Do Sanctions Improve Compliance with Public Finance Laws and Regulations?

This paper examines how a regime of penalties or sanctions for breaching public financial management (PFM) laws and regulations can be designed to increase compliance with these laws. Financial irregularities can be as high as five to eight percent of GDP or more in some poorly administered countries. If a sanctions regime is to be effective, it should meet the three core principles of impartiality, proportionality, and transparency. An empirical analysis of sanctions regimes and recovery rates in 26 countries suggests that excessive use of “harsh” sanctions could negatively affect the level of compliance. The design of a sanctions regime should include both “soft” and “harsh” measures which are proportionate to the severity of financial irregularities. The paper describes three institutional models (“financial police,” “risk‐based,” and “sanctions coordinator”) that countries have used to implement a sanctions regime. An approach targeting expenditure that is highly vulnerable to irregularities tends to achieve a better recovery rate than a regime based on a “mass investigation, mass sanctions” approach. A tailored approach based on the third model may be appropriate for low‐capacity countries.