ID mega corruption reveals weak anti-money laundering system

The Jakarta Post,14 Mar 2017, Vincent Lingga

Has anyone seen our financial intelligence agency? The whereabouts of the Financial Transaction Report and Analysis Centre (PPATK) is a big question prompted by the fact that the Corruption Eradication Commission (KPK) took about three years and questioned almost 300 witnesses to build a case on the suspected Rp 2.3 trillion (US$170 million) corruption within the Rp 5.9 trillion electronic identification card (e-ID) project.

 

Yet the KPK has so far indicted only two defendants.

 

How could such a huge amount of money — the Rp 2.3 trillion that was allegedly stolen from the project — be moved around between 2011 and 2012 without being detected by the PPATK through its anti-money laundering radar, which is supposed to monitor suspicious transactions in all financial services companies?

 

The fact that the KPK questioned almost 300 witnesses but was able to compile indictments against only two defendants out of about 50 politicians, senior officials and institutions implicated in the country’s biggest corruption case shows that it is extremely difficult to trace the illicit money.

 

This means the alleged stolen money was distributed in cash, using United States dollars or rupiah. Further down the line this boils down to a miserable failure of the anti-money laundering system that was launched in 2002 under a special law.

 

The PPATK, as the politically independent implementing agency of the Money Laundering Law, monitors suspicious transactions through banks and other financial institutions in fighting money laundering. Other providers of goods and services such as property developers, timber companies, car dealers and jewelry stores have also been required to report to the PPATK any big cash transactions (more than Rp 500 million) and other financial deals that are beyond their customers’ profiles.

 

The PPATK, which has many police officers, lawyers and financial experts among its staff, analyzes and examines the reports to ascertain as to whether a suspicious transaction smacks of money laundering. Only transactions with strong evidence of money laundering are submitted to law enforcers for further investigation and prosecution.

 

Likewise, the central bank has issued a “know-your-customer” code for all financial services companies, requiring them to report any suspicious transactions or cash transactions worth Rp 500 million or more. Suspicious transactions mean financial transactions that do not fit the income, business or economic profile of the parties involved.

 

The e-ID corruption case also points to the weak enforcement of the Money Laundering Law. Many local financial services companies and other providers of goods and services seem inconsistent in implementing the “knowyour-customer” code, afraid that reporting suspicious transactions could cost them big customers.

 

Seen from the big sums of dollars used in suspicious transactions, the central bank’s supervision of money changers also seems to be lacking.

 

As the KPK has increasingly caught corruption suspects redhanded with lots of rupiah or dollars, there has been mounting demand for amendments to the Money Laundering Law to strengthen the PPATK, and for reducing the minimum cash transactions for compulsory reporting to only Rp 100 million.

 

In fact, the global fight against big cash transactions and money laundering has continued unabated as cash transactions have been used by criminals and others engaged in illicit and corrupt activities.

 

Indian Prime Minister Narendra Modi in November ordered the withdrawal of 500 and 1,000 rupee notes from circulation. The European Central Bank announced in May last year that it was cracking down on high-denomination notes by gradually phasing out the €500 bill.

 

High-denomination notes or big cash transactions are indeed key to the illicit economy, given the anonymity and lack of transaction documents involved and the relative ease with which they can be transferred (laundered) and stored.

 

As Harvard economist Kenneth Rogoff asserts in his book, The Curse of Cash, cash facilitates crime, tax and regulatory evasion and other forms of corruption. Paper money fuels corruption, terrorism, tax evasion and illegal immigration.

 

Indeed with the growth of debit cards, electronic transfers and mobile payments, the use of cash has long declined in the legal economy, especially for medium and large transactions. A central bank survey shows that only a small percentage of large denomination notes are being held and used by ordinary people or businesses.

 

Obviously, cash will remain important for small, daily transactions. The issue is more about a balancing act between fighting crime and the need for governments to keep in place a monetary instrument that provides their citizens with a way to conduct payments in relative privacy.

 

The PPATK also needs to be more aggressive in teaming up with the Directorate General of Taxation to follow up on the PPATK reports on financial transactions and audit the annual tax returns of individuals or companies implicated in suspicious transactions.

 

Cross-checking money flow to the bank accounts of those implicated in suspicious financial transactions against what they reported in their annual tax returns would be effective in discovering tax evasion and other tax crimes.

 

The rationale is that even though the police or Attorney General’s Office are not able to discover any predicate crimes related to suspicious financial transactions, PPATK reports could still lead to the discovery of tax evasion and consequently generate additional revenue for the state.

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COMMENTARY: Freeport's threat of arbitration simply a ploy to block mining reform

Vincent Lingga
The Jakarta Post

"PT Freeport Indonesia [FI] reserves of all its rights [...] including the right to commence arbitration to enforce all provisions of the contract," Freeport-McMoRan's CEO Richard C. Adkerson asserted on Monday, referring to a protracted dispute with the Indonesian government.

That threat is quite similar to those made by many other multinational companies (MNCs), which fear decreases in their huge profits following reforms by their host governments.

Until around eight years ago international arbitration within the investor-state-dispute settlement (ISDS) mechanism had become a powerful weapon exploited by MNCs to circumvent national regulations and bully governments, notably in developing countries, to postpone or annul any reform or to silence environmental NGOs.

At the time of its launch several decades ago, ISDS was indeed vital to encourage foreign investment into developing countries where legal systems were still weak and where many governments were corrupt. It was a forum designed to resolve conflicts between investors and host governments.

ISDS has therefore been written into bilateral investment and trade agreements or treaties. One of the most popular arbitration tribunals is the Washingtonbased International Center for Settlement of Investment Disputes (ICSID), a unit of the World Bank.

The ISDS mechanism allows foreign investors to bypass local courts and seek compensation in international tribunals such as the ICSID, for what they claim to be damages caused by expropriation or policy or contractual changes by host governments.

The problem is that within the ISDS scheme only investors or companies can bring lawsuits. A government may defend itself but it cannot sue a company. The mere threat of an ISDS claim by big MNCs can alarm host governments, especially those with bad international reputations, to act in favor of the investor.

An 18-month study in 2014 and 2015 by the BuzzFeed News online platform on arbitration cases within the ISDS system in Indonesia, India, Africa, Central America and the United States, involving the inspection of tens of thousands of pages of legal documents, revealed how big corporations have turned the threat of ISDS legal action into a fearsome weapon to enable them to have their demands met by host governments in developing countries.

Under the ISDS scheme there seemed no longer a balance between protection of investors and the right of governments to regulate.

It was as striking for its power as for its secrecy, with its proceedings. Of all the ways in which ISDS is used, the most deeply hidden are the threats, uttered in private meetings or ominous letters that invoke those courts, the BuzzFeed study concluded.

The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.

Arbitrators who decide the cases are often drawn from the ranks of the same highly paid corporate lawyers who argue ISDS cases. These arbitrators have broad authority to interpret the rules however they want. And there is no meaningful appeal.

Especially for Indonesia, which still grapples with many mining contracts awarded under the authoritarian Soeharto administration (1967-1998), the mere threat of an ISDS claim could trigger alarm.

Indonesia suffered the pang of an international arbitration in 2000 when the government, groaning under the economic crisis, canceled a geothermal power plant contract with Karaha Bodas, a local subsidiary of two US companies, in West Java.

But Karaha went to an international arbitration tribunal, which in December 2000, awarded it US$261 million, even though the company had not yet ploughed even half that amount into the project. In other words, Indonesia owed a quarter-billion dollars to a private company for electricity it would never receive, from a power plant that had not been built.

Formerly, the dominant view in ISDS circles was simply "the sanctity of a contract must be honored" as long as it was concluded with a legitimate government, however immoral, incompetent or corrupt the leader who signed the contract.

However the perception within international arbitration tribunals now no longer sees a corporate contract as being absolute but a balance between corporate rights and fairness, and, especially, overall economic benefits. When circumstances change after a contract was signed that make it impractical, or uneconomic or inefficient, to comply with contractual obligations, courts may relieve a party of its commitments.

The prevailing opinion now even tends to excuse parties, especially governments in developing countries, from fulfilling contracts if they were entered under compulsion (duress) or corruption or if one party is not competent and the terms of investment arrangements seem imbalanced.

Even the United Nations Conference on Trade and Development (UNCTAD) has criticized the ISDS regime as already going far beyond its original intention, as the system now suffers from a lack of coherence, consistency and predictability.

No wonder many governments in Asia, including Indonesia, Australia, Africa, Europe and Latin America, have decided to remove ISDS provisions from their investment or trade agreements because of the tendency of its mechanism to favor large foreign investors over national governments. Even within the ICSID there has been an increasing trend not to see corporate contracts as being absolute.

Last December an ICSID tribunal decided in favor of the Indonesian government in its dispute with mining firm Churchill, rejecting the British company's claim over $1 billion in damages, after what the latter alleged to be the expropriation of its rights over huge coal reserves in East Kalimantan.

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COMMENTARY: Economic fundamentals key in coping with unexpected

Vincent Lingga
The Jakarta Post

United States president-elect Donald Trump will be inaugurated later this week, and more than 2,000 economists, businesspeople, financial leaders, senior executives of multilateral development banks and policymakers who gathered here Monday and Tuesday at the 10th Asian Financial Forum (AFF) waited for his policy statements with trepidation.

The consensus prediction so far portends a stormy cloud ahead for the global economy as Trump during his election campaign championed trade protectionism, which could deal a heavy blow to emerging economies.

His threat of a trade war between the US, the world's largest economy, and China, the second largest, seems unthinkable, but is roiling international markets.

The International Monetary Fund's latest global economic outlook report, which was issued on Tuesday, also cited uncertainty surrounding the policy stance of the incoming US administration and its global ramifications as the biggest caveat of its macroeconomic prediction.

"We expect the unexpected and prepare for the unexpected," asserted Raghuram Rajan, former governor of the Indian central bank and one of the keynote speakers at the AFF, in referring to the mounting wave of public and political skepticism in developed countries toward free trade and other aspects of globalization.

Earlier last year, the United Kingdom's vote to exit the European Union, or Brexit, had raised great concerns that anti-globalization sentiment was on the rise in developed economies.

But after the Brexit vote last June and Trump election last November, many things previously unthinkable now seem possible.

Rajan, who was chief economist of the IMF from 2003 to 2006, pointed to the fear and anger among the middle class in developed countries, who lost jobs as a result of technological change, free trade and globalization.

The mainstream attitude of economists and businesspeople from Asia, the Middle East and Europe and Russia attending the conference still strongly believe in the merits of free trade for productivity and economic welfare, both in developed and emerging economies.

Hence, the consensus is that barriers to trade and international capital's movement should be reduced.

While it was recognized that there could be losers from free trade in developed economies, these losers were assumed to be few and temporary, compared to the gainers. But the political upheavals of last year forced economists to reconsider what is now called "populism".

Populism seems to appeal to the group in society left behind by the economic development. Older and low-skilled workers, especially those in rural areas, have seen their relative incomes fall.

"Technological change has caused technological unemployment" Rajan said in describing the losers of globalization.

Mohamed El-Erian, the chairman of President Obama's Global Development Council, another keynote speaker, noted "you can, to a certain extent, tolerate inequality in income but inequality of opportunity could cause anger [and lead to] social conflict".

It is now increasingly recognized that the gains from globalization can only be defended and sustained if the losers are compensated by the winners. Otherwise, the political opposition to the process of globalization will embolden, Rajan has warned.

The main gainers from globalization have been unskilled labor in the emerging world, and those at the upper end of the income bracket in developed economies. The main losers have been manufacturing workers in the developed world.

Trump's widely-publicized fiscal pump-priming on infrastructure and slashing corporate tax rate may harm Asian currencies as they weaken against the inflated US dollar.

This, combined with Brexit, generated the second headwind of political uncertainty, which may spill into upcoming elections this year in France, Germany and Italy. Further worrying emerging countries, especially Indonesia, is the prospect of higher interest rates in the US, which would generate a higher pace of capital inflows.

While Indonesia's overall debt level is relatively low for Asia, it is still vulnerable to sudden capital inflows as foreign investors hold about 40 percent of the government's rupiah bonds and nearly 90 percent of US dollar bonds.

Then with increasing uncertainty and risk factors for investment and growth in the short and medium term, how can governments in emerging countries prevent disruptive capital outflows?

Tightening monetary policy to increase the interest rate differential in order to generate higher returns for foreign portfolio investors, while attractive, could cause a big drag on economic growth.

The consensus policy recommendation among central bankers and financial regulators is simply "back to basics", meaning enhancing inclusive growth, continuing the structural reform to strengthen the economic fundamentals by maintaining low fiscal and current account deficits, low and stable inflation, manageable foreign debt, strengthening the banking sector and building up sizeable foreign reserves.

IMF's deputy managing director, Tao Zhang, concurred that strengthening economic resilience is the first line of defense against uncertainty and the downside risk of financial market volatility. By focusing on building resilience, Asia can also benefit most from the vast investment and trade opportunities opening up within the region (intra-Asia trade).

Stephen Gross, the Asian Development Bank's vice president for East Asia, Southeast and the Pacific, cited Indonesia as an example that succeeded in curbing capital outflows after the Fed taper tantrum in May 2013 (reducing stimulus) by taking a painful move of slowing down economic growth (stops overheating) to check its current account deficit.

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Rising US interest rate, protectionism loom over global economy

Manufacturing hope: Bank Indonesia's (BI) senior deputy governor Mirza Adityaswara (third right) serves as one of the speakers alongside six central bankers and financial regulators in a session held on the first day of the 10th Asian Financial Forum on Monday in Hong Kong. The event will run until Tuesday. (Courtesy of the Hong Kong Trade Development Council)

Political and economic uncertainty was the most common theme expressed on Monday during the first four sessions of the Asian Financial Forum in Hong Kong.

The views come as the world faces a rising tide of populism, nationalism, antiglobalization and a backlash on free international trade, and the impact of Britain's exit from the European Union.

Even though renowned economists, central bankers, financial and business leaders from Asia, Europe, Russia and the Middle East gathered at the event believed that populists such as United States president-elect Donald Trump may not really mean what they say, most of the 2,000 participants at the two-day forum still seemed to be looking forward with a sense of trepidation.

Opinion polls conducted during a policy dialogue session also expressed pessimism on global economic prospects and cited the upcoming policy directions under Trump and steep rise in the US interest rate as the biggest risks to emerging economies.

"But the developments so far showed that Trump's antifree trade attitude had become less extreme. Instead his policy pronouncements on tax reform and deregulation are quite progrowth," noted Mohamed El-Erian, chairman of US President Obama's Global Development Council.

Asserting the vital importance of jobs, El-Erian said: "You can, to a certain extent, tolerate income inequality, but inequality of opportunity could cause anger and social conflict."

El-Erian said the US Federal Reserve's plan to raise its benchmark interest rate this year would attract more capital inflows to the US. But the downside risk is that if the dollar appreciates much faster than the economic fundamentals can support, thereby making American exports less competitive, protectionist sentiment may rise again.

The Fed said last month after nudging up its federal fund rate by a quarter of a percentage point to between 0.50 and 0.75 percent that it would again raise its benchmark short-term interest rate more quickly than previously projected amid signs of low unemployment and a pickup in economic rowth.

The market's consensus expectation is that the rate will be raised this year by 0.75 percentage points in three quarter moves to a range of 1.25 to 1.50 percent.

Jointly organized by the Government of The Hong Kong Special Administrative Region and Hong Kong Trade Development Council, the conference, which ends on Tuesday, addresses some of the downside risks that can affect economies and the corporate world, while offering guidelines on how to make the best of opportunities and move forward with optimism.

Bank Indonesia senior deputy governor Mirza Adityaswara told the forum that Indonesia was now financially much stronger and able to face uncertainty as its economic fundamentals had significantly strengthened as a result of the overall reforms made soon after the 1998 economic crisis.

"Our banking sector is fairly strong with an average CAR [capital adequacy ratio] of 22 percent, current account deficit at less than three percent of GDP [gross domestic product] and total foreign debts of the private sector and government at less than 35 percent of GDP," Mirza added.

Another positive sign, Mirza said, was that commodity prices were estimated to be more robust this year, thereby strengthening private consumption, while 15 economic reform packages launched over the past year would help reinvigorate private investment to generate economic growth of 5 to 5.4 percent.

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