and corruption, underlined by its opportunity to report its findings and suspicions to the police or other supervisory authorities. It follows from Section 15, paragraph 4 that the Office of the Auditor General can make such reports unconstrained by its duty of confidentiality. The term” irregularities” is used to refer to intentional acts that entail the use of dishonesty or fraudulence to achieve an unfair or unlawful benefit for oneself or others. Irregularities can be performed by one or more persons within management, by persons who have superior responsibil ity for governance and supervision or by employees or others. Irregularities can be distinguished from errors by a consideration of whether the underlying action has been carried out intentional ly or unintentionally. In general terms, the following types of irregularities are relevant for audits: • corruption • breach of trust • embezzlement • theft • false reporting of financial statements and results Auditors shall assess the risk of there being irregularities in the financial statements or other relevant information. Quantitative and qualitative considerations of materiality shall be used as a basis for the assessment of the matters that are to be audited. Auditors must be aware that cases of irregularity related to the use of public funds often attract greater attention than such cases in the private sector. The Office of the Auditor General must bear in mind the expectations of the Storting and the general public regarding how public funds are to be employed and the expectations these parties have of the Office of the Auditor General as an auditing institution. Consideration must therefore be given to the appropriate measures that must be implemented to identify any irregularities without the audit acquiring the character of an investigation. In some cases this will also apply where irregularities do not involve substantial amounts or assets.
Entities may take decisions that have financial consequences for other parties without these decisions having accounting importance for the entity or the public sector, e.g. the allocation of
96 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION concessions and permits. In addition, some entities exercise authority of a non economic nature where some parties may have an interest in influencing decisions or actions. In entities that make this type of decision there is a risk of persons becoming involved in corruption, and auditors must therefore assess the possibility of this in their risk analysis. It is the entities rather than the auditors that have the main responsibility for preventing and detecting irregularities through the implementation and operation of satisfactory systems for accounting and internal control. The audit can help to reduce the risk of irregularities arising, and when planning and performing audits auditors should have a critical attitude to the fact that there may be irregularities in the audited entity. In the event of any suspicion of irregularity, auditors should act cautiously and correctly and should not draw hasty conclusions. In consultation with the management of the division/department, auditors should clarify the procedure to be followed, including whether the police or other supervisory authorities are to be notified and whether necessary measures to avoid the destruction of evidence and the like are to be implemented. The Auditor General and the Secretary General of the Office of the Auditor General must be informed.
4. Guidelines for financial auditing In addition to the OAG’s standards on irregularities, the auditor’s tasks and obligations in this field have also been included in the new guidelines for financial auditing. These new guidelines are based to some extent on the IFAC standards, while part of the contents shows parallels with ISA 240. The new guidelines for financial auditing state: The task of “contributing to preventing and detecting irregularities” is important for both exercising the role of external auditor and for acting as the auditing and monitoring body for the Storting. Auditors’ assessments of the risk of irregularities must be related to both the financial dis positions and to the correctness of the financial statements.
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An extended assessment of the risk of irregularities entails auditors being fully aware of the audit question during the planning and performance of the audit. This applies to collecting infor mation, risk analyses and audit procedures. Audits of irregularities form an integral part of financial auditing. The cause of irregulari ties can often be linked to pressure or attitudes as well as to existing opportunities. Through dis cussions in the audit team, auditors must assess where the agency that is exposed to irregularities is to be found. The audit team should also specify more closely the types of irregularity that may occur. In addition, auditors must engage in a dialogue with the management to inform them that irregularities have been detected. If, through their monitoring activities or as a result of a tip off or similar, auditors should detect signs that irregularities have occurred, they must behave cautiously and correctly and must not draw hasty conclusions. In such cases it is important for auditors to follow the administrative procedures that apply at all times for this area. Auditors must document the assessments of the aspect of irregularity that have been made for the audited agency. More detailed guidelines on this subject are currently being drawn up.
5. Organisation and reporting Efforts to prevent and detect irregularities are not currently organised in any particular way in the OAG. When performing risk analyses in the planning of audits, auditors must give consideration to the possibility of irregularities occurring. It has been decided that the OAG is not to conduct forensic audits – in other words it is anticipated that investigations or more detailed examinations will be carried out by the police since monitoring to detect irregulari ties is included in both financial audits and performance audits as a natural part of the plan ning, conducting and reporting of the auditing work.
The former procedure has not involved the OAG notifying the police about any suspicion of economic irregularities or other criminal circumstances. Suspicions or findings were to be taken up with the agency or, if appropriate, with the supervisory ministry. In cases where the min istry did not follow up the findings satisfactorily, the matter could be reported to the Storting. On the introduction of the new Act of 15 January 1999 relating to auditing and audi tors (the Auditors Act) it was established by law that, unconstrained by the duty of confiden tiality in accordance with paragraph 3 of Section 6 1 of the Auditors Act or on special agree ment, private auditors can inform the police if in the course of an auditing assignment or other services circumstances emerge that give them reason to suspect that a criminal act has been committed. One of the evaluation team’s recommendations after the survey conducted by GRECO/the Council of Europe in 2002 directly concerned the OAG’s role in the reporting of irregularities: ”– to review the regulatory framework applicable to the cooperation between the Office of the Auditor General, the police, ØKOKRIM and other relevant law enforcement bodies. The OAG
98 THE ROLE OF SAIs IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION should be allowed to report any suspicions to the police/ØKOKRIM immediately and confiden tially upon discovery whilst the audit is continuing.” The new Act and instructions relating to the Office of the Auditor General allow the OAG to take a more proactive role in the fight against economic crime. This opportunity to play a more active role also indicates that it should be possible – unconstrained by the duty of confidentiality – to report findings and suspicions to the police or to other supervisory bodies, for example to the authorities that deal with the various types of taxes or to Customs and Excise. The OAG has thus by legal authority been given the right to inform and coope rate with the police and other supervisory authorities. This is a new departure and provides the OAG with an extended mandate on reporting irregularities to the police and cooperating with other public supervisory authorities.
Safeguarding an agency’s interests is primarily an administrative managerial responsi bility – for example by reporting economic crime. However, this opportunity for the OAG to report directly to the police authorities can be relevant if the suspicion is directed at the man agerial level in an audited entity. To make the adjustments required by the extended mandate on the reporting of irregu larities, the OAG is now working to establish case processing routines for follow up by audi tors/divisions/departments of relevant findings and of suspicions of irregularities and econom ic crime. Such routines have not yet been established, but they will include the procedure for reporting findings to the police or for cooperating with other public supervisory authorities. Some meetings have been held with the ØKOKRIM (The Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime ) to dis cuss the possibility of exchanging information.
6. Nordic working group on irregularities and economic crime A working group has been set up consisting of representatives from the Norwegian, Swedish, Danish and Finnish SAIs. This group has exchanged information about the role of the Nordic countries’ SAIs in the prevention and detection of irregularities and econom ic crime. The group’s report will be dealt with at the Nordic meeting of Auditors General in autumn 2006. Among other topics the working group has discussed what the SAIs can do to improve the handling of irregularities in auditing and to increase auditors’ understand ing of the need to prevent and detect such irregularities in their work. The measures out lined by the group include: • Compiling specific guidance material/handbooks on the practical performance of audits. • Drawing up standard working papers or templates for documents that are to be used when working on irregularities – for example documentation of risk assessments, inquiries to audited entities, declarations from the management of audited entities etc. • Establishing special routines to indicate how specific cases of irregularity detected in the audit are to be handled internally in the SAI and how the SAI is to handle such cases in
99 OFFICE OF THE AUDITOR GENERAL OF NORWAY relation to the agency in question, the supervisory ministry, the police authorities, the prose cution authorities and the tax authorities or other authorities if appropriate. • Setting up a register to record specific cases of irregularity in the audited ministries and agencies, both those that the SAI detects itself or those that the SAI receives information about in another manner (e.g. via the media, through anonymous tip offs, or disclosed by the agency). • Enhancing the competence of auditors in general through internal and external courses and seminars. • Establishing a dedicated unit in the SAI intended to build special expertise and pos sibly to assume specific responsibility for handling matters concerning irregularities or pro viding advice on such matters. • Compiling an annual report on how efforts to both prevent and detect irregularities have been carried out and on any cases of identified irregularities. The report can be relevant for both internal use by the management of the SAI and possibly with a view to reporting to the parliament concerned. • Setting up cooperative forums with other auditing organisations for the exchange of experience. • Conducting a study in a considerable number of audited entities to clarify the extent to which the management pays attention to the problem of irregularities in their own risk assessments, how they monitor this in their governance, whether cases of irregularity have been detected in these agencies etc. • Presenting to the auditors involved the result of the handling of the matter by the judi cial system and the tax authorities, and transferring the experience gained to all auditors.
The OAG is currently assessing the implementation of these draft measures. The OAG is particularly aware of the importance of assigning priority to competence enhancement for auditors through courses and suchlike, and is also considering setting up a register for record ing specific cases of irregularities.
100 SUB THEME II THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION SUPREME CHAMBER OF CONTROL OF POLAND
THE PRACTICE OF THE SUPREME CHAMBER OF CONTROL IN THE IMPLEMENTATION OF TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHT AGAINST FRAUD AND CORRUPTION
MR. MIROSŁAW SEKUŁA VICE PRESIDENT OF THE EUROSAI GOVERNING BOARD, PRESIDENT OF THE SUPREME CHAMBER OF CONTROL, CHAIR ON THE II PLENARY SESSION
1. Introduction Recent years of system transformations in Central and Eastern Europe have brought about not only beneficial changes, such as establishment of democratic governments or reconstruction of economic systems, but also factors impeding these beneficial changes, for example growing social inequality and increased fraud and corruption. Legal imperfections during the transformation period, together with the lack of expe rience in dealing with unethical behaviours of people who are responsible for the state and who perform public tasks, have resulted in many corruption threats. Corruption is not a mo dern phenomenon, but a blameworthy practice that has been accompanying human activities for ages. It increases especially in systems where democratic rules for the state functioning coincide with an imperfect legal system and inaccurate procedures. The same applies to human attitudes and behaviours, both of persons involved in the creation of the new reality and of the addresses of these actions, that is average citizens of our country. It is so, because even the best law and regulations are useless if people are not upright, honest, respectful of rights, or loyal and reliable at work. We are used to disregarding the law, and we cannot get rid of this approach even today. We happen to treat an infringement or circumvention of law as a reason for glory, instead of feeling shame. When the system is in the course of transformations towards democracy and best solu tions are being sought, when there is little experience in predicting results of various actions, and persons responsible for these changes lack ethics, distortions are more common than under dictatorship or monarchy.
102 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION
The very phenomenon of corruption has been defined and categorized in various ways. Whatever the definition, it consists always in deriving a kind of benefit while taking advantage of some available procedures or of lack of precisely defined laws. In fact, all states must cope with this type of pathology and there are no uniform and definite measures to eliminate, or at least reduce, such attitudes and behaviours.
2. Corruption prevention strategies There are several ways to formulate a corruption prevention policy, but the two most frequently considered ones are the following: The first policy, involving penal and administrative measures, emphasizes the neces sity to improve the law and methods for functioning of public administration through anti corruption regulations and their consistent application. It covers criminal, administrative and financial laws, especially in the field of public administration, financial control systems and internal audit, as well as activities of Supreme Audit Institutions (SAIs). This approach focus es on elimination, by means of detailed legal norms, of any areas of potential ‘conflict of interest’ in the activities of public officials and on creation of a penalty system for those who violate norms. The other approach in anti corruptive policy focuses on the necessity to implement fundamental administrative and economic reforms aimed at eliminating conditions that breed corruption. According to many experts, the corruption level is closely linked to the quality of state governance. The optimal and effective anti corruption strategy should be based on both approach es. This is the basis for the National Integrity System, proposed by the Transparency International. It is based on the principle of multi directional implementation of a common strategy, consisting of actions of individual institutions. It has been built on the assumption that corruption roots go down much deeper than the weakness and ineffectiveness of gover nance. Reforms of public administration and public finance management are a prerequisite to curb corruption, but it is not enough. The idea to create the National Integrity System is as follows: basic state institutions act within the framework of a multi directional strategy, which is a sum of mutually related strategies of different institutions. Particular institutions, within their statutory competence, mutually support this ‘national integrity’, like pillars supporting the roof of a building. If any of these pillars gets weak, the remaining ones will have to carry additional burden. Among the institutions that are most often named as the pillars of national integrity systems are: • the Parliament; • institutions responsible for administrative reforms; • supervisory institutions, including SAIs ; • civil society institutions; • the judiciary, • the mass media; • institutions representing businessmen
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Functioning of a „national integrity system” should achieve two major goals: direct fight against corruption and support for those actions of state authorities that are decisive for its prop er functioning. This results from the assumption that existence of a strong state, along with effi ciently operating bodies, should prevent corruption, or at least help to make it marginal.
3. Role of the Supreme Chamber of Control in fight against corruption In Poland, problems related to corruption are dealt with by scientists, experts and va rious organizations alike. Besides, Polish authorities have been increasingly involved in recog nition and evaluation of the problem, and they introduce various solutions to diminish it. Strategic activities of the Supreme Chamber of Control (NIK) are oriented towards the two methods for corruption combat that have been mentioned before. Therefore, the NIK finds it exceptionally important to carry out its audits in the most effective and efficient man ner. Active cooperation with the Parliament and with independent experts’ centres for changes in the state functioning and mass scale promotion of its achievements are also very important. It should be assumed that reinforcement of public institutions which are, or could be, the pillars of the National Integrity System should be one of the most vital means for com bating fraud and corruption. Among these institutions, an SAI plays a very important role, since it helps to promote sound financial management and efficient performance of public tasks by public sector entities. SAIs are responsible for examination of budgetary revenues and expenditures, as they audit financial integrity and reliability of auditees. As regards perfor mance audits (so called ‘value for money’ audits), examination covers efficiency of perfor mance of public tasks through analyses of legal aspects, purposefulness, reliability and eco nomic management of public tasks. External auditing always acts in favour for public accountability, as it reinforces the reli ability of auditees’ statements, provides valuable insight and information to the Parliament and general public. It is a very effective tool for promoting transparency and openness of activities of state institutions, and has a positive impact on the results of these activities. Furthermore, it provides the society with information regarding the breach or violation of commonly accepted ethical standards, norms and principles. The Supreme Chamber of Control considers investigation of areas and procedures encouraging fraud and corruption one of its priorities. Audits carried out by the NIK assist in the battle against corruption by helping to strengthen the legislative and institutional frame work of public administration, especially by reducing arbitrariness in the application of rules and regulations, simplifying administrative procedures and introducing transparency in the decision making process. All audits carried out by the Supreme Chamber of Control, in accordance with its audit methodology, are designed to identify areas threatened with corrup tion. In the course of audits, the NIK discloses concrete irregularities, indicating errors and loopholes in the legislation, dysfunctions in the organization of public institutions and errors in their decision making procedures. These phenomena may encourage, and do encourage, occurrence of corruption prone situations or create such situations. While analysing irregu larities and defining the reasons for their occurrence, the NIK can identify potential areas threatened with corruption.
104 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION
3.1 Reports and cross section studies There is no other state body in Poland, apart from the Supreme Chamber of Control, around which so many wrong ideas and unjustified expectations revolve. Not only citizens, but also representatives of institutions and even state bodies, believe that the NIK can under take operational actions similar to those of the Police, that it can act as prosecutors and pu nish like courts. The Supreme Chamber of Control, even though it cannot arrest, nor impose fines, has some instruments for combating illegal actions of audited entities. The very possi bility of audit by the NIK has an important preventive role. The experience and decisions of the NIK are expressed in its annual activity reports and cross section studies entitled ”Corruption Hazards in the Light of NIK Audits,” presented to the Sejm and public opinion. In the years 2000 – 2005, four such studies were presented. On the basis of the findings of numerous audits, the most important corruption prone areas in the functioning of public institutions have been identified. Among the areas of particular risk, the NIK indicates: public procurement, tax administration, customs services and the Police, establishment of quotas and granting licenses, special purpose funds and agencies, as well as the functioning of health services. While formulating this list, attention was paid to the existence of serious, systemic hazards, determined during NIK audits. At the same time, ana lytical works were done in individual areas of high importance to the state and those particu larly threatened with corruption. The first effect of these studies was presented to the Sejm as the cross section study entitled “The Functioning of the Act on Public Procurement in the Context of Corruption Combating” and ”Corruption Hazards in the Healthcare System in the Years 1998 – 2002”. The Supreme Chamber of Control tries to influence the law, so that regulations would not encourage corruption. If the NIK estimates that regulations create a situation that encourages corruption, it addresses competent bodies with proposals for changes to such re gulations. In April 2002, the Sejm received the study: The State of the Implementation of the Most Important Anticorruption Recommendations of the Supreme Chamber of Control, which was dedicated, in the first place, to de lege ferenda proposals that could curb corruption in Poland. Reactions to such proposals vary. Once it happened that the Parliament at first agreed with the NIK’s recommendations, later, however, succumbed to arguments of Sejm deputies.
3.2 Systemic approach the National System of Righteousness The Supreme Chamber of Control pays particular attention to improvement in the effi ciency of audit proceedings, to active cooperation with the Parliament and independent experts’ centres during works on changes in the functioning of the State and also to popular ization of its achievements. One of the most important elements of the NIK’s programme for corruption combat is work on strengthening public institutions, which are or should be the pillars of the National System of Righteousness. The NIK, as one of the pillars of the system, must perform its duties perfectly, as well as stimulate and support other pillars. The NIK helps to popularize sound management of finances and efficient performance of public tasks by entities of the public sector. It is the body responsible for inspecting state income and expenditure, through state budget execution
105 SUPREME CHAMBER OF CONTROL OF POLAND audits carried out every year. As regards performance audits “value for money” audits the efficiency of performance of public tasks is examined through an analysis of legality, efficacy, correctness and rationality of performed tasks. By close cooperation with other State bodies, the Supreme Chamber of Control also contributes to harmonization of internal financial control and internal audits, and to coordi nation of activities improving the effectiveness of state control. In 2002, the NIK concluded cooperation agreements with the Ministry of Finance, with Regional Audit Chambers (RIO) and the Public Procurement Office. To implement the agreement with the Minister of Finance, in 2002, a Task Force was established to harmonize actions in the area of financial control and internal audit.
3.3 Cooperation with the media and civic society organizations Transparency in the public activity is enhanced by strong public scrutiny based on solid legal provisions on access to information. Strengthening relations with citizens is a sound investment in better policy making and a core element of good governance. Success of strengthening public governance will ultimately be judged not by governments or internatio nal organizations, but by citizens. Let us now move on to cooperation between the Supreme Chamber of Control, the media and civic society organizations in Poland. I would like to make a reference to Article 10 of the Act on the Supreme Chamber of Control, which says that the President of the Supreme Chamber of Control may present audit findings to the pub lic, with due regard to regulations on legally protected secrecy. This is an extremely important right, because via the media the President may inform the public, including the civil society institutions concerned, about particular audit findings. This usually takes place at press conferences or press briefings. During press conferences, journalists are offered two types of materials: pronounce ments on audit findings identical to those submitted to the Sejm, and synopses, that is press statements, highlighting major audit findings. Full texts and press statements are also placed on the Supreme Chamber of Control’s webside. These issues are handled by the Press Officer’s Section of the NIK.
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Experiences gained by the Supreme Chamber of Control show that cooperation with the media has three main roles: 1. The first is a preventive role. Managers and employees of audited entities are aware that due to audits any potential irregularities will be made public by the press and exposed to criticism, so they try to avoid them. At the same time, highlighting irregularities before ge neral public encourages to eliminate them. 2. The second role is an educational and informative role. The public is informed about audit findings and, in this way, about the condition of the State. 3. The third role is a motivational one. The NIK staff is sensitive to the manner in which their institution is presented by the media. In 2005, the Press Officer’s Section of the Supreme Chamber of Control held 53 press conferences, which led to publication of 5021 press articles and numerous (627) materials broadcast in radio and TV programmes.
4. Conclusions The competencies of the Supreme Chamber of Control are part of the whole state sys tem and, therefore, its effectiveness correlates with proper execution of competencies of other elements of the system. Thus, there is no other way to fight and curb fraud and corrup tion than to establish and promote the National Integrity System in Poland. The system pro vides for effective execution of competencies of all authorities, and the sum of these activi ties, that is the sum of mutually linked institutional strategies, creates the desired added value – sustained economic growth. It is why, the strategic activities of the NIK are oriented towards three complementary goals: • enhancement of the effectiveness and efficiency of audit proceedings through improved methodology of corruption threats analysis; • carrying out analytical work on corruption mechanisms and sources as well as means to combat them; • keeping the general public informed and participating in works on reforming the state.
Thank you for your attention.
107 STATE AUDIT OFFICE OF HUNGARY
EXPERIENCES OF THE STATE AUDIT OFFICE OF HUNGARY WITHIN THE FRAMEWORK OF COOPERATION WITH THE LAW ENFORCEMENT BODIES IN FIGHTING AGAINST CORRUPTION
DR. GUSZTAV BÁGER, DIRECTOR GENERAL OF THE STATE AUDIT OFFICE OF HUNGARY
THE CONCEPT OF CORRUPTION Corruption is a risk factor which hinders – indeed devastates – the development not only of individual countries but of the world economy as a whole. In fact, linked to money laundering and drug trafficking as the financial foundations for terrorism it has ultimately become a factor jeopardising the existence of mankind and society. We can say that corruption prevents the necessary balance of the three elements of good governance i.e. of accountability, transparency and openness. Due to corruption dysfunctions of the operation of State Public Finances become stronger. Corruption is jeopardising the functioning of democracies, violating the purity of public life and the trust in activity of pub lic officials and institutions.
POSSIBLE REASONS FOR CORRUPTION
The possible reasons for corruption have analysed in many surveys. The Hungarian1 State Audit Office (SAO) also prepared summing up papers that evoke great interest analysing the reasons for corruption, indicating the risks, tendencies. Hereinafter I go into details about the findings of the abovementioned studies. Based on our survey – and in harmony with the conclusions of several, international surveys – one of the main reasons for corruption is the 1. lower level of development, 2. lack of democracy and 3. social acceptance.
1 Hungary, 93 thousand km2, 10.1 million inhabitants, GDP per capita USD 5,958 at 2004 current rate
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Economic development In order to illustrate the statistical correlation between corruption and the economic devel opment, we analysed the GDP statistics of the World Bank national account (SNA) and the Corruption Perceptions Index of the Transparency International for drawing some consequences: • We should say that in the vast majority of the countries the value of corruption inde xes are considerably correlated to level of economic development, i.e. in case of lower level of economic development the corruption is higher. See the 1st chart. • Just then the well known presumption relevant to the relation between the pace of the economic development and corruption, i.e. that where corruption level is lower there eco nomic development is higher, cannot be justified with a full scale validity on the level of macro statistics; in certain, specific cases a weak positive correlation can be detected. According to certain indications in EU Member States and in Hungary as well, the increased state investments – without proper hindering force and institutional background – also have an influence on growing corruption. • The generally accepted method of measuring corruption shows very slow changes in the corruption index both for mid , and long run. The 2nd chart illustrates this. The fact that on a macro level we cannot illustrate the role of declining corruption in bridging the gap in the development level, is also related to the above statement. • At the same time we should stress that, for example, according to company data, declining corruption has a positive influence on economic development, even in the short run and this – in our opinion – will be manifested on macro level, in the long run as well. However, exploring the reasons for corruption we can state that in the vast majority of countries the corruption and bribery indices – here the concept of bribery is interpreted widely; it includes for example giving mutual advantages, promises, political threat etc. cor relate strongly with the level of economic development and in the long run with its rising and falling trends.
Lack of democracy
According to our analysis, it is obvious that corruption is mostly insignificant where democracy is real and a political rotation system exists, where reforms are introduced, where nobody can be certain that his activities, misuse of power, remain in secret forever.
Social acceptance The third group of reasons for corruption can be characterised by how individual cor ruption phenomena is accepted and tolerated by the society, by the system of values and how, in what direction it changes. Analysing the various factors collectively a trend appears, whereby there is an inverse relation between the level of corruption and socio economic development, but a direct cor relation with the autocratic nature of the state apparatus. In the latter case the reason for this is that keeping the fundamental human rights (getting passport, moving, police actions) is
109 STATE AUDIT OFFICE OF HUNGARY also often connected with “baksheesh”. Thus it is not by chance that according to interna tional surveys corruption is the lowest in the countries of Northern Europe. The ‘contamina tion’ of Central European countries less developed than Hungary is significantly higher. Based on the CPI index, for a decade Hungary has been ranked 28 33 on the corruption list containing 102 countries, in contrast to the Northern European countries occupying posi tions between 1 and 12. See the 1st table. It follows from this that clamping down on corruption and ensuring the integrity of public finance administration could be one of the keys to economic growth in developing countries undergoing social and economic transition.
POSSIBILITIES OF SAO IN COMBATING CORRUPTION What are the characteristics of the Hungarian SAO’s activities in this field? Our SAO takes part in combating corruption in three ways. • First: during its audits SAO pays special attention to the identification of corruption risks and points them out. • Second: as I mentioned in the first part of my presentation, SAO has also prepared several, summing up papers that evoke great interest analysing the reasons for corruption, indicating the risks, tendencies. • Third: in well founded cases SAO initiates the sanctioning of committed crimes.
I. Audit activity of the SAO According to the Act on State Audit Office the SAO is the financial and economic audit body of Parliament, the supreme audit organ of the State. Sound state financial management is one of the most important opportunity to prevent corruption. This is also the condition of successful fight against corruption. The role of SAI in the fight against corruption is also connected with this fundamental state interest. The Hungarian SAO audits the four sub systems of the finances of the State: management of the central budget, local governments, Social Security and earmarked State funds. Furthermore, the SAO must, by law, audit the management and financing of political parties, business chambers and civil organisations subsidised by the State. Although its mandate does not expressly include combating corruption, the inspections carried out by the SAO can make, nevertheless, an important contribution to informing deci sion makers on public finances. With its audit activity and audit findings the SAO assists the Parliament and parliamentary committees, in preparing their decisions. According to the Act on the Hungarian SAO our institution shall make its audit reports public. The SAO sends all of its audit reports to the Hungarian Parliament; all of SAO audit reports are available in printed form and electronic way (internet). In certain period of time the SAO holds a press conference where the most important audit findings of the period of review are outlined and made known in order to help the public getting acquainted with the SAO audit reports.
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Although SAO inspections are invariably conducted retrospectively, they could play an indirect crime prevention role. I think phenomenon called corruption could be eliminated with the required predominance of transparency and accountability. For this there is a con siderable need for adequate, consistent and unequivocal laws with public institutions capable of executing them, in order to duly enforce transparency and accountability in public sector. SAO always helps the ruling Government in the creation of this.
Audit recommendations As a result of the audits, the SAO prepares and submits proposals. During the audits performed in the previous years, the SAO recommended several amendments to the legal re gulations in order to prevent deficiencies, errors and irregularities, and enhance the trans parency and efficiency of the utilisation of public funds. These recommendations were received positively by the auditees. Most of the budgetary institutions and local governments affected by the audits included the SAO’s recommendations in their action plans. The Government regularly took into account the findings and recommendations for mulated in the SAO reports in the past four years during the preparation of bills. In addition to the annual final accounts and budget appropriation acts – both of which incorporated se veral of our recommendations – our audit findings were utilised in the amendment of 28 acts between 2002 and 2005.
Application of the proposals In order to follow the utilisation of recommendations and proposals made during the audits, in the previous years the SAO requested information from the Government and the heads of the ministries about the utilisation of the recommendations. The entities affected responded to the request, and the answers given by the ministries have become more compre hensive year after year. Based on the measures taken for the elimination of the discovered deficiencies, all in all, our recommendations are received and utilised favourably. According to the information received, nearly 80% of the recommendations addressed to the ministries were either implemented, or are being implemented. Several ministries responded that we had greatly assisted them in fulfilling their profes sional tasks and in their financial management with our recommendations made during our audits, and that they had made progress in several fields in relation to regularity and efficien cy as a result of our work. It is worth noting that on certain occasions the utilisation started already during the audit.
Identifying corruption risks SAO pays special attention to the identification and disclosure of corruption risky fields during the audit activity. During our audits we classify the transparency of the operation and the accountability of the management, thus drawing attention to corruption risks, the possi bility of such acts.
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II. Studies As I mentioned SAO also prepares comprehensive studies. Many of them search and analyse the reasons, causes for corruption and to indicate the respective risks and trends. Not only the Hungarian experiences but the international experiences and trends related to cor ruption are also evaluated in these studies. Hereinafter the major risks will be discussed.
What are the risks of corruption? To understand the problems of today we have to make reference to the main features of corruption over recent decades – primarily related to deficit management. The state structure preceding the change of system in 1990 provided wide opportunities to individuals and small/large groups to assert their interests in a different way to the accepted norm when dis tributing and acquiring public monies. Certain sources and risks of corruption were mitigated during the transition (e.g. active bribery of civil servants), but new situations emerged offering wider opportunities for eco nomic irregularities than before. When looking at corruption risks we have to highlight the enterprises previously not working in the form of companies and the privatisation of state property they held. The changes in the content of corruption risks can easily be traced through the process of state property privatisation. 1. In the one or two years prior to the political economic transition the new rules were not always taken seriously, not even by the officials supposed to be upholding them. This was a legacy of bygone decades. Acquiring property became a personal interest and goal, as did exploiting the chances to link into the upper levels of the newly evolving social order. In the years of the so called ‘spontaneous’ privatisation (1988 90) As a result of the new companies, from the publicly owned companies the state was left with significantly indebted corporate shells deprived of their assets and practically ‘drained’ of their functions. The audit office investigations in this period accurately recorded and indicated the events and circumstances, business difficulties, bad decision making as well as errors regar ding risk management, market opinion and investments, etc. that led to the collapse of com panies. However, state administration was not appropriately prepared to clarify the reasons and acts underlying the facts, as well as to punish and eliminate them. 2. The subsequent phase of privatisation – from 1991 until the middle of the decade – handled centrally (in the form of agencies) was supplemented with the involvement of strategic privatisation partners and particularly foreign investors striving to acquire markets. Corruption was given a new feeding ground in many respects. Inevitably, the institutional system to direct these new, never before seen tasks of pri vatisation and the necessary regulations evolved slowly and gradually. The appropriate level of personnel and technical preparedness was missing and with the lack of a capital market and its evaluation system the real market value of assets was unknown, not even the physical records of assets were adequate. Under such circumstances, those making the decisions on property sales were very uncertain, becoming both vulnerable and influential at the same time.
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3. In the third stage of the privatisation in the second half of the decade the conditions were better. This phase comprised the sales of the large supply sectors (the energy sector and telecom munications) and then the privatisation of the commercial banks. In comparison to before, sig nificant asset sales revenue was generated – measured in billions of dollars – which made a sub stantial contribution to consolidating the Hungarian economy. But this phase was unable to avoid corruption risks either. The compulsions to sell still prevailed to a certain degree. The privatisation process finally drew to a close at the end of the 1990s in Hungary.
New corruption risks in public finances The new corruption risks arising in conjunction with the market economy and the related development of public finances principally prevail in the following three areas based on the experience of audit office investigations. These are: • Public procurement • Internal control functions • Financing of political parties
Public procurement Hungary was the first of the transition countries to adopt a law on public procurements in 1995 to facilitate transparency and fair competition. Since the introduction of this system the value of public procurements has risen three and a half fold. Despite this, the value of pur chases realised within the public procurement procedures of local governments and central budget organs is significantly down on what could be expected based on the level of public finance generated here. The main risk factors of the system operation – based on our audit experience – can be grouped as follows: 1. Internal institutional rules designed to facilitate local application of the laws are defi cient. There is insufficient harmony between public procurement regulations and other pro visions of budget financing, the conditions for bidding in and using the various aid systems.
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2. Those applying the law are not sufficiently prepared and the personnel and material con ditions for ensuring compliance with the laws are inadequate. There is a high degree of resistance from institutions with regard to centralising local procurements. The underlying misappre hension here is that implementing purchases in this way distorts their independence. 3. The mitigation of corruption risks was impeded by the limitations of financial control or the prevailing bastions of protecting business secrets. The State Audit Office was restricted in investigating price calculations, background relations, cartel agreements, etc. It appears that by removing these shortcomings most of today’s corruption risks evident in the field of public procurement can be moderated (in this respect the so called “glass pocket law” adopted in 2003 is forward facing, based on which the path of public funding to the “end users” can be traced). These kinds of SAO audits were/are connected for example with the motorway constructions. What is also clear is that thanks to the introduction of the public procurement system, various acts of differing significance come to light which violate the integrity of investments and services realised from public finances, ones that before did not even crop up as problems. This alone we consider to be an achievement. We do note that based on this new legal autho risation the SAO has carried out numerous investigations where merely clarifying the struc ture of relations with the private sector and mapping the process of money utilisation enabled the mitigation of corruption risks. In respect of public procurements as a corruption risk area it is worth noting that the danger of corruption in this field is the highest at international level as well. According to an EU survey conducted recently, in the 15 older Member States ten focus particularly on pub lic procurements in the fight against corruption, seven on the financing of political parties and in relation to this three or four countries concentrate on the declaration of external (pri vate sector) interests by members of parliament.
Internal control functions The other large area of corruption risks is the weakness and inadequate function of internal control. In the afore mentioned EU survey for example this shortcoming was not cited at all under the priorities for combating corruption. In Hungary the existing internal audit apparatus in public sector organs and institutions essentially disintegrated following the change in political and economic system. Their rene wal was hampered for a long time by unfounded hopes being attributed to the possibilities of external (principally audit office) auditing and the self regulating mechanisms of the libe ralised economy. So the fact that the internal audit system adjusting to the new circumstances developed more slowly than was otherwise possible is also attributable to the attitudes and approaches adopted. In consequence of legal status and responsibility of the State Audit Office, it can only exert an indirect effect to improve the organisation and thoroughness of this apparatus. Despite the undoubted progress made, internal control is still encumbered by significant shortcomings. Changing this situation is of crucial importance not only from the perspective of transparent public finances but also in terms of ensuring a direct decrease in corruption risks.
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Urgent task is still improving the efficiency of the system–based operation of public financial control (audits by the state audit office, by the government and by the internal audit units of the institutions), better coordinating with the various levels, adapting them to each other and creating the necessary conditions for co operation and the mutual utilisation of experiences. The prime requirement here above all other things is strengthening the internal control functions of public institutions.
Financing of political parties One specific corruption risk is linked to the financing of political parties. The creation of laws governing the operation of political parties and the co ordination of elections was for ward facing at the time and facilitated the development of transparent financing for the sys tem of political institutions. Yet the reviews carried out in the intervening period have high lighted many problems and the gradual obsolescence of certain laws. Today the main risk fac tors are the following. Owing to the shortcomings in legislation, the operation of companies – and their partners – founded by political parties are not transparent, nor is the business of ‘fund raising’ foundations organised by the private sector for the purposes of providing poli tical support. The current restrictions on authority (private sector) mean that control over them has yet to be resolved. The situation is similar for the accountability of the election cam paign. On the basis of our several reminders and warnings it seems to be that a process of changing has started. Bills defining the concept of an election campaign from a financial per spective, the scope of costs that can be included under election expense or the beginning and the end of the campaign period itself are presented to the parliament. Law amendments based on the SAO audit recommendations are also in preparation according to increasing the trans parency of the managements of the parties. The Hungarian Parliament is discussing the law amendment recommendations of the SAO. According to the abovementioned proposal the transparency of party financing will be increased. The new legislation unambiguously regulates what to be qualified as financial aid and subsidy given to the parties; arranges the accounting of party income deriving from free or low price real estate use provided by local government; specifies the audit rules making the preparation of the audit possible by other public bodies. The need to create a new election law that ensures the transparency of campaign financing has also clearly been proven. The SAO also prepared recommendations regarding the amendment to the Act on the election procedure, which hopefully contributes to the improvement of the transparency and accountability of campaign expenses. The parliamen tary debate of the abovementioned bill is in progress now. Other significant corruption risks can be detected in other areas that may vary in the different regions and areas. The existing risks could be varied, transformed to another type of risk in accordance with the social economic changes.
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III. Initiating criminal procedures According to the Act on the Hungarian State Audit Office if the auditor establishes well founded suspicion of a criminal offence, he shall notify the competent authority – usu ally police or prosecutor office of his findings without delay. Since 1990 the Hungarian SAO started criminal procedure in several cases mainly because of suspicion of Infringement of Accounting Rules. Similarly to the previous years, in 2005 the SAO complied with its obligation specified in the Act on the State Audit Office of Hungary and in the Act on criminal procedures, according to which it must inform the investigation authority about any audit findings that support the suspicion of a crime. Therefore, a criminal procedure can be based on any data representation that supports – with documents – the suspicion of a crime at the level of pro bability. The detection of crimes included corruption falls within the competence of police. The detection is often a hard task to do, thus SAO helps the investigation procedure making available the audit findings. Since its establishment, the SAO has initiated criminal procedures altogether in 66 cases, out of which 5 in 2005, which meant that a total of 109 suspicions of criminal acts have been reported, out of which 7 in 2005. Number of charges filed in the different years are illus trated in Table 2. Similarly to the previous years, in 2005 the most frequent suspicion was the infringement of accounting rules. In the period of 1993 to 2005, the SAO initiated criminal procedures in 33 cases due to the suspicion of the above crime, 2 out of which in 2005. The second most common type of criminal act is the acquisition of unjust economic benefit. The SAO discovered such crimes in 21 cases, out of which three in 2005. For the sus picion of misappropriation the SAO has initiated criminal procedures in 18 cases so far, out of which one in 2005. We have filed charges for the suspicion of embezzlement in four cases, only ones in 2005. Division of charges according to the type of crimes is illustrated in Table 3. We initiated criminal procedures in connection with the financial management of local governments more often than in any other fields audited by the SAO. This is explained by the fact that in most fields affected by the SAO audits there are several state organisations autho rised to perform audits, while the audit of the financial management of local governments is the exclusive right and responsibility of the SAO. It happens that local governments submit applications by declaring bogus funds, accounting deficiencies are also often revealed; the rules of cost reimbursement are irregular, etc. The major audits conducted last year included the so called ÖKOTÁM audit, upon which a criminal procedure was launched, too. The ÖKOTÁM system is a specific, multi pil lar method for funding local governmental road construction and canalisation projects. Pursuant to our report, the National Assembly requested the SAO – in the Act of 2004 on the final accounts – to examine the legality of the application for and the utilisation of public utility development subsidies transferred to local governments for road and sewerage con struction, with special regard to projects implemented within the ÖKOTÁM and similar sys tems. In pursuance of the request, the national audit is under way.
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It happens more and more frequently that in criminal procedures initiated by other entities (private persons, authorities) the investigation authority wants to get to know the findings of the SAO audits. In 2005, the SAO was contacted in 33 such cases. The amend ment of the Criminal Code in 2005 is an important development – the preamble of the amendment also cites the findings of the SAO audits –, accordingly the violation of the accounting rules is punishable even if the violation is the result of negligence, if that prevents the review (audit) of the economic condition. In order to support the work of auditors engaged in on site audits, in 2005 we prepared a field manual on criminal prosecution for internal use, which analyses in detail – using the experience accumulated so far – the conditions for substantiating the suspicion of crimes fre quently revealed by the SAO audits. The aid is also designed to further develop the practice of initiating criminal procedures by the SAO.
SOME CLOSING REMARKS As we have seen corruption is not an isolated phenomenon, it can emerge in more and more areas of public and private sphere in more and more form undermining the trust in the operation of public institutions. It is obvious that there is an inevitable need for cooperation of public institutions in the fight against corruption. Authorities alone could not fight against corruption effectively without any help and assistance of another public institutions for cor ruption is such a complex problem. In my presentation I detailed the different activities of Hungarian SAO. I pointed out that we are in close relationship with the Parliament, the parliamentary committees, the Government, the government bodies, law enforcement bodies and with the departments of investigation etc. According to my point of view appropriate cooperation of public institu tions and other organizations has primary importance in the fight against fraud. I think there is also a same need for international cooperation in this area. Independent states could not fight against corruption effectively without any help and assistance of anoth
117 STATE AUDIT OFFICE OF HUNGARY er states and international organizations. International conferences, seminars and workshops play important role in knowledge sharing. With the help of these kinds of events the partici pant countries can efficiently exchange theirs experiences. Corruption could not been ceased but the potential evolvement of corruption could have diminished in a large measure with the adequate consistent and unequivocal laws with public institutions capable of executing them, in order to duly enforce transparency and accountabil ity. National State Audit Institutions can play a decisive role in indicating the probable corrup tions risks and in making recommendations urging further development. In addition to the preventive role of SAO I can also emphasize the publication of suspicious activity revealed by SAO’s audit activity since the publicity and the openness are our real “weapons”. Therefore the potentiality of corruption actually can be prevented, it can also be restrained with the proper purity of public life, with the arranged legal background providing it, and with concerted activities of police and other authorities. In fact there is a need a glob al social modernisation for the sake of effective restraint corruption, however for this a wide social consensus is essential.
118 CHAMBER OF CONTROL OF GEORGIA
MR. ROMAN BOKERIA DEPUTY CHAIRMAN OF THE CHAMBER OF CONTROL OF GEORGIA
Sub theme 1. The role of SAIs in the national system development of fighting against fraud and corruption Today the activities of the Supreme Audit Institution take on special significance under the conditions of state and legal consciousness society formation. At such essential stage of state formation establishing the national system on fighting against fraud and cor ruption is of priority importance. Fraud and corruption are one of the key factors undermin ing state financial and economic order and thus as a whole having damaging effect to any country development. In this connection a special role is given to the Chamber of Control of Georgia being the Supreme Audit Institution which pursuant to the Law of Georgia “On the Chamber of Control of Georgia” performs supervision over utilization and allocation of public funds and other material stocks of the state, serves as a guardian of national wealth and assets, controls and analyzes legality, expediency and efficiency of using public material and financial resources. Fighting against fraud isn’t referred to as a principal objective of the Chamber of Control’s audit activities, however following revealed corruption and fraud indications we pass the cases to the law enforcement bodies for further investigation and thus provide them with assistance by detecting violations in financial and economic field. In such a way we become one of the major instruments of anticorruption system of the state.
Sub theme 2. Peculiarities of the SAIs co operation with the law enforcement bodies during exposure and prevention of fraud and corruption. The Chamber of Control’s remit covers all legislative, executive and judicial authori ties, local governments, special public funds, National Bank of Georgia and other institutions that authorizes it to posses the whole information in the field of public finance. For corruption elimination purposes the following directions were specified: overco ming impunity syndrome, detection of corruption cases and creation of efficient penalty sys
119 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION tem, carrying out a package of preventive anticorruption measures, support of anticorruption measures by public and its participation in their realization. In addition the main areas and priorities of anticorruption policy should be determined as the follows: liberalization of busi ness environment, financial management of public funds, increase of the efficiency of public management system, reorganization of law enforcement bodies, acceleration of launched education and science reforms. Preliminary Audit is the prime factor of fraud and corruption prevention. Such audit of public institutions not only prevents corruption and fraud cases, but also encourages finan cial units of public structures to better plan future expenditures, legality, expediency and effi ciency of utilization of public material and financial resources. Despite pursued reforms and performed changes in legislative sphere aimed at simpli fying financial activities’ procedures, administrative instructions for relevant public institu tions’ management are still in utmost need. Supreme Audit Institutions are required to make additional joint efforts with the Ministry of Finance towards improvement of statutory basis and application of new, simplified international practice based standards. Reasoning from aforementioned it is necessary to elaborate unified public financial policy implying not only introduction of new international standards and education of new staff being capable to conduct sufficient evaluation and response to situation as a whole. For these purposes training centers were created by the Ministry of Finance and the Chamber of Control with sup port of international organizations. They would undertake such educational responsibility. Establishment of a well defined internal control system in the financial control domain is one of basic factors able to influence audit quality and corruption decline via permanent monitoring. Thereto application of internationally acceptable internal control standards and their harmonization with internal legislation are required. The Supreme Audit Institution and the Ministry of Finance are empowered with leading role herein. All these measures at their initial stage are directed to corruption and error prevention and as international practice indicates they will undoubtedly play their role. Improvement of legislative basis is the paramount stage in this direction which would make it possible to establish internal control units within public institutions assumed with responsibility for internal control over financial activity. Program Audit is one of the controls over efficient and effective utilization of public funds. It implies an independent examination of efficient and effective public funds’ utiliza tion for specified state programs aimed at reduction of unplanned public funds’ expenditures, personnel policy optimization to achieve better result for the state benefit. All these measures are aimed at budget expenditures’ reduction and accordingly they will impact on corruption elimination and provide effective obstacles for careless officials. For efficient implementation of the techniques mentioned above an accurate control system is necessary, in particular an application of modern audit techniques using informa tion technologies, that will make it possible to create unified network among public institu tions working in real time mode. For example, the whole control procedure will be limited to monitoring of financial and accounting transactions carried out by one or another institution without an auditor’s
120 CHAMBER OF CONTROL OF GEORGIA direct presence, easy access to the common information database. Similar practice has been applied for a long time in the Western countries, which proved to be the most efficient one. Within the Chamber of Control pursuant to the Law “On the Chamber of Control of Georgia” an intergovernmental commission was established which was responsible for inte raction with law enforcement bodies, including the Public Prosecutor’s Office, where a team work on considering disputable questions to find a consensus is carried out. In 2005 alone 61 financial cases of the Georgian Criminal Code violations were revealed and brought to the attention of the law enforcement bodies. Within the stated above cases the majority fall at the regions of Georgia, that is mainly caused by both corruptive activities and legislation ignorance and deficiency in qualified staff on the local level. All these measures will help not only to establish financial order in the country, but also serve as a critical factor in fighting with offences in the field of shadow money that will have a positive result for transnational crimes’ decrease as a whole, covering such as illegal transit, terrorism and commodity turnover. The latter are of relevant importance following geopoli tical position of Georgia and in general are financed from various shadow sources. The Chamber of Control is financed from the State Budget of Georgia and corre spondingly is accountable to the public and the Parliament. All reports and materials are at most available for the public via mass media and Internet.
Sub theme 3. The practice of SAIs in implementation of transparency and publicity in the field of fighting against fraud and corruption. All above listed provides conditions for publicity, in particular public discussions of the methods of revealing and eliminating corruption, detecting those careless public officials abusing their powers and misappropriating taxpayers’ money, thereby causing vast damage to the Budget and the state as a whole. Public discussions of such individuals will be an illustra tive example for other potential fraudsters. Such measures absolutely correspond to democ
121 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION racy and publicity principles, as well as the Lima Declaration which postulates are success fully being implemented in the whole civilization. In public view the Chamber of Control of Georgia is an instrument of control over expenditures of Georgian taxpayers’ resources and is accountable to them in the person of the national Parliament, which in its turn is responsible to its electorate. At the moment with assistance from international donor organizations an intense staff retraining is conducted in the Chamber of Control of Georgia, which will allow us to achieve an international level and realize intended plans. We are convinced that this Conference like any other events serves for the good of all Supreme Audit Institutions from EUROSAI and INTOSAI member states.
Thank you very much for your attention!
Enclosed audit materials: In 2005 the Chamber of Control conducted audit activities in the following areas: 1. Financial and economic Department conducted audits in the financial and eco nomic sphere. In the accounting period 41 entities were audited, 51 offences were revealed, inexpedient expenditures of the State Budget funds amounted to GRL 94381 thousand or USD 52726 thousand. 2. Social Sector Department conducted audits in the social sphere. In the accounting period 45 entities were audited, 343 offences were revealed, inexpedient expenditures of the State Budget funds amounted to USD 5520 thousand. 3. Law enforcement Activity and Defense Department conducted audits in the power and law enforcement sphere. In the accounting period 110 entities were audited, 127 offences were revealed, inexpedient expenditures of the State Budget funds amounted to GRL 458 thousand or USD 255 thousand.
Number of audited entities
Financial-and-
Economic sphere
12 11 Social sphere 9 10 8 Power and law- 8 enforcement sphere 6 4 4 Real sector 4
2 Regions 0
4. Real Sector and Privatization Department conducted audits of the real sector. In the accounting period 89 entities were audited, 175 offences were revealed, inexpedient expendi
122 CHAMBER OF CONTROL OF GEORGIA tures of the State Budget funds amounted to GRL 5795 thousand or USD 3237 thousand.
Inexpedient expenditures of the State Budget funds Financial-and-- Economic sphere
10000 Social sphere
8000 Power and law- 6000 enforcement sphere
4000 Real sector
2000 Regions 0
5. The Chambers of Control of the Adzhariya and Abkhazia Autonomous Republics and Local Budget Department conducted audits in the regions. In the accounting period 95 entities were audited, 984 offences were revealed, inexpedient expenditures of the State Budget funds amounted to GRL 5601 thousand or USD 3129 thousand.
Number of revealed offences Financial-and-- Economic sphere 98 100 Social sphere
80 Power and law- 60 enforcement sphere
34 40 Real sector
17 20 12 5 Regions 0
In 2005 upon the result of audit activities total of GRL 5459 thousand or USD 3050 thousand was recovered to the State and Local Budgets.
123 COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA
INTERACTION PECULIARITIES BETWEEN THE COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA AND LAW ENFORCEMENT BODIES REGARDING THE DETECTION AND PREVENTION OF FRAUD AND CORRUPTION
MR. MICHAIL CHYBOTARU MEMBER OF THE COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA
“Those who do not punish injustice contribute to its existence and development” (Leonardo da Vinci) During recent years the fight against corruption and protectionism has more and more attracted the attention of the international community, having become one of the most burn ing problems in the work of international institutions and national governments. It is pleasant that from year to year they organize such international conferences where international organizations, Supreme Audit Institutions of different countries, leading scien tists and experts can discuss the problems relating to corruption and protectionism, exchange experience in this field and express suggestions regarding planning and forecasting in the fight against this evil. Taking this opportunity we congratulate the staff of the Accounting Chamber of Ukraine on their 10 th Anniversary and wish success, prosperity and all the best. Speaking about the interaction of the Court of Audit of Moldova with law enforcement bodies according to the Republic of Moldova’s legislation the fight against corruption and protectionism is performed by: the Center on Fighting against Economic Crimes and Corruption, the General Prosecutor’s Office, (an Anticorruption Prosecutor’s Office has
124 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION recently been created), Ministry of Justice, Ministry of Internal Affairs, Information and Security Service and other governmental and non governmental organizations. The Law on the Court of Audit of the Republic of Moldova envisages its cooperation with the above mentioned bodies on the issues dealing with detection, prevention and sup pression of corruption and protectionism facts as well as the realization through these bodies of materials received as a result of a financial audit. In particular, according to the materials of financial audit, which are reflected in the resolutions of the Court of Audit, the President, the Parliament and the Government of the Republic of Moldova receive information. And according to the corruption facts and other financial violations other corresponding legal bodies receive information and they are obliged to study the submitted documents. Moreover, there are agreements on mutual assistance signed between the Court of Audit and the Center on Fighting against Economic Crimes and Corruption, Ministry of Internal Affairs, Information and Security Service and General Prosecutor’s Office that envisage such directions of cooperation as: • Fight against corruption and protectionism; • Financial audit aimed at preventing corruption; • Detection and investigation of the facts of law violation, which deal with illegal administration and utilization of financial funds; • Restoring the rights of private and legal entities, with respect to which unjust actions have been made as well as removal of other dangerous consequences of corruption and protectionism. The interaction of the Court of Audit of Moldova with law enforcement bodies can be seen through the prism of the National Anti Corruption Strategy, which has become the basis for the state policy in this field, and of the Action Plan on Strategy implementation, adopted by the Parliament of the Republic in December 2004 (with some further amendments and changes) through the creation of the Coordination Council for fighting against corruption and criminality at the President’s Office and of the Monitoring group, where a representative of the Court of Audit is a member. The cooperation of the Court of Audit of Moldova with law enforcement bodies devel ops also on the basis of the efficient system of measures on counteracting corruption and pro tectionism implemented in the Supreme Audit Institution of Moldova, including issues of decreasing corruption facts by employees, especially after the elaboration and implementa tion of the Ethics Code of the State Auditor of the Court of Audit. These problems are under constant control and are discussed during the meetings of the Court of Audit of Moldova members. Efforts of all law enforcement bodies to fight against corruption and protectionism have been well coordinated in Moldova in the last years. As a result of the measures taken and close cooperation of institutions which have the power to fight against corruption positive changes have taken place in terms of decreasing the number of corruption facts through removing some reasons and conditions of their origin. At the same time it is necessary that legal institutions fighting against corruption act only on the basis of the law, are independent in making decisions and exclude the cases of protectionism in their activities. An important contribution to counteracting corruption was also the integration of the
125 COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA efforts of law enforcement bodies, public and non governmental organizations with civil society by means of its attracting to solving the problems of preventing and fighting against this social phenomenon. As an example of the cooperation of the Center and civil society in fighting against corruption we can mention the creation in 2005 of an Anticorruption Alliance which united the efforts of over 10 non governmental organizations. Development of inter departmental and inter institutional cooperation and relations between bodies who have authority in the field of preventing corruption and protectionism facilitates and coordinates the efforts of the mentioned institutions by means of a simplified exchange of information between them, giving incentives to conduct joint actions, supplying personnel and technical resources necessary for conducting scale actions and revealing and removing the main obstacles that arise in its practice. In December 2005 under the auspices of the Center on Fighting Against Economic Crimes and Corruption and of the European Council they conducted a national scientific and practical conference of the law enforcement bodies of Moldova where they discussed the results achieved, corresponding difficulties and the problems of fighting against corruption which face institutions that have the power to fight against corruption. The discussed phe nomenon of corruption at the present time makes a real threat against democracy, violates human rights and undermines the principles of well organized administration, social equali ty, distorts the criterion of competitiveness, hampers economic development and undermines the stability of democratic institutions and moral principles of the society. Unfortunately it was stated at the conference that the fight against corruption is not a single act, but a continuous process and main efforts were accentuated not on eradicating corruption as such but on its reduction. The vital problems of the cooperation of authorized bodies fighting against corruption were also raised at the conference. It was said that certain measures are necessary to be taken such as: • Revelation of main objects in fight against corruption; • Improvement and putting into practice of national legislation on fight against corruption; • Openness of the personnel promotion procedure; • Reduction of the risk factors in court instances; • Rise of responsibility and transparency in public administration and, in particular, in introducing standards of audit or monitoring; • Legal education of people and other measures. This year on the basis of the joint order a Permanent Consultative Council of the Court of Audit and the Center on Fighting against Economic Crimes and Corruption was created with the aim of preliminary study of financial audit materials which have to be submitted to the Center for further decision regarding instituting criminal cases. We hope that the work of this Consultative body will enable us to make more efficient decisions on the revealed facts of cor ruption and protectionism during financial audit with the aim of calling the guilty to account. On June 16, 2006 there was a joint meeting of the Center on Fighting against Economic Crimes and Corruption and Information and Security Service of Moldova with the participa tion of the President of the Republic where among other measures of the fight against cor ruption they offered measures on toughening legislation in this field: confiscation of proper
126 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION ty in case of corruption, terrorism and money laundering. In necessary cases they offered to audit compliance of expenditure and income and create a unified efficient mechanism for conducting such audit. At present, once per month, leaders of the country receive full and complete account of efforts made by law enforcement bodies including the Court of Audit in fighting against corruption and the Center on Fighting against Economic Crimes and Corruption receives information about the steps taken in the process of carrying out the National Anti Corruption Strategy. One of the current tasks of the Court of Audit in terms of the cooperation with law enforcement bodies is the protection of the economy of the country from different criminal schemes, investments and other gross violations in public finance administration. Over the last 2 years more than 50 materials have been submitted to law enforcement bodies. 31 criminal cases have been instituted, the rest of the materials still are at the stage of audit and execution. According to the legislation of Moldova the Court of Audit audits financial activities of law enforcement bodies and simultaneously with cooperation aimed at enhancing efficiency of revelation and prevention of corruption and protectionism facts corresponding measures for enhancing transparency and making public the results of legality of public finance spend ing are taken. The Court of Audit of Moldova aims its activity at making the interaction with law enforcement bodies correspond to high standards of transparency and any decision which the society is interested in well grounded and public. Cooperation of the anticorruption institutions of Moldova needs deep analysis of all activities, reforming of legal and other authorities, their further participation in scientific and practical national and international activities and arrangements especially in terms of exchanging experiences on the issues dealing with fight against corruption and protectionism. Within the framework of anticorruption and anti protectionism campaign in Moldova it is advisable not only to use the institutions authorized to fight against these phenomena, but also to make businessmen and civil society in general join this process.
127 COURT OF AUDIT OF THE REPUBLIC OF MOLDOVA
Active cooperation in the field of the fight against corruption and protectionism with international organizations, Supreme Audit Institutions present at this conference enables us to strengthen friendly contacts and develop further relations between us. Finally I would like to cite the saying of a great scientist, philosopher, politician and a sovereign of Moldova Dimitriy Kantemir: “The right of a judge is to judge himself for the truth, and the others – for illegal actions. At first look at yourself, then save from poverty and then acquit or punish in compliance with the deed”.
Thank you for your attention.
128 COMMITTEE OF THE STATE FINANCIAL CONTROL OF THE REPUBLIC OF TAJIKISTAN
EXPERIENCE OF THE REPUBLIC OF TAJIKISTAN IN DETECTION AND PREVENTION OF CORRUPTION
MR. ABDUJABBOR SHYRYNOV CHAIRMAN OF THE COMMITTEE OF THE STATE FINANCIAL CONTROL OF THE REPUBLIC OF TAJIKISTAN
This presentation contains an examination of Tajikistan’s experience in separate aspects of the fight against corruption and fraud, as well as issues of the interaction of the Committee of the State Financial Control of the Republic of Tajikistan with law enforce ment bodies. During recent years, the fight against corruption in the Republic of Tajikistan became a priority of state policy and of the law enforcement bodies. The fight against corruption is strengthened by the active participation of Majlisi Oli (the Parliament), the President of the Republic, the Government and other state authorities. At present, the Republic has created and improved the legislative and normative and the legal basis regulating the fight against corruption. Legislative acts, which were specially devoted to corruption counteraction, include the Law of the Republic of Tajikistan on the Fight against Corruption, the Criminal Code of the Republic of Tajikistan (in corresponding sections) and the Decree of the President of the Republic of Tajikistan on Additional Measures for Strengthening Crime Suppression in the Sphere of Economy and Corruption. Measures aimed at the suppression of corruption and management of conflict of inter ests are also contained in the Laws on the Civil Service, the State Financial Control, Auditing Activity, the State Support and Development of Entrepreneurship and Privatization of State Property, as well as in the Tax, Customs and Civil Codes, other legislative acts, Presidential Decrees and resolutions of the Government of the Republic of Tajikistan. On 24 February 2006, the Majlisi Oli of the Republic of Tajikistan adopted a new Law on the Public Purchase of Works, Goods and Services, which was elaborated to take into account the requirements of international standards on transparency and non creation of conditions for corruption during public purchase.
129 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION
The resolution of the Majlisi Oli of the Republic of Tajikistan approved, in December of 2005, measures which were developed by the above bodies and which envisage the follow ing for the purpose of bringing national legislation in line with international standards on the fight against corruption: the drafting of laws on amendments and supplements to the Criminal Code, the Code on Administrative Offences, the Labor Code and the Civil Code of the Republic of Tajikistan, Laws On the Civil Service, On the State Financial Control, On the Government Finance of the Republic of Tajikistan, as well as the drafting of the Law of the Republic of Tajikistan on the Order of Declaring Income and Property of Persons Holding Public Offices; forming of a working group composed of representatives of the Majlisi Milli, the Majlisi Oli, the Supreme Court, the Prosecutor General’s Office and other law enforcement bodies on anti corruption expertise of normative and legal acts, the detection and elimina tion of legislation “loopholes”, which can contribute to the committing of corrupt acts; the preparation of propositions on the development of the State Program of the Republic of Tajikistan for Corruption Prevention for 2006 2010; developing measures for the further implementation of Recommendations of the Organization for Economic Cooperation and Development dated 21 January 2004; taking measures for the practical fight against corruption, detection and prevention of corrupt acts by state authorities, force structures, law enforcement bodies, in the spheres of education and health etc; taking measures for the coordination of activity, improved interaction, exchange of information and technical facilities between authorized structures of law enforcement bod ies which fight against corruption, organized crime, smuggling and other crimes; increasing the number of legal consultations on the fight against corruption, organiz ing meetings of the members of the Upper Chamber of Parliament with People’s Deputies and responsible workers of the local state authorities; holding national, regional and international conferences, seminars and meetings on fight against corruption.
130 COMMITTEE OF THE STATE FINANCIAL CONTROL OF THE REPUBLIC OF TAJIKISTAN
Measures are also taken to intensify the prevention of corruption in the civil service. A new Law of the Republic of Tajikistan on the Civil Service has been drafted by the Department of the Civil Service under the President of the Republic of Tajikistan and sub mitted for consideration of the Parliament. It was prepared with the direct participation of international organizations, taking into account their opinions, and meets international stan dards. The Decree of the President of the Republic of Tajikistan dated 14 June 2004 #1343 approved the Code of Ethics for Civil Servants, aimed at ensuring honesty and fairness with in the civil service. In order to prevent the occurrence of possibilities for corruption of public officials and to strengthen the financial control over their income and property, the Resolution of the Government of the Republic # 289 approved on 1 August 2005 forms of Statement on Income and Property of a Civil Servant, which were introduced from 1 April 2005. In order to eliminate obstacles to entrepreneurship and to limit the interference of state authorities in the sphere of economy, the Law of the Republic of Tajikistan on Amendments and Supplements to the Criminal Code of the Republic of Tajikistan dated 17 May 2004 decriminalized some economic crimes, significantly raised the minimum amount threshold for offence damage, after which an action shall be regarded as a crime. Books of records and business entity inspection registration books have been introduced, which positively influ enced the number and frequency of business entity inspections conducted by different state control authorities. The Law of the Republic of Tajikistan on Inspecting the Activities of Business Entities in the Republic of Tajikistan has been adopted. It envisages a specific list of public authori ties, which have the right to conduct inspections and revisions as regards the activities of busi ness entities, grounds, order, duration, frequency and procedure of conducting inspections and revisions, rights, functions and responsibilities connected with the conducting of inspec tions of business entities. The Law entered into force on 28 July 2006. On 24 December 2004, the President of the Republic of Tajikistan had a meeting with the staff of the law enforcement bodies, the most part of which was devoted to the state of the fight against corruption in the Republic. On the basis of the results of the meeting, the Plan of Measures of the Government of the Republic of Tajikistan was adopted, which was aimed at strengthening the fight against corruption in the Republic. In order to raise the transparency and openness of the activities of public authorities, as well as to simplify access to information, the President of the Republic of Tajikistan ordered all ministries and departments in his Decree dated 4 March 2005 # ŕp 1677 to hold press conferences with the participation of mass media on the results of each quarter. In 2005 an Internet web site was opened for the President of the Republic of Tajikistan to ensure the possibility of direct address for citizens to the President of the country: www.president.tj At the end of 2005, the Center for Strategic Studies under the President of the Republic of Tajikistan conducted, with the financial assistance of the Representation of the United Nations Development Program, extensive studies of peculiarities of manifestation, perception, causes and consequences of corruption in Tajikistan, the results of which would
131 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION have significant importance during the elaboration of the national program for the fight against corruption. Paying special attention to the development of an institutional base for the fight against corruption, the President of the Republic of Tajikistan formed, by his Decree dated 2 June 2004 # 1340, the Department for the Fight against Corruption within the structure of the Prosecutor General’s Office, which proved its effectiveness in a short term. As well as the Department for the Fight against Corruption, a body which detects and suppresses corrupt acts in the Republic it also includes the Committee of the State Financial Control, Ministry of Internal Affairs, Ministry of Security, tax and police bodies of the Ministry for Public Revenue and Duties and other law enforcement bodies. The detection, suppression and persecution of facts of corrupt acts within public authorities, law enforcement bodies, force structures, education and health spheres are rec ognized in the Republic as priority lines in law enforcement activity in the sphere of fight against corruption. The interaction of the Committee of the State Financial Control of the Republic of Tajikistan with law enforcement bodies is based on the provision of the Law of the Republic of Tajikistan on the State Financial Control in the Republic of Tajikistan. According to this Law, the Supreme Audit Institution shall forward respective materi als to the Prosecutor’s Office, if it detects signs of corpus delicti or other significant law infringements during inspections and revisions. Bodies of the Prosecutor’s Office and other law enforcement bodies are obliged to inform the SAI on the results of considering the mate rials for inspections and revisions. It should be noted that the Republic did not have, until recently, a legislative and legal act which would establish a single order for forwarding materials for inspections and revisions to law enforcement bodies in the case of detection of corruption and other offences. It was because of the absence of such an act that many control bodies, financial insti tutions, banks, bodies of regulatory supervision and services of internal security of ministries and departments and local authorities did not send corresponding materials to the bodies of criminal prosecution, when they detected major corruption offences during their activity. In order to rectify the situation, the President approved in his Decree dated 21 June 2005 # 1570 the Rules of Forwarding Materials of Inspections and Revisions to the Law Enforcement Bodies and Taking them on Procedure, which are intended to significantly improve the interaction between the control and revision and law enforcement bodies on the detection and investigation of corrupt acts. Over the first half of the current year, the Committee of the State Financial Control of the Republic of Tajikistan forwarded 149 materials for inspection and revision to the amount of damage exceeding 10,0 million Somoni to the law enforcement bodies of the Republic, including 121 cases to the bodies of Prosecutor’s Office, 9 cases – to the Ministry of Internal Affairs and 11 cases – to the Ministry of Security, which testifies to the close contacts of the Committee with law enforcement bodies. The collegiums of the Committee of the State Financial Control hold joint meetings
132 COMMITTEE OF THE STATE FINANCIAL CONTROL OF THE REPUBLIC OF TAJIKISTAN with the Prosecutor’s General Office of the Republic. Regular meetings are also held by the leadership of the Committee and law enforcement bodies. Tajikistan was the first among the countries of Central Asia to approve in September 2003 the Istanbul Anti Corruption Action Plan for countries with a transition economy, which has been proposed by the Anti Corruption Network of the Organization for Economic Cooperation and Development (OECD). Having observed the requirements of the analyti cal phase of the Istanbul Anti Corruption Action Plan, the Government of the Republic of Tajikistan pre pared the National Report on the State of Legislative and Legal and Institutional Base of the Republic on the Fight against Corruption and submitted it for consid eration of the OECD expert group. According to results of the review, the international experts positively evaluated the efforts of authorities of the Republic and state of law enforcement activity and legislative and legal base of the Republic on fight against corruption. The Government of the Republic approved the OECD Recommendations on lines for further improvement of its legislative and legal and institutional base for the fight against cor ruption. Between 13 and 20 November 2005, the Republic was visited by the OECD mission monitoring the implementation of Recommendations of the Organization. The OECD high ly evaluated the progress of Tajikistan in this direction based on the results of the visit. In November 2004, a National conference was held in the capital of the Republic under the title: “Strengthening the legislative, legal and institutional base of the Republic of Tajikistan on the fight against corruption.” In April 2005, a scientific and practical confer ence was held at the Center of Strategic Studies under the President of the Republic of Tajikistan under the title “Tajikistan against corruption.” In November 2005, a regional con ference was held in the city of Dushanbe with the support of representatives of the United Nation Development Program and the Embassy of France in the Republic of Tajikistan under the title: “The face of corruption in Central Asia, causes and ways of counteracting”, among the participants were representatives of all branches of power, including the Committee of the State Financial Control of the Republic of Tajikistan with a presentation. At present, key lines of anti corruption activity in the Republic include: elaborating the State Program of the Republic of Tajikistan for the Fight against Corruption for 2006 2010;
133 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION
elaborating a package of legislative and legal acts for bringing national legislation into line with international standards for the fight against corruption; conducting anti corruption expertise of laws; implementing the recommendations of the Organization for Economic Cooperation and Development dated 21 January 2004. In our view, the problem of the fight against economic delinquency and corruption should be considered and solved from the viewpoint of raising the efficiency of the activities of all law enforcement, state and economic authorities and through the detection of new ten dencies and problems in the sphere of crime prevention. It is necessary to use the experiences of the fight against corruption gained by the world community and to make it the common property of all bodies concerned. Also, a concept and a state program should be developed for the stage by stage exclu sion of the shadow economy as a basis of economic delinquency. In order to achieve the said goals, it would be rather useful to organize and to hold sci entific and practical conferences and seminars with the participation of SAI specialists and leadership, as well as law enforcement structures of states and international financial organ izations on the following themes: • unifying effective laws and agreeing to the adoption of new ones, which would regulate aspects of state control in coordination with budget and criminal legislation in the first place; • providing legislative support to fight against corruption in the budget sphere; • conducting qualified expertise of the public debt, customs and tax obligations; • conducting expertise of the forming and implementing of the budget with the appli cation of information technologies etc.
134 SWEDISH NATIONAL AUDIT OFFICE
IN DEPTH AUDIT OF FRAUD AND IRREGULARITIES, AND ACTIVE SUPPORT TO LAW ENFORCEMENT AUTHORITIES
MR. GÖRAN HYLTANDER DIRECTOR OF THE SWEDISH NATIONAL AUDIT OFFICE MR. STAFFAN IVARSSON AUDIT DIRECTOR OF THE SWEDISH NATIONAL AUDIT OFFICE
1. Mandate for in depth audit in cases where there are indications of fraud and irregularities The Swedish National Audit Office (SNAO) carries out auditing activities and has a mandate for financial audits as well as a mandate for performance audits. The in depth audits carried out so far have mainly had their basis in the mandate for financial audits. The Act on the SNAO stipulates that its audits should be performed in accordance with good auditing practice. This means that the work should be carried out in line with the methodological instructions which guide the work on financial audit at the SNAO. These instructions are based on good auditing practice as evidenced by INTOSAI’s Code of Ethics and Auditing Standards as well as IFAC’s ISA 240 (International Federation of Accauntants, International Standards of Auditing, ISA 240 The Auditor’s Responsibility to Consider Fraud and Error). The SNAO’s methodological instructions for financial audits, including rules and guid ance, have been adapted to comply with ISA 240. In addition, there are special internal rules and guidance on in depth audit in cases where there are indications of fraud and irregularities.
Conclusions relating to the auditing mandate The SNAO considers that the in depth audit of fraud and irregularities is covered by its auditing mandate even though there are no explicit legislative provisions to this effect. The mandate for investigation or in depth audit follows from the concept of good audi ting practice for INTOSAI members, with ISA 240 being of particular importance.
135 THE PECULIARITIES OF THE SAIs COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION
2. Organisation of the in depth audit in cases of fraud and irregularities, including the discussion with law enforcement authorities The in depth audit undertaken when there are indications of fraud and irregularities is referred to as an ‘in depth audit of assumed irregularities’. It is carried out and reported on by a small, specialised function within the SNAO called the ‘BSG C’. The BSG C has the task of identifying assumed cases of fraud and irregularities at government agencies and state enterprises in order to use auditing methods to analyse and document the factual circum stances and communicate them to the management of the agencies and enterprises, with a view to ensuring that the law enforcement authorities, included the Tax Agency is given re levant information to take appropriate decisions. The choice of forms of investigation and reporting is influenced to a large extent by the type of irregularities which may be involved. There are two main types of irregularities which an in depth audit may concern: 1. Assumed fraud – i.e. the audit concerns events which may give rise to suspicion of crime; 2. Assumed tax evasion – i.e. the audit concerns events which may amount to estab lished tax error, tax evasion or evasion of social security contributions. When there are indications of irregularities, the regular audit services – for both finan cial and performance audits – are to inform the SNAO’s specialist function, the BSG C, of this. The BSG C is in charge of initiating a pre study, carrying out an in depth audit, making contact with law enforcement authorities, reporting to the organisation concerned and con cluding the in depth audit after follow up with the law enforcement authorities on subse quent developments. For in depth audits concerning possible irregularities, infractions which are believed to be ‘of a serious nature’ must be involved. As a consequence, the BSG C nor mally carries out a preliminary study to determine whether the infractions which may have occurred are indeed serious. On the basis of such a study, the Auditor General responsible decides whether an in depth audit should be carried out. In cases of indications of law infractions One consequence of a decision to perform an in depth audit concerning assumed crimes is that a de identified discussion with a prosecutor must be carried out. Such a discus sion is important for several reasons: • While the SNAO has legal skills of its own, also within the BSG C, we need access to lawyers with specialist skills, usually specialised prosecutors, to decide whether the pheno menon in question may be a crime or not – i.e. whether there is reason to assume that a crime has been committed and whether there are sufficient grounds for the prosecutor to initiate a preliminary investigation. • Support in our decision as to whether further audit should be carried out before the event in question reaches the degree of suspicion necessary for the initiation of a preliminary investigation by a prosecutor. • The assessment of secrecy in the individual matter. While the SNAO decides inde pendently on secrecy, the prosecutor’s assessment is very important. If the various circum stances indicate – or even give reason to suspect – that a crime has been committed, secrecy should apply in the matter. • An assessment by a prosecutor is important to ensure the quality of our conclusions, and it also affects the impact of the recommendation that we give to the management of the agency concerned. 136 SWEDISH NATIONAL AUDIT OFFICE
When an in depth audit has been completed and there is reason to suspect that a crime has been committed, the matter is presented to the Auditor General responsible, with infor mation about the content of the in depth audit report and a recommendation for the ma nagement of the agency concerned to submit the matter to a prosecutor for a decision on whether to initiate a preliminary investigation. Then the matter is presented to the manage ment of the agency concerned and referred to this agency through the delivery of a report including documentation to support the information presented in the report. The ambition is for the documentation delivered to be sufficient as a basis for the prosecutor’s decision on whether to initiate a preliminary investigation. The reporting to the agency concerned of a matter relating to suspected irregularities is cov ered by secrecy. As has been mentioned, the report is usually presented to the agency concerned – more precisely, to the management of this agency. If the agency fails to follow our recommen dation, or if there is reason to assume that members of its management themselves are involved in irregularities, the SNAO can submit the matter directly to a prosecutor for examination. Internal handling in brief: 1. The audit team concerned reports to the BSG C. 2. The BSG C carries out a preliminary study. 3. The matter is presented to the Auditor General responsible, who decides on an in depth audit. 4. The in depth audit is carried out, including a discussion with a prosecutor. 5. When the audit has been completed, the matter is presented to the Auditor General responsible, who decides to submit the audit report to the management of the agency concerned. 6. The matter is fed back to the audit team concerned, and general feedback is provi ded annually to all auditors. External handling in brief: 1. The agency concerned is normally informed that an in depth audit is initiated. 2. The matter is discussed with a prosecutor. 3. The matter is normally reported to the management of the agency concerned, with a recommendation to submit the matter to a prosecutor for examination. 4. The agency normally submits the matter to a prosecutor for examination. 5. The SNAO accounts, in a very summary fashion, for these in depth audits in its annual report to the Swedish Parliament. 6. Follow up how the matter is further dealt with by the prosecutor concerned. In cases of indications of tax evasion One consequence of a decision to perform an in depth audit is that a de identified dis cussion with an expert at the tax authority must be carried out. Such a discussion is impor tant for several reasons: • While the staff at the BSG C have skills in tax matters, they need to discuss with spe cialists to decide whether the phenomena in question may constitute tax evasion. If the tax authority experts find that the circumstances appear to constitute tax evasion, the matter pro ceeds; otherwise the in depth audit is stopped. • It provides the BSG C with support in its decision on whether a further audit should be carried out before it can be determined whether or not tax evasion has occurred. • Having had the matter dealt with by the tax authority is an important success factor in connection with the reporting to the agency concerned.
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Once the in depth audit has been completed, the matter is presented to the Auditor General responsible, with information about the content of the report and, normally, a re commendation to the agency concerned to submit the matter to the tax authority for deci sion. The matter is presented by the BSG C to the management of the agency concerned and referred to this agency through the delivery of a in depth audit report, which may include supporting documentation. As a principal rule, the matter is reported to the management of the agency concerned – if there is reason to assume that members of its management them selves are involved the SNAO may report directly to the tax authority. Internal handling in brief: 1. The audit team concerned reports to the BSG C. 2. A preliminary study is carried out. 3. The BSG C presents to the Auditor General responsible, who decide on an in depth audit. 4. The in depth audit is carried out, including a discussion with an expert at the tax authority. 5. When the audit has been completed, the matter is presented to the Auditor General responsible, who decides to submit an in depth audit report to the agency concerned. 6. The matter is fed back to the audit team concerned, and general feedback is provi ded annually to all auditors. External handling in brief: 1. The agency concerned is informed that an in depth audit has been initiated. 2. Discussion with an expert at the Tax Agency. 3. The matter is reported to the management of the agency concerned. 4. The matter is reported by the agency to the tax authority. 5. The SNAO accounts, in a very summary fashion, for these audits in its annual report to the Swedish Parliament. 6. Follow up how the matter is further dealt with by the tax authority.
3. Experience Results Each year since 2004, we have performed four or five in depth audits and reported on them to the law enforcement authorities. These audits relate mainly to fraud, disloyalty, tax crimes and tax evasion in the form of non taxed housing, food and travel benefits and fees, and they concern both agency management and large groups of employees. For reasons of secrecy, complete information cannot be provided. However, all in depth audits performed so far have led to a decision by a prosecutor to carry out a preliminary investigation or, in the case of tax evasion audits, to a decision by a tax authority to change a taxation decision or to recalculate an employer’s social security contributions.
The discussion with law enforcement authorities is very important The experience gained so far shows that the progress of our in depth audits is deter mined by the following factors: A. Co operation with the regular audit team is important, including its continuation during the course of the in depth audit. This co operation includes feedback reporting once the in depth audit has been concluded and reported on.
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B. Contacts with prosecutors and the tax authority respectively, affect the quality of the audit, its impact on the agency concerned and the degree of success once the matter has been referred to the law enforcement authorities. C. Open reporting to the management of the agencies concerned about the in depth audit, including the process with the law enforcement, increases understanding of our in depth audits and affects the preventive efforts carried out at the agencies.
Work remaining A. Achieving better understanding among auditors, both within annual auditing and within performance auditing. There is a lack of knowledge and sometimes a view that it is not part of government auditing. Counter measures: see Points B and C below. B. Training auditors so that they better can detect fraud and irregularities and report them as soon as possible to the BSG C. C. Providing more qualified feedback both to the teams and project groups involved and generally to all auditors – feedback including specific examples of matters which have led to charges being pressed, to convictions being made, to taxes being recalculated, etc.
4. Strategy In depth audit in cases of assumed fraud and irregularities – to assist the SNAO in its work to achieve its overall vision of complete confidence in government administration. Task Based on the observations made by the SNAO and on its own analysis, the BSG C has the task of identifying assumed cases of fraud and irregularities at government agencies and state enterprises in order to use auditing methods to analyse and document the factual circumstances and communicate them to the management of the agencies and enterprises, with a view to ensuring that the law enforcement authorities or the Tax Agency receive relevant information. Objective: Carry out operations which are of such high quality that general crime prevention is favoured and that the law enforcement authorities including the Tax Agency decide to take action.
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Strategy for the BSG C: • Provide knowledge and advice whenever auditors identify assumed cases of irregula rities and tax evasion. • Carry out in depth audits after liaising with auditors at the Annual Audit and Performance Audit Units, in accordance with the procedures set out in the Instructions on Annual Audits and the special instructions. • Identify risk areas for fraud, irregularities, tax evasion, etc., and carry out audits on its own initiative. • Build and maintain good contacts with those responsible at the prosecutorial autho rities and the Tax Agency for the exchange of information and the assessment of assumed infractions. • Communicate and report on the results of in depth audits to the management of the organisation responsible. • Build skills and develop methods for in depth audits and for the identification, on the BSG C’s own initiative, of specific risk areas for fraud, irregularities and tax evasion. • Inform and participate in training of SNAO staff on how to handle fraud, irregularities and tax errors. • Report annually on the overall efforts made to the Board of Directors of the SNAO and – through the SNAO Annual Report – to the Swedish Government. • Cooperate with counterparts in other Nordic countries on audit of fraud and irregularities.
Conclusions relating to in depth audit The SNAO has established clear procedures for all auditors as to how indications of fraud and irregularities should be identified and communicated to a dedicated specialist function. There are rules on how this specialist function should work both internally, in relation to prosecutors and the tax authority and in relation to the agencies and enterpris es audited. The specialist function performs in depth audits as decided by the Auditor General responsible. Discussions with law enforcement authorities are important for the outcome of an in depth audit. Once an in depth audit has been completed, if there are sufficient reasons, the specialist function suggests that the Auditor General recommend the agency concerned to submit the audit report to the law enforcement authorities.
5. Performance audit in the area of preventing fraud and corruption Based on the SNAO’s assessment of risks, its performance audits also examine the pro tection of agencies and enterprises against fraud and corruption. We have recently carried out such audits of Apoteket AB (the Swedish pharmaceutical retailing state enterprise), the Swedish National Rail Administration and the Swedish Pharmaceutical Benefits Board. Work is ongoing on an audit of the protection against fraud and corruption of the Swedish International Development Co operation Agency (SIDA).
140 SUB THEME III THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION ACCOUNTS CHAMBER OF THE KYRGYZ REPUBLIC
THE PRACTICE OF IMPLEMENTING PRINCIPLES OF TRANSPARENCY AND PUBLICITY IN FIGHTING AGAINST FRAUD AND CORRUPTION BY THE SUPREME AUDIT INSTITUTIONS
MR. NADYRBEK TURGANBAEV CHAIRMAN OF THE ACCOUNTS CHAMBER OF THE KYRGYZ REPUBLIC
Dear Conference participants!
I think it would not be a gross overestimate to state that corruption is one of the hardest crimes along with terrorism and its funding, weapon and drugs distribution. Corruption causes like in any other anti public phenomenon are predetermined by a set of social contradictions. External factors of corruption increase in our Republic should be attributed first of all to existence of specified legal vacuum in the field of regulating emerging market relations. Process of legal basis forming significantly lags behind ever changing processes in economic and social spheres of the Republic. Today the only statement we could hear is: “The reforms in tax, law enforcement, judi cial systems and education and health protection domains are required”. However frequently inconsistency and contradiction taken place by pursuing reforms not only prejudice expediency of their conduction, but also have direct effect on favoring cor ruption and fraud. Misappropriation of huge budget funds both damages heavily a national economy and compromises the Republic management in general public’s opinion. Corruption has covered almost all government and public fields resulting in such forms as bribery, crude violations in financial domain, lobbying and adoption of illegal regulations, abuse of power. There is a possibility and causes for corruption and machination in each case where regulations connected with review and solution of the issues regarding financing, credit
142 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION ing, banking activities, privatization, licensing, parceling and distribution are under reg ulated legislatively. But one shouldn’t give in and declare about one’s weakness. Combating corruption is quite real where transparency, publicity and preventive measures could serve as effective tools aimed at preventing this evil occurrence. And by this situation the government financial con troller Accounts Chamber should play a major role. The Accounts Chamber pointing at possible problem areas suggests their solutions, assists government authorities by elaborating specific decisions and taking various measures. It means that according to the provisions of Article 16 of the Lima Declaration on guiding audit principles, the key objective of the Supreme Audit Institutions’ activities is to force authorities to improve weaknesses of the apparatus mediated by public opinion. Bringing expert judgments to public notice the Supreme Audit Institutions should entail a chain reaction of public discussions and evaluations of transactions’ legality by engaged bodies and oblige authorities to take corrective measures. In such a way the Supreme Audit Institutions all over the world perform the function of a principal tool of the public control over the Government activities’ efficiency in mana ging financial resources (State Budget) entrusted by taxpayers. As a result the future of any Ministry, Institution or their Heads would depend on SAIs’ publicly claimed position. In one publication I read such a phrase: “transparency and publicity are more dreadful than a gun”, and it is just the case. There is no more efficient and effective mean of eliminating one or another well per formed illegal system of so called financial crimes than a public disclosure of these facts, gi ving publicity to mechanism and organization of such crimes. The Accounts Chamber in the course of its audits accumulates an enormous informa tion base of quantities, nature, causes of the most typical violations, weaknesses, problems practically in all fields of the economy and social life of the Republic. The President of the Kyrgyz Republic having visited the Accounts Chamber and met with its staff last month named one of the objectives, which is a usage of such data to influ ence the Republican legislative basis. In addition to the control function the audit should perform an essential information function since it provides the public with exact information on government bodies’ activities and efficiency of their utilization of the budget funds. Our President called corruption and poverty a “huge trouble in the state”. Corruption and fraud dominate in the areas where hothouse conditions are provided, which are referred to as “inefficient utilization of government funds”. They are cunning at taking advantage of control weaknesses and gaps, legal holes and vague regulations. Today we should become aware of the fact, that appealing to public and mass media as partners and making the Accounts Chamber’s activity as open and transparent as possible, we pursue preventive purpose rather than one of combating corruption. Should careless official become thoughtful once he read a newspaper article based on revealed financial violations upon the Accounts Chamber materials and thus cut short
143 ACCOUNTS CHAMBER OF THE KYRGYZ REPUBLIC in his illegal actions, it would be a decisive step forward triumph in fighting against fraud and corruption. That is why the Republican Accounts Chamber is constantly informing about its activ ities in mass media. The meeting results of the Accounts Chamber’s Board are made public on a wide and regular basis. We pay special attention to publicity, regularity and preventing activities of the Accounts Chamber. For this purpose we created a web site where news and reports of the Accounts Chamber are being placed and available for all users.
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MS. INA DE HAAN SENIOR AUDITOR OF THE NETHERLANDS COURT OF AUDIT
1. Introduction In this paper we describe the approach of the Netherlands Court of Audit towards figh ting fraud and corruption. Fraud and corruption are specific examples of lack of integrity. The wider scope of promoting the integrity of the public sector is the basis of the approach of the Netherlands Court of Audit towards fighting fraud and corruption. We start this paper with a brief description of the different levels on which SAIs can contribute to controlling fraud and corruption and promoting integrity in the public sector. Subsequently we focus on integrity in the public sector in the Netherlands and the audit approach of the Netherlands Court of Audit. We end this paper with a summary.
2. Different roles on different levels SAIs can play different roles on different levels, seeking different allies in combating fraud and corruption and promoting integrity the public sector. These roles can vary from prevention and detection to prosecution and repression. On an institutional level a well functioning SAI is invaluable to the establishment and maintenance of Good Governance and the prevention of fraud and corruption in a country. SAIs are well placed to promote the integrity of the public sector by contributing to account ability and transparency. Its allies on this level of institution building are other national insti tutions, international organizations and the SAI community. UN and World Bank programmes for developing countries and EU accession pro grammes recognize this. INTOSAI also contributes to the capacity building of SAIs e.g. through it’s Development Program, IDI. The Netherlands Court of Audit participates in se veral of these programmes. The INTOSAI Lima declaration of 1977 is a worldwide recognised basis for the estab lishment of a SAI. With the 1998 Uruguay recommendations on the role of SAIs in fighting fraud and corruption the INTOSAI community went one step further and formulated 12 dif
145 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION ferent ways in which SAIs could specifically contribute to the fight against fraud and corrup tion. The Netherlands Court of Audit has evaluated the implementation of these recommen dations in a survey, and reported on this during the XVIII INCOSAI in Budapest. Last but not least a major contribution of a SAI to promoting integrity in the public sec tor lies in leading by example. Not only by adopting the INTOSAI code of ethics, but also by making sure that it’s own integrity system can stand scrutiny. The Netherlands Court of Audit is collaborating with some SAIs within the Global Working Group of Auditor Generals to prepare a self assessment tool that SAIs can use for this purpose. We will report on this dur ing the XIX INCOSAI in Mexico. On a strategic level a SAI can make a difference in prevention and detection of fraud and corruption and promote integrity by wisely choosing its audit approach, audit objects and other activities, in accordance with the situation in a country. Allies on this level are other national institutions, public organisations or NGOs within the country that also have an interest in promoting the integrity of the public sector. The Netherlands Court of Audit has based her strategy of choosing its audit approach, audit objects and other activities on the UN principles of Good Governance. In accordance with our statutory task and mission, we consider four aspects of Good Governance to be with in our domain. They are transparency and accountability, aimed at the operation of public administration, and effectiveness and efficiency and responsiveness, aimed at the performance of public administration. We have incorporated these aspects in the two “pillars” of our stra tegy: Operation of the public administration: Accountability and supervision is one pillar. Performance of the public administration: The link between policy and implementation is the other pillar.
Through monitoring, communication, account management and the exchange of know how, and building networks we are further developing the effectiveness of our work. Within this strategic framework promoting the integrity of the public sector is one of the “bridges” between the two pillars of operation and performance in the public administra tion. This means that integrity is an aspect of all our audits
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On an operational level SAIs, depending on their statutory task and remit, can con tribute to prevention, detection and repression of fraud and corruption by testing the integri ty system, performing special investigations, integrity audits, forensic audits and law enforce ment. Its allies on this level are other institutions and public organisations or NGOs within the country that also have an interest in promoting the integrity of the public sector, e.g. supervisory , investigative and law enforcing agencies. The Netherlands Court of Audit has no remit that allows it to play a role in the prose cution of fraud and corruption. Neither do we spend our (scarce) resources on investigating cases of fraud and corruption. In our national integrity system other parties are better equipped to play this role. We focus on the system and audit the functioning of this system and the organizations that are part of it. If, in the course of our audits, we find possible cases of fraud, it is brought to the notice of the responsible management of the organization, in order to enable them to hand over the case to the proper investigating authorities. Only if they fail to do so, we bring the case to the Public Prosecution Service. Very seldom we get a direct request for information from the PPS. In those cases we will assist the PPS.
3. Integrity of the public sector in the Netherlands “The government is either incorruptible or it is corruptible. There is nothing in between. Integrity is unconditional. And integrity is vital to the functioning of the public administration; violation of integrity in the public sector means nothing less than that the government loses the confidence of the citizens. And democracy cannot do without the confidence of the citizens. It would mean the end of democracy.” With these words, spoken in 1992, the minister of the Interior, the late Mrs. Ien Dales, put the matter of integrity within the public sector on the agenda. But even until recently the common view among Dutch authorities was that corruption is not a major problem and that it is not a widespread phenomenon in The Netherlands. Until, with the help of a whistle blower, fraudulent activities in the construction sector came to light, involving civil servants. This led to a parliamentary enquiry in 2002. Also in 2002 it became known that some schools for higher education had ‘virtual students’ on their enrolment lists in order to increase their income from government contributions. These affairs helped in increasing the awareness of the authorities of the weaknesses of the integrity system of the public sector in The Netherlands. In 2002 and 2004 The Netherlands was examined by GRECO, a group of states against corruption, under the responsibility of the Council of Europe. In their recommendations they emphasized the importance of a more pro active approach from the authorities that are responsible for formulating anti corruption policies and the need for better statistics in order to measure more clearly the extent of corruption. This last conclusion is supported by a recent academic study on Corruption in the Dutch public sector, requested by the government. In its report on the state of the integrity systems (2004) the NCA also emphasized the importance of reliable statistics (see also par.
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4.2). Recently the Dutch Government sent a white paper on corruption prevention to Parliament in which improvement of registration is one of the five lines of action proposed: 1. Integrity policy aiming at the development of rules, awareness raising and compliance 2. Improvement of the registration of internal investigations into integrity violations, including corruption 3. Improvement of attention raising of breaches of integrity 4. Strengthening of judicial compliance of the rules in cases of corruption 5. Collaboration between the public authorities and civil society The major authorities and their role in the integrity system of the Dutch public sector are: The Ministry of the Interior is the coordinating state institution for integrity within the public sector. Within the decentralised structure of the Dutch government system, it is responsible for legislation and establishes principles and guidelines for assistance to all governmental bodies. Recently the ministry of the interior also has established BIOS, a Bureau for Ethics and Integrity, to support public organisations in maintaining their own integrity policy. The police, specially the Rijksrecherche (Dutch National Police Special Investigation Department). The Rijksrecherche is an independent Special Investigation Service of the Dutch police, under the authority of the Board of Procurators General and is responsible for investigating cases of corruption involving public officials. For internal investigations within the police force there are internal investigations departments. The Public Prosecution Service. The tasks of the public prosecutors’ offices include responsibility for police work in criminal investigation proceedings. The public prosecutor ini tiates an investigation after being informed of a criminal offence, provided the case is within his or her jurisdiction, and is responsible both for that investigation and the police work involved. The FIOD/ECD (Fiscal Intelli gence and Investigation Service/Eco nomic Investigation Service) is a spe cial unit of the Tax Authorities and is a Special Investigation Service. They concentrate their investigative activi ties on tax and customs fraud. They are also responsible for internal inves tigations of cases of corruption within the tax and customs authorities. SIOD/ AID/ VROM IOD are special investigation services concen trating on fraud with subsidies and contributions within the fields of social security, agriculture and envi ronmental issues.
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BIBOB (Facilitation of judgements on integrity evaluations by government bodies), an office within the Ministry of Justice. The purpose of this office is to support authorised local authorities in enforcing the BIBOB law. Under the authority of these local authorities, the BIBOB Office investigates the integrity of applicants for licenses and subsidies. BIBOB then advises local authorities on the danger of misuse of licences, subsidies and contracts. The local authority is responsible for its own decision, it can decide not to follow the BIBOB advice. In addition to these there are also the Law Courts, National Ombudsman, National Security Service (AIVD), some municipal Integrity Bureaus (notably Amsterdam) and the Netherlands Court of Audit.
4. The audit approach of the Netherlands Court of Audit As stated earlier in this paper the Netherlands Court of Audit considers fraud and cor ruption to be specific examples of lack of integrity. We consider the wider scope of promoting integrity within the public sector to be more in accordance with our statutory task and mis sion. The Netherlands Court of Audit considers integrity an essential condition for trust in the public administration. Therefore integrity is part of the current five year strategy and, whenever possible, an aspect of all audits that we do. This way we will be able to use the knowledge we acquire over a number of years to obtain a deeper insight into the main factors that influence the integrity of the public sector in The Netherlands. The emphasis in our approach is on prevention and not on repression of fraud or corruption. In our audits we therefore focus on the integrity system and the functioning of this sys tem and the organizations that are part of it, not on individual cases. We have a three tier approach to contribute to the integrity of the public sector: A strategy of embedding integrity in all types of audit that we do, conducting special Integrity Audits and seeking alliances in knowledge sharing.
4.1 Embedding integrity in regularity and performance audits In our regularity audits we certify the reliability of State accounts and the orderliness and auditability of financial and operational management. Our regularity audits are risk based:
Risk basedapproach
Basic controls
Specific risk areas?
No Yes Additional contr ols
‘red flags’?
No Ye s In depth analysis
Reporting
149 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION
In the risk analysis we identify high risk areas concerning: • Procurements and stocks • Money flows (Cash, bank) • Collection (taxes, fees) • Subsidies, transfers • Information (confidentiality, privacy) • Inspection and sanctioning
During the audit we are alert to “Red flags” regarding: • Institutional aspects and governance • External relations • Personnel • Processes • Documents The results of our annual regularity audits are presented in audit reports to parliament. Annual regularity audits have a preventative effect on fraud and corruption within the public administration. In our performance audits we look, among other things, at the performance of public institutions playing a role in the supervisory system of the Dutch society. A good supervisory system is of great importance to prevention, detection and repression of fraud and corruption. The NCA focuses in many of these audits on the cooperation between the actors involved. Experience shows that evaluations by the ministries tend to focus on the performance of indi vidual actors and not on the chain as a whole. So a SAI can contribute substantially to better supervisory systems by aiming at the performance of the chain of actors. The Netherlands Court of Audit carried out several audits on performance of supervi sory institutions in the last decade. The NCA makes recommendations to the organizations it has audited and reports its conclusions and recommendations to Parliament. On fraud and related topics the following NCA publications should be mentioned: • Inspection of private income tax returns (2006). This audit focused on the risk based approach the Tax Administration uses when checking income tax returns filed by private indi viduals and which makes the tax system susceptible to misuse and improper use. • Combating fraud: situation 2004. The audit focused on tax and social insurance fraud and fraud within the banking and insurance sector, and is a follow up of an audit that the NCA conducted in 2000: Detection and Prosecution. • An insight into police performance (2003). From April 2001 to April 2002 the Netherlands Court of Audit investigated the management and control of the execution of police tasks. • For the second part of 2006 the NCA has programmed an audit that focuses on iden tifying the factors impeding an efficient and effective detection, investigation and prosecution of financial economic crime.
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4.2 Integrity audits The NCA has a long term programme to audit the integrity management systems of ministries and non departmental public bodies. These audits focus on the existence of an integrity policy and specific measures to insure integrity of the organization. The first audits were held in 1996 and 1998. In 2004 the NCA stepped up its efforts along this line and con ducted a base line measurement of all ministries and 10 non departmental public bodies (NDPBs) on elements of integrity management: • Integrity policy • Policy evaluation • Risk analysis • Code of conduct • Internal Control • Integrity audit • Registration of reporting • Registration of violations • Investigation protocol • Prosecution • Registration of judgements
The NCA published its report in 2005 and concluded that the integrity management system of the Dutch ministries and NDPBs has improved since 1996 and 1998, but still nee ded significant intensification. The findings per ministry were published on our website. The same method will be used in performance audits on NDPBs that the NCA is conducting. Also the NCA does specific integrity audits, either on request of parliament or on its own accord. Two examples:
• In 2002, the Court of Audit conducted, on request of Parliament, a review on the audit of irregularities in the funding of higher education, performed by the audit department of the ministry of education. • In 1999 the Netherlands Court of Audit investigated the ethical standards and the policies for prevention and sanctioning in penal institutions and the way in which such poli cies are implemented and carried out.
4.3 Seeking alliances and knowledge sharing In order to ensure the effectiveness of our work, the NCA looks for different ways to disseminate its knowledge. Our auditors are encouraged to write articles about their work and cooperate with other actors in their field. The NCA organizes expert meetings and confe rences, gives presentations and participates in training programmes. A good example is the development of an Intergrity self assessment tool: SAINT (Self Assessment INTegrity), together with the Ministry of the Interior and the Integrity Bureau of the City of Amsterdam. The instrument is designed for the public sector in particular and consists of a one day workshop in which an organization can evaluate it’s integrity risks and
151 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION the maturity level of its integrity measures. BIOS, the Bureau for Ethics and Integrity from the ministry of the interior, has now taken over the maintenance and support of SAINT. Part of this project is the development of a database that can be used for benchmarking.
5. Summary In the view of the NCA SAIs can play an important role in the fight against fraud and corruption, on three levels: On an institutional level SAIs are well placed to promote the integrity of the public sec tor by contributing to accountability and transparency. On a strategic level a SAI can make a difference by wisely choosing its audit subjects and audit approach, fitting to the situation in a country. On an operational level SAIs, depending on their statutory task and remit, can con tribute by performing special investigations, forensic auditing and law enforcement. The scope of the Netherlands Court of Audit is on promoting integrity within the pub lic sector. Our emphasis is on prevention and our focus is on the integrity system. In this we adopt a three tier approach: Embedding integrity in regularity and performance audits, monitoring the integrity of the public sector and seeking out strategic allies for knowledge sharing.
152 SUPREME AUDIT OFFICE OF THE CZECH REPUBLIC
MR. VÁCLAV PEŔICH EXPERT OF THE SUPREME AUDIT OFFICE OF THE CZECH REPUBLIC
Introduction Fraud and corruption represent some of the most serious threats in our contemporary society. They occur everywhere there, where public administration fails to fulfil its functions effectively. It might result from more causes and take more forms. In one country, corruption substitutes lacking (or underdeveloped) mechanisms of administration and distribution, in another country, it is intentionally linked up with power motivated ruling. There are also more developed countries where bureaucracy creates so complicated system that many officials can quite comfortably pump their clients for bribe by bullying them or making obstructions. All these practices are running without direct evidence. It is almost impossible to catch offenders red handed, because both parties of such transactions are interested to hide them. A few corruption cases are revealed usually after failing with help of an unsatisfied direct participant. There are two simple consequences connected with the theme of our conference: • Combating fraud and corruption should focus on preventative means such as transparency, objectivity, and effectiveness of public administration; simplifying processes and procedures, minimising corruption opportunities etc. • Supreme Audit Institutions should foster sound financial management in all its elements rather than to pretend ability to hunt for corrupted officials. Of course, when an SAI has proper investigation powers available, chasing after bribery might be proper and effective. Nevertheless, a core of auditing is work with documents, and particularly in our country, we apply reasonable division of labour between criminal prosecu tion, financial inspection, and external audit authorities. This presentation describes how the Czech Supreme Audit Office contributes in our battle against fraud and corruption by applying its remit.
153 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION
The position and remit of the Supreme Audit Office In compliance with the Lima Declaration, the Constitution of the Czech Republic defines the status of the Czech Supreme Audit Office (hereinafter referred to as “SAO”) as an independent body that shall audit the management of state property and implementation of the state budget. Subsequently adopted Act Number 166/93 lays down more detailed provisions: • The SAO audits the management of state property and the revenue and expenditure of the state budget, for example, the payment of taxes by liable persons and their correct calculation and collection by the revenue authorities. • The SAO also audits the financial resources collected for services such as health and social insurance. The SAO’s audit work is carried out at the central level but it can follow financial resources from the state budget or from abroad (including EU funds) to the level of the final beneficiary. The SAO cannot, however, audit resources levied directly by municipa lities or regions under their own jurisdiction. • The SAO’s remit includes the audit of the issue and amortization of government securities and public tenders organized by state bodies (or for the so called State Funds). The SAO also audits certain explicitly enumerated public bodies, such as the Czech National Bank (partly) or the Czech Consolidating Agency, for which the state has assumed guarantees. Further, the SAO shall draw up and submit to the Chamber of Deputies (the lower chamber of the Czech Parliament) its opinion on the report on the course of implementation of the State Budget and on the state final account of the Czech Republic, including the audit reports on which its opinion is based. When so requested by the Chamber of Deputies or by the Senate (the upper chamber of the Czech Parliament) and their bodies, the SAO also shall draw up its opinion on drafts of legal regulations concerning budgetary management, accounting, state statistics and per formance of auditing, supervisory and inspection activities.
Rights of access and outputs of the Supreme Audit Office The SAO has full access to the premises of audited bodies in order to carry out its work and can demand that audited bodies provide it with the original documents and other papers it needs, including electronic records, within a specified time period. Audit staff can examine all relevant documentation on site and can also carry out spot checks on assets. Auditors can require true and full, oral and written information from the officials of the audited body. Where a body does not cooperate fully, the SAO can enforce access by imposing financial sanctions on the body concerned and these sanctions can be levied repeatedly if cooperation is not forthcoming within a time period defined by the auditors. The SAO issues more types of external outputs: • Annual Audit Plan of the SAO is a public document and it sets out the individual auditing operations planned for the coming budgetary year. It specifies the object and purpose of audits, designates the bodies to be audited and establishes an audit timetable. It also sets out the names of the SAO members entrusted with drawing up the audit conclusions and SAO bodies responsible for approving the conclusions.
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• Audit Conclusions, summarizing the results of individual Audit Protocols, are published quarterly in the SAO Bulletin. There are usually eight to ten Audit Conclusions in each volume. • The Annual Report, summarizing the work of the SAO in the year and its main findings. • Opinions on the Government’s quarterly reports on the implementation of the State Budget these are addressed to the Chamber of Deputies and are then publicly available as parliamentary documents. • Opinions resulting from the SAO’s analysis of draft legislation. • Announcements to law enforcement authorities of suspicious activities or events. All announcements are strictly confidential, formal and must be supported by strong evidence.
Outputs of auditing All of the SAO external documents are publicly available and they must have the same wording for three categories of users – legislators, governmental departments, and general public. This principle was particularly important after change of the regime in our country because we needed to deserve trustworthiness in public view. It is most likely the reason that our legislators laid down a unique provision on the SAO’s Annual Audit Plan. Every audited entity knows about our audits in advance and might be assured that the audit had to have been adopted by the whole SAO Board it is impossible to impersonate himself off as an auditor without an appropriate warrant. Audit protocols contain a description of ascertained facts and specify defects and legal regulations that have been contravened. Protocols must include the names of auditors, desig nation of auditees, the place and the date of the audit, its object and references to the docu ments on which the protocols are based. The auditors and the auditees sign protocols. Auditees may file objections in writing and state the grounds for them. Heads of audit teams are empowered to decide on objections. If the head of the team disallows the objections, the auditee may file an appeal with responsible SAO bodies (SAO member, Senate or Board), which then decide on the objec tions and further procedure. On the basis of audit protocols and relevant documents results of audits are summa rized and evaluated in the form of audit conclusions. Audit conclusions are prepared by SAO members responsible for the conduct of audits in cooperation with the appropriate coordi nating or regional departments. The Board or the authorized Senate approves them after members’ comments have been considered. The SAO President presents all approved audit conclusions without delay to the Chamber of Deputies, the Senate, the Government of the Czech Republic, the Czech National Bank, and upon request to ministries concerned. They are also published in the SAO Bulletin. Audit protocols and other data pertaining to the approved audit conclusions might be made available (in controlled way) by the SAO, on request, to the Chamber of Deputies, its bodies and the Government of the Czech Republic. If the SAO while auditing discovers facts that indicate criminal offence or contravention of legal regulations, the SAO President notifies the appropriate law enforcement authorities. 155 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION
Other outputs Parliament is the main addressee of all the other outputs of the SAO’s activities, parti cularly its opinions on the implementation of the state budget and its annual report. The SAO sends copies of its documents to both Houses of Parliament immediately it has approved them, but there is no automatic procedure whereby the reports must be considered by Parliament. The SAO also sends an official quarterly Bulletin to all Deputies and Senators, containing among other things a set of audit conclusions adopted during the preceding three months. Parliamentary bodies can ask the SAO’s opinion of draft bills in such areas as accoun tancy, state statistics, budgetary rules, internal control/audit, inspection, and supervision. The Chamber of Deputies usually also asks the SAO to comment on the draft budget. Occasionally, the SAO’s involvement in developing legislation may go beyond provi ding a legal opinion. For example, the draft bill on Financial Control in Public Administ ration was considerably changed during its proceedings in Parliament after input from a working group of experts including representatives of the SAO. The SAO also contributed a lot during parliamentary proceedings connected with the freedom of information act. The SAO’s experts are also regular reviewers of draft amendments or new bills prepared by governmental departments and central agencies. An indirect output of the SAO activities is presented to the public through the Office of The Government. In 1998 the Government incorporated provisions into its Procedural Rules on how to deal with the SAO’s reports. Each central authority is required to prepare a statement containing general comments on the report, its response to the audit findings and a list of the follow up measures it plans to take. At least once each quarter, the Government invites the SAO’s President to a cabinet meeting to discuss the audit conclusions and assess the follow up measures. The Government usually adopts its own resolution assigning follow up tasks to min istries or strengthening the requirements on them to take action. Implementation of these tasks is regularly reviewed. Each of cabinet meetings is followed by a press conference and journalists often ask information about results of auditing. This practice facilitates public understanding of
156 SUPREME AUDIT OFFICE OF THE CZECH REPUBLIC the SAO’s activity considerably because such a type of discussion between the SAO and the gov ernmental bodies in question is much simpler and concrete than any full audit report.
Cooperation with the Supreme Public Prosecutor’s Office The Supreme Public Prosecutor’s Office of the Czech Republic (hereinafter referred to as „SPPO”) represents public prosecution in the criminal proceedings and it performs other duties where specified by Law. The whole system of prosecution corresponds with the judicial system – it has four levels: district, regional, high and supreme. If the SAO while auditing dis covers facts that indicate criminal offence or contravention of legal regulations, the SAO President notifies the appropriate law enforcement authorities. This procedure is applied normally at the basic – district level of the law enforcement authorities but the SAO simulta neously gives all such documents to the SPPO for supervision and documentation purposes. In order to apply these contacts as efficiently as is possible, both institutions adopted the co operation agreement, which includes details on information exchange, mutual parti cipation of own experts as lecturers at in house trainings of the partner etc. For example, the SAO regularly organizes a three day training of auditors „Procedures and preventive meas ures against corruption”; and an important part of this training is always prepared and pre sented by a senior official from the SPPO. A member of the High Court and a teacher from the Police Academy provide another parts of this course in addition to the SAO’s experts. A concept of the course resulted from previous contacts between the SAO and the SPPO, which started more than ten years ago. As it was already mentioned above, criminal nature of operations is many in many cases hidden or covered by complicated structures of procedures, forms and other documents. Experts from the SPPO and the SAO took a set of cases, which were detected (in fact as a not large part of likely committed deeds), and analysed them in detail to develop typical indicators – so called ‘red flags’. Such indicators usually seem to be only unimportant mess but particularly in mutual combination they imply something more severe. Each type of institutions has its own risk profile composed of various combinations of indicators. Our expert group prepared a very useful material for the best practice of the SAO auditors but it did not manage to bring it to the form of guideline or manual yet. We would like to develop for our conditions a similar manual like “Fraud Examiners Manual”, Third Edition, Association of Certified Fraud Examiners, Austin, Texas, which introduces this list of most common ‘fraud and corruption’ indicators: • Rising expenses for goods and services. • Slow deliveries from or substandard performance by a vendor. • Rapidly increasing purchases from one vendor. • Excessive purchases of goods or services. • No division of duties between new vendor approval and authorization for purchasing. • Contracts written to limit competition (for example, sole source contracts). • The same vendor always wins contracts by small margins. • The contract always goes to the bid received last. • Splitting one purchase into multiples to avoid the approval process. • Paying above market prices for goods or services.
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It might be concluded that the co operation between the SAO and the SPPO stood in test of time particularly by a combination of both criminal and economic expertise.
Co operation with other institutions The SAO’s representatives are frequently invited to participate in various seminars, workshops, conferences, educational and promotional events organized in the area of com bating fraud and corruption. Organizers of such events could be from any type of institutions – governmental, business, or civil society sector including universities, non profit organiza tions, media etc. The Institute of State Administration has several educational serials for various cate gories of public servants. Courses for senior officials always include some lessons on combat ing fraud and corruption where the SAO’s experts are usually keynote speakers. Officials of lower rank have at least two lessons about ethics, which also provide guidance in preventing corruption. The Ministry of Interior and its Institute of Local and Regional Self governments also prepare similar educational events with the SAO participation. These courses have slightly shifted preferences in thematic structure of lessons because the risk profile of local adminis tration differs from the risk profile of state administration. For example, procurement con tracts on the central level have much better professional service than those on the local level, thus preventive measures against corruption should be there much stronger. An important partner of the SAO in relation to civil sector is the Czech National Chapter of the Transparency International. Transparency International (TI)is a global network including more than 90 locally established national chapters and chapters in formation. These bodies fight corruption in the national arena in a number of ways. They bring together relevant players from government, civil society, business and the media to promote transparen cy in elections, in public administration, in procurement and in business. Since 1996 it is a main organizational body preparing and running globally organized International Anti Corruption Conferences (IACC). The jubilee 10th IACC 2001 was held in Prague (the Czech Republic), the SAO’s representatives participated in preparing committees (organizational; program) and among speakers. The SAO also contributed into TI publications for general pub lic (the Czech Sourcebook; the Textbook on Anticorruption in Public Administration). In similar way the SAO participate also in other educational and promotional projects and events held by universities and academic institutions.
158 NATIONAL AUDIT OFFICE OF DENMARK
MR. NIELSEN MOGENS UHD HEAD OF SECTION OF THE NATIONAL AUDIT OFFICE OF DENMARK
Sub theme I: The primary responsibility of preventing and exposing fraud and corruption lies with the administration. For this purpose the administration is under an obligation to establish internal procedures and internal control systems that are eligible to prevent and expose fraud and corruption. The National Audit Office of Denmark (hereinafter referred to as the NAOD) has – according to the Auditor General’s Act – a responsibility to audit the accounts mentioned in the Act. The overall aim of this audit is to form the basis for a conclusion that the accounts are without significant errors and deficiencies. In order to reach such a conclusion the audit process must comprise a number of audit steps to different ends. Fraud and corruption may affect the account in question in a significant way. Therefore, the audit process also comprises steps designed to convince the auditor that the account in question is without significant errors and deficiencies due to fraud and/or corruption. On this background a part of the audit process is an assessment whether internal pro cedures and internal control systems are sufficient and complied with. Furthermore the auditor must always during the audit have an eye for circumstances that indicate fraud and/or corruption. Such indications must be confirmed or denied, especially in case they are considered to be eligible to affect the information contained in the account.
Sub theme II: If the NAOD discovers cases of fraud and/or corruption the NAOD will ask the ma nagement of the audited entity to inform the law enforcement bodies which are in charge of investigating cases on fraud and corruption. It is the responsibility of the relevant law enforcement body to determine – after the investigation – whether the case in question should be prosecuted.
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The law enforcement bodies carry out their own investigation. The NAOD is normal ly not part in that investigation. Only in exceptional cases the NAOD will take part in the investigation and only for audit purposes.
Sub theme III: It is not within the mandate of the NAOD to take measures specifically intended to implement transparency and publicity in the field of fighting against fraud and corruption. The NAOD has an audit task. The results of the audit will be reported to the audited entity and the Parliament. The audit process and the results hereof (reported to the parlia ment in audit memoranda and audit reports) is transparent in the sense that anyone has the right to have access to the NAOD’s documents. This right is only subject to the specific li mitations provided for in the applicable legislation which contain provisions regarding confi dentiality and other kinds of restricted information.
160 NATIONAL AUDIT OFFICE OF THE UNITED KINGDOM
MR. FRANK GROGAN DIRECTOR GENERAL OF THE NATIONAL AUDIT OFFICE OF THE UNITED KINGDOM
INTRODUCTION In the United Kingdom, reports published by government departments, HM Treasury, the National Audit Office and Parliament’s Committee of Public Accounts have shown that much good work is being done across government departments and the central public sector to prevent and detect fraud against public funds. The internal financial control arrangements in place are designed to inhibit the occurrence of internal fraud. However, significant amounts of public money are still lost each year through external fraud. These losses arise from a wide range of different types of fraud. At one end of the scale are individuals who see an opportunity to make a small gain. At the other extreme a relative ly small number of organised crime groups carry out premeditated systematic attacks for large sums of money. Law abiding taxpayers have the right to expect government departments and other bodies to safeguard public funds and to crack down on those committing fraud. Because of the standards expected and reinforced in the United Kingdom central pub lic sector (in which the NAO, as the UK’s Supreme Audit Institution, operates), corruption is perhaps perceived as less of a problem compared with the position found in some other countries. But the risks posed by corruption – such as the abuse of official position and the misuse of power for benefit or gain – require a different audit response from that directed at fraud, by virtue of the fact that corruption will often occur “off book”, without involving pub lic funds directly and without leaving evidential traces in the books of account and records of the entities concerned. The risks and threat of fraud and corruption are faced by national audit offices – Supreme Audit Institutions (SAIs) – in other countries around the world. Fraud, money laundering, economic crime and corruption acknowledge no borders; are not confined to the private or commercial sector; and occur in both developed and developing economies. The effects of fraud and economic crime are corrosive, socially damaging and economically debi
161 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION litating for counties and economies. Measures to prevent, detect and discourage fraud and economic crime are arguably far more important in the public than private sector because of the importance of public sector service delivery to citizens; and the public sector’s position of governance as standard setter and guardian in the life of the nation. All types of fraudsters weigh up the potential gains against the risk of getting caught and the sanctions they may face. Government departments and other public bodies need to make fraud as unattractive as they can. Failing to act against fraud can undermine the reputation, integrity and professionalism of an organisation; and have a detrimental effect on perceptions about the quality of the services it provides, leading to a loss in public and even international confidence. The prime responsibility for the prevention, detection and discouragement of fraud and corruption lies with the entities themselves: with management rather than with the auditor, the SAI. In the United Kingdom, a number of public departments are carrying out fraud risk assessments to show the scale of the problem and are assessing how these risks can be reduced. Total elimination of fraud is unlikely ever to be achieved, but it is important that momentum is maintained, and good practices developed and shared. The NAO has an important role to play in ensuring adequate financial control, the proper conduct of public business and good governance. This paper summarises and explains some of the good practices used in the UK by the NAO in tackling external fraud. It shows how a strategic overview of good corporate governance is necessary to drive an anti fraud regime and how external financial and performance audit can aid in combating fraud. Other SAIs may wish to consider how such practices might be adapted and applied to their own circumstances and regulatory framework. The NAO’s approach concentrates on oversight and governance as the key functions that any SAI can and should engage with. These are the functions or roles through which an SAI can gain wide impact and achieve most beneficial results for the effort expended in con trast, for example, to the pursuit of case based detection and investigation.
Key concepts suggested are: • The value of strategic coordination and the importance of “joining up” financial audit and performance (value for money) audit in particular: but also the SAI’s role in regulatory work, oversight and education/guidance to auditees, the public sector generally and Parliament. This can be done within a framework of cross disciplinary communications, information sharing, joint and complementary working, and an integrated strategic approach. • The value of a holistic approach to audit activities focussed on fraud and corruption, where different activities and audit practitioners are able to draw on each other and provide a single interface with the public sector and audited bodies. • The benefits from the SAI emphasising a governance oversight role, and acting positively and constructively as governance partners with the audited entities.
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PART 1 ¾ The main elements of an integrated strategic approach to fraud ¾ Identifying and assessing fraud risk ¾ Response to fraud risks ¾ Monitoring and reviewing fraud risks
THE MAIN ELEMENTS OF AN INTEGRATED STRATEGIC APPROACH TO TACKLING FRAUD AND CORRUPTION In the UK, public sector organisations are increasingly taking a strategic approach to understanding and managing the risks of fraud because this: • Is consistent with good corporate governance. A major element of good corporate governance is a sound assessment of the organisation’s business or operational risks. Fraud risk should be managed in the same way as managing any other business risk and should therefore be approached systematically at both the organisational and operational levels. The external auditor/SAI can oversee and encourage this. • Helps with developing a range of measures which apply proportionate and well tar geted pressure at all levels of the problem. • Can help to achieve a cost effective approach in tackling fraud, by focusing on areas of greatest risk and where efforts may have the greatest impact. A strategic approach can pro vide a rational and robust basis for allocating additional resources to tackle fraud, where needed. • Can be a helpful way of communicating to staff and to external parties what the organisation is trying to do and what is expected from them. Some organisations have also published their strategies as a way of informing the pub lic that they have a well thought out approach to tackling external fraud. This can also send a deterrent message to potential fraudsters that they are less likely to succeed in attempts to commit fraud against the organisation. Figure 1 provides an overview of the elements of the strategic level approach to com bating fraud. This strategy and guidance covers each key element.
Figure 1: The main elements of an integrated strategic approach to tackling fraud
163 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION
IDENTIFYING AND ASSESSING FRAUD RISKS 1. Assessing the scale of fraud threats Assessing the scale of loss from fraud is an important first step in developing a strategy for tackling external fraud. SAIs can provide support to audited bodies in taking this forward. An estimate of loss highlights the scope for potential savings, which can then help to deter mine the relative priority that should be given to tackling fraud in the context of all the other calls on an organisation’s resources. Such estimates then establish a baseline against which performance can be judged. If repeated at intervals, these estimates can help an organisation assess how well they are doing and whether the threat is changing. There may be circumstances where an organisation decides that it is not practicable to produce overall estimates. Nevertheless, they may be able to use a range of techniques, such as carrying out in depth research into an area where fraud is suspected to gain a better under standing of the scale and nature of the threat. Some observers have said that: • it is too difficult to produce estimates of fraud, and that it is not worth attempting to do so; • the resources used to produce an estimate could be better used on tackling fraud, for example, by carrying out more investigations. These issues are dealt with below.
Producing reliable estimates UK Government bodies have used operational research and statistical methods to pro duce estimates of losses to fraud. Two main methods used are statistical modelling and sampling.
Statistical modelling Statistical modelling has been used in the UK to produce overall estimates of fraud or loss, notably on revenue activities. This involves comparing levels of actual receipts or expen diture with the total level of receipts or expenditure that might be expected using other sources of data on the level of activity under review. This is a technique that may be used by government departments but can also be used by an SAI, which has wide access to govern ment statistics and an overview of the central public sector. Points to consider for statistical modelling are: • The data required may be incomplete. Therefore, the model may have to use a num ber of assumptions, which means that results will be subject to a margin of error. It is impor tant to take this into account when making decisions on actions to reduce losses. • Other work may be needed to give an insight into the perpetrators of fraud or the type of action that might deter them. This may include more in depth modelling work. • Further research may be needed into the causes of increases or decreases in the level of losses and the extent to which this is due to anti fraud measures implemented. .It is worth remembering, in this and other contexts, that the position of a national audit office – the SAI – is one that provides oversight of others. The SAI may have regulato
164 NATIONAL AUDIT OFFICE OF THE UNITED KINGDOM ry or pseudo regulatory functions but can also constitute a governance partner for the public sector entities that it audits. In this regard, the SAI does not have the responsibility for iden tifying solutions and methodologies, but may advise and work with the audited bodies in for mulating appropriate responses.
Sampling Estimates of loss can be generated by checking a representative sample of cases to see whether fraud is involved, and extrapolating the results to the whole population to estimate the total level of fraud loss in the area of expenditure or revenue. When checking individual cases it can be difficult to determine whether any discrepancy is due to fraud or error (reck lessness, carelessness or ignorance) because of the judgements that need to be made. For example, in their work in estimating fraud in individual expenditure streams, the UK National Health Service Counter Fraud Unit is deciding whether fraud is involved by using the concept of fraud and burden of proof applicable in civil law that is to say, whether some one knowingly or recklessly obtained resources to which they were not entitled, on the bal ance of probability. This is to ensure that all behaviour which can legally be determined as fraud is measured. The SAI can provide both impetus and support to such initiatives, by impro ving accountability for the areas concerned. A key consideration in producing an estimate of fraud loss on an area of expenditure/revenue is the level of accuracy required. A greater degree of precision produces more reliable estimates (essential for assessing any real change in the level of fraud over time) but at additional cost, because the size of the sample required increases where greater accu racy is needed. Stratifying the sample according to the type of risk, using skilled reviewers to detect whether fraud has occurred, and instituting quality control procedures to ensure that the review process is correctly and consistently applied can also increase the accuracy of any assessment of the level of fraud risk based on sampling.
2. Understanding the types of fraud risks A department or other government body will be unable to develop an appropriate response based only on the estimates of fraud. They also ideally need to know: • the types of fraud perpetrated against them, for how long and the financial loss involved; and • who the fraudsters are, their characteristics and behaviours, how often they carry out the frauds, which types of frauds they commit, how they do it, and whether they are oppor tunistic or organised. Examination of detected fraud cases either from investigation or from the random sam ples of cases examined to produce estimates of fraud loss, can give an insight into these risks. Larger UK departments or those which face serious threats also have intelligence ana lysts and/or commission research into the threats. This enables them to focus their resources accordingly. For example, the BBC has commissioned research programmes over a number of years, which have shown that evaders of the license fee vary both in their behaviour and in
165 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION their attitude to the license fee. Overall the research shows that evaders tend to be younger people and the less well off, who regard the license as unfair or just another tax that they “get nothing for”. Further research was carried out to model the evader population with commer cially available data on where they lived. This showed that areas with higher evasion rates were likely to have, for example, a higher than average population of low income households and/or students and a higher level of convictions for petty crimes. At the other end of the spectrum, there are some departments and agencies that may have few or no recent instances of external fraud. Checking a sample of cases, or carrying out research into the possible threats, will help to confirm whether the risks from fraud are low and will aid the assessment of the amount of resource that needs to be allocated for anti fraud activities.
3. Identifying the areas most vulnerable to the risk of fraud Assessing the scale of past frauds gives some indication of the potential level of future fraud and thereby the scale of the threat. Understanding the types of fraud risk which are spe cific to the organisation gives an indication of the types of fraud that might be perpetrated, and those transaction streams that could be particularly attractive to potential fraudsters and therefore considered to be high risk. Together, these provide an indication of areas most vul nerable to the risk of fraud and enable an organisation to develop appropriate anti fraud measures focussed on the key risk areas. The external auditor/SAI is integral to the regular testing and functionality of these disclosures. For, example, research conducted by the Customs and Excise department (now Revenue and Customs) has led them to divide their estimate of Value Added Tax losses into losses from VAT “missing trader” fraud (a serious fraud that exploits European Union trading arrangements); VAT avoidance; failure to register for VAT; and general non compliance. Analysing their estimate of loss in this way enables Customs to understand the different risks provided by different elements of the trader population, and to focus the resources devoted to preventing, detecting and responding to fraud.
RESPONSE TO FRAUD RISKS All organisations that are serious about responding appropriately to the risk or inci dences of fraud, and making it more difficult for fraud to occur, should have a comprehensive integrated method of addressing fraud risks. The external auditor/SAI can be instrumental in encouraging and monitoring good practice from its standpoint as a governance partner with the audited organisations. This method should start at the top, where senior management set the tone of the organisation and should promote an anti fraud culture throughout the whole organisation. Operational staff then design, implement and operate the control actions required to min imise risk. The personnel (human resources) function ensures that the right staff are recruit ed and that employment and conduct is carried out against an appropriate ethical framework to ensure integrity; the proper conduct of public business; and sound stewardship of public funds and assets. Accommodation services ensure physical security; and information tech nology (IT) services promote computer and data security.
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The role of internal audit is to provide assurance to senior management on the quality and operation of the whole of an organisation’s risk management, internal control and gov ernance arrangements. In relation to fraud, this will include review of the adequacy of arrangements for managing the risk of fraud, and ensuring that the organisation actively pro motes an anti fraud culture. Specific responsibility for managing fraud risk should be assigned to an appropriate member of senior management. Senior management should try to create the conditions in which staff have neither the motivation nor the opportunity to commit fraud. The mainte nance of good staff morale may help to minimise the likelihood of an employee causing harm to the organisation through fraud. The organisation’s approach to fraud, which contributes to an anti fraud culture, should be communicated throughout the organisation, including contractors and third par ties delivering services on behalf of the organisation. Specific key elements that can be used to address fraud risk are described in more detail below.
1. Focusing resources on the most effective anti fraud measures There is no single package of measures which can be applied universally by ministries, departments and other government bodies to tackle fraud. Measures need to be tailored to the type and size of the threat faced. The external auditor/SAI can provide advice from an expert perspective on the appropriate response, either through the regular financial audit process or by focussed work in contributing to improved governance. In deciding which measures to use, and the extent to which to use them, some departments have assessed the savings that could be achieved by targeting their resources in a better way. Savings can arise in three ways: • Through direct effects from recovering amounts defrauded. Where the measures involve re allocating resources into existing activities, the department or entity can look at current costs/savings as a basis for estimating the return from increasing the levels of count er fraud activity. Where new measures are proposed, it is good practice to pilot these before hand, in order to test and refine their operation, assess their likely effectiveness and confirm the type of savings that can be achieved. • Through the preventive effect, from improved future compliance from those who have been previously detected committing fraud. For example, the UK Customs and Excise department assume that the Value Added Tax yield will increase immediately from traders previously detected committing VAT fraud, but that this additional yield will gradually reduce if no further checks are subsequently made. • Through the deterrent effect on others who become more compliant as they learn of greater efforts being taken to crack down on fraud. In practice, it can be very difficult to assess these deterrent effects with any accuracy and departments do not always seek to do so.
2. Setting targets and monitoring performance Some public departments in the UK have set targets to stabilise or reduce fraud over a period of time. Focusing targets on the overall level of fraud or loss is a good way of assessing
167 THE PRACTICE OF SAIs IN IMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION performance, and generally a better measure than the amount of fraud or loss detected. The latter is difficult to interpret if the full scale of fraud or loss is not known. Other measures of performance are useful complements to estimates of total fraud loss, such as changes in regional levels of loss; the cost of tackling fraud compared to the return obtained; and the rate of recovery of detected frauds. For example, the UK Department for Work and Pensions have public service agree ment targets which require them to reduce particular losses as follows: • from customers of working age, in Income Support and Jobseekers Allowance, to be reduced by 50% by March 2006, from a 1997 1998 baseline; • in Housing Benefit, by 25% by 2006, against a 2002 2003 baseline; and • in Pension Credit, by 20% by 2006, against a 2001 2002 baseline. Performance data on outcome targets may not be available until long after the period being measured, due to the amount of work involved in sampling cases, checking, calculation and validation of the results. To monitor performance in a given year, managers may rely on output results to indicate whether the outcomes are likely to be achieved. For example, ma nagers may monitor: • the results of operational checks on transactions; • fraud investigation activity and outcomes from that; • number and types of sanctions imposed; and • the achieved rate of recovery of defrauded amounts that have been detected. In order to ensure that they are taken seriously and reported on accurately, it is impor tant that performance against any targets is validated by an independent source. This can also increase public confidence in reported performance and in promoting the message that “fraud does not pay”. Independent validation of anti fraud performance targets can be an area where External Audit contributes to an organisation’s overall anti fraud culture. (Further details of the potential role of external audit are provided in Part 2.)
3. Assigning responsibility for tackling fraud As stated above, responsibility for tackling fraud and managing fraud risks starts at the top of the organisation within the senior management board or equivalent management forum. At this level, ownership of fraud risks is assigned and responsibilities allocated for managing individ ual fraud risks. Although everybody in the organisation has a role to play in tackling fraud, some organisations have also set up central units or focal points with responsibility for tackling exter nal fraud. These have coordinated work on developing the organisation’s strategies; ensuring their implementation; monitoring results; and providing advice and guidance. Fraud can be a moving target as the scale and nature of the risks change, and regular monitoring of the situation is required to identify and respond to new threats. A focal point or team may help this process. Regardless of the arrangements in place, organisations need to ensure that someone is fully responsible for implementing the plans for tackling fraud in the way intended and that sufficient resources are in place. Someone should also be responsible for performance against targets. There is no point in having a well thought out strategy if it is not then put into effect, or there is no way of confirming that it is being put into effect as intended.
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4. Deterring and preventing fraud To show that organisations are serious about tackling external fraud, they need to detect cases of fraud against them; investigate them where appropriate and impose sanctions which are proportionate to the crime. This will help to deter potential fraudsters in the future by showing that crime does not pay, especially if the outcomes of cases are well publicised. Organisations also need to consider whether the frauds detected indicate that new threats are emerging, or are on a larger scale than originally thought. From this work, depart ments and agencies will need to consider whether their strategic approach needs updating. They will also need to assess whether any frauds reveal systemic weaknesses which need to be tackled.
5. Detecting and investigating fraud and imposing sanctions Frauds may be detected in a number of different ways. Referrals may come from staff who have carried out checks on transactions and suspect a fraud. Members of the public may contact the department about their suspicions. In the UK, Departments also use a range of techniques and technologies to identify suspicious cases for further investigation. They may also carry out special pro active exercises to detect fraud in high risk areas. Fraud investiga tors may develop their own intelligence by following leads on existing cases where there may be links to other frauds. This section focuses on the use of whistle blowing hotlines and com puter software techniques.
Hotlines Hotlines (sometimes called whistle blowing or ethics lines) can be a cost effective way of obtaining from staff and the public details of possible cases of fraud which can be assessed and investigated further. Good practices include: • Setting up a single toll free telephone number, with alternative means of contacting the department, including email and freepost addresses; • Advertising the telephone number and contact details on the department’s website, in leaflets and posters, and in advertisements during anti fraud campaigns; and • Giving undertakings on confidentiality, indicating the information that is useful in a referral; and setting out the types of frauds that the department are particularly interested in, and how the department will deal with the information provided. It is also good practice to record information received onto a standard form. This can help in prompting the person making the referral into providing as much relevant information as possible. An electronic version of the form can be included on a website, which can be com pleted and submitted anonymously online. The person providing information may wish to know what action may be taken, and may expect feedback on what happens. While it is possi ble to give general information on how referrals are handled, it may well not be possible to give specific details on individual referrals, where this would breach confidentiality requirements. Hotlines should be evaluated at regular intervals, for example, analysing the number and type of referrals received, what has happened in each case, and overall results.
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Computer Software Techniques A range of techniques using computer software and technologies can be used to detect cases of fraud. These include techniques such as data matching, data mining and neural networks. It may be possible to draw on the experience and lessons of others in the use of these techniques. Data matching involves computerised scanning of data held in different data files either within the same organisation or in different organisations. It can be used by management for a range of purposes including detecting potential fraud. With increasing computer power, data matching across files is possible on a very large scale. Data matching between different bodies is facilitated greatly by common data descrip tors but is possible only if there is appropriate authority for data to be transferred or shared between these bodies. This authority may derive from a statutory basis for demanding or dis closing the data or both. Uncertainty over authority to share data may sometimes have hin dered the use of data matching; data matching has also raised concerns about the possible infringement of individual rights to privacy. To help focus resources on the data matches which may indicate possible fraud, data matching software should be configured in such a way as to: • highlight the highest priority matches; • allow users to filter only those matches that meet investigators’ criteria for investiga tion; and • explain the importance of each match type and protocols. The largest data matching exercise of this kind in Europe is carried out by the UK Audit Commission, the auditors of local government entities. Their National Fraud Initiative involves analysis of over 14 million data records within local government bodies and the National Health Service. The data matching technique identifies potential inaccuracies and inconsistencies in benefit payments which could indicate the occurrence of fraud. For exam ple, where an individual is claiming Housing Benefit while receiving a salary or pension that precludes the right to such a benefit; or where an individual is claiming Housing Benefit from two different bodies. The results are passed to participating bodies with supporting information and gui dance for further investigation as part of the Audit Commission’s external audit service. In 2002 2003, this exercise resulted in the detection of more than Ł83 million of fraud and over payments, including more than 2,000 instances of an occupational pension continuing to be paid after the death of the pensioner. Over 100 public sector employees resigned or were dis missed as a result of frauds revealed by the National Fraud Initiative in 2002 2003.
Investigating Fraud Where fraud has occurred, the organisation should consider: • stopping the fraud at the earliest opportunity and reviewing whether weak controls have been exploited which need to be tightened up; • deciding whether to prosecute the case criminally or impose a penalty; and • collecting any arrears and imposing penalties, to ensure that the economics of the crime are undermined and to deter others.
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Organisations also need to look at whether the total number of investigations is com mensurate with the potential sums lost from fraud. Investigating cases of fraud can be resource intensive. Assessing the financial return achieved on the overall caseload and on dif ferent categories of case will indicate the likely benefits of undertaking more investigations or a different mix of investigations. Tracking the progress of fraud investigations allows managers to assess the overall work load (such as whether investigations are concentrated on the main types of fraud set out in a government Department’s strategy); to identify problem areas, such as where progress is slower than would be expected; and to understand the cost implications of investigations and the effects on the planning of future resource usage, or the consequences of increasing or decreasing resource levels. When organisations investigate fraud they will need to consider whether they have suffi cient staff with the right technical knowledge and experience. Specific training for key staff may be appropriate. For example, the UK Customs and Excise service have developed new proce dures, provided training for all investigators and implemented a quality control process to ensure that all investigations adhere to established procedures. Investigators can also be supported in their work by specialists, such as forensic accountants and computer analysts. The Customs and Excise are taking further steps to professionalize their investigations by ensuring that future train ing will meet the standards set by the UK Police Skills and Standards Organisation. Investigations into fraud should be consistent with the aims of the criminal justice sys tem to reduce crime and the fear of crime; and to dispense justice fairly and efficiently, pro moting confidence in the rule of law. Independently reviewing the way in which fraud inves tigations have been carried out can help to ensure that appropriate standards and legal requirements have been followed. The findings can highlight areas where improvement is needed. The reviews can be undertaken by independent internal teams with expertise in fraud investigation, to review the conduct and quality of fraud investigations or the appointment of an external assessor.
Imposing Sanctions Where investigations reveal evidence of fraud, the organisation will usually seek to impose some form of sanction. The purposes of this are: to deter others from carrying out similar types of fraud against the organisation; • to recover the money defrauded; and • to punish the fraudster by imposing a penalty, such as a fine, or confiscating an asset, or by criminal prosecution in the courts. It can be useful to publish the approach adopted in detecting and investigating fraud, and the sanctions that can be imposed, so as to deter potential fraudsters and ensure that a consistent approach is taken. Examples of types of sanctions: Fines and other penalties Fines and other penalties imposed on those committing fraud need to be recovered (collected) to ensure that they act as a deterrent.
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It is important to monitor progress in recovering fines and penalties, including the enforcement of fines imposed by the courts on convicted fraudsters. Even if the organisation does not collect fines itself, it should consider working with the relevant authorities to determine the level of fines actually paid. The extent of re offending may indicate whether sanctions pro vide a sufficient deterrent and whether imposing new sanctions needs to be considered. For example, the UK Department for Work and Pensions estimates that nine per cent of those fraudulently claiming Income Support and Jobseeker’s Allowance are re offenders. To help combat recidivism, since April 2002 the Department have been able to stop all ben efits for 13 weeks if individuals are convicted of committing benefit fraud twice within the space of three years. When imposing sanctions, organisations need to be aware of relevant human rights le gislation, for example, Article 6(1) of the “The European Convention on Human Rights,” which provides for rights to a fair trial and which notes: “In determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law”. As a final recourse, someone who has been subject to a fine or other sanction should be allowed to dispute the sanction in a relevant court.
Criminal prosecution Preparing cases to the state of proof required for a criminal prosecution may take a long time and involve significant resources. Decisions on whether to prosecute may depend on whether: • there is sufficient evidence to obtain a conviction; • the case involves a systematic attack on the organisation’s systems and has led to sub stantial amounts of money being lost; • there is a history of re offending; • professionals such as lawyers and accountants are involved in the fraud; and/or • criminal prosecution will increase the deterrent effect on others. These factors need to be balanced against the time and cost of bringing a case to court, and the availability of other forms of sanction which may be more appropriate. Some UK public departments have laid down the circumstances in which they will prosecute, to ensure that they take a consistent approach in each case. Organisations will need to consider whether the number of prosecutions is commensurate with the potential sums at stake in lost revenue and thus provide a sufficient deterrent.
The recovery of money defrauded In most jurisdictions, individuals and organisations have a choice of recovering money through civil or through criminal legal action. Obviously, the exact method used will depend on the jurisdiction in operation; but the freezing and seizing of criminal proceeds can be a faster, more effective and more cost effective response to economic crime than criminal pro secution. However, all organisations will need to consider:
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• the amounts stolen and therefore potentially recoverable; • the prospects of success in any judicial proceedings; • the value of assets held by the suspected fraudster; and • the likely legal costs of any court action.
In all of these measures the SAI has a role to play in giving guidance and incentive through its position of providing governance oversight.
MONITORING AND REVIEWING FRAUD RISKS Evaluating the effectiveness of sanctions Evaluating the effectiveness of sanctions is not straightforward, mainly because of the difficulties in assessing the deterrent effect. In broad terms, the deterrent effect of sanctions will be reflected in whether the amount of fraud has reduced, although it is hard to disentan gle the effects of sanctions from other action to reduce fraud as well as wider economic effects. When evaluating the effectiveness of sanctions, organisations may wish to consider fac tors such as: • the number of frauds identified or considered to be occurring; • the number of identified frauds where no sanction was imposed; • the number of cases where re offending has occurred; • the number of penalty charges or other fines imposed; • the amount raised by penalty charges or fines imposed; • the number of cases recommended for criminal prosecution; • the number of convictions achieved; • the total estimated losses from frauds and the amount recovered; and • the number and amount of confiscations and assets seized from fraudsters.
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PART 2
¾ The direct role of external audit in combating fraud ¾ Financial audit ¾ Performance audit ¾ Revenue audit
THE ROLE OF EXTERNAL AUDIT (the SAI) IN COMBATING FRAUD The routine external audit process in the financial audit examination and certification of entities’ accounts and financial statements is not designed to detect fraud, other than to have a reasonable prospect of identifying material fraud, if present. Under International Standards on Auditing, the prevention and detection of fraud and the maintenance of an effective system of internal control is the responsibility of management, not the auditors. Nevertheless, external auditors should assess and address the risk of fraud and irregularity in carrying out their work. The UK National Audit Office uses a coordinated approach to risk analysis. Both financial audit and value for money (performance audit) teams carry out their own risk assessments as part of their audit approach. These risks are shared so that financial audit teams are tasked with addressing all risks to the truth and fairness of the financial statements; and the VFM team is tasked with addressing all business risks not directly relevant to the end of year financial reporting process. In certain cases, risks may be identified that warrant investigation but do not fall with in the remit of either financial audit or VFM. In this case, the NAO has a budget for good governance studies (focussed investigative audit work directed initially at systems and arrangements rather than specific case based instances of fraud or corruption). Past examples of these have focussed on specific control weaknesses and unusual transactions, which may not be large enough by value to give rise to the risk of material accounting misstatements and do not fall within the planned work programme of VFM audit teams. Since 2003 04, the NAO’s VFM directors have also been asked to certify whether they have any information on control weaknesses that are significant enough to feed into the Statement of Internal Control which entities produce under the UK’s financial reporting requirements. This is an example of “joined up” or complementary work by the separate financial and performance audit teams. Although not specifically aimed at detecting or pre venting fraud, this process ensures that any significant control weaknesses, including those that make it more difficult to assess and respond to fraud risks, are brought to the attention both of the financial auditors and Parliament. In addition, Supreme Audit Institutions can more directly aid the bodies that they audit in combating fraud. This is because they can take a strategic overview across (in the UK context) the entire central government or local government sector; and can perform data matching exercises to identify inconsistencies in, for example, the sorts of benefits that indi viduals claim and other records held about them elsewhere. The UK Audit Commission’s National Fraud Initiative is a particularly effective use of this global oversight role.
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FINANCIAL AUDIT The external auditor’s responsibility to consider fraud is set out in International Standard of Auditing 240 (revised): The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (ISA240). This identifies two types of intentional misstate ments that fall under the definition of fraud, namely: • misstatements arising from fraudulent financial reporting; and • misstatements resulting from misappropriation of assets. Although the external auditor’s approach to fraud in the public sector is normally focussed on misstatements arising from misappropriation of assets, it is as important to con sider fraudulent financial reporting. This is because fraudulent financial reporting often involves management override of controls that can appear to be operating effectively. It may be committed because management is under pressure, from sources outside or inside the enti ty, to achieve expected (and perhaps unrealistic) targets. Although specific responsibilities may vary from country to country, the primary responsibility for the prevention and detection of fraud rests both with management and, where different, those charged with governance – for example governing boards or the go verning bodies of international or inter governmental organisations. The objective of an audit of the financial statements is to enable the auditor to express an opinion on whether those statements are prepared, in all material respects, within the applicable financial reporting framework. Even if the audit is properly planned and prepared, there is a risk that some material misstatements will not be detected. The risk of not detecting a material misstatement arising from fraud is usually higher than the risk of material misstatement arising from error, because fraud may involve sophisti cated measures designed to conceal it. If management is involved in the fraud, then the risk is greater, since management is frequently in a position to directly or indirectly manipulate accounting records and present fraudulent financial information to the auditors.
Responsibilities of the external auditor External auditors are not responsible and should not be held as responsible for finding all fraud, but they should be looking for ways to improve the detection rate, in order to help build trust in their role. This is particularly important for the UK NAO, which has the key role of “helping the nation spend wisely”. This means that the key question the NAO asks itself when considering its approach to detecting and preventing fraud is: “How effective are our procedures in detecting material fraud? Can we, and should we, be doing more?” The UK auditing standard that sets out the auditor’s response to fraud is SAS 100. However, the relevant International Standard on Auditing, ISA 240 (Revised) to which the NAO adheres goes into far more detail than its British predecessor in describing the level of professional engagement necessary to respond to fraud risk. In particular, it re introduced the specific requirement for proper “professional scepticism” when considering audit evidence, recognising the possibility that a material fraud could exist, notwithstanding any previous knowledge about the entity and about the honesty and integrity of management. The UK Auditing Practices Board sees ISA 240 as a significant strengthening of British standards.
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ISA 240 requires auditors to obtain an understanding of the audited body’s organisa tion and its environment, including internal controls. Detailed risk assessment procedures are laid down with a requirement for the audit team to discuss the susceptibility of the enti ty’s financial statements to material misstatement. The team must consider the attitudes, awareness and actions of senior management, and the prevailing ethical culture and tone of the audited body, as well as systems and structures. Auditors must also make those charged with governance aware of material weaknesses in the design and implementation of controls. Where risk assessment procedures provide information that one or more material fraud risk factors are present, ISA 240 requires auditors to design and perform further substantive procedures to specifically address that risk. Auditors should also consider the knowledge, skill, experience and level of supervision of staff assigned to the area where there is a risk of material misstatement due to fraud; and should consider incorporating an element of unpre dictability in the timing and extent of audit procedures. If a fraud is detected or if information is obtained that suggests a fraud might exist, the auditor should communicate these matters as soon as possible to the appropriate level of management. However, if the auditors believe that management or employees who have a sig nificant role in internal control may have perpetrated the fraud, they should communicate instead with those charged with governance. Currently, the standard suite of planning procedures used by the NAO specifically requires audit teams to consider the risk that the financial statements may be materially mis stated due to the risk of fraud; and to identify management controls over that risk. Specific substantive procedures should be included to respond to any risks of material fraud. There are also specific procedures that address the risk of money laundering. In response to the more detailed requirements of ISA240, the Institute for Chartered Accountants in England and Wales (ICAEW) proposed a ten point plan to improve current pro cedures. The plan and its implications for public sector audit in the UK is summarised below:
1. Perform an in depth review of the effectiveness of the corporate and engagement level procedures to combat fraud risk at client (audited) entities SAIs need to keep their anti fraud audit procedures under regular review to ensure that they are as effective as possible. They should ideally have methodologies that address current good practices in terms of identifying and responding to fraud risk; and which all audit direc tors, managers and staff understand and can practically implement.
2. Cover fraud risk in the acceptance of entities as clients (the audit engagement) and in continuance procedures In most cases it will not be possible for a public sector audit institution to withdraw from an audit engagement. However, it is still worth considering the risk of fraud each year, in particular to identify instances where there are concerns over management integrity. The NAO uses formal procedures to cover this as part of the normal audit process. If there are seri ous concerns over the integrity of client management, then the audit approach and the level of review needs to be altered accordingly.
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3. Reinforce professional rigour, scepticism and judgement from the top, especially when there is heightened fraud risk Senior management at SAIs should ensure that everyone understands the importance to the office’s reputation of focusing effectively on fraud risk. If the risk of material misstate ment due to fraud is considered to be high, the involvement of an experienced and senior review director or adviser at a senior level outside the main audit team will reinforce the audit director’s judgment, particularly if difficult decisions have to be taken. SAIs need to develop quality control procedures that promote and reinforce professional scepticism.
4. Deliver fraud risk training and best practices to all Audit firms, and therefore SAIs, should look at how to improve the effectiveness of all their audit practitioners in relation to fraud risk. This includes recruitment, development, and training. A combination of on the job and structured training, together with regular sharing of experiences and work on case studies, will help develop skills and foster a sceptical state of mind that takes nothing for granted. It can also include making more effective use of specia lists and, in the public sector, liaison with law enforcement and other relevant government bodies and competent authorities.
5. Make a specific, separate assessment of fraud risk to help focus on the key issues ISA 240 puts greater emphasis on the specific consideration of fraud risk on every audit, and adopting the new ISA approach is likely to improve performance. The fraud risk assessment is based on consideration, in relation to every client or audited entity, of the three conditions that are normally present when fraud occurs: incentive or pressure, opportunity, and attitude or rationalisation, meaning the ability to self justify or an ethos that allows the intentional commission of a fraudulent act. There is a higher risk of fraud where two or all three conditions are present; but even one factor being present may be enough to warrant the auditor taking further steps. A variety of approaches to fraud risk assessment may be effective, the key factors being a specific focus on fraud risk factors which is separate from considering error; the interpretation of information collected; and the link to audit procedures.
6. Keep the fraud risk assessment under review and tailor audit procedures to respond to any fraud risk factors that have been identified Unless the basic approach for all audits already assumes a high risk of fraud, audit effectiveness will usually be increased if procedures on individual engagements are tailored to address the fraud risks identified. Emphasis on more targeted procedures and the application of individual judgment (depending on the nature of the risk) is likely to be more effective than merely increasing the extent of work on ‘routine’ audit procedures.
7. Consider the risk of management fraud as being more likely to result in material mis statement of the financial statements and harder to detect While the risk of ‘employee fraud’ is still important, experience shows that the most material frauds involve management and the auditor therefore benefits from a specific assess ment of management fraud risk and related responses.
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8. Give risks relating to the pressure to manipulate results as much weight as those asso ciated with other types of fraud The audit considerations and procedures relating to the risk of manipulation of finan cial results by management can be different from those of other frauds. Specific considera tion of this within the overall fraud risk assessment will increase audit effectiveness. Auditors should pay attention to accounting estimates, in particular if revenue or profit manipulation could be involved, in order to assess whether there is management bias. The importance of this increases where more and more public bodies are subject to financial performance tar gets, and with the increasing use in the public sector of performance measurement techniques and results based budgeting and management.
9. Auditors should discuss with senior management and others charged with governance, how they discharge their fraud risk responsibilities These discussions are crucial. They enable the auditor to find out about management’s knowledge of any fraud (whether actual, suspected or alleged) in the organisation, and about anti fraud measures. This in turn gives the auditor a better understanding of fraud risk factors and the risk that the financial statements could be materially affected by fraud. Discussions can also help ensure management and those charged with governance in an organisation to understand that it is their responsibility to prevent fraud through effective internal control and diligence; and to detect and respond to it, if it occurs, in a timely fashion.
10. Put fraud risk on the agenda of audit team meetings that include experienced team members Knowing the client/audited body, sharing that knowledge and applying independent judgment and scepticism are crucial to effective auditing. Team discussions on the nature and level of any fraud risk help to ensure that all members of the team think about fraud risk and enable them to identify patterns of unusual activity from discussing individual members’ audit findings. Team meetings reinforce professional scepticism and stimulate a fresh look at the risk of fraud, combating over familiarity with the audit approach.
PERFORMANCE AUDIT Performance audit (known in the UK as Value for Money, or VFM, audit) involves focussed studies on key areas of concern for Parliament. It can focus on operational issues such as hospital waiting times but can also focus on particular streams of government expen diture or major cross cutting issues. Major Value for Money reports are published and usually result in review by Parliament, specifically the Public Accounts Committee. These tend to be very high profile and are widely reported in the UK media. Value for Money reports specifically on fraud in government departments (or reports associated with government accounts which deal with specific instances of significant fraud) can receive significant negative publicity in the media and can lead to hostile questions in Parliament directed at the civil servants responsible.
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One of the features of a properly run VFM study is that the audit team should be in constant communication with the government department being audited and with other stakeholders and contributors to the study. This means that if significant frauds, or controls weaknesses that could lead to fraud are detected, they are communicated to the department or ministry for action. This has the benefit that the department can begin to respond to the detected fraud or control weakness immediately and, by the time that a formal audit report is issued, systems to prevent the fraud reoccurring should already be in place, and these can be highlighted to deter potential copycat fraudsters. When conducting a VFM study into any issue, but particularly into suspected fraud or the systems to prevent fraud, the design of the study is particularly important. Design involves all the key factors which will influence the production of a study: • the scope of the examination and the questions to be addressed; • the availability of relevant evidence; • the types of tools and techniques (methodologies) used to collect and analyse evi dence; • the likely added value; and • the skills required to deliver a quality product. For example, the NAO’s VFM study on Tackling Fraud Against the Inland Revenue drew on experience of other studies conducted by NAO’s Revenue and Customs VFM teams; and employed a variety of techniques to gather evidence using a mixture of internal staff and consultants. This included interviews with policy makers, central and regional management, and operational staff drawn from across the Revenue, in particular those areas with a strong focus on ensuring compliance. The study utilised an economic consultancy firm to review the methodologies used by the departments in measuring and analysing fraud. It reviewed the approach and extent of use of data sharing, data matching and other innovative techniques in tackling fraud and compliance; and employed a business risk consultancy to develop a best practice checklist covering the prevention, detection and investigation of fraud, which was used to critically examine the audited department’s approach.
REVENUE AUDIT The UK Comptroller and Auditor General (C&AG) is required to ascertain that ade quate regulations and procedures have been framed to secure an effective check on the assess ment, collection and proper allocation of revenue under Section 2(2) of the 1921 Exchequer and Audit Departments Act as amended. Effectively, this means that the C&AG is required to comment on developments with in corporate governance and supporting systems so far as they relate to the collection of receipts of revenue. This is an annual audit which focuses on the key systems of the main re venue generating bodies within UK central government primarily Revenue and Customs. The audit also covers systems introduced to ensure accurate collection of any new taxes that generate significant income; and it involves additional focused substantive testing of any sys tems where significant weaknesses have been discovered.
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The focused testing may be influenced by client management requests, by risks identi fied in previous Section 2 or financial audits, or in response to whistle blowing disclosures by members of the public. It acts as a good method to identify significant frauds and to identify and respond to weaknesses in controls that could make frauds easier to commit. For example, a whistleblower contacted the NAO with concerns over a warehouse where goods seized by Customs (which are bonded goods) were held prior to either destruc tion or the relevant import duties being paid. The NAO’s auditors followed up this contact and identified a significant fraud where bonded goods were being illegally removed from the warehouse for sale on the black market. The fraud had escaped detection because of weak nesses in stock controls and a lack of segregation of duties. As a result of this investigation, a number of individuals were prosecuted and new stock management procedures were institu ted to reduce the chance of similar frauds occurring in the future. Revenue audits may lead to reports included in departmental accounts or to separate reports to Parliament. As with the NAO’s VFM reports, Section 2 reports tend to be fairly high profile and are widely reported in the British media. The negative publicity attached to the discovery of significant public sector frauds acts as an incentive to client management to improve their systems for preventing and detecting fraud. Departments are often asked to publicly respond to NAO reports, to explain what they are doing to reduce the chances of similar frauds occurring in the future. This can act as a deterrent for potential fraudsters.
PART 3
¾ Corruption
CORRUPTION What is corruption? Defining corruption: Corruption is the offering, giving, soliciting or acceptance of an inducement or reward which may influence the action of any person. That is, an individual receives a bribe as a reward or incentive for action or inaction, contrary to the proper conduct of his or her duties, for the direct benefit of a third party. Whereas the loss to the audited organisation is usually fairly apparent in cases of fraud, in the case of corruption, the corrupt employee (or a third party) may benefit from the act but there may not be any loss to the organisation, or any effect on the accounts or financial statements. The most popular and simplest definition of corruption is the one used by the World Bank: “The abuse of public power for private benefit” (Tanzi 1998). Economically, it is often modelled as a principal–agent problem: A principal delegates some decision power to an agent. The principal’s rules of preference in exercising the power are known to the agent. The principal’s problem is that the agent may serve his own interests rather than the principal’s.
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A standard example is a situation in which companies bid to obtain a government con tract. The government (principal) is represented by an official (agent). The government has communicated a set of preferences, related to factors such as price, quality and delivery, to guide the official in deciding which company (client) to give the contract to. But the official may be tempted to give the contract to a company from which he receives a bribe, rather than the one that best meets the government’s criteria. Are corruption and bribery synonymous terms? Corruption is the abuse of public power for private benefit, and that private benefit is most often in the form of illicit money or in kind payment from a client to the agent, i.e. a bribe. Economic literature on corruption tends to focus on bribery, often simply defining cor ruption as government officials abusing their power to extract/accept bribes from the private sector for personal benefit. It is probable that the general public would associate corruption very strongly with bribery. Many indicators used by experts are based on surveys of people’s perception of the levels of corruption. However, a personnel officer who hires a family member rather than the best qualified applicant is corrupt. But his gain may be in terms of “family standing” rather than a bribe. And although it is common to focus on bribes paid to government officials, the principal agent problem may occur in a private organisation as well. For instance, a provisions officer in a company may choose a supplier on the basis of a bribe, rather than on aspects of interest to the company, such as price and quality. Bribery certainly is a form of corruption, and corruption most often involves bribery. Corruption may involve actions to circumvent or achieve management override of con trols; and, where this is the case, may be addressed in audit terms in a similar way to the audit response to fraud risk. However, corruption is frequently an “off book” activity in financial terms, without direct evidence or transactions appearing in the organisation’s books and records. This means that, where a risk of corruption is perceived or indicated by some factor, it requires special consideration and attention from management and auditors. For the NAO in the UK context, addressing corruption is dealt with in two ways: (i) Through the “policing” function of the external audit process, by auditors (parti cularly financial auditors) remaining alert to the risks and possibility of corruption in their audit testing of entities’ internal controls, accounts, transactions and operations (for exam ple in contracting and procurement). This is a key responsibility of the SAI as public sector auditors. This requires the public sector auditor to retain an appreciation of the need to be a watchdog to ensure the proper conduct of public business and identify suspicious transactions or unacceptable practices. This involves carrying out routine audit tests which include the coverage of regularity and propriety in addition to the other audit test objectives (complete ness, occurrence or existence, measurement or valuation, existence and disclosure). Regularity is the requirement for all items of expenditure and receipts to be dealt with in accordance with the legislation authorising them, any delegated authority, and any other relevant authorities, such as government accounting rules and regulations. Regularity is about compliance with appropriate authorities and the NAO includes assurance on compliance as an explicit part of the audit opinions it provides on the accounts audited.
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Propriety is linked to regularity, with an emphasis on Parliamentary control. Propriety is the further requirement that expenditure and receipts should be dealt with in accordance with Parliament’s intentions and the principles of Parliamentary control, including the con ventions agreed with Parliament (and in particular the Public Accounts Committee), for the proper conduct of public business, and consistent with the values, standards and behaviours appropriate to the public sector. Propriety therefore goes wider than regularity and is concerned with fairness, integrity and probity (honesty); and would include matters such as the avoidance of personal profit from public business, even handedness in the appointment of staff, open competition in the letting of contracts, and the avoidance of waste and extravagance. (ii) By responding to any ad hoc issues or cases that arise through the audit process itself or which are brought to the NAO’s attention, and which may merit special or focussed attention and investigation. The NAO also plays a role in engaging with other public sector entities and regulatory or oversight bodies, in the provision of advice and education in the maintenance of a public sector culture which deplores and takes action against all types of fraud and corruption. The NAO is not itself part of the law enforcement system, nor does it have judicial po wers or the ability directly to sanction. Its strength comes from its independence, its powers of access and its ability to report to Parliament and to the public at large. The NAO neverthe less cooperates with and supports the various law enforcement authorities, and the judicial system as required to deal with identified fraud and corruption.
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RECOMMENDATIONS UPON THE RESULTS OF THE EUROSAI INTERNATIONAL CONFERENCE “THE ROLE OF SUPREME AUDIT INSTITUTIONS IN FIGHTING AGAINST FRAUD AND CORRUPTION”
KYIV, SEPTEMBER 19 21, 2006
Participants of the EUROSAI International Conference “The Role of Supreme Audit Institutions in Fighting Against Fraud and Corruption” unanimously agreed about the urgency and immediate need to treat the problems of public finance fraud and corruption as extremely dangerous socio economic phenomena. Following discussions of aforementioned problem, based on SAIs´ working experience in this field, the Conference participants declare: • SAI’s of all countries without exception play major and growing role in reinfor cing processes and procedures intended to prevent and treat fraud and corrup tion in systems of public finance management. • As SAI’s experience indicates, corruption varies in different forms being the most dangerous when there takes place a merger of corruptive government offi cials with various commercial organizations and criminal structures. • Existence of confusing nonconforming, contradicting legislation and laws regu lating economic relations, imperfect taxation system favoring economy “sha dowing” provide proper grounds for carrying fraudulent activities. • Corruptive relations between government officials and economic entities entail elaborating and approving legislative and standard acts granting privileges for individuals neglecting national interests. As a result prerequisites for “shadow” economy development, strengthening positions of criminal structures and decreasing the quality of public services are provided. • Audits conducted by SAI’s have direct impact on strengthening legislative and institutional system of public administration, decreasing arbitrariness of govern ment officials, simplifying administrative procedures and making a decision making process transparent, revealing red flag areas under corruption threat. • By extending accountability and transparency, regulating and improving auditing approaches and through the sound selection of audited entities, SAI’s contribute to combating fraud and corruption. • Where their mandates allow, SAI’s can cooperate with law enforcement agencies to protect economies from significant irregularities, money laundering and other violations of proper public administration. Working within their mandates, Conference participants draw special attention to the need of solving the following tasks:
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In the field of SAI’s role in fighting against public finance fraud and corruption: 1. Working within their mandates SAI’s should seek to ensure that the fight against fraud and corruption gains the status of government policy. 2. Complying within the Lima Declaration, SAI’s should do their utmost to extend publicity and transparency limits at all stages of the auditing process as an integral part of reinforcing efforts to detect, prevent and fight fraud and corruption. 3. The task of SAI’s in this field implies first of all supporting efforts intended to reduce materially the risk of fraud and corruption. In this connection, and again working in accor dance with their mandates, SAI’s should encourage and may indeed participate in adminis trative and economic reforms aimed at the extermination of conditions that allow corruption and fraud to develop, through interactions with legislative and executive authorities. 4. Within granted authorities SAI’s should elaborate and strive for implementation of proposals on legislation and public management improvement in the field of combating fraud and corruption. 5. SAI’s activities should be directed towards increasing auditing efficiency as a result of improving methodologies of detecting fraud and corruption risks in the course of auditing. 6. Where their mandates allow, SAI’s should be a key player in elaborating an integral system of external and internal financial control, introducing international standards, their compliance and harmonization with national legislation being one of the fundamental factors that could impact on improving audit quality and deterring fraud and corruption. 7. Where their mandates allow SAI’s should strengthen the oversight of local govern ment in their use interbudget transfers and subsidies allocated to them from the State Budget for meeting national functions and tasks. 8. SAI’s should pay due attention to professional education in the field of government audit, training techniques and to the development of methodology based on their own expe rience and that of SAI’s. 9. Under current prevailing conditions of international relations globalization SAI’s should facilitate and extend international cooperation and, where appropriate, the coordina tion of control processes intended to detect, prevent and fight against fraud and corruption. 10. Where their mandates allow, SAI should take measures to promote establishing the “transparency” practice of cash flows on bank accounts and transactions with real estate of chief officers of respective states.
In the field of SAI’s cooperation with the law enforcement agencies in detecting and pre venting corruptive activities 11. Where their mandates allow, SAI’s should cooperate with law enforcement agen cies in developing a systematic set of measures for establishing the legal basis for the fight against fraud and corruption. 12. Where their mandates allow, SAI’s should develop their cooperation with law enforcement agencies for improving techniques for detecting areas in the management of pub lic finance, prove to the risk of corruption and the factors and conditions that create that risk.
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13. Where their mandates allow, SAI’s should assist law enforcement agencies to apply affective legal measures against public servants who violate anti corruption legislation. Where appropriate there, SAI’s should work in cooperation with law enforcement agencies to make the mechanisms of this interaction more effective.
In the field of SAI’s implementing principles of transparency and publicity in the fight against fraud and corruption 14. Complying with the principles of independency, openness, transparency and pub licity in a steady manner, SAI’s should, where their mandates allow, take an active role in pro moting higher morals and ethics in the public sector, the development of the institution of civil society, and the increase in citizens´ interest in activities of the politicians they have elected and in efficient and proper use the taxes they have paid. 15. Pursuing constructive dialogue with legislative and executive authorities SAI’s should, where their mandates allow, strive for the introduction in government bodies of mo dern information technologies on control over administrative activities that would make those activities more transparent. 16. Within their mandates, SAI’s should promote civil society’s awareness of their rights to public services and the possible mechanisms of their participation in performing control over efficiency of government bodies´ operations. Conference participants are confidant that these Recommendations will promote fur ther close cooperation between SAI’s from EUROSAI member countries; the further deve lopment and extension of international cooperation and, where appropriate, coordination of control processes; and the solution of common problems in an efficient manner, including, among other things, the problem of preventing fraud and corruption.
185 TABLE OF CONTENTS
TABLE OF CONTENTS
FOREWORD ...... 1
OPENING STATEMENT CHAIRMAN OF THE ACCOUNTING CHAMBER OF UKRAINE DR. VALENTYN SYMONENKO ...... 2
OPENING STATEMENT CHAIRMAN OF THE PARLIAMENT OF UKRAINE MR. OLEKSANDR MOROZ ...... 5
WELCOMING ADDRESS SECRETARY GENERAL OF THE EUROSAI, PRESIDENT OF THE SPANISH COURT OF AUDIT DR. UBALDO NIETO DE ALBA ...... 8
WELCOMING SPEECH CHAIRMAN OF THE INTOSAI GOVERNING BOARD, PRESIDENT OF THE STATE AUDIT OFFICE OF HUNGARY DR. ÁRPÁD KOVÁCS ...... 10
WELCOMING SPEECH VICE PRESIDENT OF THE EUROSAI GOVERNING BOARD, PRESIDENT OF THE SUPREME CHAMBER OF CONTROL OF POLAND MR. MIROSłAW SEKUłA ...... 13
KEY NOTE SPEECH
CHAIRMAN OF THE ACCOUNTING CHAMBER OF UKRAINE
DR. VALENTYN SYMONENKO ...... 14
SUB THEME I: THE ROLE OF SAIS IN THE NATIONAL SYSTEM DEVELOPMENT OF FIGHTING AGAINST FRAUD AND CORRUPTION ...... 19
SAI OF THE RUSSIAN FEDERATION ...... 20
NATIONAL SECURITY AND DEFENSE COUNCIL OF UKRAINE ...... 25
SECURITY SERVICE OF UKRAINE ...... 29
SAI OF ALBANIA ...... 33
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SAI OF THE REPUBLIC OF BELARUS ...... 42
SAI OF THE REPUBLIC OF AZERBAIJAN ...... 47
SAI OF THE REPUBLIC OF ARMENIA ...... 51
SAI OF ESTONIA ...... 54
EUROPEAN COURT OF AUDITORS ...... 58
GENERAL PROSECUTOR’S OFFICE OF UKRAINE ...... 65
STATE COMMITTEE FOR FINANCIAL MONITORING OF UKRAINE ...... 70
SAI OF THE REPUBLIC OF KAZAKHSTAN ...... 78
SAI OF LATVIA ...... 85
SAI OF THE REPUBLIC OF MOLDOVA ...... 89
SAI OF NORWAY ...... 94
SUB THEME II: THE PECULIARITIES OF THE SAIS COOPERATION WITH THE LAW ENFORCEMENT BODIES DURING EXPOSURE AND PREVENTION OF FRAUD AND CORRUPTION ...... 101
SAI OF POLAND ...... 102
SAI OF HUNGARY ...... 108
SAI OF GEORGIA ...... 119
SAI OF THE REPUBLIC OF MOLDOVA ...... 124
SAI OF THE REPUBLIC OF TAJIKISTAN ...... 129
SAI OF SWEDEN ...... 135
SUB THEME III: THE PRACTICE OF SAISINIMPLEMENTATION TRANSPARENCY AND PUBLICITY IN THE FIELD OF FIGHTING AGAINST FRAUD AND CORRUPTION ...... 141
SAI OF THE KYRGYZ REPUBLIC ...... 142
SAI OF THE NETHERLANDS ...... 145
SAI OF THE CZECH REPUBLIC ...... 153
***
SAI OF DENMARK ...... 159
SAI OF THE UNITED KINGDOM ...... 161
*** RECOMMENDATIONS ...... 183
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