POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JUNE 2010 · Number 17 54960 Income and Asset Disclosure Systems: Establishing Good Governance through Accountability Ruxandra Burdescu, Gary J. Reid, Stephanie E. Trapnell, and Daniel W. Barnes Financial declarations or income and asset disclosures (IADs) are quickly becoming an important tool for anticorruption agencies and governments to fight corruption. IAD systems can play two important roles within a broader framework of good governance: prevention and enforcement. In an effort to discover how best to design and implement an IAD system, the analysis conducted suggests that countries ultimately must design a system that best complements the environment in which it will function. However, there are several key principles that policy makers and practitioners need to consider: limit the number of filers to improve the odds of success, set modest and achievable expectations, provide resources commensurate with the mandate, prioritize verification procedures to align with available resources, and balance privacy concerns with public access to declarations. Income and Asset Declaration systems can be a power- quirements was an effort to address concerns by citizens about ful tool to prevent corruption and detect the theft of the honesty of civil servants and politicians. By the middle of public assets. . . . We should never forget the reason we the 20th century, many of the more developed democratic create these systems. As part of an overall anti-corrup- countries had some form of disclosure requirements for public tion strategy, they help ensure that scarce resources are officials; however, the laws and rules were widely varied. spent honestly and wisely. In this way, we help citizens Moreover, a broader body of empirical research has begun get the health care, the education, the roads and the to suggest that well-functioning governance institutions con- quality of life they have paid for and deserve. And. . . this tribute in an important way to economic growth. Gover- attention to good governance acts as a reinforcing foun- nance, as understood in this context, refers to the "essential dation for prosperity and stability. ­ Otaviano Canuto, parts of a broad cluster of institutions" (Acemoglu 2008, p. Poverty Reduction and Economic Management Net- 1) and encompasses the methods that officials employ in pol- work Vice President icy making and delivery of goods and services (World Bank 2007). The focus on accountability as a means of improving Financial disclosures are quickly becoming one of a number those processes stems from a belief that establishing the un- of important tools for anticorruption agencies and govern- derlying institutional arrangements of accountability (that is, ments to use in fighting corruption. The genesis of such re- rules of the game) and strengthening organizational capacity 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise to achieve mandates will lead to better governance perform- Limit the Number of Filers to Improve the ance and, by implication, to greater economic growth. Odds of Success Despite the prominence of governance and anticorruption The number of individuals who are required to declare their in the development agenda1 and the tremendous progress incomes and assets may compromise the effectiveness of an that has been made in measuring governance outcomes in IAD system, particularly if resources devoted to that system combating corruption,2 far less effort has been made to un- are limited. Limiting coverage to positions most at risk of sig- derstand the specific policies and institutions that contribute nificant conflicts of interest or illicit enrichment (such as pro- to the control of corruption. Recent experience suggests that curement officials who directly oversee spending decisions) intervention in inefficient or ineffective public sectors may can provide an important option for ensuring both the effi- alleviate the misallocation of public funds. A new focus on cacy and the cost effectiveness of an IAD system. It is imper- preventive and/or corrective action against illicit enrichment ative that governments craft an approach that takes into practices is addressing the need to further support this agenda. account such trade-offs. This imperative applies both to pol- The misuse of funds at all levels of government leads to fail- icy makers who are creating an IAD system and to the public ures in economic development, no matter the cause. servants who are responsible for implementing the system. Better evidence on the link between institutions and gov- In the latter case, if available resources are particularly re- ernance will encourage efforts to instill a culture of integrity stricted, it may be appropriate to focus on collecting decla- in public service that shapes behaviors and perceptions of rations from high-level officials or from positions with the good governance. Transparency and accountability practices most conflict-of-interest risk or with the greatest access to contribute to good governance both by explicitly defining funds that could be stolen. acceptable actions and by establishing an environment in It is important, however, to understand both the goals of which public officials understand what is expected of them, the system and the ability of the implementing agency (or both from the system and from the citizens they serve. Eco- agencies) to meet those goals. Although limiting the number nomic development policies will benefit from systems that of filers may be an effective way to ensure their declarations function in an environment of credible accountability prac- are appropriately overseen, there may be other avenues avail- tices and that shape the incentives of public officials through able to ensure proper implementation and monitoring--such prevention and enforcement. as electronic filing and electronic verification of the content IAD systems can play two important roles within broader of the declarations, as the experience of Argentina suggests. good-governance efforts: prevention and enforcement. On the prevention side (exemplified by systems in the United Set Modest and Achievable Expectations States and countries of the European Union), IAD require- Realistic expectations concerning the outcomes of an IAD ments can help bring to light conflict-of-interest risks faced system can significantly improve the system's credibility with by public officials who file IAD forms, thereby facilitating stakeholders, thereby enhancing the odds of success. The fail- avoidance of situations that may lead to inadvertent (or in- ure of IAD systems to live up to expectations, particularly if tentional) misuse of public resources. On the enforcement swift and comprehensive outcomes were promised, can ruin side (exemplified by systems in places such as Hong Kong, the sustainability of reform efforts. For this reason, it is of China; Macao, China; or Georgia), IAD requirements can fundamental importance that expected outcomes be achiev- provide one more source of information for use when inves- able. Examples of ways to address this challenge include lim- tigating and prosecuting suspected illicit enrichment cases, iting the number of filers, setting realistic time frames for thereby aiding asset recovery efforts. achieving clear milestones, and not promising to significantly Recent empirical work on IAD policies and practices reduce corruption and successfully prosecute corruption highlights five key trade-offs that must be addressed, and it cases with the IAD system alone. An IAD system is only one suggests principles that should guide policy makers (as fur- of many tools that can be used in the effort to detect and dis- ther explained below). courage corrupt activity. These systems are best considered in conjunction with other mechanisms for encouraging the Key Trade-offs in Design and Implementation accountability of public officials. of IAD Systems Provide Resources Commensurate with the Mandate There are several key considerations for policy makers and Without adequate resources, even the best-designed IAD sys- practitioners building an effective IAD system and establish- tem functions poorly. Not only should an IAD unit's budget ing the credibility of the system with stakeholders. Discussed remain independent from those of other entities, provide for below are some of the trade-offs that countries face in devel- adequate resources to support the system, and ensure conti- oping and implementing an IAD system in a given context.3 nuity of funding; but the unit itself must have properly 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise trained personnel, secure and functioning facilities, and the ularities or inconsistencies within a single IAD form or ability to monitor the system. in IAD forms over time can alert an experienced re- What is typical in practice is modest or little financial sup- viewer to potential breaches of ethical or legal behavior, port for IAD implementation. In many cases, this is sympto- particularly if the law allows reviewers to follow up and matic of broader budgetary constraints for the government. seek clarification or corroboration. If resources prevent In the Kyrgyz Republic, for example, several staff have ex- undertaking these simple checks for all declarations, pressed concern that financing from the budget is not ade- simple checks on a high-risk subset or a random subset quate for the number of declarations received. of the declarations can provide significant benefits at a Beyond mere monetary resources, it is also important to fraction of the cost. consider the staffing needs relative to the number of decla- · Tier 2: Cross-checking data with other sources of related rations to be collected or analyzed. For instance, Mongolia's information. A careful cross-checking review can reveal anticorruption agency has a dedicated staff of 10 people who discrepancies between asset declarations and other are directly responsible for the declarations of the 256 high- sources--such as property registries, tax declarations, est-ranking public officials (a 1:25 ratio); however, they are and other databases. To be effective, the IAD agency ultimately responsible for a total of 52,000 declarations (a needs to have the authority and the capacity to conduct 1:5,200 ratio) submitted each year. These numbers can be such checks, and the information from external sources analyzed in comparison with those of Kyrgyzstan, which has needs to be available and reliable. a staff of 4 people responsible for 17,000 declarations (a · Tier 3: Computerized pattern recognition checks. Elec- 1:4,250 ratio); Argentina, where a staff of 12 is responsible tronic IAD review systems equipped with data-mining for 34,000 declarations (1:2,833); and Croatia, where a staff software enable implementing agencies to conduct ran- of as many as 27 people manage 1,800 declarations (1:66). dom and risk-targeted verifications of asset declarations As these numbers suggest, the ratio of personnel to declara- and to "red-flag" patterns or irregularities that might tions can vary wildly among countries, and it doesn't neces- escape the notice of even the most diligent reviewers. sarily correlate directly with "success" for the system. The key Electronic submission and verification procedures thus issue is what these staff are expected to do with the declara- can significantly enhance the effectiveness of IAD sys- tions, and whether those responsibilities are commensurate tems by enabling reviewers to select and prioritize spe- with the number of declarations being received. cific risk categories. Argentina has tried to institute an electronic verification All three of these verification tiers can be facilitated by system for the declarations, easing the demands on individual establishing user-friendly submission systems that ensure in- staff. Mongolia has decided to focus resources on the decla- formation is provided in a consistent format (making it easier rations of the top 256 officials there, while devolving some to review). In countries with technological capabilities, cap- responsibilities for the remaining declarations to ethics offi- turing returns in electronic form can automate completeness cials within individual government agencies. Other countries, and consistency checks. Such uniform formatting and elec- recognizing the staffing shortages they may face, have chosen tronic filing can reduce both delays caused by incomplete or to concentrate on submission compliance rather than on ver- incorrect declarations and content verification costs. How- ifying the accuracy of the declarations. These are significant ever, in determining whether such a system is appropriate, it trade-offs that must be considered when designing and im- is important to consider both the initial costs of implement- plementing a system. ing the system and the long-run costs of maintaining, run- ning, and updating such equipment. Prioritize Verification Procedures to Align with Available Resources Balance Privacy Concerns with Public Access to A well-designed IAD system requires timely review of the con- Declarations tent of declarations by a qualified and impartial official. With- Even in countries where an IAD system is acknowledged as out monitoring and verifying the data in declarations, the a powerful tool to prevent conflicts of interest and to detect process of filling out declarations can easily become a mere for- possible corruption, the tension between granting public ac- mality. However, verifying the accuracy of declarations is one cess to asset disclosure information and an official's right to of the hardest parameters to implement. As a consequence, it (or concerns about privacy) often emerges as a controversial is wise to take a multitiered approach to verification, beginning issue. Although citizen privacy is accepted in some countries with the first tier and encompassing the succeeding tiers as re- as a fundamental individual right, privacy rights may hinder sources and authority permit. These are the suggested tiers: the effectiveness of some disclosure systems--particularly · Tier 1: Simple checks for both completeness and consis- those that lack rigorous verification procedures and thus de- tency of the information contained in submissions. Irreg- pend all the more on public scrutiny for effective enforce- 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise ment or those in countries where the enforcement of laws Snapshots of IAD Implementation against illicit enrichment are weak or unreliable. In an at- tempt to resolve the debate between public availability and As mentioned at the beginning of this note, countries should privacy, some experts suggest that a distinction be made be- ultimately design an IAD system that best complements the tween different categories of information contained in a fi- environment in which it will function. Below are some snap- nancial disclosure, thus allowing public access only to a subset shots from a selected number of country examples, reflect- of that information--namely, that information deemed not ing different approaches from the perspective of both their to compromise privacy rights or personal security. (See box legal framework and their choice of implementation ap- 2 for country-specific examples.) proach. Box 1. The Limits of Good Practice Whereas most countries with an asset declaration system no more than 30 percent of countries specify explicit apply many of the "good-practice" elements of an IAD legal criteria in the legislation for this responsibility. framework, here are some notable findings from a sample of The descriptive statistics here are using data and indicators 74 countries: that can be found on the recently launched World Bank data · Only 11 percent of countries with an IAD framework portal. (For more information, see the PAM-AGI Web site pro- require free provision of declaration content. vided in the source note to this box.) The portal is a powerful tool to explore consolidated data and indicators on gover- · Fully 40 percent of countries fail to specify a location nance in several countries across the world, including the IAD at which declaration content may be accessed. legal frameworks in 87 countries. · Fully 82 percent of countries fail to specify how long IAD records must be maintained. Figure B.2. Where Are Declarations Accessed? · Whereas nearly 60 percent of countries identify an agency (hard copy) agency tasked with verifying or reviewing declarations, online official gazette Figure B.1. How Is Declaration Content Verified? media 70 (print/online) share of sample with a legal 60 framework for IAD (%) not specified 50 0 5 10 15 20 25 30 35 40 45 40 percent 30 20 Figure B.3. How Long Are Records Maintained? 10 < 6 years 0 6­10 years head of ministers MPs civil state servants 10+ years explicit criteria and standards are not specified established to verify accuracy of declarations 0 10 20 30 40 50 60 70 80 90 a specific agency is responsible for verifying content of declarations percent Source: Public Accountability Mechanisms (PAM) Initiative, Income and Asset Disclosure legislative indicator dataset, 2009: https://www.agidata.info/pam. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Argentina: Continuously Strengthening a Sound IAD acts of corruption in which asset declarations may play an System important part. Since its passage in 1999, the IAD system for Argentina's ex- ecutive branch has achieved significant success in filing com- Macao, China: Protecting Files and Filers pliance and implementation. The system was designed to Notwithstanding the advent in some jurisdictions of online enable content accuracy verification of declarations from the submission of declaration forms, income and asset declaration most senior 5 percent of public officials, and to provide a sys- systems typically produce very large amounts of paper doc- tematic and targeted audit of the remaining 95 percent of of- uments. The forms are legally required to be kept confiden- ficials on the basis of risk. These categories of risk include tial at all times. There are strict provisions protecting the declarations that demonstrate significant changes in asset val- integrity of the data contained in these files. In many coun- ues over time (revealed through electronic data mining) and tries, forms should be (but rarely are) kept for several years. employees of certain ministries where the risk of engaging in Moreover, storage capacity of asset declarations remains a corruption is higher (for example, taxation or custom agency problem for many countries. The risk of destruction or theft employees). requires the same sorts of risk mitigation measures, regardless Although challenges of enforcing sanctions remain-- of whether the data are stored in hard-copy or electronic largely because of bottlenecks in the court system--some of form. The specifics of each measure, however, will differ be- Argentina's procedures may represent good practice. The tween paper and electronic systems. For example, the system country's experience is also a good example of (1) an IAD in Macao, China, mitigates against this risk by producing system whose procedures have been adjusted and honed over forms that contain carbon copies that are stored in a secure time through learning by doing, (2) a strong framework for facility. There is currently an initiative to have copies stored coordination between the verification of declarations and the in a separate building to guard against loss through fire or investigation functions of the broader anticorruption agenda, natural disaster. and (3) the power to conduct investigations into underlying Mongolia: Good Practices in a Nascent IAD System Mongolia's experience is a good example of gradual imple- mentation of an IAD system in its early stages. A 2006 law created the Independent Agency Against Corruption (IAAC), Box 2. The Issue of IAD Forms Confidentiality in Selected which is responsible for managing the IAD program. Enter- Economies ing its fourth year of existence, the IAAC has achieved sig- nificant progress in relatively little time, reporting a 99.9 Guatemala's Probity Law ensures complete confidentiality of percent submission compliance rate. Despite its success on asset disclosures, except by court order. This ban extends to this front, the agency has faced some challenges regarding re- government entities, including the Prosecutor's Office. Given sources and obtaining cooperation from outside agencies and the limits this places on the use of the declarations, it might banks. be preferable to improve interagency cooperation for the pur- The IAAC, although granted authority to verify any dec- pose of criminal investigations, rather than to ban access to laration at its discretion, is specifically required to analyze declarations. the declarations of officials who are the subject of an official Similarly, the IAD system in Macao, China, remains com- complaint. Despite having the authority to audit other dec- pletely confidential. However, declaration information has larations, the agency reports that it has chosen only to audit been used successfully to prosecute corrupt officials charged declarations if an official complaint is made --a choice made with illegal enrichment, and so it may contribute to public in an effort to ensure that its audits do not appear to be po- faith in the system. It is important to note, however, that this litically motivated. This is an example of an anticorruption system has achieved its level of success in an environment agency taking the country's political circumstances into ac- characterized by a strong rule of law. count when determining policy, attempting to establish its On the other side of the spectrum, Hong Kong, China; Kyr- credibility as a nonpartisan and fully independent agency. gyzstan; and Mongolia use a tiered public access model, However, such a strategy may not always be advisable be- granting access according to the seniority of the declaring of- cause official complaints could prove politically motivated. ficial. Mongolia, in particular, requires investigations of any A preferable approach is where the agency is able to imple- official's asset declaration if an allegation of inaccuracies on ment random or fisk-based audits that are believed by the the declaration is lodged against the official by any member public to be honest and impartial. Because Mongolia's cur- of the public. rent approach is not a particularly systematic approach to risk-based targeting, it is a good idea to complement such re- 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise quirements with a systematic targeting of verifications--even site, a tool to explore data and indicators on transparency and if the systematic algorithm is simply a random sample of all accountability in World Bank client countries (including the IAD filings. legal frameworks in 87 countries) is available at https://www. agidata.org/pam. Notes References 1. See, for example, World Bank (1997, 2000, 2004, 2006a,b). Acemoglu, Daron. 2008. "Interactions between Development and Growth: What World Bank Economists Need to Know." In Governance, Growth, 2. See, for example, Kaufmann, Kraay, and Mastruzzi and Development Decision-Making, Douglass North, Daron Acemoglu, (2006); and TI (2003, 2005, 2006). Francis Fukuyama, and Dani Rodrik, 1­7. Washington, DC: World Bank. 3. For more details on the individual trade-offs and their Burdescu, Ruxandra, Gary J. Reid, Stuart Gilman, and Stephanie E. Trapnell. overall role and impact on IAD systems, see Burdescu et al. 2009. Income and Asset Declarations: Tools and Trade-Offs. Conference (2009). edition. Washington, DC: World Bank, Washington, DC. Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2006. "Governance Matters V: Governance Indicators for 1996­2005." Policy Research About the Authors Working Paper 4012. World Bank, Washington, D.C. http://www.world- bank.org/wbi/governance/. Ruxandra Burdescu is special assistant to the World Bank man- TI (Transparency International). 2003. Global Corruption Report. Berlin, Ger- aging director. Gary Reid is lead public sector specialist in the many. World Bank Public Sector and Governance Anchor of the Poverty ------. 2005. Global Corruption Report. Berlin, Germany. Reduction and Economic Management Network. Stephanie ------. 2006. Global Corruption Report. Berlin, Germany. World Bank. 1997. "Helping Countries Combat Corruption: The Role of Trapnell and Dan Barnes are governance consultants with the the World Bank." Washington, DC. World Bank. ------. 2000. Reforming Public Institutions and Strengthening Governance: A World Bank Strategy. Washington, DC. This note is based on Burdescu et al. (2009). The project was ------. 2004. "Mainstreaming Anticorruption Activities in World Bank As- developed in partnership by the Stolen Asset Recovery Initiative sistance--A Review of Progress Since 1997." Report 29620. Operations (StAR) and the Public Accountability Mechanisms Initiative Evaluation Department, Washington, DC. ------. 2006a. Anticorruption in Transition: Who Is Succeeding. . . and Why? under the Actionable Governance Indicators (PAM-AGI) ini- Washington, DC. tiative in the Public Sector Governance Group of the World ------. 2006b. "Strengthening World Bank Group Engagement on Gover- Bank. The full report is available at http://web.worldbank.org/ nance and Anticorruption." September. Washington, DC. WBSITE/EXTERNAL/TOPICS/EXTSARI/0,,menuPK:5570 ------. 2007. "Strengthening World Bank Group Engagement on Gover- 290~pagePK:64168427~piPK:64168435~theSitePK:55 nance and Anticorruption." March 21. Washington, DC. 70285,00.html. The Public Accountability Mechanisms Web The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.