How to Enforce Sanctions against Financial Non-Compliance

Posted by Yugo Koshima and Olya Kroytor1

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Many budget system laws include provisions to impose sanctions in cases of financial non-compliance during the budget execution process. Historically, most legal frameworks have involved sanctions on individual officers, rather than on the spending agencies they are working for. Although enforcement of financial regulations is often buttressed by sanctions, sanctions often end up as a last resort solution and in practice are rarely exercised. So, what should an effective sanctions regime look like under a modern budget system law? Reflecting on this question, it is helpful to explore legal developments in several jurisdictions.

In some countries, sanctions under the budget system law center on the notion of strict personal liability of individual officers in the payment process. In brief, “strict liability” means that a person is legally responsible for the damage or loss regardless of fault (negligence or intentional act). For example:

• In France2, generally, a public accountant (comptable public)3 needs to pay the full amount of damages caused by loss of cash or securities, failure to collect revenue, or irregular payments of expenses. However, the official is excluded from this personal liability when there are circumstances constituting force majeure4 or the payment is based on a requisition order5. In addition, under certain conditions, the Minister of Finance may reduce or cancel the liability through a “graceful discount” procedure.

• In the U.S.6, accountable officers, including certifying officers7, disbursing officers, cashiers, and collecting officers, are personally and strictly liable for the amount of (i) physical loss or deficiency of public money, vouchers, records, or valuables, and (ii) illegal, improper, or incorrect payments. Under the law, however, there is a process of relief which gives the Comptroller General8 the authority to absolve an accountable officer from his liability. One of the grounds for such relief is that the physical loss or improper payment was not the result of fault or negligence by the accountable officer. The accountable officer, however, has the burden of proving the lack of fault or negligence in order to qualify for the relief.

• In Russia9, a broad range of officials, responsible for the custody of cash or other valuables, or for collecting, accounting, or disbursing public money, may be required to compensate their employer for any losses or deficiencies in these amounts. This legal provision also bears the characteristics of strict personal liability.

The policy of strict personal liability often dates back to the 19th century, when communication and transportation were primitive and payment processes were fragmented and carried out manually. At that time, as the U.S. Supreme Court ruled, the implementation of strict liability was deemed critical to “protect against dishonesty by officers themselves”. In the context of modern budget execution processes, however, the policy may be difficult to sustain against legal challenges. In particular:

How can personal liabilities be determined when finance officers or accountants exercise internal control through automated systems, and the rules of budget execution become more flexible? In such a context, it may be difficult to determine whether financial non-compliance is attributable to the misconduct of an individual officer or to problems in systems that are outside individual’s control.

How can a clear division of responsibility be determined when budget execution involves an intricate relationship between the finance ministry and spending agencies? In practice, it may be difficult to identify who is legally responsible for financial non-compliance, unless a separation of key duties is clearly defined in legislation, and the appointment of financial officers and the delegation of his powers are also clarified in law.

What happens if a superior officer or the political head of an agency instructs an officer to commit an act of financial non-compliance? For example, an officer responsible for authorizing commitments in a spending agency may face pressure from the agency’s political head to process unbudgeted expenditures in violation of financial regulations. To address such a situation, a statutory mechanism to shift the responsibility from the officer to the political head is necessary.

Is the concept of strict personal liability compatible with a country’s broader legal framework? Today, budget system laws are surrounded by a complicated framework of laws covering tort liabilities, human rights, public services, and other issues. These legal instruments may include various mechanisms for pursuing personal liabilities that are not necessarily consistent with the notion of personal strict liability.

In addition to personal strict liabilities, other types of sanctions against individual officers may be cited, for example:

• In Spain and Japan, personal liabilities for damages of financial non-compliance are not strict liabilities but are based on fault (an intentional act or grave negligence)10;

• Some budget system laws include fines or other criminal punishments for the misreporting and violation of the financial regulations (for example, France11);

• Budget system laws may also include disciplinary sanctions, including salary-cuts or the suspension or dismissal of an officer; such sanctions, however, are normally provided by public service laws or codes of ethics.

Nonetheless, as in the case of personal strict liabilities, the legal challenges discussed above generally decrease the effectiveness of these personal sanctions, the imposition of which has become less frequent in many jurisdictions.

To increase the effectiveness of sanctions, some recently-enacted budget system laws have moved towards strengthening the corrective measures that can be taken against organizations rather than individuals. For example, in Austria, the Federal Organic Budget Act 2013 includes a power for the Minister of Finance to reduce the financial flexibility of a spending ministry that breaches the financial regulations, or to suspend or reduce its appropriations12. A similar provision is included in the Fiscal Responsibility and Budget Systems Law 2014 of Cyprus. Although in Austria these measures are described as “sanctions”, their essential purpose is to correct problems in organizations, rather than penalize them. In this regard, in Russia, the Budget Code amended in 2013 characterizes a new set of organizational measures as “budget enforcement measures”13.

In sum, a properly functioning modern budget execution process is more likely to be judged by the effectiveness and transparency of its internal control systems at the organizational level than by the honesty of its individual officers. If this is the case, designers of budget system laws might consider shifting their focus from (personal) sanctions to (organizational) corrective measures. This advice is especially applicable to advanced economies with sophisticated internal control and audit functions, and perhaps less so for developing countries.

 

1 Yugo Koshima is a Counsel in the Legal Department of the IMF. Olya Kroytor is a Consulting Counsel in the Legal Department of the IMF.

2 The personal strict liabilities of public accountants in France are provided by Article 60 of Law No. 63-156 of 23 February 1963. For further details, see Jean-Luc Girardi, 2012, “Le régime de responsabilité personnelle et pécuniaire des comptables publics après «La» réforme”, Gestion & Finances Publiques No. 11 - 2012, pp. 35-39.

3 A public accountant is appointed by the Minister of Finance to a spending agency and exclusively responsible for handling money and keeping accounts of the agency.

4 Generally, “force majeure” means external, unforeseeable, and irresistible influences.

5 When a public accountant rejects a payment due to irregularities or inaccuracies in a certificate issued by his authorizing officer, the officer concerned can require the public accountant to make the payment by issuing a requisition order. The public accountant is required to follow the requisition order, except when the rejection is based on the unavailability of funds or other reasons specified in legislation.

6The personal strict liabilities of accountable officers in the U.S. are governed by various Acts of Congress, Supreme Court decisions, and reports and decisions of the Government Accountability Office (GAO). For further details, see GAO, 2006, “Principles of Federal Appropriations Law” (Third Edition) Volume II, pages 9-1 to 9-143

7 Certifying officers are basically employees of spending agencies and responsible for certifying payment vouchers.

8 On some occasions, this relief authority is delegated to, or exercised by, spending agencies.

9 The personal strict liabilities for deficiency of cash and valuables in Russia are governed by the Labor Code (December 30, 2001 No. 197-FZ) and the Resolution of the Ministry of Labor (December 31, 2002 No. 85). Because these officers are required to conclude written agreements on their liabilities with their employers, such personal strict liabilities are determined along with the agreements.

10 Regarding Spain, see Title VII of the General Budgetary Law (Ley 47/2003, de 26 de noviembre, General Presupuestaria). Regarding Japan, see the Law on Responsibilities of Budget Execution Officers (Law No. 172 of 1950).

11 In France, in a broad range of financial non-compliance cases, the Court of Budgetary and Financial Discipline, an institution associated with the Court of Accounts, may impose fines under the Code of Financial Jurisdictions.

12 “Incentive and sanction mechanisms” are provided under the Federal Organic Budget Act 2013 (Chapter 3, Part 5). For further details, see Gerhard Steger, “Budget Reform in Austria: From Traditional to Modern Budgeting”, Prespuesto y Gasto Publico 69/2012, pp. 147-162

13 Budget enforcement measures are specified in Article 306.2 of the Budget Code dated July 31, 1998 No. 145-FZ. They include such measures as extra-judicial foreclosure of the amount of resources provided from one budget of the Russian Federation to another, suspension and reduction of inter-budget transfers (except for subventions), and transferring the powers to manage a budget from one official to another.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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