Risk Management System and Compliance Control in Kazakhstan's State Budget Support

Risk Management System as Part of the Treasury Support of the State Budget of the Republic of Kazakhstan 2023

Compliance control (ongoing control (ex ante) + internal control) provides maximum information on cash execution of the state budget in local treasury offices and informs managerial decisions 1 helps evaluate relevance of requirements set forth by laws and statutory instruments through reviewing financial documents executed by responsible treasury officers. 2 helps to effectively identify deficiencies (violations) while methodology sets the framework to comply with 3 3

Ex-ante control 1 State acceptance commission act lacking 610 bln tenge (USD 1.4 bln) 2 Financial violations prevented (in 2022 - -1.2 trillion tenge USD 2.7 bln) 390 bln tenge (USD 0.9 bln) Design specifications and estimates lacking 3 97 bln tenge (USD 0.2 bln) Public procurement procedures not carried out 4 Certificates of acceptance lacking when paying for construction and assembly works 103 bln tenge (USD 0.2 bln) 4

Ex-ante control Civil law transactions Payments 2022, Qty 2022,( mln tenge) 2022 Reasons for rejection Risk prevention 2022, Qty Reasons for rejection Risks prevented (mln tenge) 1,237,069.4 Lack of resources Expenditure of budget funds in excess of the financing plan Cash gap 15,560 1 Lack of resources Budget overrun 4,117 142,343.94 1 Lack of resources on cash control account Submitted bills do not comply with budget legislation requirements 167 1,987.7 2 Expenditures suspension Failure to meet deadlines for amending financing plans. Failure to execute documents 801 6,544.8 Violations of budget discipline 1,064 68,795.7 2 3 executive Expenditures suspension Failure to meet deadlines for amending financing plans. Failure to execute enforcement orders 5,514 9,749.8 4 No underlying document and supporting document serving as the basis for the allocation of money Misuse violation of RK legislation of budget funds, 2,862 83,524.15 3 Supporting document data does not match bill data Misuse of budget funds 21,994 183,509.4 5 Mismatch between expenditure codes and Unified Budget Classification codes Violation of advance payment requirement Misuse of budget funds 20,859 44,573.1 6 Formalization of the application and the contract, violation of the procedure for submitting an application for satisfaction of accounts payable, violation of the advance amount Mismatch between expenditure codes and Unified Budget Classification codes Contract presented w/o integration with e- Procurement IS, w/o treasury support requirement applied Violation of budgetary discipline, accounts receivable formation 8,822 670,468.54 4 Accounts receivable, misuse of budget funds, risk of corruption 65 6,730.2 7 Failure to submit a signed commissioning certificate and supporting documents Misuse of budget funds, violation of construction legislation. Failure to meet construction deadlines and inefficient use of budget funds. 1,080 8,320.0 8 Misuse of budget funds 5 1,444 42,267.45 Violations of the Law on Public Procurement 6 58 15,034.75 Payments effected w/o registration of commitments by specific area and commitment type requiring mandatory registration with treasury bodies Failure to comply with public procurement legislation 2,602 23,826.2 9 5

COSO model Internal Control System Integrated Management Framework Risk Management System 6

COSO model Internal control Kyzyl- Orda region TO Akmola region TO Aktubins k region TO Zhetysu region TO Karagand a region TO Kostanai region TO Mangyst au region TO Pavlodar region TO Turkesta n region TO Ulytau region TO Abai Almaty region TO Atyrau region TO Zzhambyl region TO Shymke nt TO Almaty TO Astana TO Degree Total Violation type EKR TO WKR TO NKR TO region TO The purpose of the payment does not correspond to the expenditure area as per the Structure of Classification of Expenditures 5.1 2 6 4 12 11 4 4 2 5 4 9 9 19 1 7 10 3 2 6 16 34 168 Specific Economic Bill payable/payment instruction returned without execution (rejected) unreasonably 5.98 2 3 2 1 1 1 2 5 1 3 1 1 18 39 Risk Management System nddegree violation weight vs. Total number of 2 degree violations for the Department (%) 50 2 Implications Technical regulation measures Normative regulation measures nd Qty Risk (violation identified) Conclusion For Spending Unit For Treasury Committee 5.1 Misuse of budget funds Violation of regulations set forth by laws and regulations. 34 1) art..97 of BC 95-IV; 2) para.222 of Rules 540; 3) Order 281 4) Order 403 5) Order 95FOU ; 6) responsible officers job descriptions; 7) PI responsibility; 1) art. 97 of BC; 2) para. 222, 224 of Rules 540; 3) Order 30; 4) Order 281; 5) Order 403; 6) Order of TC of RK MoF #95FOU 7) Responsible officers job descriptions No FLC 1) Strengthen ex-ante and ongoing control while processing clients financial documents; 2) Analyze violations causes and frequency; 3) Education of spening units, entities, responsible officers; 4) Submit letters to local bodies of executive power and budget programs administrators upon violations; 5) Ensure even load for responsible officers; 6) Submit proposals re. measures to prevent violations; 7) Enhance control by the head and deputy heads; The purpose of the payment does not correspond to the expenditure area as per the Structure of Economic Classification of Expenditures Specific 5.98 Unused budget funds. Payment delays Violation of requirements set forth by laws and regulations. Risk of corruption. 18 26,5 1) Strengthen ex-ante and ongoing control while processing clients financial documents; 2) Analyze violations causes and frequency; 3) Education of responsible officers; 4) Submit letters to local bodies of executive power and budget programs administrators upon violations; 5) Ensure even load for responsible officers; 6) Submit proposals re. measures to prevent violations; 7) Enhance control by the head and deputy heads; Bill instruction returned without execution unreasonably payable/payment (rejected) 7

Preconditions for the Treasury Risk Management System Internal risks Treasury Committee system External risks limited resources (capacity) major violations External risks 8

Organizational Structure Now 1. Making management decisions in terms of forecasting and minimizing treasury risks; performance evaluation (rating). 2. Development of risk management application methods, compliance control, risk analysis and assessment. Overall coordination of risk management activities together with regional treasury offices (RTOs). Information systematization and consolidation Informing Public Internal Audit Committee (PIAC) (external risks). 3. Operations of RTOs and internal control by Internal Control Service (ICS): compliance control, risk taking and preventive measures. Informing local bodies of executive power (LBEP), national budget programs administrators (NBPAs). Treasury Committee & Tr. Dept. leadership system (RMS) Treasury Committee & Tr. Dept. units in charge of RMS Regional Treasury Office (treasury support) LBEP NBPA PIAC (external risks) (information to take measures) (information to take measures) 9

Organizational Structure Treasury monitoring (since January 1, 2024) Future 1. Making management decisions in terms of forecasting and minimizing treasury risks; performance evaluation (rating). Treasury Committee & Treas. Dept. leadership 2. Development of RMS application methods, compliance control, risk analysis and assessment. Treasury Committee & Treas. Dept. units in charge of RMS Overall coordination together with regional treasury offices. of risk management activities Information systematization and consolidation Informing PIAC (external risks). Treasury Regional Offices (treasury support) 3. Operations of RTOs and ICS internal control: compliance control, risk taking and preventive measures. Informing local bodies of executive power, NBPAs. 4. Information sharing under treasury monitoring and managerial decision-making based on recommendations from the Government, the Parliament, the Supreme Audit Chamber. PIAC (external risks) LBEP Government, Parliament, Supreme Audit Chamber NBPA (information to take measures) (information to take measures) 10

Risk Management System Stages STAGE 1: Information Gathering (ongoing control, compliance control, departmental control, financial documents monitoring and analysis) STAGE 2: Risk Identification STAGE 3: Risk Assessment STAGE 4: Response Measures STAGE 5: Risk Monitoring 11

Information Gathering Activity area Execution of financing plans and notes re. their amendments; Registration of civil law transactions of public institutions; Payments and money transfers in national currency; FX transactions; Execution of collection orders, orders of state revenue body, authorized body for internal public audit and executive documents; Ex-ante control to prevent and minimize risks. 12

Information Gathering A list of possible (key) violations in treasury bodies activities Violation A contract is registered in the absence of a positive conclusion from a comprehensive non-departmental expert evaluation of design and estimate documentation 4.25 2 A civil law transaction registered with the RTO contains two or more budget programs, except in cases where funds are allocated from the reserve of the Government of the Republic of Kazakhstan 4.55 2 The payment has been made to form or increase the authorized capital of quasi-public sector entities in the absence of a positive economic opinion of the authorized state planning body re. the financial and economic feasibility study 5.64 2 13

Risk Identification most frequent violations; significance assessment Information about violations detected in the course of departmental control during the reporting period Risk Risk-prevention measures taken Risks Measures needed to prevent risks implications Source: Remote Control Report 1) Strengthen ex-ante and ongoing control while processing clients financial documents; 2) Analyze violations causes and frequency; 3) Education and outreach to spending units, responsible officers; 4) Submit letters to local bodies of executive power and budget programs administrators upon violations; 5) Ensure even load for responsible officers; 6) Submit proposals re. measures to prevent violations; 7) Enhance control by the head and deputy heads; 8) Return of the bill for payment without execution with indication of the reason Mismatch between the purpose of the payment and the purpose of expenses in accordance with the Structure of Specific Economic Classification of Expenditures Misuse of budget funds. Violation of norms and requirements set forth by laws and regulations 1 Laws and regulations requirements Goal: identify risk- prone transactions 1) Strengthen ex-ante and ongoing control while processing clients financial documents; 2) Analyze violations causes and frequency; 3) Education and outreach to spending units, responsible officers; 4) Submit letters to local bodies of executive power and budget programs administrators upon violations; 5) Ensure even load for responsible officers; The bill for payment does not have a signed certificate of acceptance in the final settlement for work performed related to the construction or reconstruction of buildings, structures, roads, major repairs of premises, buildings, structures, roads and other facilities Risk of unauthorized and unjustified use of budget funds. Risk of corruption. Violation of requirements set forth by laws and regulations. Laws and regulations requirements; pop-up window warning of the need to perform additional check (traffic light). 6) Submit proposals re. measures to prevent violations; 7) Enhance control by the head and deputy heads; 2 14

Risk Assessment 6 9 score High (red zone) 4 5 score Medium (yellow zone) Risk Map 3 - 4 score Low (green zone3) 15

Response Measures Management decisions to minimize treasury risks Performance evaluation (rating) Risk Monitoring monitoring of: treasury risk factors treasury risk parameters management decisions outcomes RISK MONITORING risk relevance review 16

Thank you! 17