GAO

United States General Accounting Office

Report to the Chairman, Committee on 

the Budget, House of Representatives

September 2000 INTERNATIONAL 

MONETARY FUND

Status of Efforts to 

Strengthen Safeguards 

Over Lending

GAO/NSIAD-00-211

Page 1 GAO/NSIAD-00-211 IMF Safeguards

Contents

Letter 3

Appendixes Appendix I: The International Monetary Fund’s Response to

Recent Cases of Misreporting by Russia 24

Appendix II: The International Monetary Fund’s Response to

Recent Cases of Misreporting by Ukraine 26

Appendix III: Comments From the Department of the Treasury 27

Appendix IV: Comments From the International Monetary

Fund 29

Appendix V: GAO Contacts and Staff Acknowledgments 31

Tables Table 1: Cases of Borrower Misreporting of Information to

IMF Brought to the Board of Executive Directors

Since 1984 15

Abbreviations

IMF International Monetary Fund
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-285775 Letr

September 1, 2000

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman:

The International Monetary Fund is a cooperative, intergovernmental, 

monetary, and financial institution whose financial resources are provided 

by its member countries.1

 The Fund provides financing to member 

countries that are experiencing or are about to experience balance-ofpayments problems, that is, when they have difficulty obtaining the foreign 

currency needed to meet their external financial obligations. The Fund 

lends to member countries by providing them with foreign currencies to 

augment their international reserves.2

 Funds are generally provided in 

installments that are linked to the borrower’s observance of specific 

economic and financial performance criteria. The Fund’s Articles of 

Agreement require borrowers to provide information the Fund needs to 

determine whether its borrowers meet these economic and financial 

performance criteria. The articles also require the Fund to adopt policies 

that will establish adequate safeguards for the temporary use of its 

resources. To date, the vast majority of the Fund’s borrowers have repaid 

their obligations.3

1

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

2

 With the exception of some financing for low-income countries, the Fund does not loan 

funds to a country, per se. Rather, the country “purchases” the currency it needs from the 

Fund with an equivalent amount of its own currency and then later “repurchases” its own 

currency according to the terms applicable to the Fund’s financing policy. Purchases are 

usually made pursuant to “arrangements” that set out the understandings between the Fund 

and the borrowing member country. For the purposes of this report, we will use the terms 

“borrower” to refer to the country receiving Fund financial assistance. We use the terms 

“disbursement” and “loan” to refer to “purchases” and “repay” to refer to “repurchase.”

3

 As of January 2000, 7 of the Fund’s 93 active borrowers were in arrears for more than

6 months. These arrears, totaling $1.5 billion, represent about 2 percent of the Fund’s total 

outstanding credit.
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Over the last 2 years, the Fund has called for several investigations by 

independent international accounting firms to determine whether 

allegations were true that certain borrowers had misappropriated Fund 

resources and/or had misreported4

 information to the Fund. The 

accounting firms reported that they found no evidence that Fund resources 

were misappropriated; however, the investigations, which were made 

publicly available by the Fund, confirmed that certain borrowers had 

misreported information to the Fund. In doing so, they obtained Fund 

resources they may not have been entitled to. The Fund and the countries 

involved have undertaken a number of corrective steps (see apps. I and II 

for descriptions of two of these incidents and the corrective steps 

undertaken). 

In response to these events, beginning in October 1999, the Fund undertook 

in-depth studies of its procedures and controls to identify ways to 

strengthen safeguards on the use of its funds and its procedures for 

assessing the integrity of the financial information reported to the Fund by 

its members. For both of these areas, a series of reviews completed in 

February 2000, identified a need for the Fund to improve its procedures 

and controls. In response to your concerns about whether the Fund’s 

policies provide reasonable assurances that financial resources provided to 

member countries are adequately safeguarded, we are providing a status 

report on the Fund’s progress in strengthening its policies and procedures 

relating to (1) the appropriate use of Fund resources by borrowers and

(2) the accuracy of economic and financial information reported by 

borrowers, and upon which the Fund makes lending decisions. 

4

 “Misreporting” is defined by the Fund to denote inaccurate information provided 

intentionally or unintentionally to the Fund by a member country in breach of the Fund’s 

rules for mandatory information, in particular to ascertain compliance with the agreed 

conditionality for disbursement of Fund resources.
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To address these issues, we interviewed Fund officials responsible for 

financial management and compliance matters and reviewed and analyzed 

information contained in a series of studies on these topics completed by 

the Fund in February 2000.5

 We did not assess the quality or completeness 

of these studies; however, we noted that an external panel of international 

experts reviewed one of the studies for the Fund and endorsed its 

recommendations. We also interviewed officials from the Department of 

the Treasury, which has the lead role within the executive branch regarding 

U.S. policy toward the Fund.

Results in Brief The International Monetary Fund’s long-standing method for safeguarding 

its resources against misuse by borrowers has primarily been to monitor 

borrowers’ compliance with specific, agreed-upon loan conditions, and 

Fund management believes that this means of assurance has generally been 

adequate. However, according to a study conducted by Fund staff, the 

Fund’s financial resources have been vulnerable to borrower misuse 

because the Fund had not typically assessed the control procedures 

exercised by its borrowers’ monetary authorities over their resources. 

Without such assessments, the Fund did not have reasonable assurance 

that the borrowers’ systems of internal controls, accounting, reporting, and 

auditing were adequate to ensure the integrity of the borrowers’ financial 

operations. Although internal controls can be circumvented, an assessment 

as to the adequacy of these controls could lead to improved financial 

reporting and detection of the misuse of resources. The Fund has 

introduced additional measures for safeguarding its resources. Beginning 

with loans approved after June 30, 2000, the Fund’s policy now is to assess 

the control environment of borrowing countries’ central banks, particularly 

their internal controls and accounting and reporting systems, to evaluate 

the integrity of their operations. According to Fund management, the Fund 

will withhold loan disbursements until borrowers have corrected any 

critical deficiencies discovered in the course of these assessments. Fund 

management also intends to assist borrowers in building their capacity to 

manage funds to help prevent the misuse of international reserves, 

including those obtained from the Fund. This process of assessing the 

control environment and building management capacity is still in the 

5

 Although these studies are classified and not publicly available, the Fund has published 

some information contained in them in the “Report of the Acting Managing Director to the 

International Monetary and Financial Committee on Strengthening Safeguards on the Use of 

Fund Resources and Misreporting of Information,” dated April 10, 2000.
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experimental phase, and, according to Fund management, it will take time 

and resources to implement. Fund management officials said they cannot 

estimate the overall magnitude of this effort until more progress has been 

made in implementing it. In addition to these assessments, as of July 1, 

2000, the Fund implemented a policy of requiring all borrowers to publish 

financial statements of their central banks, audited by independent 

external auditors in accordance with internationally accepted standards.

The Fund had traditionally relied primarily on a relationship of trust with 

its members as a basis for assuring the integrity and accuracy of the 

information it needs, such as the amount of the country’s international 

reserves, to effectively design and monitor programs and make lending 

decisions. Nonetheless, the Fund has established a number of measures to 

help prevent, detect, and address borrower misreporting of key 

information, whether unintentional or intentional. For example, according 

to Fund management, it checks, to the extent possible, the validity of the 

information reported by borrowers; also, in 1984, the Fund’s Board of 

Executive Directors established guidelines for applying sanctions against 

borrowers that receive loan funds based on misreported information. 

Despite these measures, the internal Fund study concluded in February 

2000 that the Fund faced limitations in its ability to obtain assurances as to 

the accuracy of information that borrowers reported. In several instances, 

borrowers reported inaccurate information to the Fund and received loan 

funds to which they may not have been entitled. According to the Fund 

study, the Fund remained vulnerable to borrowers receiving loan funds 

based on misreported information. To address these concerns, the Fund 

has taken several steps. In March 2000, for example, Fund management 

adopted a new policy of publicizing the identities of countries that obtain 

Fund resources based on inaccurate reporting. In July 2000, the Fund’s 

Board of Executive Directors revised and strengthened its guidelines for 

addressing cases of borrower misreporting, and it may levy sanctions in 

more types of misreporting cases. According to Fund officials, the Fund’s 

management has also begun to strengthen its internal operating practices 

for monitoring borrowers’ compliance with loan conditions and reporting 

requirements, but it has not yet completed and reported on its plans in this 

area. Since some of the Fund’s initiatives are still in the developmental or 

implementation stages, the extent to which these actions will be effective 

in correcting the weaknesses identified in the Fund studies is as yet 

unknown.
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Background International reserves are critical for a country’s economic well-being. 

Holding these reserves helps ensure that a country can meet its 

international financial obligations, such as for imports of goods and 

services or repayment of foreign debt. International reserves also support 

the value of a country’s local currency and, thus, its purchasing power in 

international markets.6

 In times of economic distress, when a country risks 

depleting its international reserves, it may obtain financial assistance from 

the International Monetary Fund (IMF) in the foreign currency it needs. 

Because IMF funds are provided for balance-of-payments support and are 

not earmarked for any specific expenditures, it is difficult to track or 

control how borrowers use IMF funds. Unlike project funds from other 

lenders, such as the World Bank, IMF funds are typically added to and 

commingled with a country’s international reserves for general use by the 

country and are usually under the control of the central bank. Given the 

fungible nature of money, tracking the specific use of IMF funds is virtually 

impossible. 

Measures for 

Protecting Its 

Resources From 

Misuse 

The primary means by which the IMF assures itself that its resources are 

safeguarded and that funds are repaid is by establishing specific agreedupon conditions and performance criteria for its loans. Often borrowers 

must meet certain preconditions7

 before the IMF’s Board of Executive 

Directors will approve a loan arrangement or disbursement.8

 After the loan 

arrangement has been approved, borrowers must usually adhere to a host 

of agreed-upon conditions before IMF funds are released. These conditions 

may include general commitments to cooperate with the IMF staff in 

formulating and implementing economic policies and meeting specific, 

quantitative targets for macroeconomic variables as well as more 

qualitative measures involving explicit structural reform policies. Meeting 

6

 International reserves give people confidence to hold a local currency, thus supporting its 

value, because these reserves represent the ability of the government to readily convert 

local currency to major currencies. 

7

 These preconditions, called “prior actions,” are policy measures that the IMF management 

views as key to the effectiveness of the assistance program to a country. They may include 

such things as reforming the operations of the country’s foreign exchange market or 

lowering its level of foreign debt arrearages.

8

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

Director.
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quantitative performance criteria usually entails staying within prescribed 

minimum and maximum levels for various macroeconomic variables, such 

as international reserves, domestic credit extended by the central bank, 

budget expenditures and revenue, and external debt. Meeting qualitative 

performance criteria usually involves implementing agreed-upon policy 

changes, such as reforming procedures for conducting fiscal and monetary 

transactions or operating the banking system. IMF funds are usually 

disbursed in installments, with each installment contingent upon 

compliance with such agreed-upon quantitative and qualitative 

performance criteria. If a country fails to meet performance criteria, 

disbursements cease, unless the Board of Executive Directors issues a 

waiver.

IMF staff monitors loan arrangements to ensure that borrowers meet the 

agreed-upon conditions and performance criteria. It assesses each 

borrower’s compliance with performance criteria, typically on a quarterly 

basis, and, based upon these assessments, the Board of Executive 

Directors makes decisions about whether to release additional portions of 

the loan.9

 The staff relies primarily on information provided by the 

borrowers in conducting this monitoring. 

The IMF also has several other measures that it believes contribute to 

safeguarding its resources. For example, the IMF management has 

encouraged member countries to voluntarily adopt internationally 

accepted codes and standards of operation with regard to monetary, fiscal, 

and financial policy-making; banking supervision; the dissemination of 

economic and financial data; and the management of international 

reserves. In addition, the IMF supports the proper management of 

borrowing country resources, including IMF funds, through its good 

governance initiatives, which involve policy advice, loan conditionality, and 

technical assistance in areas such as improving public sector 

accountability. Furthermore, IMF loan arrangements with borrower 

countries often contain provisions that the IMF can use to withhold 

financial assistance from members engaged in poor governance or 

corruption that can be shown to have a macroeconomic impact. According 

to the IMF, it has withheld loan disbursements and new resource 

commitments in such cases. 

9

 For more information on this process, see International Monetary Fund: Approach Used to 

Establish and Monitor Conditions for Financial Assistance (GAO/GGD/NSIAD-99-168, June 

22, 1999).
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Despite these measures for protecting its resources from misuse, a 

February 2000 internal IMF study indicated that the IMF’s existing 

procedures did not provide all necessary assurance that its borrowers’ 

management controls were sufficient to prevent the borrower’s misuse of 

international reserves, including IMF funds.10 The study noted that the IMF 

did not conduct assessments of the control environment of its borrowers’ 

monetary authorities (typically central banks), including their systems of 

internal controls, accounting and reporting, as commercial lenders usually 

do with respect to their private borrowers. The IMF’s traditional 

assessments of countries’ fiscal, monetary, financial, and banking 

operations did not typically address the capacity of central banks11 to 

manage funds borrowed through the IMF. 

To better assess the risks in IMF loan programs and to help borrowers 

strengthen their management controls, the IMF’s Board of Executive 

Directors approved a plan in March 2000 for IMF staff to assess the 

management controls of borrowing countries’ central banks. According to 

the IMF, these assessments would evaluate whether the control, 

accounting, reporting, and auditing systems within borrowing countries’ 

central banks are adequate to control and monitor the IMF funds entrusted 

to them. The assessments are to determine whether borrowing countries 

are complying with a series of desirable practices, rules, and regulations 

regarding internal control procedures, financial reporting, and audit 

mechanisms. The objective of this approach is for both the country 

authorities and the IMF to be reasonably assured that the systems put in 

place to manage international reserves are adequate to ensure the proper 

use of IMF funds. Assessments would also address the accountability and 

transparency (openness) of government policies that affect central bank 

operations.

These assessments are being conducted, on an experimental basis, for all 

countries with new loan programs approved after June 30, 2000, and will be 

conducted in one or two stages. In the first stage, borrowers will be asked 

to provide information and documents relating to the internal control and 

external auditing procedures of their central banks, as well as legislation 

and other information concerning the operations of the central banks. If 

IMF management, based on the staff’s review of the documents, judges a 

10 See footnote 6.

11 The central bank of a country is usually the fiscal agent for IMF loans.
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borrower’s management controls to be adequate, it will regard the 

assessment as complete. If not, a second stage will follow, including an 

on-site assessment. IMF staff will head up the on-site assessment teams, 

which will include experts from central banks, multilateral agencies, such 

as the World Bank, and private accounting firms. The assessment teams 

will then propose actions to address any identified weaknesses in internal 

procedures, including any internal control deficiencies. According to the 

IMF’s Treasurer, if critical vulnerabilities are found in a central bank’s 

control environment, the IMF will require the borrower to undertake 

immediate improvements to address them before any loan funds are 

disbursed. This assessment process became operational as of July 1, 2000, 

and first stage assessments have been initiated for 33 countries as of 

August 2000.

Assessments will be more limited for ongoing programs approved before 

June 30, 2000: Borrowers will be required to publish the financial 

statements of their central banks, independently audited in accordance 

with internationally accepted standards, and to provide the IMF with the 

audit report and management letter. This audit documentation will be 

required for all future loan programs as well. 

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

will

• enhance the overall implementation of control, accounting, and 

reporting procedures at central banks and raise awareness of 

internationally recognized standards and best practices;

• provide the IMF with a more comprehensive knowledge of its members’ 

practices and activities and the opportunity to make practical 

recommendations for improvements, based on identified best practices; 

and

• reduce the potential for misuse and misreporting of international 

reserves by borrowers.

The IMF intends these assessments to be comparable to procedures 

followed in private capital markets, where commercial lenders to private 

borrowers follow the universal principle that, in addition to measured risktaking, they have a fiduciary duty to protect shareholders’ capital. This duty 

calls for various safeguard mechanisms to ensure that borrowers have 

adequate financial management and internal control systems capable of 
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reliably recording and reporting all financial transactions. The proposal for 

conducting the assessments was endorsed by an international panel of 

experts from the public and private sectors, convened by the IMF, who are 

familiar with the relevant management, control, and other issues relating to 

central bank and treasury operations. 

The IMF’s Board of Executive Directors approved the assessment program 

in April 2000, but achieving tangible and sustained results from the 

program may take many years. Conducting these assessments will be a 

major new undertaking for the IMF, according to IMF management 

officials, requiring additional resources, including specialized staff. IMF 

officials said that the necessary resources have been allocated to conduct 

the assessments that will be required during the first year of this initiative. 

However, conducting these assessments in all borrower countries and 

implementing all of the necessary reforms may be a long-term effort. IMF 

management officials told us that the IMF is committed to the long-term 

implementation of this effort and that resources will be made available for 

conducting the assessments and providing member countries with 

technical assistance to implement reforms. 

Procedures for Helping 

to Prevent Borrowers 

From Misreporting Key 

Information

As has been the practice for many years, the IMF depends primarily on 

borrowers to provide accurate economic and financial data to them. Even 

so, the IMF established several procedures and controls for validating 

borrower financial and economic information and addressing cases of 

misreporting. However, an internal IMF study completed in February 2000 

found that these procedures and controls were limited in their ability to 

deter and redress cases of misreporting of key economic and financial 

information by borrowers.12 In over a dozen cases, borrowers have 

obtained IMF funds that they may not have been entitled to by misreporting 

such information to the IMF. Beginning in April 2000, the IMF undertook a 

number of initiatives to improve its systems for preventing, detecting, and 

addressing cases of misreporting. However, some of these initiatives are 

still in developmental or implementation stages; consequently, the extent to 

which these actions will be effective in correcting the weaknesses 

identified in the IMF studies is as yet unknown.

12 See footnote 6.
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IMF Relies Primarily on 

Borrowers to Provide 

Accurate Information 

The IMF, as a cooperative institution, has relied primarily on a relationship 

of trust with its members as a basis for assuring the integrity and accuracy 

of the information it needs to effectively exercise surveillance, design and 

monitor programs, and make lending decisions. IMF members provide 

various types of information to IMF, as follows.

• Reporting on Preconditions: Before the IMF makes a loan, it may 

request borrowing countries to provide certain information 

demonstrating that the borrower has met certain preconditions to 

qualify for IMF assistance.

• Mandatory Reporting Under Loan Arrangements: Once a loan 

arrangement with a borrowing country has been approved, the country 

is required to report data relating to the quantitative and qualitative 

performance criteria. The nature and frequency of reporting required of 

a borrower are normally detailed in a technical memorandum of 

understanding between the IMF staff and the borrower. Typically, 

certain critical data, such as the net amount of international reserves, 

must be reported on a more frequent basis—usually weekly or daily. The 

IMF also requires borrowers to report other financial and economic data 

not directly related to specific performance criteria. Such information, 

such as fiscal data, is essential for monitoring the borrower’s economic 

performance and policies that may have a direct bearing on the 

structure of IMF assistance programs and lending decisions.

• Other Mandatory Reporting of Essential Information: The IMF’s Articles 

of Agreement also obligate members to provide information that the 

IMF needs to carry out its duties. As a minimum, the articles specifically 

list certain categories of required information, such as international 

reserve levels and balance-of-payments data. In addition to this 

information, the articles allow the Board of Executive Directors to 

require other specific information from members for the purpose of any 

IMF activity.

• Voluntary Reporting: In addition to the mandatory reporting, borrower 

countries are encouraged to adopt a data collection system, called the 

Special Data Dissemination Standard, to report on various aspects of 

their economic and financial condition. The IMF suggests that such a 

system include information, which would be publicly accessible through 

an IMF website, on the amount and composition of international 

reserves, other foreign exchange assets held by the central bank and the 

government, short-term foreign liabilities, and related activities that 
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affect the usability of reserves. As of March 2000, 47 of the IMF’s 182 

member countries had adopted this voluntary standard. 

Through its monitoring efforts, the IMF’s staff attempts to check the 

validity of this reported information to the extent possible, according to 

IMF management officials. IMF staff sometimes indirectly cross-check 

information received from the borrowers against information from thirdparty sources and may assess the validity of the reported information in the 

light of common sense and economic principles. However, much of this 

information is generated by member government sources, and the IMF 

does not have the resources to independently validate it on a routine basis. 

When there is particular cause for concern about the accuracy of 

international reserves data and the reliability of controls on the use of 

reserves, the IMF has required independent investigations or audits of the 

financial records of the central bank and, in a few cases, other entities, 

such as bank subsidiaries, or public accounts. For example, in 1999, in 

response to allegations of misreporting of Russia’s international reserves, 

the IMF required an independent audit of financial transactions between 

the Russian Central Bank and its offshore subsidiaries. (See app. I for a 

description of the results of this audit.)

In 1984, the IMF’s Board of Executive Directors established guidelines for 

addressing instances in which borrowers have provided erroneous or false 

information on program performance criteria or other conditions (whether 

intentional or not). These misreporting guidelines and other IMF rules 

require IMF management to investigate all potential cases of misreporting 

and to submit a report to the Board (along with recommendations) in every 

case where misreporting has occurred. The IMF can address cases of 

misreporting in a variety of ways. Under the misreporting guidelines, the 

IMF can call on the borrower to repay, usually within 30 days, funds 

obtained from the IMF based on misreported information concerning 

performance criteria or other conditions specified by the IMF Board in 

approving the loan disbursement. (See table 1 for a summary of cases of 

borrower misreporting of information to IMF.) In addition, under the IMF’s 

Articles of Agreement, the IMF may impose other sanctions on borrowers 

for misreporting information required by the Board of Executive Directors 

or explicitly required under the articles. These sanctions may include 

denial of access to additional funds, declaration of temporary ineligibility 

to receive funds, suspension of voting rights in the IMF, and expulsion from 

membership in the IMF. In addition, in the recent cases of misreporting by 

Russia, the IMF called on Russia to voluntarily hold IMF funds in a special 

account to be used only for repayment of Russia’s other IMF loans. In some 
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cases, the IMF may call on borrowers to correct the information and take 

steps, such as implementing new data collection and reporting systems, to 

ensure more accurate reporting in the future.

IMF Borrowers Have 

Received IMF Funds Based 

on Inaccurately Reported 

Information

According to the February 2000 IMF study on borrower misreporting and 

other IMF documents, 17 cases have been brought to the attention of the 

Board of Executive Directors since 1984 in which the Board had approved 

loans or disbursed funds based on inaccurate information provided by the 

borrower (see table 1 for a summary of these cases). However, it is not 

reasonably possible to judge the seriousness and pervasiveness of 

misreporting based on these 17 cases. The study pointed out that the IMF’s 

Board has approved hundreds of loans during this period in which 

misreporting was not raised as an issue. However, it is not possible to 

determine whether there were other cases of misreporting that were not 

uncovered by IMF staff. 
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Table 1: Cases of Borrower Misreporting of Information to IMF Brought to the Board of Executive Directors Since 1984

a

The IMF originally reported these amounts in special drawing rights (the IMF’s standard unit of 

account). We converted these amounts to dollars using a GAO-constructed special drawing rights 

price deflator and the average annual exchange rate. We used a U.S. implicit price deflator to express 

the figures in year 2000 dollars.

b

The IMF did not state the amount of funds disbursed in these cases in its February 2000 report to the 

Board of Executive Directors on misreporting, which we used as the source for this table. That report, 

and thus this table, identifies only those funds disbursed based on misreported data relating to 

performance criteria.

c

Requirement of early repayment of the loan was not available as a sanction for misreporting in these 

cases under the IMF’s misreporting guidelines.

d

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

e

This case of misreporting was disclosed by the IMF after the February 2000 study on misreporting 

was completed.

Source: GAO analysis of IMF data.

Case Years Type of information misreported

Loan funds received by the

borrower on the basis of

inaccurate information

(stated in millions of year

2000 U.S. dollarsa

)

Early repayment of

loan funds requested

by IMF due to

inaccurate reporting

by borrower

1 1985 External credit and loan guarantees $13.7 No

2 1985 Credit to the government 78.5 No

3 1986 External debt 20.0 No

4 1988 External arrears 3.6 No

5 1988-89 Monetary and balance-of-payment statistics, 

domestic, and external debt

267.4 Yes

6 1990 Net international reserves 274.7 No

7 1995 External arrears 334.1 No

8 1995 Loan preconditions b c

9 1995-96 Loan precondition and operation of foreign 

exchange market

b c

10 1996 International reserves, domestic assets, credit 

to government, and budget deficit

2,734.5 No

11 1996 Loan precondition b c

12 1996-97 Key transactions b c

13 1996-97 National income and fiscal data b c ,d

14 1996-98 International reserves b c

15e 1998 Fiscal data 26.6 Yes

16 1999 Budget deficit 52.7 No

17 1999 Loan guarantees 30.6 No

Total $3,836.4
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As table 1 shows, according to IMF records, borrowers have received over 

$3.8 billion in IMF loans13 on the basis of misreported data.14 This does not 

necessarily mean that the borrowers would not have received the funds 

had they reported the required information accurately. If the discrepancy 

were minor or temporary in nature, or if appropriate policy measures could 

be agreed with the authorities, a waiver may have been granted, permitting 

the country to receive the funds despite the breach of a performance 

criterion. 

Reasons for misreported data in these 17 cases varied widely, according to 

the IMF study. An unspecified number were attributable to weaknesses in 

the borrowing country’s internal reporting systems and poor coordination 

among government agencies within the borrowing country.15 These cases 

included misreporting of external debt levels, budget deficits, and 

international reserves. Other cases were attributable to borrowers’ 

inexperience and lack of familiarity with IMF procedures. The IMF study 

indicates that an unidentified number of misreporting cases were 

inadvertent, while some appeared to be intentional. Some cases were 

revealed by borrowing country authorities themselves, some by individuals 

and organizations within the country, and some by IMF staff during 

monitoring. According to the study, some cases might have been detected 

earlier if the IMF staff had monitored available information more closely.

The IMF study on misreporting noted that the IMF has not ensured that 

borrowers have adequate systems in place for preparing and verifying key 

financial and economic data. There have been instances in which 

misreporting has been the result of weaknesses in the administrative 

systems, reporting arrangements, and control structures in member 

countries, according to the IMF.

The study also found that in some instances, IMF staff procedures for 

validating information reported by borrowers did not appear to be effective 

in uncovering cases on misreporting. The study identified the following 

limitations in these procedures. 

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

14 This total includes only funds disbursed based on inaccurate information relating to 

performance criteria, not on information on preconditions or other essential information.

15 The IMF study on misreporting did not enumerate each type of misreporting case.
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• Although loan arrangements contain specific conditions that are 

verifiable and monitorable, in some instances, the loan documents did 

not clearly define how IMF staff would monitor borrower compliance 

with specific loan conditions. Therefore, the data reporting 

requirements may not have been clearly specified when the Board of 

Executive Directors approved a loan arrangement.

• Information about known weaknesses and anomalies in reported 

information was not always shared among IMF staff and with the Board 

of Executive Directors; such information would have indicated the areas 

in which IMF staff should have more carefully scrutinized borrower 

actions and financial and economic conditions. 

• The IMF staff did not always use third-party information effectively or 

widely enough to cross-check reported information. In particular, IMF 

staff had not always obtained information available within a borrowing 

country that could have confirmed or contradicted information 

provided by government authorities. The IMF staff had not always used 

resident representatives—IMF officials posted in member countries—

effectively for this purpose. 

According to the IMF study on misreporting, the IMF had not consistently 

imposed sanctions on borrowers for misreporting. The IMF has requested 

early repayments in 2 out of 11 cases where such a remedy was available 

under IMF guidelines (see table 1).16 Instead, the IMF has usually called on 

the borrower to take corrective action to improve the accuracy of reported 

information. According to the IMF’s Treasurer, the IMF did not request 

early repayment of the loans in many of these cases because the 

misreporting was judged to be small and/or did not alter the IMF’s view of 

the member’s performance under a loan arrangement. Also, the IMF had 

not applied sanctions available under the provisions in its Articles of 

Agreement in cases of misreporting because these sanctions were 

considered to be disproportionately severe, according to the IMF’s 

Treasurer. 

According to the IMF study on misreporting, the IMF’s ability to ensure 

accurate reporting may have been hampered in the past by limitations in its 

16 As noted in table 1, in one additional case a borrower voluntarily repaid loan funds that 

had been obtained on the basis of misreported information.
B-285775

Page 18 GAO/NSIAD-00-211 IMF Safeguards

own policies and procedures for addressing cases of misreporting, as 

follows:

• IMF management did not consider sanctions provided for in the 

misreporting guidelines applicable in all cases in which borrowers 

provided inaccurate information to the IMF. In particular, these 

sanctions were not considered applicable in cases where the Board of 

Executive Directors approved loan arrangements or disbursements 

based on incorrect information from the borrowers indicating that they 

had fulfilled the loan’s preconditions. In such cases, the IMF determined 

that the sanctions did not apply because the preconditions were not 

identified in the loan arrangement or other Board decisions as specific 

conditions or criteria for receiving IMF funds. 

• Sanctions for misreporting key information under the IMF’s Articles of 

Agreement were not available in some cases. The articles do not 

specifically require reporting of certain types of critical information 

such as fiscal and financial information. Thus, unless this information 

was specifically required under a loan arrangement, the sanctions 

provided for in the Articles of Agreement did not apply if this 

information was misreported.

• IMF guidelines had provided that, in order to require early loan 

repayment or impose certain other sanctions against borrowers for 

misreporting, evidence of the misreporting must have been discovered 

within a 2-year limitation period. Recent cases of misreporting indicate 

that 2 years may not be sufficient time to discover misreporting

(see app. I for one such example of misreporting). The 2-year limitation 

period does not apply to sanctions for misreporting provided for in the 

Articles of Agreement.

• The IMF did not have a general policy on publicizing cases of 

misreporting. The threat of adverse publicity in these cases could have 

acted as a deterrent to misreporting.

• The IMF had not established basic ground rules for investigating cases 

of misreporting to ensure that all cases were handled consistently. In 

most cases, investigations had been conducted entirely by IMF staff, but 

in some cases, other procedures were followed, including the use of 

outside consultants engaged by the IMF or by the borrowing country 

authorities.
B-285775

Page 19 GAO/NSIAD-00-211 IMF Safeguards

Efforts to Improve the 

Fund’s Ability to Prevent 

Misreporting

The IMF has begun to address most of the limitations identified in its 

February 2000 study on misreporting and strengthen its policies and 

procedures for preventing misreporting, as follows. 

• IMF management plans to revise and improve procedures for gathering 

and using information on borrowers’ economic situations, according to 

IMF officials. Changes to these procedures are intended to intensify 

existing efforts to cross-check, question, and refine information initially 

received from the borrowers. 

• In July 2000, the Board of Executive Directors revised and strengthened 

the IMF’s guidelines for addressing misreporting. The IMF’s procedures 

have been broadened so that the guidelines will now be applied to cases 

of misreporting of information relating to preconditions and other 

essential information that borrowers are required to provide. The Board 

has also lengthened the limitation period for imposing penalties from 

2 years to 4 years. These and other modifications to the guidelines give 

the IMF greater flexibility and scope to impose penalties on borrowers 

in cases of misreporting.

• According to IMF management officials, in October 2000, the Board is 

scheduled to discuss possible expansion of the list of information that 

members are required to provide under the IMF’s Articles of Agreement 

to include more extensive data reporting requirements, including 

reporting of fiscal and financial information. Such modifications could 

give the IMF greater authority to impose sanctions against misreporting 

of these types of data. In October 2000, the Board also plans to consider 

procedures to deal with potential cases of misreporting related to the 

assistance it provides under the Highly Indebted Poor Countries 

Initiative.17

• In March 2000, the Board of Executive Directors adopted a policy to 

publicize each case of misreporting, suitable to the seriousness of the 

misreporting, after the Board has fully reviewed the case and issued its 

conclusions. In fact, the IMF has publicized two misreporting cases in 

April and May 2000 under this new policy, issuing press releases clearly 

17 The goal of the Highly Indebted Poor Countries Initiative is to bring heavily indebted 

countries’ debt loads to a level where they can make debt payments on time and without 

rescheduling. Resources to reduce the level of debt are provided by the IMF, the World 

Bank, and other multilateral and bilateral creditors. 
B-285775

Page 20 GAO/NSIAD-00-211 IMF Safeguards

identifying the borrowers (Pakistan and Ukraine), details about the 

misreporting incidents, and information about the remedial steps that 

the IMF and the borrowers have taken.18

The IMF has not yet taken explicit steps to address a few of the limitations 

described in the IMF study on misreporting. We could not determine how 

the IMF will address the need for clearer monitoring plans for its loan 

programs, as described in the study. However, according to the IMF 

Treasurer, IMF staff are making greater efforts to ensure that data required 

for monitoring of borrower compliance with loan conditions are defined 

more clearly. Also, while the IMF has not adopted any new ground rules for 

investigating potential cases of misreporting or criteria for sharing 

information about known weaknesses and anomalies in reported 

information among IMF staff or with the Board of Executive Directors, the 

Fund’s management is considering whether or not new ground rules are 

warranted.

Agency Comments We received written comments from the Department of the Treasury, the 

agency that represents the United States at the IMF, as well as from the 

IMF. Treasury and the Fund’s management have agreed with the 

information presented and their comments are reprinted as appendixes III 

and IV. In addition to their overall comments, the Treasury and the IMF 

provided technical comments, which we incorporated in the report as 

appropriate.

Treasury commented that the report provides, overall, an informative and 

useful treatment of an extremely important issue that is central to the 

integrity of the IMF. While the Treasury points out that IMF’s strengthened 

safeguards cannot be absolutely failsafe, they constitute a meaningful 

effort in the area of protecting IMF resources and deterring misreporting. 

Treasury stated that one of its highest priorities is to ensure that the IMF’s 

strengthened system of safeguards is vigorously and forcefully 

implemented, continuing an effort that the U.S., through the Treasury, has 

been working to promote for a considerable period of time. Treasury noted 

that, in addition to the new safeguards and misreporting framework, it is 

essential that the IMF do a better job in using the existing instruments at its 

disposal, particularly with respect to monitoring and cross-checking data 

18 The Fund had also publicized two earlier cases of misreporting—by Russia, in August 

1999, and by Jordan, in October 1999.
B-285775

Page 21 GAO/NSIAD-00-211 IMF Safeguards

provided by countries, and applying the existing guidelines on misreporting 

of data. 

The IMF reemphasized the importance placed by its management and 

Board of Executive Directors on assuring that IMF resources are used for 

their intended purpose and the member countries’ economic programs 

being supported by these resources are based on accurate information. The 

IMF stated that the Board of Executive Directors and management satisfy 

themselves as far as is reasonably possible that borrowing member 

countries comply with their obligations to use IMF resources as intended 

and to supply accurate information to the IMF. The IMF also stated that in 

the vast majority of cases it has had—and continues to have—an excellent 

experience with the trust-based relationship central to its interaction with 

individual members. The IMF noted that significantly strengthened policies 

are now in effect, in particular, safeguards assessments of member 

countries’ central banks and the stronger misreporting guidelines. 

Scope and 

Methodology

To identify the IMF’s progress in strengthening its policies and procedures 

relating to (1) the appropriate use of Fund resources by borrowers and

(2) the accuracy of economic and financial information reported by 

borrowers, we reviewed documents, prepared in 1999 and 2000, relating to 

these subjects provided by the IMF and the U.S. Department of the 

Treasury. In particular, we reviewed and analyzed a series of internal IMF 

studies, issued in February 2000, that specifically addressed the issues of 

borrower misuse of international reserves and borrower misreporting. 

These studies described the IMF’s existing policies and procedures to 

prevent misuse of funds and misreporting by borrowers, identified 

weaknesses in these policies and procedures, described cases of borrower 

misreporting and potential misuse of funds, and outlined recommendations 

for improvement. We also interviewed cognizant Treasury officials, the 

IMF’s Treasurer, and officials in the IMF’s Policy Development and Review 

Department to identify the status and nature of current IMF efforts to 

improve its management controls.

We conducted our work in Washington, D.C., from April through July 2000 

in accordance with generally accepted government auditing standards.
B-285775

Page 22 GAO/NSIAD-00-211 IMF Safeguards

We are sending copies of this report to the Honorable Lawrence H. 

Summers, the Secretary of the Treasury; Horst Köhler, Managing Director 

of the IMF; and interested congressional committees. Copies will be made 

available to other interested parties upon request.

Please contact me on (202) 512-4128 if you or your staff have any questions 

about this report. Other contacts and key contributors to this report are 

listed in appendix V.

Sincerely yours, 

Harold J. Johnson, Associate Director

International Relations and Trade Issues
Page 23 GAO/NSIAD-00-211 IMF Safeguards
Page 24 GAO/NSIAD-00-211 IMF Safeguards

Appendix I

The International Monetary Fund’s Response Apendxies

to Recent Cases of Misreporting by Russia ApendxiI

In 1999, the International Monetary Fund (IMF) became aware of 

allegations that the Central Bank of Russia had used offshore subsidiaries 

during 1994-96 to allocate its international reserves for inappropriate 

purposes. Based on these allegations, the IMF required the Central Bank of 

Russia to undergo an investigation of its financial transactions with 

subsidiaries. The investigation was conducted by an independent, 

international accounting firm, which issued four reports on the 

investigation between July and December 1999. The primary investigation 

report, published in August 1999, revealed that Russia had engaged in 

transactions that resulted in misreporting of required information to the 

IMF. In particular, Russia had repeatedly misstated total international 

reserves from 1995 through 1998 by improperly counting as international 

reserves funds that the Central Bank of Russia was using to guarantee 

loans and Russian government securities purchases. In addition, Russia 

had understated net domestic assets, net credit to the government, and the 

budget deficit. Funds were made available to Russia during 1996 that would 

not have been made available on the basis of a correct reporting of 

international reserve data.

The following specific examples of misreporting by Russian authorities 

were uncovered in the audit.

• In 1996, the Central Bank of Russia deliberately falsified its records and 

reported a sale of Russian government securities to its subsidiary, the 

Financial Management Company, which did not occur, and reported the 

proceeds of the sale as international reserves. As a result, Russian 

authorities overstated net international reserves and understated net 

credit to the government and net domestic assets by $1.2 billion.

• In 1995 and 1996, the Financial Management Company used funds that it 

had received from the Central Bank of Russia to guarantee the purchase 

of Russian government securities even though the Central Bank of 

Russia had reported these funds to the IMF as international reserves. 

Thus, in addition to overstating net international reserves, Russian 

authorities understated net domestic assets as well as net credit 

extended to the government.

• In 1996, the Central Bank of Russia deposited $300 million with another 

subsidiary, Eurobank, to guarantee credits it extended to Russian 

commercial banks. In reporting to the IMF, the Central Bank of Russia 

misclassified these loans as liquid international reserves, even though 

they could not be immediately converted to foreign currency. Thus, the 
Appendix I

The International Monetary Fund’s Response 

to Recent Cases of Misreporting by Russia

Page 25 GAO/NSIAD-00-211 IMF Safeguards

central bank overstated the total amount of its international reserves. 

• In 1997 and 1998, the Central Bank of Russia extended as much as 

$223 million in credit to another subsidiary, the Ost-West Handelsbank. 

However, the central bank continued to report these funds as liquid 

international reserves, even though they could not be immediately 

converted to foreign currency. Thus, the central bank again overstated 

its total amount of international reserves to the IMF. 

In 1996, Russia received about $2.7 billion1

 on the basis of information that 

has been subsequently deemed to be incorrect. The penalties provided by 

the IMF’s guidelines on misreporting did not apply in these cases because 

the 2-year limitation period on imposing penalties had already expired by 

the time the IMF had become aware of the misreporting. However, the IMF 

determined that the misreporting violated mandatory reporting 

requirements established in the IMF’s Articles of Agreement, for which 

there is no established limitation period. Under a $4.5-billion loan program 

that the IMF Board of Executive Directors approved in July 1999, Russia 

agreed to hold all new IMF funds in an account at the IMF that may be used 

only to repay Russian debt to the IMF. This procedure would apply to any 

new IMF program negotiated in 2000. The IMF and Russia agreed on a 

number of other remedial actions, including the creation of internal 

barriers at the central bank between operations with its foreign 

subsidiaries and its reserves management, redefinition of international 

reserves to exclude deposits with foreign subsidiaries, an IMF assessment 

of Russian reporting procedures, and a further investigation of the 

operations of the Central Bank of Russia with other subsidiaries.

1

 This amount is stated in year 2000 dollars. The IMF originally reported the amount as 

1.9 billion special drawing rights (the IMF’s standard unit of account). We converted special 

drawing rights to dollars using a GAO-constructed special drawing rights price deflator 

based on the average annual exchange rate. We used a U.S. implicit price deflator to express 

the figure in year 2000 dollars.
Page 26 GAO/NSIAD-00-211 IMF Safeguards

Appendix II

The International Monetary Fund’s Response 

to Recent Cases of Misreporting by Ukraine ApendxiI

Various allegations have been made about the use of Ukraine’s 

international reserves held by the National Bank of Ukraine, the country’s 

central bank, in 1996-98, prior to approval of Ukraine’s most recent IMF 

arrangement in 1998. The IMF learned in 1998 about some central bank 

transactions that gave the impression that Ukraine’s international reserves 

were larger than was actually the case. At that time, the IMF required 

Ukraine to correct its reporting of these reserves and institute quarterly 

audits by a reputable international accounting firm. Based on new 

allegations this year, the IMF also required that the National Bank of 

Ukraine undergo a series of transactional investigations by an independent, 

international accounting firm. The results of the first two investigations 

(covering July 1997 through January 1998) indicate that Ukraine had 

engaged in transactions leading to an overstatement of its international 

reserves. For example, in 1997, the National Bank of Ukraine deposited 

some of its international reserves with a foreign bank, which then lent the 

funds to a commercial bank in Ukraine, which redeposited the funds with 

the National Bank of Ukraine. This “round tripping” resulted in the same 

international reserves being counted twice. IMF management will not 

know the full extent of the overstatement until ongoing investigations have 

been completed. By giving a misleading impression of the size of Ukraine’s 

international reserves, Ukraine appeared to meet the performance criteria 

for its loan program and obtained IMF funds that it might not otherwise 

have received.

As of August 2000, the IMF was completing its review of the situation to 

determine what sanctions should be levied against Ukraine for its provision 

of inaccurate reserve information. Remedial action, which the IMF’s Board 

of Executive Directors will consider shortly, could include early repayment 

of IMF disbursements that Ukraine received on the basis of inaccurate 

information it reported to the IMF. According to the IMF, at its request, the 

National Bank of Ukraine has taken a number of corrective steps, including 

depositing all of its liquid reserves in top-rated international banks, 

discontinuing all transactions that had rendered international reserves 

liquid, and improving international reserves management practices. 

Further, the IMF would expect the Ukrainian authorities to leave possible 

future disbursements to the Ukraine in an account in the IMF that may only 

be used to repay Ukrainian obligations to the IMF.
Page 27 GAO/NSIAD-00-211 IMF Safeguards

Appendix III

Comments From the Department of the 

Treasury ApendxiI
Appendix III

Comments From the Department of the 

Treasury

Page 28 GAO/NSIAD-00-211 IMF Safeguards
Page 29 GAO/NSIAD-00-211 IMF Safeguards

Appendix IV

Comments From the International Monetary 

Fund ApendxiIV
Appendix IV

Comments From the International Monetary 

Fund

Page 30 GAO/NSIAD-00-211 IMF Safeguards
Page 31 GAO/NSIAD-00-211 IMF Safeguards

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Harold Johnson (202) 512-4128

Phyllis Anderson (202) 512-7364

Acknowledgments In addition to those named above, Patricia Martin, James Michels, Rona 

Mendelsohn, Mary Moutsos, Samantha Roberts, and Mark Speight made 

key contributions to this report.

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