News Brief No. 00/77

News Brief: IMF Finds Ukraine National Bank Misreported International Reserves, Considers Circumstances, and Proposes Measures to Prevent Recurrences

September 6, 2000

The Executive Board of the International Monetary Fund (IMF) today met to discuss the misreporting of information on the international reserves of the National Bank of Ukraine (NBU), examine the circumstances surrounding Ukraine's misreporting, and consider future relations with Ukraine. The IMF is taking measures to prevent similar cases in the future.

Summary of Board Discussion

At the conclusion of the Executive Board's discussion, Stanley Fischer, First Deputy Managing Director and Acting Chair, said:

"In their meeting to draw final conclusions and take decisions on allegations of misreporting by the National Bank of Ukraine (NBU) of data on the level of international reserves, Executive Directors stressed the ample factual basis for reaching the conclusion that extensive misreporting had taken place. They noted that, following allegations of misreporting, the NBU commissioned a three-stage audit of its official reserves. Reports on the first and second stage audits, covering the period November 1996 to January 31, 1998, were completed some time ago, and the report on the third stage audit, covering the period January 31 to September 30, 1998, has just been completed. Directors also had before them a report prepared by the IMF's Office of Internal Audit, which carried out an examination of the circumstances surrounding the misreporting.

"In their discussion, Executive Directors expressed concern that the Ukrainian authorities had overstated their reserves throughout the entire period under review, engaging in numerous instances of misreporting, including misreporting of information necessary to assess observance of performance criteria data under the arrangements in place. Accordingly, as described in the staff report, Ukraine was found to have breached its obligations under Article VIII, Section 5 of the IMF's Articles of Agreement to report accurate information to the Fund. In addition, Directors found that Ukraine had made two noncomplying purchases that Ukraine would not have been entitled to make had it not overstated the level of its net international reserves. These two purchases, each amounting to SDR 36.27 million, were effected on December 29, 1997 and February 2, 1998. Directors noted that another purchase amounting to SDR 72.5 million which was effected on December 1, 1997, would have been noncomplying were it not for the effect of the two-year limitation period under the Guidelines on Misreporting.

"In light of the serious and repetitive instances of misreporting, Directors called on the Ukrainian authorities to undertake significant remedial measures. In this vein, Directors welcomed the commitment by the Ukrainian authorities to prevent a reoccurrence of similar problems, as expressed in a letter to the Managing Director, received on August 29, which is being made public. In this letter, the authorities acknowledged the findings of IMF staff, and committed themselves to maintain the measures already in place to ensure accurate reporting in the future.

In particular, the authorities will continue to conduct quarterly audits of the reserve position of the NBU; hold their reserves in first-rank international banks; and refrain from undertaking any transactions that would impair the liquidity of their reserves. These safeguards will remain in place during the period of the EFF arrangement and beyond, until such time as the IMF and Ukraine agree that they are no longer necessary. Directors noted the intention of the Managing Director to issue a complaint for a declaration of ineligibility of Ukraine to use the IMF's general resources if Ukraine fails to adhere to these understandings. The authorities have also committed to keep the proceeds of any purchases made under Ukraine's Extended Arrangement in Ukraine's SDR account held with the IMF. Directors also welcomed the recent voluntary repurchase of SDR 72.5 million made by Ukraine against the two purchases that it would not have been entitled to make had the level of net international reserves not been overstated. Directors noted that this repurchase was a tangible demonstration of a commitment by the authorities to break with the past and ensure accurate reporting in the future.

"Directors noted that no evidence had been presented of misappropriation of Ukraine's reserves, although the examinations by the auditors were incomplete because of the non-response of some non-Ukrainian third-party banks to the audit confirmation requests.

"Directors emphasized that accurate reporting was crucial in maintaining trust between the IMF and its members, which is fundamental to the work of the IMF as a cooperative institution. Likewise, members benefit from ensuring that the advice they receive from the IMF is based on sound information. While IMF staff are provided an opportunity to verify and cross-check information from the authorities to form an overall assessment of the economic situation, it is the procedures and safeguards within member countries that must play the primary role in ensuring the quality of the data provided to the IMF.

"A number of Directors stressed that they hoped the authorities, having implemented procedures for accurate reporting, and safeguards on the use of IMF resources, would redouble their efforts to put their economic reform program back on track. Directors noted that the reform momentum is still insufficient, but expressed the hope that sufficient progress will be made on the outstanding issues so that a strong program, with persuasive prior actions, can be presented to the Executive Board for its consideration. These efforts are needed to provide a strengthening of Ukraine's growth prospects, and an improvement in standards of living for the Ukrainian population," Mr. Fischer said.

Measures to Prevent Similar Cases

In considering Ukraine's misreporting, the Executive Board also had available a report by the IMF's Office of Internal Audit and Inspection (OIA) on the circumstances surrounding these incidents (News Brief No. 00/26, May 4, 2000). The report examined the timing and substance of what staff and management knew, whether and why the monitoring criteria failed adequately to take account of the transactions, and the decisions or judgements made by the authorities, staff, and management about investigating or reporting such transactions.

Among the conclusions of the OIA report was that evidence of misreporting by Ukraine was not brought sufficiently early to the attention of IMF management, in part because the forward-looking focus of staff work meant there was an insufficient review of past events, including the implications of past misreporting for Ukraine's eligibility to borrow from the IMF on several previous occasions. With respect to the period in early September 1998, when evidence of past misreporting was not followed up adequately, the report drew attention to a failure to follow internal procedures, in part a result of the perceived urgency of reaching an agreement with Ukraine as rapidly as possible, so as to minimize the spread of the Russian financial crisis to Ukraine and other countries.

Executive Directors concluded that management, the Board, and the staff shared the responsibility for failing to follow up adequately on early indications of misreporting.

In the light of this and other recent cases, the IMF in April announced strengthened safeguards against misreporting by members (Public Information Notice No. 00/28, April 4, 2000).

In addition, to strengthen internal procedures, IMF management is preparing a formal note to all staff to ensure a systematic focus on data issues and weaknesses to help prevent future misreporting cases. The note will cover a number of points, including the need to subject data-both historical and program projections-to critical scrutiny with the aim of enhancing the integrity and quality of information used in the IMF. It will also call on staff to bring data weaknesses promptly to the attention of management, as well as any questions regarding the accuracy of reporting in relation to program targets or agreed upon policy measures. Executive Directors noted that they in turn expect that cases of misreporting will be brought promptly to the attention of the Board.