MCC undertakes a process each fiscal year to identify countries as candidates for MCA assistance. MCC uses per capita income data to identify two pools of countries as eligible candidates: low-income countries and lower-middle-income countries. Candidate countries also must not be statutorily barred from receiving U.S. assistance. MCC’s Board of Directors then uses quantitative indicators to assess a candidate country’s policy performance. To be eligible for MCA assistance, a country must pass the indicator for control of corruption and at least one-half of the indicators in each of the following three categories: ruling justly, investing in people, and encouraging economic freedom. To pass an indicator test, a country must score better than at least one-half of the other candidates (above the median) in its income group. If the policy performance of a country implementing a compact declines, the board can suspend or terminate the compact. Eligible countries may develop and propose projects, with guidance from MCC, with the goal of achieving economic growth and poverty reduction. MCC conducts an initial peer review of the country’s proposal, including an examination of proposed accountability and procurement structures, project scope, preliminary cost estimates, and the feasibility of implementing projects within the 5-year compact period. MCC also may provide 609(g) funds to the country to assist in compact development. If MCC accepts the proposal, it negotiates and signs a compact with the eligible country, committing the full amount of the compact. After compact signature, the MCA completes additional agreements, budgets, and plans prior to entry-into-force. At entry-into-force, MCC obligates and begins disbursing compact funds, and compact implementation begins. Following MCC’s internal reorganization in October 2007, MCC revamped its compact development process to include greater up-front engagement with eligible countries and assistance in conducting needed studies and establishing management structures. MCC’s 2010 Congressional Budget Justification notes that it revised the phases of compact development in an effort to address the challenges and problems it encountered with current compacts. The three compacts we selected for review vary in the type and size of projects funded, but each devotes more than one-half of compact funds to infrastructure projects, such as roadways, bridges, and ports. Figures 1, 2, and 3 provide compact obligations by country. As of August 2009, these three compacts were in their 4th year of 5 years of compact implementation. MCC has developed management and control guidance and structures to implement the statutory requirements for fiscal accountability and for open, fair, and competitive procurements. MCC and MCAs have established processes for controls over compact funds; the procurement of required goods, works, and services; and the development and management of contracts after award. MCC compacts and related documents include sections on fiscal accountability that describe the agreement between MCC and the recipient country in areas such as financial management and procurement practices. According to MCC’s Fiscal Year 2007 Guidance for Compact-Eligible Countries, two key entities are generally involved in fiscal accountability. First, the country must authorize an accountable entity to oversee the MCC program and its components, allocate resources, oversee and implement a financial plan, approve expenditures and procurements, and be accountable for MCC program results. Second, the compact typically will require a fiscal agent for MCC-funded activities that is responsible for certain aspects of fiscal accountability, such as funds controls and, in some cases, procurement management. The MCC fiscal accountability framework is depicted in figure 4. To address financial management, MCC requires each MCA to adopt a FAP that clearly documents the policies and procedures, including internal controls, that will help ensure appropriate fiscal accountability over the use of MCC-provided funds. In its Fiscal Year 2007 Guidance for Compact-Eligible Countries, MCC provided the MCAs with information that the MCAs should consider when developing their policies and procedures. For example, the MCAs should ensure that, in developing procedures for their disbursements, they consider funds control and documentation (i.e., procedures for authorizing, verifying, and recording a transaction); separation of duties and other internal controls (i.e., procedures for segregating approval and processing duties); and procedures related to the reconciliation of funds. MCC, as a component of this framework, is responsible for reviewing and approving certain policy documents and for ensuring that financial controls are adequately structured and implemented for each country. MCC assesses the status of financial management at the compact country through the review of reports, in particular annual financial audits of the MCA financial statements and Quarterly Disbursement Reports. MCC requires annual financial audits of the resources managed by the MCAs to assess whether funds received and costs incurred are recorded in conformity with the terms of the compact agreement and generally accepted accounting principles. MCC also requires Quarterly Disbursement Requests and Reports from the MCAs, which describe the funds used in the past quarter and the estimated expenses requiring MCC funding for the next quarter and beyond. After reviewing and approving the quarterly disbursement requests, MCC authorizes disbursement of the funds for the next quarter. Prior to fiscal year 2008, MCC requested that the Department of the Treasury (Treasury) transfer compact funds into the MCA bank accounts (e.g., permitted bank accounts) for redisbursement by the MCAs to their contractors. According to MCC officials, in September 2008, MCC started using the Treasury’s Common Payment System to make direct payments to the MCA contractors. However, as shown in figure 4, countries still maintain permitted bank accounts that are used to redisburse funds received from MCC. Thus, the MCAs may continue to internally process and manage project or program payments through the use of the country’s permitted bank account, which receives funds during MCC’s quarterly disbursements. As part of the country’s proposal for compact funding, the MCAs identify their approach to procurement. Prior to May 2007, the guidelines used by the MCAs were negotiated and documented in a procurement agreement— a supplemental agreement to the compact. MCC currently uses standard procurement guidelines, based on World Bank guidelines, and requires their use in compacts, unless it specifically permits alternative procedures. MCC also has developed several guidance papers that assist countries in implementing the standard procurement guidelines. The MCAs may contract with a procurement agent to perform key procurement functions. Figure 5 summarizes MCC’s compact procurement process. The MCAs manage compact procurements, but MCC retains review authority at points in the process, including procurement planning, prequalification, bid evaluation, and proposed contract award. MCC’s guidelines require both MCA and MCC approvals at up to three levels: (1) the MCA procurement director, (2) the MCA governing body, and (3) MCC. The level of review depends on the value and method of the procurement. Higher-value procurements and those using less-competitive methods generally require more second- and third-level reviews and approvals. Before MCC published standardized guidelines, the Honduras, Georgia, and Cape Verde procurement agreements required the first approval to be by the MCA management, and the second approval to be by the MCC governing body, or in the case of Cape Verde, by a special Procurement Review Commission consisting of Cape Verde government officials. To conduct oversight of large infrastructure projects managed by the MCAs, MCC reviews key documents, such as bidding packages, contract documents, technical project requirements, and work plans. In general, MCC’s implementation process for infrastructure contracts and projects requires that the MCAs have individual project directors—for example, a roads director—who oversee outside implementing entities and project management consultants. MCC also requires the MCAs to engage the services of a project management firm or an implementing entity to help manage compact projects before receiving project funding. MCA independent construction supervisors conduct oversight of day-to-day construction and the activities of the construction contractors to ensure compliance with contract requirements. MCC’s Implementation Support Team (IST) and resident country director, aided by MCC’s own independent engineers, monitor progress of the construction works as managed by the MCAs and executed by their contractors. To report progress, the MCAs prepare quarterly reports to MCC. MCC’s deputy vice presidents hold quarterly country portfolio reviews during which the IST reports on implementation progress as well as issues and concerns. Figure 6 depicts the oversight, management, and contractual relationships between MCC, the MCA, and their contractors for infrastructure projects. The MCAs have made progress in implementing polices and procedures for managing their administrative and operating expenses. However, our review of these policies and procedures, as documented in each country’s FAP, found gaps in the design of the policies and procedures, which prevented the establishment of an adequate internal control structure. In addition, our tests of transactions at the three MCAs showed that processed financial transactions did not consistently comply with the MCAs’ established controls, resulting in transactions that lacked proper approvals and adequate documentation. During our review of the three MCAs we visited, we found that each entity had documented policies and procedures in their FAPs as required by MCC. However, travel and payroll policies in two of the three countries we visited were incomplete or did not address key procedures or controls. In addition, the FAPs in all three countries lacked policies and procedures related to disbursements for each MCA’s main project or program expenses. The lack of adequate and comprehensive policies contributes to internal control structures that increase the risk of fraud, waste, and abuse in MCC-funded projects. For example: Travel policies in Honduras and Cape Verde lacked key requirements for supporting documentation.