The 10th ASOSAI Research Project (Final Meeting)

Audit to detect Fraud and Corruption: Evaluating of Fight against Corruption and Money Laundering

16-18 Dec, 2014 (T ehran, Iran)

Shin, Min Chul Senior Research Fellow

The Board of Audit and Inspection of

Korea

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Table of Contents

I. Introduction

II. Evaluation of the Current Situation of Corrup tion and Money Laundering

III. -Evaluation of the Current Situation of Anti C - orruption and Anti Money Laundering

IV. Evaluation of SAI’s Roles and Measures in De tecting and Preventing Fraud, Corruption, a

nd Money Laundering

V. Conclusions: Lession Learned and Limitations

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I. Introduction

Background

• The Board of Audit and Inspection (hereafter referred to as the BAI), a Supreme Audit Institution for the Republic of Korea, is a constitutional agency whose functions, status, and organization are clearly stated in the Constitution.

• The BAI was established under the President of the Republic of Korea, but retains an independent status in performing its duties.

• Historically, the Board of Audit and the Commission of Inspection were merged into the current BAI.

• So, besides its intrinsic function of verifying the accounts of revenues and expenditures of public areas, the BAI, as part of its major functions of anti-corruption, has exerted strong control over all public entities by inspecting the operations and duties of the government and its officials.

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I. Introduction

Methodology

• The Methodology adopted is a descriptive study utilizing a survey method.

• The survey aims to cover the qualitative and quantitative aspects of evaluating the fight against corruption and money laundering to assess the current corruption status.

• The questionnaires were distributed to the BAI, Anti-Corruption and Civil Right Commissions, Ministry of Finance, Ministry of Justice and Financial Intelligence Unit.

• In addition, advice and support were received from the Audit and Inspection Research Institute of the BAI.

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II. Evaluation of the Current Situation of Corruption and Money Laundering

Current Situation of Corruption

• The responses on current fraud and corruption aspects in Korea revealed that corruption is moderately prevalent and somewhat widespread among some of the public sectors.

• According to the Global Integrity Index, such as CPI(Corruption Perception Index) by TI(Transparency International), Korea is perceived to higher level of corruption than other advanced countries and the corruption ranking does not change significantly over time.

• Respondents believed that one of the most persistent problems for the past generation’s anti-corruption reform movement has been due to a lack of specific measurements and feedback.

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II. Evaluation of the Current Situation of Corruption and Money Laundering

Current Situation of Money Laundering

• The respondents perceived the situation of money laundering in Korea not to be a prevalent issue.

• However, the money laundering tends to increase and becomes more sophisticated over the years.

• The money laundering is mainly observed in private entities, such as in the finance, banking industry, international trade, or foreign investments.

• They are considered to be most vulnerable fields.

• As indicated in the survey, among the most common styles of laundering money are evading taxes and stock price manipulation.

• According to the surveys, what concerns most in Korea is to damage the national reputation and to weaken the financial system.

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III. Evaluation of the Current Situation of - - Anti Corruption and Anti Money Laundering

-Evaluation of Anti Corruption

• In an attempt to fight the issue of corruption, the Korean government has an anti-corruption strategy and an action plan. Based on the various anti-corruption related acts, most of the government bodies will publicize their anti-corruption documents and action plans in their websites.

• In regards to the anti-corruption agency, the Anti-Corruption and Civil Rights Commission (ACRC) as the Korean government’s anti-corruption body, it has the authority to monitor and evaluate the implementation of the anti-corruption strategy.

• Additionally, it is making efforts toward mitigating corruption in cooperation with related bodies, such as the BAI, the Prosecutors’ Office and the National Police Agency.

• According to the survey, the majority of the respondents, based on their experiences, believed that preventive policies and measures play more critical roles in anti-corruption activities than detective or punitive actions. Also, they answered new laws and regulations for nepotism, abuse of position, influence peddling, which are all necessary to improve anti-corruption polices.

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III. Evaluation of the Current Situation of - - Anti Corruption and Anti Money Laundering

- Evaluation of Anti Money Laundering

• In terms of money laundering, Korea has specific laws and regulations based on International recommendations (FATA, etc.).

• Korea’s anti-money laundering legislation consists of the Financial Transaction Reports Act (FTRA) and the Prohibition of Financing for Offences of Public Intimidation Act (PFOPIA).

• Currently, the Korea Financial Intelligence Unit (KoFIU) under the Ministry of Finance and Economy is the official authority and works as a national center for the collecting, analyzing, and disseminating information to strengthen transparency and reliability in the financial sector.

• Respondents believed that money laundering policies throughout the KoFIU have had somewhat of a positive impact by contributing to the prevention of money laundering.

• However, the policies need to take on stronger punitive measures, as light penalties may be a possible cause in encouraging the occurrence of money laundering incidents. 8

IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

Roles of Audit to Combat Fraud and Corruption

• In anti-corruption, under the Constitution and the Board of Audit and Inspection Act, the BAI has authority to inspect the final accounts of public agencies and official functions of public institutions.

• Accordingly, the BAI has established the 'Special Investigation Bureau' to investigate the government officers by inspecting and examining whether they violate the laws or work in illegal manners.

• The inspection discloses misconducts and draws problems of statutory and institutional, or administrative contradictions for the purpose of the prevention corruption, including personal inspection (only for public-related officers) to be corrected and improved.

• Presently, the BAI made an effort to build a cooperative relationship among other ACAs, such as law enforcement agencies (Police, Supreme Prosecutors’ Office and etc.), internal audit units (IAUs) in public sectors and ACRC (Anti-corruption and civil right commissions) by sharing information and exchanging staffs regularly. 9

IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

(1 ) Preventind Role

• In order to minimize and control the occurrence of corruption, the BAI carries out preventive measures by collecting and analyzing data on corruptive behaviors of public officials, building a cooperative relationship with Internal Audit Units (IAUs), the prosecution and the police, and monitoring areas vulnerable to corruption.

• The BAI accumulates database on corruption-vulnerable fields, mainly targeting senior government officials, by continuously collecting information and monitoring suspicious officials pertaining to concealing his/her property by property change, ownership of a luxury car, habitual visits to gambling places, litigation over the payment of taxes, and military service and recruitment of their family or relatives.

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IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

2( ) Detective Role

• The BAI has mainly inspected public officials susceptible to corruption in a strategic manner. It plays a role as a control tower on detecting corruption by setting up the headquarter for the inspection of public officials, which incorporates the Special Investigations Bureau, the Audit Requests Investigation Bureau, the IT Audit Group, and the Internal Audit Support Group.

• First of all, the BAI has established the database of public officials susceptible to corruption on a regular basis, and set up a monitoring system in which the inspection information of high-ranking officials have been collected.

• Secondly, it analyzes data on corruption-vulnerable areas including accounting, contract, etc., by using IT data matching or data mining skills. Additionally, the BAI also develops audit scenarios for each audit subject.

• Finally, in order to enhance its effectiveness, the BAI has developed whistle-blowing systems such as “Inconvenience of National & Corporation Complaint Center” and “Corruption Complaints Hotline” operated by Audit Requests Investigation Bureau of the BAI in which reporters are rewarded.

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IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

(CASE)

• Special Investigations Bureau of the BAI conducted an IT audit in 2012 to detect corruption.

• It utilized a profile analysis of a payroll officer (including tenure, age, checking whether accounting officials hold concurrent posts) and then analyzed database about the details of expenditure of payroll systemically.

• It made good results in terms of detecting embezzlement, misappropriation and fraud: it detected 14 cases worth over $16.3 million.

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IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

R RRRRRRRR RRR RRRRRR RRR RR R RRR 3

• The BAI shall disclose the audit and inspection results on the website when corruption is detected to promote anti-corruption environment. When the corruption is verified, it is notified to the Prosecutor’s Office and the BAI reviews its results.

• If necessary, the BAI makes a report to the President Office and the National Assembly.

• The BAI makes efforts to prevent and administrate the recurrence of corruption through follow-up audit and inspection.

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IV. Evaluation of SAI’s Roles and Measures in Detecting and Preventing Fraud, Corruption and Money Laundering

Roles of Audit to Combat Money Laundering

• The BAI does not directly investigate and analyze information on illegal behaviors including money-laundering. However, it carries out preventive measures indirectly and monitoring operation of the concerned institutions.

• The BAI audits and inspects the internal control and review systems of public entities by monitoring anti-money laundering activities performed by KoFIU indirectly.

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V. Conclusions: Lesson and Limitation

Lesson Learned from othe SAI’s

• The awareness of ASOSAI members’ efforts in fighting against corruption was very helpful to identify where we are and what to do for the next.

• What we realized is most SAIs in this research project attempt to fight against corruption by various measures to prevent, detect, investigate, punish and control the corruption, i.e. the use of evidence-gathering methods.

• According to other SAI’s experiences, in order to promote more effective anti-corruption system, the BAI should reinforce its capacity to develop and plan strategic anti-corruption policies.

• Also, broad understanding and analysis of the misbehaviors and structural vulnerability of public sectors (ex. public procurement, land revenue, income tax, custom, police, public works, utilities, etc) are needed to identify and fix the corruption issues.

• Finally, the BAI should strengthen the co-operations with other anti-corruption agencies at national levels and in international levels.

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V. Conclusions: Lesson and Limitation

Limitations

• Although the BAI has made some achievements in fighting against corruption through various anti-corruption activities, several concerns still remain, including the vulnerability of anti-corruption systems.

• Firstly, the more sophisticated policies and strategies are needed to for controlling corruption effectively. For example, under the current laws and regulations, politicians and public officials who are members of the National Assembly, the judiciary and the Constitutional Court are exempted from inspections of the BAI, considering their operational performance.

• Additionally, the BAI shall be more careful in disclosing the corruption related findings and in cooperation with media, because sometimes media provide inaccurate and biased information or exaggerate the corruption situation to the public.

• Finally, all societies including NGOs, socio-professional organizations, socio-political organizations, and citizens, shall involve in tackling corruption with the BAI and anti-corruption agenc

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Thank You

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