The AFROSAI 2017/18 Coordinated Audit on Corruption as a driver of Illicit Financial Flows

The AFROSAI 2017/18 Coordinated Audit on Corruption as a driver of Illicit Financial Flows

TACKLING ILLICIT FINANCIAL FLOWS T O G E T H E R

GOOD FINANCIALG O V E R N A N C E C O N F E R E N C EYAOUNDÉ 24 - 26 MAY 2017

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What are Illicit Financial Flows and how are they linked to corruption?

IllicitFinancialFlows(IFFs)aredefinedasmoneythatisillegallyearned,transferredorutilised.

With an estimated amount of about 50 billion USD of IFFs leavingthecontinentperyear, there isasignificantshortfallofrevenueforAfricangovern-ments.Thesefundscouldhavesupporteddevel-opment initiatives and public service delivery to citizens. The illegal outflows are furthermore es-timatedtobehigherthan inflowsofOfficialDe-velopmentAssistance,implyingthatAfricawouldbeabletofinanceitsdevelopmentmoreauton-omously were IFFs effectively stopped. IFFs aredriven by three types of activities: 1) commercial activities: corporate revenue generated in Africa but not declared on the continent for the pur-pose of tax evasion or avoidance; 2) illegal ac-tivities that generate substantial revenue such as theproceedsofhumananddrugtraffickingthatarethenlaundered;and3)corruption.

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Why an AFROSAI coordinated audit on Illicit Financial Flows with

a focus on corruption?

Given the detrimental effect of IFFs on the conti-nent’spublic finances, theAfricanOrganisationof Supreme Audit Institutions (AFROSAI) assessed the role Supreme Audit Institutions (SAIs) could playincombatingIFFs.AFROSAIconcludedthatit could have maximum impact by focusing on corruption.Whereascorruptionisonlyestimatedtomakeup for5%of IFFs, ithasbeen identifiedasakeyfacilitatorofallotherdriversofIFF.Thisisparticularly true for criminal and commercial ac-tivitieswhichareoftenfacilitatedthroughbribes.Consequently, AFROSAI decided to assess theeffectiveness of selected existing mechanisms to addresscorruption.

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What is the role of Supreme Audit Institutions

in fighting corruption?

SAIs are essential actors in national accountabili-tysystems.Throughtheiraudits,theyholdgovern-ments to account for how taxpayers’ money was spent. Theyprovidevaluable recommendationsonhowtoimprovepublicfinancemanagementsystemsandservicedeliverytocitizens.Thereby,they play an important role in the prevention of corruption. Depending on the country system,some SAIs in addition have the mandate to inves-tigate,hence in thedetectionofcorruption . Inexercisingthisoversightrole,theyneedtomain-tainaneffective interfacewithother institutions,suchasparliamentandjudiciary.ByauditingAf-ricangovernments’effortstoaddresscorruption,in2018,AfricanSAIsarethusmakingavaluablecontribution the African Union’s Year against Corruption.

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How did AFROSAI audit corruption as a driver of IFFs ?

Aware of the fact that IFFs need to be addressed at the national as well as international level,AFROSAI undertook a coordinated complianceand performance audit on corruption as a driv-er of IFFs. Coordinated audits combine individ-ual parallel audits at country level that follow a common methodology with a regional synthesis report. Twelve SAIs fromAnglophone and Fran-cophone Africa took part in the joint planning,undertookfieldwork,andconcludedtheauditin2018.

The core question of the auditors was to what ex-tent African governments had implemented core anti-corruptioninstrumentsthattheyhadratified,namely the African Union Convention for the Pre-venting and Combatting of Corruption (AUCP-CC),andtheUnitedNationsConventionagainstCorruption (UNCAC). Two especially importantissues regulated by the Conventions were chosen as audit topics by the SAIs due to their relevance and impact on public spending and IFFs:

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X Asset declaration systems which are key inpreventing and detecting illicit enrichment by publicofficials,and

X Publicprocurement systems,whicharepar-ticularlyvulnerable tocorruption, resulting inhugefinanciallossesforthepublic.

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The auditors assessed whether national legislation was in line with the recommendations on asset declaration and public procurement in the con-ventions,andwhetherthenationalsystemswereworkingeffectively.

The SAIs chose either one or both topics after as-sessing their respective relevance in the context oftheircountry.TheSAIsofChad,Côted’Ivoire,Niger,Senegal,SouthAfrica,Tanzania,Uganda,andZimbabwefocusedonpublicprocurement,while the SAIs of Kenya, Liberia, Senegal, SierraLeone,SouthAfrica,andTogofocusedonassetdeclaration.

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UnitedNationsConvention Against

Corruption

African Union Conven-tion for the Preventing and Combatting of

Corruption

StateParties

Nationallegislativeframework

Ratificationanddomestication

Implementationoflegislativeframeworks

Effectivelyworking(publicprocurementandassetdeclaration) systems at country level

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May-Nov 2017 SAIsundertakefieldworkand

internal quality control

Oct 2017AFROSAI General Assembly:

Side meeting of participating SAIs IFFs audit progress presented

to GA

May 2017Side meeting of participating

SAIs at the International Conference on IFFs organised

byAFROPAC,AFROSAI,ATAF,andCABRIinYaounde,

Cameroon

Nov 2017Review and Communication WorkshopwithparticipatingSAIsinKampala,Uganda

Mar-May 2017Planning matrixes are finalisedandpanelofmentors is put in place

April 2018Regional Synthesis Report

WritingWorkshopinYaounde,Cameroon

Feb/Mar 2017Interested SAIs attend a planning

workshopinNairobi,KenyaHead of SAIs sign MoU and audit teams plan audit on

asset declarations and public procurement

Aug 2018 PresentationofregionalreportatAFROSAIGoverningBoard

2016AFROSAIGoverningBoarddecidestoundertakeacooperativeauditonIFF,

coordinated by KSC

Dec 2016A call for manifestion of

interest is sent to all AFROSAI members

2015GoverningBoardsof

AFROSAIandAFROSAI-Ediscuss the role of SAIs

regarding IFF

What did the audit reveal?

Asset Declaration Systems

• Systems have been put in place in all but one country,buttheydiffersubstantiallyintermsofwhichcategoriesofofficialshavetodeclare,intermsofcontenttobedeclared,aswellasintheirdegreeofeffectiveoperationalization.

• There is a need to revisit the regulatory frame-works. While many of the essential criteria are contained, there are nevertheless omissionsintheregimes.Itis importanttoclearlydefinewho is required todeclareassets. This specifi-cationshouldideallybebasedonregularriskanalyses and assure that definitions of assetsare broad enough to capture relevant assets (incl. of close family members and assets inforeign countries) and are adapted to coun-trycustoms. Individuals shouldbe required toupdatetheirdeclarationsregularly.

• The sanction regime needs to be strengthened and fully applied. There is a need to elabo-rate appropriate sanctions for various level of non-compliance, for instance non-submis-

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sionofdeclarationformsvs.falseinformation.Sanctions,eveniflow,needtobepredictablyappliedtoactasdeterrents.

• In most countries, the verification of declara-tions needs to be urgently improved. Detection of illicit enrichment that can potentially later flowoutofthecountryasIFFsisonlypossibleifdeclarationsareverifiedregularlyandunusualchanges in declaredassets are investigated.This requires updated registries including ap-propriate datamanagement. In the verifica-tionprocess,variousagenciesneedtocoop-erate, for example, tax agencies andbanks.In contrast, the audit showed that althoughthe verification function in all countries wasgiven to specific institutions, thiswas typicallynot supported by a corresponding allocation ofsufficientfinancialandhumanresourcestofulfillthemandate.Furthermore,themajorityofdeclarationsaresubmittedinpaper,renderingtheanalysisofsuchdeclarationscumbersome,as it has to be conducted manually without assistanceby IT tools. Verificationsaremostlynotbasedonariskanalysis.Especiallyinthosecountrieswhereallpublicofficialshavetode-clare,thecombinationofinsufficientresources

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andlackofarisk-basedapproachcanresultinthenon-verificationofdeclarationsofhighriskpublicofficials.

• Public accessibility of declarations needs to be reconsidered. Out of concerns for priva-cyrightsandsecurityofdeclaring individuals,most countries have decided to not publish the declarations or only publish parts there-of.Whilethesearevalidconcerns,thismeansthat in most countries not even the information whetheranofficialhascompliedwithhisorherduty to submit a complete declaration in time is beingpublished, although thiswouldbe inthepublic interesttoknow. Inthosecountrieswith a partly public declaration it was found that even the information required to be dis-closedwasmissingfromthepublicregisters.

Afinalconcernraisedduringtheaudit is that insome countries SAIs have been denied access to the declarations which were only accessible bycourtorder.Incombinationwiththeverylim-ited verification by the institutions as describedabove,thereisnoeffectiveoversightoverasys-temwhichisessentialforcombatingIFFs.

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Governments should therefore consider to:

D Revisit categories of declarants and assets de-clared to ensure the asset declaration systems covers the relevant public officials and theirassets,

D Fosteracultureofregulardeclarationofassets,

D Introducerisk-basedapproachesinthedeter-minationofdeclarantsaswellasinverificationprocesses,

D Introduce electronic declaration systems (sim-ilar to tax filing systems) that protect privatedata, but allow for effective data manage-ment,analysis,andverification,

D Clarify SAI mandates and reinforcing the SAI’s oversight responsibility with regards to asset declarations.Inparticular,clarifythemandateof SAIs to have access to all necessary informa-tion to perform their audits as well as processes of data-protection/anonymization measures toprotectprivacyrightswhiledoingso,

D Strengtheninter-agencycooperationtomakeverificationofdeclarationsmoreeffective.

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Public Procurement Systems

• Systems have been put in place in all coun-tries with regulatory frameworks that provide for transparency. Public procurement systems can be centralized – a system with one central procurement authority- or decentralized – a system in which many government institutions haveaprocurementunit.Whereas rulesandstructures therefore differ from country to coun-try, commonmessages can be foundwhichcan guide governments in the design and im-plementationoftheirongoingsystemreforms.Nearly everywhere, there is a sufficient sepa-rationbetweentheactualprocurement,andtheregulationandsupervisionofprocurement.Regulatory frameworks have strong require-mentson transparency.Operationalisationofexistingframeworksneedstobestrengthened.

• Public procurement systems need to deliver on competitiveness and efficiency. All countries have made open procurement the default method of procurement. However, in somecountries thresholds for competitive processes have been set at too high a level which under-minescompetitiveness.Inothers,eventhough

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thresholds seem adequate, numerous caseshavebeenidentifiedwherecompetitionisre-duced due to waiving of the procurement rules or false justification of “emergency services”.The introduction and use of e-procurement has the potential to improve transparency,competitiveness,andefficiencyofprocesses.

• Conflicts of interest in public procurement need to be better managed. Conflictsofinter-ests are to be avoided or managed in order to preventwastefulprocurement.Theawarenessof the relevance of this process needs to be strengthened. Inmanycountries, there isonlyalimitednumberofofficialsthataredeclaringa conflict of interest, and they often do notsystematicallyincludethosethathaveasignifi-cantinfluenceovertheprocess.Insomecoun-tries,officials signcompliancewithacodeofethics that includes a generic statement re-gardingfreedomofconflictofinterest,leadingtoasituationwhereofficialsarenotdeclaringtheirspecificinterestineachprocurementpro-cess they are involved in. In countrieswherethe legislative framework seems adequate,implementation gaps have been found with conflictofinterestdeclarationslackinginsome

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procurementprocessesorabsenceofconflictsbeing falsely declared. This had led to con-tracts being awarded to companies in which officialsortheirclosefamilymembershavein-terests in.Onlya limitednumberofcountries,some only recently, have prohibited their of-ficials fromdoingbusinesswith the state. Themonitoring of conflicts of interests becomesthusevenmorerelevant.

• Inclusion of procurement officials in asset dec-laration regimes is essential.Procurementoffi-cials are not always included asset declaration regimes even though they are managing an importantpartofpublicexpenditure. It iscru-cialthattheseofficialsareconsideredinassetdeclarationsystems.

• Corruption reporting mechanisms need to be made fully operational. Corruption reporting mechanisms are not fully functional in most countries as protection of whistleblower from retaliation or at least anonymity is not guaran-teedornotfullytrusted,withtheeffectofcor-ruptiongoingundetected.

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• Oversight over procurement, including follow up and sanctions, must be strengthened. Eventhoughoversight/regulatorybodiesundertakeaudits (orhaveprivatefirmsundertakeauditsfor them), thefollow-upof therecommenda-tions of these audits needs to be improved in somecountries.SupremeAuditInstitutionsalsohaveanimportantroletoplay,astheyunder-take procurement audits and make specificrecommendations. These need to be bettertaken into consideration by oversight bodiesin order to strengthen the procurement system and its related internalcontrols. Sanctionsdonot act as deterrent in the abuse of procure-ment laws and regulations: either because in some countries their effect is minimal com-pared to the transgression or because they are determined by various legal texts which are outdated or unclear leading to an inconsistent application.Thismakesthesystemvulnerabletomanipulationandbiasedinterpretation.

• Capacity for implementation of procurement laws and regulations is weak. Procurement rules often change and especially the intro-duction of e-procurement will need capable

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officials that are knowledgeable in the lawsandregulationtoadequatelyundertakepro-curement.Notallcountrieshavecompetencyframeworks or corresponding job profiles forprocurementofficials,whiletheydohavethemforaccountants,whichisoftenthedefaultpro-fileformostpositionsinthepublicsector.Pro-curementofficialsrequireonthejobtrainingtokeepup todate (especially in decentralizedsystems)and shouldalso receive specifican-ti-corruption sensitizations. Audit recommen-dations by SAIs and regulatory/oversight bod-ies should be more systematically used as basis forneedsassessmentforcapacity-building,asalreadydoneinsomecountries.

Governments should therefore consider to:

D Ensurethatthelawsandregulationsmaximizethe competitiveness, efficiency, effectivenessandtransparencyintheprocurementprocess,

D Strengthen transparency and oversight by in-troducing and effectively operationalise e-pro-curement,

D Ensure conflicts of interests are managedthroughadequatedeclarationsofinterest,

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D Ensurethatassetdeclarationsystemssufficient-lycoverpublicprocurementofficials,

D Promote existing corruption reporting frame-worksandintroduce/strengthenwhistleblowerprotection,

D Strengthen regulatory/oversight bodies and provideforaframeworkforthemtocooperatewithSAIsandotheragencies,

D Revisit the applicable sanctions to ensure that sanctionscanactasadeterrent,

D Providing adequate training and sensitization onprocurementandemergingrisks,

D Strengthen audit and investigation functions linked to public procurement, e.g. audit byprocurementoversightbodiesand SAIs, con-trolofcorrectnessofdeclarationofconflictofinterest,etc.

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Overall Conclusion

X The Governments audited have made sub-stantial progress in putting the asset decla-ration and procurement systems required by AUCPCCandUNCACinplace. It isnowim-perativetoimprovetheiroperations.

X As an overarching finding, it is imperativeto strengthen the controls of these systems,whether it is the verification of asset decla-rations, theprocurementauditsbyoversightbodies or the control of declarations of con-flictofinterestinprocurement.Thesecontrolscombined with adequate sanction regimes mustbeputinplacetopreventimpunity.

X Supreme Audit Institutions are essential actors in providing recommendations for improving theseandotherpublicfinancesystems.Theirrole in national governance systems should thereforebestrengthened.

Afirststepcouldbetherecognitionoftheim-portanceof their independenceto fulfill thisroleatAfricanUnionlevel.

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Other AFROSAI Initiatives on IFFs

Besides the coordinated audit, AFROSAI hasalso joined forces with other key AfricanGoodFinancial Governance players to combat IFFs.Together with the African Organisation of Public Accounts Committees (AFROPAC), the African TaxAdministrationForum(ATAF),andtheCollab-orative Africa Budget Reform Initiative (CABRI),AFROSAI organised an international conference in 2017 to discuss ways that IFFs can be addressed throughbetterpublicfinancemanagementandgood financialgovernance. TheYaoundeDec-laration against Illicit Financial Flows signed by all networkscanbefoundhere:

http://www.afrosai.org/sites/default/files/ContentNonpaginer/yaounde_iff_declaration_finalen.pdf

Addressing IFFs demands a whole-of-government approach.Inordertoimprovesystems,SAIsneedto also continue developing their communication

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tools todeliver relevant informationtoauditees,parliament, and government. AFROSAI’s En-glish-speaking linguistic sub-group has thereforedeveloped a new Public Financial Management ReportingFrameworkthatiscurrentlybeingpilot-ed.Moreinformationcanbefoundhere:

https://www.intosaicbc.org/a-framework-for-reporting-on-public-finance-management/

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Contact DrBarbaraDutzlerProgramme ManagerE-mail:barbara.dutzler@giz.deTel: +27 (0)12 423 7952

Good Financial Governance in Africa ProgrammeGIZOfficePretoriaP.O.Box13732,Hatfield,0028HatfieldGardens,BlockC,GroundFloor,333GrosvenorStreet,PretoriaSouth Africawww.giz.de/en/worldwide/15725.html

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