Internal Operational Risk Management System at the Federal

Internal (Operational) Risk Management System at the Federal Treasury Deputy Head of the Federal Treasury Alexander Demidov

PRESENTATION OUTLINE 1. Origins of the Internal (Operational) Treasury Risk Management System at the Federal Treasury 2. Internal (Operational) Treasury Risk Management System at the Federal Treasury 3. Organizational Structure of the Internal (Operational) Treasury Risk Management System at the Federal Treasury 4. Regulations of the Internal (Operational) Treasury Risk Management System 2

1. Origins of the Internal (Operational) Treasury Risk Management System at the Federal Treasury

PRECONDITIONS FOR THE TREASURY RISK MANAGEMENT SYSTEM External Environment Internal Environment System of the Federal Treasury Internal Environment External Risks Limited Resources Focus on Most Important Issues External Risks 4

CONTROL DIMENSIONS BEFORE CREATION OF THE TREASURY RISK MANAGEMENT SYSTEM (BEFORE 2009) Checks (ex-post control) of the operation of Federal Treasury territorial bodies at least once in 2 years in all areas FT . . . Functional Areas FTTB No. 1 . . . Administration 15 Supporting Areas FTTB No. 85 Checks (ex-post control) of the operation of Federal Treasury territorial body units at least once a year in all areas Unit No. 1 Internal Control and Audit Unit . . . Functional area. . . Unit No. 3500 2 Administration 5

STAGE I OF TREASURY RISK MANAGEMENT SYSTEM CREATION (2006 -2009) Violations Results of Checks Review of violations identified as a result of checks (in text format). Types of violations Standard violations No. 7 Checks List of Possible (Basic) Violations in FTTB Operation Code of Violation Type of Violation Keeping budget, tax and managerial records in budget execution … 7 14 Violations committed in cash operations: … Aim: Uniformity of definitions and systematization of violations 2006 7 14 2 Non-compliance with the order of executing operations with cash in hand: 7 14 2 1 Cash issue from cash office for purposes other than intended 2009 6

List of possible (basic) violations in FTTB's operation Aim: To systematize information about violations Quantity, weighted average of violations No. 7 Information about violations detected when carrying out controls and audits within the reporting period Code of Violation Type of Violation Keeping budget, tax and managerial records in budget execution Quantity Weighted Average of Total Number pcs. % + … 7 2009 STAGE II OF TREASURY RISK MANAGEMENT SYSTEM CREATION (2009 -2015) 14 2 1 Cash issue from cash office for purposes other than intended 2015 7

STAGE III OF TREASUTY RISK MANAGEMENT SYSTEM CREATION (2015 -2017) Most often detected violations Legal value assessment Information about violations detected when carrying out controls and audits within the reporting period Classification of Treasury Risks by areas of FTTB's operation No. of Ite m 7 Aim: To identify risky operations Code of Risk Name of Risk Value 0. 5 0. 8 1. 0 Keeping budget, tax and managerial records in budget execution … 7 14 Violations committed when carrying out cash operations: … 7 14 2 Non-compliance with the order of executing operations with cash in hand: 7 14 2 1 Cash issue from cash office for purposes other than intended 2015 Background information: in the current classification of internal (operational) treasury risks, there are 21 areas and 633 risks; the structure of areas: administrative risks, internal control risks, functional, technological and other risks Х 2017 8

ALGORYTHM OF RISK CLASSIFICATION DEFINITION AT THE FEDERAL TREASURY Internal Risk Identification Complaints and addresses from citizens and organizations List of Risk-Impacted Objects Information from the media Lists of detected violations Changes in regulatory acts Reporting on internal control and internal audit results Classification of Treasury Risks Internal Risk Assessment Value V (0. 5; 0. 8; 1. 0) Uniformity of definitions Large procurements Probability P (unlikely (less than 0. 1), less likely (0. 1 -0. 29), likely (0. 30. 69), very likely (0. 7 -0. 89), almost inevitable (0. 9 and higher) Staff changes Integral assessment results EXAMPLE: Item No. 7 Level of risk L=V*P (low (less than 0. 3), moderate (0. 3 -0. 49), medium (0. 5 -0. 59), significant (0. 6 -0. 69), high (0. 7 -0. 89), extremely high (0. 9 and higher) Assessment Management Code of Risk Name of Risk Value of Risk 0. 5 14 Uniformity of reporting 2 1 Cash issue from cash office for purposes other than intended – 0. 8 1. 0 – X 9

APPLICATION OF TREASURY RISK CLASSIFICATION Check Object of Control Fact finding Act, Report Drafting Result Implementation of Violation definition Evaluation and specific measure taking Value Classification of Treasury Risks Risk Management System Probability x Value = Level of Risk List of possible systemic response options Ø Staff training; Ø Material and moral incentives; Ø Changes in regulatory acts and technical regulations; Ø Automation of procedures/upgrade of existing applied software Ø Changes in internal procedures; Ø Inclusion of operations in the system of ex-post operational internal control; Ø Inclusion of risks in the classification of risks/ risk value changes 10

PLANS TO DEVELOP THE TREASURY RISK MANAGEMENT SYSTEM (2017 -2018 ) Review of violations No. detected as a result of checks 7 Code of Risk Keeping Name of Risk budget, managerial records execution tax Value 0. 5 0. 8 Probab ility 1. 0 and 7 2015 1 4 2 1 Cash issue from cash office for purposes other than intended + + in budget … List of basic (possible) violations in the FTTB's operation Response Measures Level of Risk Х 2017 2018 11

2. Treasury Risk Management System at the Federal Treasury

TREASURY RISK MANAGEMENT SYSTEM STRUCTURE TREASURY RISK MANAGEMENT EXTERNAL TREASURY RISK MANAGEMENT INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT FT External Risk Management Department Internal Public Financial Control Enhancement Department 13

GOALS AND OBJECTIVES OF INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT GOAL: To ensure sustainable continuing non-stop functioning and development of the treasury system OBJECTIVE 1: To regulate management of internal treasury risks at the Federal Treasury OBJECTIVE 2: To constantly carry out procedures of identification, assessment, analysis, processing, monitoring and control of internal treasury risks occurring when fulfilling duties in the established area of operation by the Federal Treasury bodies and the Federal Government Agency "Support Center for the Operation of the Russian Treasury" OBJECTIVE 3: To evaluate performance and improve the operation of the internal risk management system at the Federal Treasury OBJECTIVE 4: To develop and maintain applied software for automation of treasury risk management processes at the Federal Treasury 14

RISK-BASED CONTROL AND AUDIT PLANNING MODEL RISK FACTORS List of questions in the standard checking program by all areas of FTTB's operation Increase in % of sample New functions and competences Information on existence of violations contained in addresses of citizens and organizations Violations identified based on results of monitoring publications in the media - control of FTTBs - control of FTCO New check areas External sources of information Presence of violations identified by supervisory bodies Internal sources of information Violations when executing regulatory acts Low quality of financial management Signing of contracts for an amount over 2 million rubles by FTTBs, FGA Staff changes Low performance rating in the past year 15

3. Organizational Structure of the Internal (Operational) Treasury Risk Management System at the Federal Treasury 16

ORGANIZATIONAL STRUCTURE OF THE INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM 1 Level of Management: FTCO structural subdivision in charge of risk management system operation: 1. Solving methodological tasks, making managerial decisions to forecast and minimize treasury risks; FT Leadership 2. General coordination of risk management activities; Internal Public Financial Control Enhancement Department 3. Information systemization and generalization; 4. Performance evaluation and control of risk management system operation FTCO divisions (managing risks for the corresponding area of activity) FT IROD FTD FGA “SCORT" 17

ORGANIZATIONAL STRUCTURE OF THE INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM 2 Level of Management: FTCO structural subdivisions managing risks: 1. Risk identification: FTCO Identification based on the results of internal control, internal audit, checks of supervisory bodies, addresses FT Leadership Analysis of regulatory acts, legal acts, technical regulations Internal Public Financial Control Enhancement Department 2. Risk analysis and evaluation, drafting proposals for their minimization 3. Generation of reporting on internal treasury risk management FTCO divisions (managing risks for the corresponding area of activity) FT IROD FTD 4. Managerial decision-making FGA “SCORT" 5. Coordination of FTTB's operation managing internal treasury risks in the corresponding area 18

ORGANIZATIONAL STRUCTURE OF THE INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM 3 Level of Management: 1. Identification of selected risk groups: FTCO FT Leadership Identification based on results of internal control, internal audit, checks of supervisory bodies, addresses Internal Public Financial Control Enhancement Division Analysis of regulatory acts, legal acts, technical regulations 2. Analysis and evaluation of identified risk groups, drawing proposals for their minimization FTCO divisions (managing risks in the corresponding area of activity) FT IROD FTTO structural subdivisions coordinating risk management FTD 3. Generation of reporting on identified internal treasury risk group management FGA “SCORT" 4. Managerial decision-making 19

ORGANIZATIONAL STRUCTURE OF THE INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM 4 Level of Management: 1. Identification of selected risks: FTCO FT Leadership Identification based on the results of internal control, internal audit, checks of supervisory bodies, addresses Internal Public Financial Control Enhancement Department Analysis of regulatory acts, legal acts, technical regulations 2. Analysis and evaluation of selected risks, drafting proposals for their minimization FTCO divisions (managing risks in the corresponding area of activity) FT IROD Unit FTTB’s structural subdivisions managing risks: FTD Unit 3. Generation of reporting on selected internal treasury risk management FGA “SCORT" Unit 4. Managerial decision-making 20

4. Regulations of the Internal (Operational) Treasury Risk Management System 21

REGULATIONS OF THE INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM AT THE FEDERAL TREASURY The Order of the Federal Treasury on Organization of the Federal Treasury's Internal Financial Control and Internal Financial Audit Operations Internal Control Standard of the Federal Treasury Internal Control and Internal Audit Standards of the Federal Treasury applied by the Federal Treasury control and audit subdivisions in controls and audits Ex-post Operational Internal Automated Control Standard in Federal Treasury Territorial Bodies Classifications of internal (operational) risks by areas of activity of Federal Treasury territorial bodies (lists of possible (basic) violations in operation of Federal Treasury territorial bodies) The order of carrying out integral evaluation of Federal Treasury territorial bodies' operations based on control and audit findings 22

RESPONSE OPTIONS TO INTERNAL (OPERATIONAL) TREASURY RISKS AT THE FEDERAL TREASURY RISK ASSUMPTION RISK AVOIDANCE RISK TRANSFER RISK CONTROL (REDUCTION) It is economically unfeasible to take response measures compared to the possible damage in case of treasury risk occurrence Change in the established order of operation to avoid risk Transfer of treasury risks for insourcing/outsourcing Reduced amount of loss in case of risk occurrence 23

RISK MONITORING AND INTERNAL (OPERATIONAL) TREASURY RISK MANAGEMENT SYSTEM FUNCTIONING PERFORMANCE CONTROL RISK MONITORING Observation of changes: • in treasury risk factors, • in treasury risk dimensions, • in the results of managerial decisions adopted in its respect. RISK MANAGEMENT SYSTEM FUNCTIONING PERFORMANCE EVALUATION Ensuring attainment of values of performance indicators in the Federal Treasury's operation 24

Thank you for attention 25