Zero tolerance of financial irregularities in practice

1. Introduction

The Ministry of Foreign Affairs has a policy of zero tolerance of financial irregularities in connection with the use of funds allocated to the Ministry by the Storting (Norwegian parliament). The principle of zero tolerance applies to both operating funds and grant funds.

The Ministry seeks to reduce risk and prevent financial irregularities in all parts of the organisation. Zero tolerance means that the Ministry will respond to any deviation from the rules and conditions that form the basis for the use of Ministry funds, including agreements relating to operational activities and grant management. The form of response will be adapted to the nature and severity of the irregularity.

The principle of zero tolerance of financial irregularities also applies to the use and management of funds that the Ministry has allocated (through an allocation letter or by other means) to third parties, including its subsidiary agencies – Norad and Norec (formerly FK Norway). It also applies to grants given by Norfund.

Allocation letters and agreements, debit authorisations and letters of assignment regarding the transfer of administrative responsibility must all refer to the principle of zero tolerance of financial irregularities, and contain provisions stating that cases of suspected financial irregularities are to be reported to the Ministry and followed up in accordance with the Guidelines for dealing with suspected financial irregularities in the Foreign Service.

All grant recipients must also undertake to show zero tolerance of financial irregularities in connection with funds provided by Norway, and to report any deviations from this principle.

As far as procurement contracts are concerned, there are provisions in Norway’s public procurement legislation to ensure that contracts are not awarded to tenderers that for specified reasons do not fulfil the criteria for eligibility. This means that in certain situations there may be a right or a duty to exclude a tenderer if there are grounds for doing so.

The policy of zero tolerance for financial irregularities must be implemented in line with current applicable legislation relating to the use of allocated funds and the current Ethical Guidelines for the Public Service.

 

2. Financial irregularities and breaches

 

The term financial irregularities is used in this document as a general term for financial practices or conduct that are illegal or that involve misuse of Ministry funds.

Examples of financial irregularities include corruption, embezzlement, misuse of funds, fraud, theft, accounting violations, favouritism or nepotism, or other abuse of position in connection with the funds provided by Norway. Corruption and other forms of economic crime are regulated by the Norwegian Penal Code. The rules and guidelines for employees in the public service also contain provisions on financial irregularities. Grant agreements define and give examples of financial irregularities that are prohibited under the agreements.

The term breaches is used here as a general term for various kinds of breaches of conditions and agreements. The terms ‘financial irregularities’ and ‘breaches’ are partly overlapping, since a financial irregularity will almost always involve a breach of an agreement. Many kinds of breaches, for example delayed reporting, will not, however, constitute a financial irregularity on their own, but will be followed up as a deviation by the person or organisation responsible for administering the funds.

 

3. Response

When grant funds are made available under an agreement, the agreement partner (grant recipient) undertakes to use the funding provided in accordance with the agreement. Any deviation may give grounds for a response by the grant provider.

As a rule, grant agreements contain a definition of financial irregularities as all use of grant funds that is not in accordance with the agreement and/or approved implementation plans and budget, in addition to unacceptable practices such as corruption, embezzlement and nepotism. If financial irregularities have occurred, the Ministry has broad powers to suspend payment of all or part of the grant, terminate the agreement, and claim repayment of all or part of the grant.

The severity and nature of unacceptable conditions that are uncovered and that require a response will vary. As a rule, the misused funds must be repaid. The specific follow-up of a case, including the extent of the investigations and the form of response chosen, will depend on what has been uncovered in the case concerned. The response should be proportional to the irregularity, i.e. to the kind of irregularity concerned, the amount of funding in question, and the resources needed to follow up the matter and respond. The purpose of the response, whether under administrative law or contract law, should not be to punish the recipient.

3.1 Suspension of further payments

If there are grounds to suspect financial irregularities in the operations of a recipient of funding from the Ministry, regardless of the reason, all disbursements to the recipient under the grant agreement concerned must as a rule be suspended immediately, until the case has been investigated and adequate risk-reducing measures have been implemented, where appropriate. It is normally only disbursements under the relevant agreement that will be suspended.

3.2 Repayment of funds

As a rule, a claim will be brought for the repayment of grant funds if there is documentation that the funds have been misused, or if the grant recipient is unable to document that the funds have been used in accordance with the agreement. The agreement itself will usually form the basis for a claim for the repayment of funds, but a claim may also be brought on the basis of a legally binding judgment or an admission by the person or organisation responsible for administering the funds. A claim for repayment of funds must be brought within a reasonable period of time. The rules on the limitation period set absolute limits for when claims for the repayment of funds can legally be brought. The Regulations and Provisions on Financial Management in Central Government set out a more detailed framework for following up claims.

In certain cases, and on certain conditions, losses as a result of financial irregularities or breaches of a grant agreement may be covered by the grant recipient repaying the amount concerned to the project.

In order for repayment to take place in this way, it is an absolute condition that the grant recipient has uncovered the irregularity or breach itself, and has notified the Ministry immediately.

In addition, the Ministry will assess the specific case, and importance will be attached to the following points:

• the Norwegian state does not suffer any harm or loss;
• the grant recipient has established sound routines for internal control with regard to the administration of the funds, and is not itself significantly to blame for the irregularity or breach;
• the matter has been reported to the police, as long as there is a legal basis for doing so. Any exceptions to this rule, e.g. because the principles of the rule of law are not upheld in the country concerned and reporting the matter is therefore not advisable, must be agreed with the Ministry;
• any conditions that made the irregularity or breach possible have been rectified, and the Ministry is of the view that the funds will in future be used responsibly and in accordance with the agreement.

3.3 Claims for compensation

In each individual case, an assessment should be made of whether a claim for compensation should be brought against the agreement partner (grant recipient) or others. There are various situations in which bringing a claim for compensation may be appropriate, for example if the Ministry has suffered a financial loss or if expenses have been incurred in connection with the irregularity or breach. A claim for compensation may be based on the agreement, or on the general rules on non-contractual compensation (tort).

3.4  Legal steps, including criminal proceedings

If a claim for repayment or compensation is contested, the Ministry should consider taking legal steps to recover the funds. Once sufficient documentation has been obtained and it has been established beyond reasonable doubt that a criminal offence has been committed, consideration should always be given to initiating criminal proceedings.

3.5 Exceptions in cases of force majeure

In certain cases, the grant recipient or another party to the agreement may claim exemption from liability due to special circumstances beyond human control, which could therefore clearly not be prevented (force majeure). Moreover, agreements that refer to Norwegian legislation may give grounds for an assessment of reasonableness under contract law when following up irregularities or breaches. As a rule, the Ministry’s grant agreements do not contain provisions on exemption from liability or grounds for cancelling the agreement due to force majeure or unreasonableness. However, in certain cases there may nevertheless be grounds for claiming exemption from liability due to force majeure or unreasonableness, in line with relevant rules.

Financial irregularities, by their very nature, will only in exceptional cases fulfil the conditions for exemption from liability on grounds of force majeure. 

3.6 Disciplinary measures

In cases that concern Foreign Service employees, disciplinary measures may be appropriate, possibly in combination with other forms of response, including reporting the matter to the police. The Norwegian Civil Service Handbook contains guidelines for handling cases of this kind.

Grant recipients, suppliers and those responsible for administering allocated funds are expected to consider disciplinary measures in cases of financial irregularities that involve their employees.

3.7 Consequences for cooperation

Cooperation should be discontinued if there are grounds for terminating the agreement because of financial irregularities, and if the partner has not shown the necessary ability or willingness to rectify the situation.

 

4. Cooperation with other donors

 

In cases where Norway is not the only donor providing funds to an agreement partner (grant recipient), other donors should as a rule be informed when financial irregularities are suspected in connection with the funds provided by Norway. Where appropriate, other donors should be encouraged to share information.

When several donors are affected by financial irregularities, there will be a need to discuss the response with a view to finding a common, coordinated response. It should be clearly communicated that Norway practices a policy of zero tolerance of financial irregularities and that its usual practice is to claim repayment of the funds.

5. Funds channelled through multilateral channels

The UN, the development banks and other multilateral organisations and funds supported by Norway are expected to show zero tolerance of financial irregularities and follow this up by means of preventive measures, control systems and internal guidelines, and by responding in the event of deviations. This means that the organisations should have, or be affiliated with, an independent internal audit and investigation function with the necessary mandate and capacity to supervise the organisations and carry out investigations in the event of suspected irregularities within the organisations or in the operations of external partners. Norway is working in various ways, for instance by participating in governing bodies, to strengthen the organisations’ financial management, control functions and handling of cases of suspected financial irregularities.

The responsibility for preventing, uncovering and dealing with financial irregularities lies with the organisations themselves. They are also responsible for reporting on irregularities in their annual reports, and in some cases to each donor. Norway is to follow the organisations’ handling of cases of suspected irregularities, and seek to cooperate with other donor countries on a joint response where appropriate. The organisations’ obligations vis-à-vis Norway in cases where Norwegian funds may be involved are regulated by agreements and are followed up in line with these agreements.