From the Chair
If all government-funded public service providers working for non-governmental organizations (NGO) stayed home from work tomorrow, all of us—even Parliamentarians—would quickly notice the impact.
Rush hour traffic congestion in Auckland and Wellington would be greatly reduced with about a fifth of the workforce staying home. Mid-day traffic and public transport use would also be noticeably diminished without home care workers and volunteers going about their jobs.
At least 20% of health care is provided by not for profit organisations funded by the Health Budget through contracts including for mental health, special advice, long-term conditions, residential care, hospice and community-based service-delivery. Ministry of Social Development funded social services, education, sporting bodies, community services and others also rely on NGOs for delivery.
Many of those NGO contractors, including, for example, hospices, enhance their tight budgets with staff who work on a volunteer basis. In some cases, these services would cost the taxpayer at least 200% more if government funding was withdrawn from volunteer-based NGOs.
Any Prime Minister, Party Leader, Finance Minister, existing or aspiring Cabinet Minister (including the Minister for the Community and Voluntary Sector) attacks these service providers at their peril. And so it was for a recent junior minister who threatened to cut funding to such organisations that spoke against the Government. They jeopardize effective service delivery at value-for-money to the taxpayer.
Voluntary and community sector workers have the right to free speech.
They are voices to listen to. They are the experts in their fields, with knowledge based on deep experience of what their users need. Their dedication, commitment, genuine care and love for those they look after strengthens their message.
The desire of government and political leaders to hush up these people is crazy.
It goes against human rights.
It is also against the law.
In 2014, the Supreme Court of New Zealand delivered its first decision relating to charitable purpose. An important finding is that political purposes can be charitable.
It identified what these were.
- Since "political” means different things to different people, the concept at the basis of this decision is "advocacy for causes". This applies to any time an organisation acts to persuade people to its views about the charitable purpose it delivers.
- "Advocacy for causes” can be in the form of opinion pieces, lobbying decision makers, submissions to Parliament, petitions or challenging the decisions of government or business, including in front of the courts.
Other activities that could be regarded as forms of advocacy may qualify under the charitable purpose of advances in education. The Supreme Court's example of this is a charity that conducts objective, unbiased research without having a pre-determined position, or provides advice around the organisation's expertise to decision makers, or helps individuals understand their legal rights or obligations.
The test is that a charity that advocates for causes or tries to persuade people to its views, is charitable when (1) the reason why the charity is advocating (e.g. the relief of poverty), (2) how their goals will be achieved through its policy (such as raising the minimum wage), and (3) what they are doing (submissions, protests) is similar to previously accepted charitable purposes.
Charities may advocate the policies of a political party as long as they ensure that they're independent and don't provide support or funding to a political party.
For example, charities often ask questions of political parties, and publish their answers on their website. Identifying the answers which most align with the charity's purpose wouldn't disqualify the charity from registration (or government funding).
There’s a lot of work to do to open up freedom of speech in the NGO sector. Transparency International New Zealand (TINZ) 2013 National Integrity System Assessment (NIS) took a deep dive into the Civil Society Sector, the pillar which includes the community and voluntary sector.
Integrity Plus 2013 New Zealand National Integrity System Assessment (IGPS, 9 December 2013, Wellington, page 332)
Two of its recommendations are:
c. Civil society:
- Review the appropriateness of contractual and/or statutory restrictions on public advocacy by non-government organisations.
- Educate the public on what information they should expect from non-government organisations.
In its response to the 2013 NIS published in 2016 to meet a requirement of the Open Government Partnership National Action Plan, Cabinet said (section 82):
The NIS Report recommendation is focussed on the ability of NGOs to speak out on policy matters which they may have expert knowledge about. No statutory restrictions have been identified. Any contractual provisions will be the subject of negotiations between the parties.
With the upcoming election period looming, TINZ is preparing its questions for candidates and political leaders. Direct questions about how they will ensure that NGO contracts are aligned with the Supreme Court’s 2014 decision will be part of our questioning.
And it would be timely too for other civil society organisations to be asking questions on the same basis. In many cases, they will have direct contractual provisions to use as examples.
Suzanne Snively, Chair
Transparency International New Zealand Inc.
29 May 2017
In This Issue
Message from the CEO May 2017
TINZ Chief Executive Officer
by Janine McGruddy
TINZ Chief Executive Officer
Kia ora TINZanites!
Once again, New Zealand’s high ranking in transparency indices has us in the hot seat for providing advice to those lower down the rankings.
I have been invited on an intensive visit to Taiwan, presenting to two conferences—one with their Defence to discuss the Government Defence Anti-Corruption Index (in which New Zealand got the only A in the Asia Pacific in 2015). The second a Local Government Conference to share the secrets of being number one in the Corruptions Perceptions Index (CPI). Meetings were also scheduled with their Justice Minister, Head of the Agency Against Corruption and the Chief of the Ministry of Justice Investigation Bureau.
Our “goodness” or “badness’ is all relative. The rest of the world sees us in headlines such as “New Zealand—Number One in CPI” or “New Zealand wins best country in the world for the fourth year in a row”. Whether our consistently high rankings leave you feeling proud, or worried about how bad things can be elsewhere, probably depends on your personal situation.
That the gap between the haves and the have-nots in Aotearoa is getting wider, is food for thought. Corruption and inequality feed off each other to create a vicious circle between corruption, unequal distribution of power in society, and unequal distribution of wealth. Polling shows New Zealanders have consistently rated inequality as the single biggest issue facing the country since 2014. Over 80 per cent of the country are concerned or very concerned about income and wealth imbalances.
Internationally, all the world’s major economic bodies—including the IMF, the OECD and the World Bank—have argued for some time that inequality is a major problem that must be addressed.
After remaining fairly stagnant from the 1950s through the 1980s, the income gap has been growing markedly, by every major statistical measure, for some 30 years.
Domestically we now see troubling headlines like “Income inequality: How New Zealand is one of the worst in the world?” Given the correlation between corruption and inequality we have a lot of work to do if we want to maintain our low corruption society.
A lot of what we have is cultural and intangible. While others expect some practical policy advice it is really about building a culture that rejects corruption. TINZ has developed “Seven Actions” to build a corruption free culture. This is the core advice that we share with both internally and externally. These are covered in the article on procurement later in the Transparency Times.
I will report back on Taiwan on my return.
Nāku noa, nā
“E hara taku toa, I te toa takitahi, he toa takitini -
My strength is not as an individual but as a collective””
David Howman’s support of sporting integrity
by Mark Sainsbury
Having David Howman at your board meeting is like listening to a secret witness at a mafia extortion trial. You can’t believe the extent of the corruption you hear about and to be honest, you wonder how the witness got out alive.
Being Director General of the World Anti-Doping Agency (WADA) since 2003 put Wellington lawyer and sports nut David Howman very much in the line of fire. There were death threats and political pressures and the fight to get the job done while being deliberately underfunded. What saved his sanity and possibly his life was his kiwiness. And there’s no secret testimony from Howman—simply the view that transparency in sport like in any other sphere of life is essential.
Everyone who heard David speak to our board meeting came away both shocked and impressed. Shocked at the scale of corruption in sport but impressed that here was someone willing to stand up and talk about it. David has since finished his tenure at WADA but has been co-opted to chair the new Integrity Unit for World Athletics.
Given what he has to say and its importance, I interviewed him for my Radiolive Morning Talk show. We are happy to share that with you. He needs to be heard.
Transparency, governance and the Constitution’s role supporting official information
Sir Geoffrey Palmer
Former New Zealand Prime Minister Sir Geoffrey Palmer, spoke to the May Board meeting of Transparency International New Zealand (TINZ) about his project A Constitution for Aotearoa New Zealand.
Their proposal: a modern constitution that is easy to understand, reflects New Zealand’s identity and nationhood, protects rights and liberties, and prevents governments from abusing power.
Central to TINZ’s purpose is connecting the principles of constitutional design to transparency, thus reducing the risk of corruption.
One constitutional lawyer found the New Zealand constitution to be located in 45 Acts of Parliament including six passed in England, 12 international treaties, nine areas of common law, eight constitutional conventions, three-and-a-half executive instruments, one prerogative instrument, one legislative instrument and half a judicial instrument.
The authors believe this scattering of sources creates obscurity and a lack of clarity. These are enemies to transparency and democracy.
To date there are over 2,500 submissions. Many are thoughtful and useful, indicating a considerable interest in the project and an appetite for change.
Sir Geoffrey asked TINZ to make a submission about:
- The wording in the Constitution regarding the transparency of official information as an important way to prevent corruption.
- He also asked TINZ to make a submission about the importance of free and frank advice from the public sector.
TINZ proposed to prepare a Submission by the 1 December 2017 deadline.
A redrafted Constitution for further consideration will be produced by Butler and Palmer early next year along with an analysis about ways to further advance the project.
TINZ mission consistent with the proposed constitution
TINZ’s role is to ensure that “government, politics, business, civil society and the daily lives of people are free of corruption.” Sir Geoffrey believes that in order to reach that condition, a number of other features of public policy are necessary.
The new constitution would be an important tool to maintain New Zealand's high trust society where "Integrity and good governance are important in that they underpin government legitimacy and the freedoms, civil liberties and ability to participate in a democratic state. When people trust their institutions, they are more likely to pay their taxes, fill in the census forms and to comply with laws and regulations."
The democratic deficit
“When one looks around the western world now, one finds some worrying trends revolving around politics and public trust”, Sir Geoffrey said. “Inter-active conversations between the governed and the decision-makers seem more difficult to conduct now.”
Dutch writer, David Van Reybrouck, author of a book with the provocative title Against Elections, makes a case that the trend now is toward “deliberative democracy" which he defines as:
Deliberative democracy is a form of democracy in which collective deliberation is central and in which participants formulate concrete, rational solutions to social challenges based on information and reasoning.
Sir Geoffrey notes that “To have a better democracy in New Zealand we need to thicken and deepen the Constitution. We are quite some distance from being a deliberative democracy”.
Open government and information
"Open government is an important value”, Sir Geoffrey said. “Public opinion is one of the checks against arbitrary power, but only if people know what is going on”.
Quoting famous American Judge Louis Brandeis:
"Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman."
That is a basis for New Zealand’s 1982 Official Information Act as well as the 1980 Danks Committee principles for the proposed legislation:
- A better-informed public can better participate in the democratic process.
- Secrecy is an important impediment to accountability when Parliament, press, and public cannot properly follow and scrutinise the actions of Government.
- Public servants make many important decisions that affect people and the permanent administration should also be accountable through greater flows of information about what they are doing.
- Better information flows will produce more effective government and help towards the more flexible development of policy. With more information available, it is easier to prepare for change.
- If more information is available, public cooperation with government will be enhanced.
Sir Geoffrey concluded that after more than 35 years of the Act, the present policy settings remain inadequate and do not serve the interests of transparency in government as well as they should. It is still often difficult to get information about public affairs in a timely fashion.
A strengthened Official Information Act would increase protection against corruption and questionable decision-making in both central and local government.
Butler and Sir Geoffrey, think that a commitment to greater openness of government information in a written codified and judicially enforceable constitution would be a safeguard worth having.
Sir Geoffrey challenged the TINZ Board to make a submission on the best way to word a constitutional guarantee of official information.
Sir Geoffrey Palmer presenting to the TINZ Board 22 May, 2017
AML2 Legislation—What is it? How will it affect me?
by Brendon Wilson
Writing for Employers and Manufacturers Association
This article is intended to answer questions particularly to prepare small to medium sized companies for the legislation.
What and why?
- The New Zealand Parliament introduced the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Amendment Bill (‘AML2’) into Parliament in March 2017. Government intends to pass the Bill in mid-2017.
- The current AML/CFT laws (‘AML1’) have been in place since 2013, applying to banks, casinos and other financial service providers who are required to have a risk assessment programme in place. In practice, this means that these businesses consider how their services could be misused for money laundering and terrorist financing, carry out staff vetting and training, verify the identity of their customers, monitor their transactions and report anything suspicious to the Financial Intelligence Unit of the NZ Police.
- Each year about $1.3 billion from the proceeds of fraud and illegal drugs are laundered through everyday New Zealand businesses. Global and local expectation is to prevent or minimise this harm.
- The NZ Government has proposed these significant reforms to combat such serious crimes. International criminals would be deterred from using New Zealand as a 'soft target' to move their criminal funds, and the measures will introduce more transparency into financial dealings that allow the police to identify criminals and trace their assets—in line with international standards.
- AML2 proposes to extend legal coverage to a range of non-financial sectors including some lawyers, accountants, real estate agents, conveyancers, high value dealers (for example, jewellers and motor vehicle dealers), and the New Zealand Racing Board.
- The Government estimates that it will cost the affected business sectors $0.8 to $1.1 billion over 10 years.
- On the other hand, it estimates that the proposed laws will disrupt about $1.7 billion of illegal drugs and fraud crime over the same period.
What does it mean?
- Businesses may already be familiar with the current AML/CFT requirement. For example, a business opening a bank account will have been asked for identification information on the owners of the business and directors of the company.
- Changes for the targeted businesses will be significant. However, not all businesses in the sectors will be affected. For example,
- Only lawyers and accountants involved in financial services and the establishment and management of trusts and companies will be regulated.
- Real estate agents will be affected when they are involved in the purchase and sale of real estate—this does not include leasing and property management services.
- High-value goods' dealers will only be affected when they deal in large amounts of cash. It is currently proposed that businesses such as jewellers and motor vehicle dealers will only have to comply when they accept over $15,000 in cash—physical currency. Businesses in these sectors deciding not to take such large amounts in cash will not have any obligations.
- Businesses affected by the laws will have to have procedures in place to comply. The laws will set the minimum standards and are risk-based. This means businesses are first required to assess the way in which their services could be misused to launder money or finance terrorism. The Police and the ‘AML/CFT Supervisor’ (proposed to be the Department of Internal Affairs (DIA)) will help businesses to do this.
- Affected businesses will need to develop and implement procedures—an AML/CFT programme—including policies for:
- staff vetting and training,
- verifying the identity of their customers,
- monitoring their transactions,
- reporting anything suspicious to the Financial Intelligence Unit of the Police.
- DIA will provide guidance on how to do this in line with the laws. They anticipate that this guidance will be available for the new sectors before implementation of the new Act (AML2).
- Other businesses may also feel an impact as customers e.g. when a business buys or sells property, the conveyancing firm and the real estate agent will ask for identification documents, including information about the real owners of the business.
What happens next?
- The Government has said it intends to pass the Bill in mid-2017.
- The laws would come into effect in stages over two years to July 2019.
- It is proposed that lawyers and accountants will be drawn in first in 2018, followed by the other sectors in 2019.
- Businesses in the sectors covered should first determine if they are within the scope of the proposed legislation, and if they are, start thinking about implementation. We recommend seeking professional guidance to ensure they are well informed and have time to prepare.
Transparency International New Zealand (TINZ) applauds any effective measures to prevent New Zealand being a soft target for the commission of these serious crimes against peoples here and elsewhere. This legislation will bring us into line with international norms and stop us being seen as a soft touch. TINZ and the writer do not hold themselves as expert in this law and strongly recommend you approach to appropriate professionals.
See Transparency International New Zealand's latest select committee submission (20 April) on the Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill.
Preventing corruption and strengthening integrity in procurement
Janine McGruddy, CEO TINZ
Fresh off the heels of the latest budget it is always a good time to think about how that money will be spent—no, not the extra $10 per year in your pocket, but the approximately $30 billion to $40 billion on goods and services, including infrastructure, spent by the New Zealand Central Government on procurement each year.
Procurement is a process where transparency and implementing strong integrity systems is paramount. So important in fact, that integrity and trust are listed first in the role and person characteristics of the core competencies for all levels of the New Zealand Government Procurement Competency Framework. As a reminder, seven actions needed to prevent bribery and corruption are listed below. We hope to make progress on procurement best practice this year and to that end, we are delighted to welcome Tod Cooper to our Board as the TINZ Delegated Authority for Procurement.
Tod is a Member of the Chartered Institute of Procurement and Supply (CIPS), which is the global gold standard for procurement professionals. He has a strong background in both Government and the private sector. His passion for procurement is about challenging the status quo and creating a wider commercial value where traditionally only cost savings were the objective.
Since joining CIPS in 2012, Tod was voted to Regional Chair in 2014 and most recently as National Chair in 2016. Tod recognises that developing awareness and implementation of global best practice and ethical procurement across our public and private sectors is important for New Zealand’s reputation in the global free market.
Seven actions to preventing corruption and strengthening integrity in your organisation
- Tone at the top: Leadership committed to integrity—essential to your organisations integrity culture. This is where Boards need to be educated to take this aspect of leadership appointments very seriously.
- Code of conduct and guidelines continuously improved—this must be a living document and they can vary wildly in terms of quality. Contact me if you would like to see what exemplary looks like.
- Corruption prevention communication and training—as part of induction then refreshed annually. Does your organisations Annual Report mention this as a valued activity?
- Knowledge of relevant legislation/regulation—ignorance is not excuse when it comes to prosecuting breaches in court.
- Avenues for reporting breaches in ethical standards—whistleblowing, an area sorely needing to be taken seriously by organisations. Whistleblowers are loyal employees—they deserve to be listened to and protected.
- Due diligence of distributors agents, joint ventures—know who you are doing business with—escalate any concerns about their behaviour.
- Regular risk assessments that uncover corrupt practice—without a clear vision of its own specific corruption risks, an organisation’s corruption prevention efforts may fail to protect it.
Whistle-blower murder and fight for justice in Putin's Russia
How I became Putin’s No. 1 enemy
Bill Browder (Corgi, 2015)
Book review by David Dunsheath
Wellington-based Newsletter Editor
Red Notice: How I became Putin’s No. 1 enemy, Bill Browder (Corgi, 2015)
This riveting true story will fascinate both financially-literate and lay readers alike. It outlines the author’s tenacious and skilful pursuit of truth to expose money laundering fraud and lack of transparency in post-Soviet Russia.
On the one hand, it is an account of Bill Browder’s early career struggles before stunning success as a Russian capital markets investor. On the other hand, the book promotes Browder’s crusade against fraud, corruption, and abuse of human rights within President Vladimir Putin’s government.
From 1996, Browder pursued a wave of privatisation opportunities following post-Soviet reforms. By 2000, his Moscow-based Hermitage Capital Management had amassed £4.5 billion of clients’ assets. It was ranked the world’s best-performing ‘emerging markets fund’. Gains of 1,500% were achieved for its initial investors, despite a 90% free-fall loss in the 1998 Russian financial crisis. Browder provides a fascinating summary of his management of risk through innovative research and assessments, sound decision making, and occasional lucky breaks.
After a harrowing detention at Moscow airport in 2000, he was blacklisted from further entry into Russia. His ban arose from his publicly exposing fraud and corruption among Russian oligarchs. The Fund’s continued success was slowed by unlawful barriers and ‘corporate raid’ seizures of three Hermitage holding companies on bogus charges.
To Browder’s deep and unceasing regret his Moscow-based, whistle-blowing lawyer, Sergei Magnitsky, was arrested in 2008. He was tortured and beaten to death during 11 months’ pre-trial detention. His ‘crime’ as such was to not withdraw his testimony against a $230 million fraud by Russian Interior Ministry officials.
The book then follows Browder’s crusade to expose the most notorious and best-documented example of human rights abuse in Putin’s Russia. It resulted in the United States senate’s ‘Magnitsky Rule of Law Accountability Act’ (2012). This enables the United States to withhold visas and freeze financial assets of Russian officials thought to have been involved with human rights violations. Then followed the European Parliament’s ‘Magnitsky Sanctions List’ (2014) for asset freezes and visa sanctions against those complicit in the Magnitsky case.
This thriller-like true story provides a very readable intermingling of Browder’s personal life and his untiring global-networking with colleagues, clients, officials, journalists and friends. A comprehensive index is provided. But some names and places have been changed “in order to protect the innocent [from possible reprisals by] some very powerful and dangerous people”.
Related links include:
1) Bill Browder’s public awareness raising videos (in chronological order):
- Overview of the company seizures scheme provided in: ‘Hermitage reveals Russian police fraud’ (2009)
- ‘Russian Untouchables. Episode 1: Artem Kuznetsov’ (2010)
- ‘Russian Untouchables. Episode 2: Pavel Karpov’ (2010)
- ‘Russian Untouchables. Episode 3. Olga Stepanova’ (2011)
- ‘Russian Untouchables. Episode 4: The Magnitsky Files. Organized Crime Inside the Russian Government’ (2015)
3) Overview to the privatisation of 45,000 state enterprises in Russia following post-Soviet reforms: Privatisation in Russia.
International Monetary Fund’s 2016 Financial Sector Assessment Program (FSAP) review of New Zealand
In 2016, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of New Zealand’s financial system. While the FSAP assessment is centred on different things from Transparency International New Zealand’s Financial Integrity System Assessment (FISA), the FSAP assessment provides an important context for the evidence that will be collected for the FISA.
The FSAP team was led by the IMF’s Alejandro López Mejía. It was comprised of several other IMF employees, external experts and inputs from the IMF Legal Department.
Included in the review were
- The Reserve Bank of New Zealand (RBNZ)
- The Financial Markets Authority (FMA)
- The Ministry of Business, Innovation, and Employment (MBIE)
- The Ministry of Justice
- The New Zealand Treasury (the Treasury)
- The Department of Internal Affairs (DIA)
- various market participants.
The IMF mission also met with
- The Australian Treasury
- The Reserve Bank of Australia (RBA)
- The Australian Prudential Regulation Authority (APRA)
- The Australian Securities and Investments Commission (ASIC)
- and market participants in Australia.
An important attribute of the FSAP is that it provides an opportunity for New Zealand’s financial system to be benchmarked against international principles.
It’s these principles that provide context for the FISA, to be carried out for the first time this year and only in New Zealand.
FSAPs assess the stability of the financial system as a whole. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk-affecting financial institutions such as operational or legal risk and/or risk related to bribery, corruption and fraud, are not covered in the FSAPs system-wide stability analysis.
In contrast, TINZ’s FISA will centre on the assessment of how the financial system addresses the prevention of bribery, corruption and fraud based on evidence about the attributes of financial system integrity that contribute to its resilience. It is this resilience that will enable the financial system to rebuff financial flows associated with corrupt behaviour and money laundering internationally.
The previous IMF FSAP published in 2004 found that the New Zealand financial system had a well-capitalized banking system, which counterbalanced some concerns on the lack of active supervision, high dependence on wholesale funding, and low savings.
As part of its 2016 review, the IMF team examined the implementation of the 2004 FSAP’s key recommendations. Only one of the 2004 recommendations were “Fully Implemented”.
“Fit-and-proper criteria should continue to apply in a comprehensive manner. The RBNZ could offer independent bank directors the possibility of discussing areas of concerns without absolving directors of their statutory responsibilities.”
It took from 2004 until 2010 for the RBNZ to introduce new corporate government requirements which came into effect in 2012.
“The changes were broadly designed to strengthen the independence of locally incorporated foreign-owned banks (vis-à-vis their parents). Post GFC, the RBNZ has also significantly increased its engagement with independent directors.”
Turning to the IMF’s 2016 review:
“Imbalances in the housing market, banks’ concentrated exposures to the dairy sector, and their high reliance on wholesale offshore funding are the key macro financial vulnerabilities in New Zealand. The banking sector has significant exposures to real estate and agriculture, is relatively dependent on foreign funding and is dominated by four Australian subsidiaries. A sharp decline in the real estate market, a reversal of the recent recovery in dairy prices, deterioration in global economic conditions, and a tightening in financial markets would adversely impact the system. The key risks faced by the insurance sector relate to New Zealand’s vulnerability to natural catastrophes”. (IMF FSSA, published 10 April 2017, page 6)
- Despite these vulnerabilities, the banking system is resilient to severe shocks.
- Strengthening for macroprudential framework is important.
- The approach of the RBNZ to supervision should be strengthened by increasing the weight of regulatory discipline in its three-pillar framework.
- Increasing supervisory resources for all financial sectors is key.
- The proposed reforms to the regulatory and oversight framework for Financial Market Infrastructures (FMIs) will get New Zealand broadly on par with international standards.
- The reform of securities market regulations significantly improved the framework, but further enhancements are required.
- The crisis resolution framework needs to be enhanced further.
- The home-host relationships between Australia and New Zealand are well above international practice, but stronger collaboration would enhance synergies.
“While there has been progress on a framework for assessing systemic importance, and discussions on coordinated responses, the authorities involved have national mandates and accountabilities, which may constrain their ability to agree in advance on measures to deal with a potential crisis whose precise details are unknown”. (IMF FSSA, page 37)
This framework also has the potential for collaboration on strengthening ways for New Zealand and Australia financial sector organisations to work together to repel financial flows stemming from international crime, money laundering and/or corruption.
Foreign exchange global code to be adopted by RBNZ and FMA
The Foreign Exchange (FX) Global Code (Global Code) is a set of global principles of good practice in the foreign exchange market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. It was developed by a partnership between central banks and Market Participants from 16 jurisdictions around the globe.
Its purpose is to promote a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of Market Participants operate. Supported by resilient infrastructure, they are able to confidently and effectively transact at competitive prices that reflect available market information, and in a manner, that conforms to acceptable standards of behaviour.
On the central bank side, the Foreign Exchange Working Group (FXWG) was established in July 2015 to facilitate the creation of the Global Code and to promote its adoption. It operates under the auspices of the Markets Committee, which is composed of senior officials responsible for market operations in 21 central banks representing the largest currency areas, chaired by Guy Debelle (Deputy Governor, Reserve Bank of Australia).
On the private sector side, the FXWG formed a Market Participants Group (MPG), chaired by David Puth, Chief Executive Officer of CLS Bank International, to help coordinate across the regional foreign exchange committees (FXCs) and representatives of the FX Market in other regions. This is in order to engage a broad and diverse set of Market Participants in the process of developing and promoting the Global Code.
The Global FX Code is organised around six leading principles:
- Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market.
- Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX Market activity and to promote responsible engagement in the FX Market.
- Execution: Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent FX Market.
- Information Sharing: Market Participants are expected to be clear and accurate in their communications and to protect Confidential Information, so as to promote effective communication that supports a robust, fair, open, liquid, and appropriately transparent FX Market.
- Risk Management and Compliance: Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage, and report on the risks associated with their engagement in the FX Market.
- Confirmation and Settlement Processes: Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX Market.
The Global Code will be periodically reviewed and is expected to evolve over time in a similarly collaborative manner.
TINZ applauds the RBNZ and FMA for their international collaboration to design a code based on international best practice for foreign exchange activities.
Now, through TINZ’s Financial Integrity System Assessment (FISA), financial organisations will become more aware of the impact of bribery and corruption on financial markets.
There is more work to do, however, if the sector is to be protected from bribery and corruption which is likely to make up at least 35% of illicit transactions. Based on the experience of the global financial crisis, an important feature of the code should be its whistle-blowing process, backed up with a strong policy of protective disclosure.
After the FISA, the RBNZ and FMA will be positioned to incorporate provisions to prevent bribery and corruption, as part of the implementation of the 6 elements that make up the Global FX Code.
The fundamentals of fraud and how organisations and internal audit can prevent and detect this
by Sylvester Shamy
Chairman of the Institute of Internal Auditors NZ
and 2016 NZ Internal Auditor of the Year
I remember a moment of bemusement as an undergraduate at university when, during a lecture on auditing, our Professor asserted that fraud in its purest form is almost impossible to prevent and that once perpetrated is very difficult to identify. It followed, then, that audit’s role was less to prevent or detect but instead help the organisation to respond, including as much as possible, reducing its risk of recurrence.
As I sit here now recalling that “truism” I still require a digestive moment to process the depth of that message and its implication.
Fresh out of university and into professional practice I was educated on the realities of fraud sophistication, and therefore why, as a consequence, audit could never be expected to identify and highlight all instances of fraud. This caveat was enshrined in our engagement contracts with audit clients.
Admittedly, this was before the wide use of computer-assisted audit techniques (CAATs), data mining, information intelligence and their technology-enabled cousins. The audit profession was also, at that time, largely backwards glancing—“the rear-view mirror, not the windscreen” as someone once explained to me.
Thankfully, times have changed. But fraud, its preconditions and the motivations of its perpetrators, has not. Auditors are now better equipped than ever to combat this, and we have modern auditing techniques to assist us in this endeavour.
By its very definition—illegal acts that are characterized by deceit, concealment or violation of trust—fraud is broad in practice. There is a myriad of frauds that can, and are, committed against individuals on a daily basis. Phishing schemes, online lotteries, targeted emails, identity impersonation, credit card theft; the list goes on and on.
My focus in this article is on corporate fraud, which can be less sophisticated than fraud targeting individuals, but with potentially greater consequences both in financial and emotional terms. This article examines its preconditions. In the next issue of Transparency Times, I will discuss the many ways in which internal audit can help organisations prevent and detect corporate fraud.
The preconditions for a fraud
The Fraud Triangle
The fraud triangle is a framework designed to explain the reasoning behind an individual’s decision to commit workplace fraud. The three stages, categorised by the effect on the individual, can be summarised as pressure, opportunity and rationalisation, illustrated in the diagram above.
The theory is that a combination of demand side (pressure and rationalisation) and supply side (opportunity) dimensions are needed for fraud to be perpetrated. To elaborate:
- Pressure—fraudsters often face financial pressure to pay off debts or to support their lifestyles. This is hardly unique. We all have financial commitments that need to be met. The fraudster however, is able to rationalise their actions.
- Rationalisation—often, the rationalisation is less about committing the act of fraud (i.e. acknowledging the immoral action) and more about: convincing oneself either that:
- the assets being misappropriated are minor (e.g. “The company has lots of money and this will not be missed”)
- that the crime is a victimless one (“It’s not like I’m stealing money from a person”), or would be the last in the chain
- that the individual is entitled to the assets (“I pay my taxes, do really good work and I’m underpaid and undervalued”).
If there’s one thing internal audit can admit defeat on, it’s changing human nature, or at the very least being able to positively influence those with a predisposition to commit crime. Audit can and should however, influence the third dimension:
- Opportunity—here, fraudsters are often aided by weaknesses in organisational processes, especially around recruitment, procurement, contract management and financial management.
Design—processes and controls
A way to prevent fraud is for recruitment, procurement, contract management and financial processes to be designed and stress-tested from an end-to-end perspective, as opposed to siloed design and evaluation.
Base minimum anti-fraud mechanisms should be incorporated into key processes, including:
- Pre-employment identity vetting and screening checks should be implemented.
- Due diligence should be performed over new vendors to confirm no relationship exists with existing staff and/or contractors. This should include a Companies Office check against the vendor’s directors and shareholders.
- Similarly, a cross-reference check should be performed on vendor bank accounts against employee and contractor bank accounts before the vendor is created in organisational systems.
- A relationship/conflict declaration should be completed by all staff directly involved in the sourcing and creation of each new vendor with proper processes to manage any identified issues.
- A change to vendor details, such as their bank account, should only be accepted when supported by a bank deposit slip and matched to the vendor invoice. Each instance of change should trigger an employee/contractor bank account cross-reference check.
- A contract’s manager should be different to the contract’s approver, to ensure independent oversight and monitoring.
- Organisational systems should be designed to identify, hold and escalate all instances of delegation breaches on a one-up basis.
- Wherever possible, and especially for large value purchases (per item or cumulatively), the authoriser of goods and services should similarly be independent from the contract manager and approver. This authoriser should be satisfied that goods and services have been received prior to authorising the payment of the invoice. This accountability should be clearly outlined.
- Regular vendor performance reviews should be performed, prioritised by performance track-record and expenditure volumes, and these should be conducted by staff independent of vendor set-up, approval, management and invoice authorisation responsibilities.
Fraud may be impossible to completely prevent. Internal auditors are a wonderful cadre of professionals, but we still lack the requisite mind-reading and mind-bending powers that would enable us to mitigate fraud’s “Pressure” and “Rationalisation” preconditions. However, with proactive organisational support we can reduce the “Opportunity”.
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