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.