Transparency and Anti-Corruption Challenges in Indonesia

The following report is on a recent conference cosponsored by the U.S.-Indonesia Society and the US-ASEAN Business Council, sovaldi in cooperation with the World Bank and the Embassy of the Republic of Indonesia.

Corruption was a big issue with Indonesian voters in the 2004 elections; eliminating corruption remains a top priority of President Susilo Bambang Yudhoyono; anti-corruption laws have been passed by parliament starting in 1999, order under President Habibie, in 2001 and 2002 under President Megawati; and the subject was of great interest to an overflow USINDO audience on October 12 who came to hear two high ranking Indonesian officials report on progress. Three other speakers added their own perspectives.

The two speakers from the Indonesian government agencies came armed with power point presentations showing extensive data on the laws, the memoranda of understanding that have been signed pledging cooperation among myriad institutions, and the tables of organization of the two agencies.  But if the audience was expecting to hear dramatic results – successful prosecutions of prominent persons – they were disappointed.  Neither speaker made extravagant claims; in fact, both were at pains to point out that corruption has been so thoroughly institutionalized for such a long time that only a profound cultural change will bring results, and these too will take time.  “Ninety-nine percent of corruption is between government and the private sector,” said Erry Riyana Hardjapamekas, deputy commissioner of the Commission to Eradicate Corruption (KPK), and many things will have to change before the bureaucracy can be reformed.  Even for a respected figure such as President SBY, and even if he were less cautious, an attempt to “fire all the bureaucrats,” as one recent USINDO speaker suggested, might bring chaos rather than reform.

If the core problem is bureaucratic graft, the solution must include the private sector — individuals who pay the bribes – on the principle that it ‘takes two to tango.’  Several speakers urged greater reform and leadership from the private sector.

Or the core problem may be the legendary tolerance of Indonesians.  Mr. Yunus Husein, head of the Indonesian Tranaction Report and Analysis Centre, said “From this viewpoint, it may be said that rampant corruption is attributable to the great leniency that our laws and law enforcers show toward corruptors.”

Meanwhile, several speakers reported on immediate steps already undertaken to increase transparency in the various institutions involved.  Among these are regularizing the state budget, transcribing court proceedings and requiring reports of sizeable financial transactions.  It might have surprised the audience to realize that these standard practices, widely assumed to be the practice in developed economies, were only recently put in place in Indonesia.

Two important state agencies have been established since the anti-corruption laws of 2001 and 2002, and two key representatives reported on their organizations.

INTRAC/PPATK

Dr. Yunus Husein, head of the Indonesian Transaction Report and Analysis Centre (INTRAC), lamented that “Indonesians may not be conscious of the fact that their life cycles are caught up in an intricate network of corruption….This cycle of criminal acts range from simple things such as taking money from safe deposit boxes, skimming from project funds, marking up costs, demanding commissions from contractors, selling licenses, as well as giving blank shares to public officials.”  He went on to list more sophisticated scams that may have startled some of the less creative minds in the audience.

INTRAC (the Indonesian name for this agency, Pusat Pelaporan dan Analisis Transaksi Keuangan, is known as PPATK in Indonesia) was established by the Anti-Money Laundering Law #25 of 2003 to track financial transactions with the aim of eliminating money-laundering, the concealment of the source of illegally-gained money.  It has no prosecuting powers but does have wide powers of requiring financial service centers to submit Suspicious Transaction Reports (STR) and Cash Transaction Reports (CTR).  Persons in possession of sums of 10 million rupiah or more, when challenged in court, must prove that the money is NOT illegally obtained.  The reporting requirements and the reverse burden of proof, contravening earlier laws that protected bank secrecy, bode well for creating more transparency in financial transactions.

Dr. Yunus praised Indonesian financial institutions for their strenuous efforts to comply with reporting requirements of the anti-money laundering law.  He said

that 97 percent of commercial banks report suspicious or unverified financial transactions to PPATK, representing approximately 90 percent of total bank assets.  Within the past year 2,734 Suspicious Transaction Reports have been received from 98 banks and 43 non bank financial institutions, as well as nearly 1.5 million Cash Transaction Reports.  “There have now been a total of 355 cases referred by PPATK to the police and the attorney general’s office…. [resulting in] one successful prosecution involving terrorism, 19 involving bank fraud and/or corruption and two for money laundering offenses….Sentences range from four months in prison to the death sentence…There are now 30 cases in the prosecution process,” he said.

KPK

Erry Riyana Hardjapamekas is a Deputy Commissioner of the Commission to Eradicate Corruption (KPK), an independent state agency provided for in the anti-corruption law #30 of 2002 but only within the past year actually getting started.  KPK has wide powers; in fact its mandate is so broad that it would be difficult to imagine how it could all be carried out.  A questioner asked whether KPK could be really effective in view, he claimed, that it has a budget of only $14 million in 2005 and $20 million in 2006.

Among KPK’s duties are not only the investigation of crimes of corruption, but prevention as well, including “institution building, capacity building and rallying public participation,” Erry said.

KPK may investigate (including the use of wiretaps) and indict alleged corruptors, who would be tried in a special Court of Corruption also established in the same 2002 law.  KPK may take over an investigation by the police or attorney general if it deems the process is taking too long.

The KPK consists of five commissioners: one chairman (Taufiequrachman Ruki, formerly Inspector General of Police) and four vice chairmen, each responsible for one of KPK’s functions, e.g. prevention, legal action, information).  The commissioners are selected by parliament from a list submitted by the president for a four year term, with a possible reappointment for one term.

The Court of Corruption is established in Jakarta, with jurisdiction for all of Indonesia.  It is composed of two district court judges appointed by the head of the Supreme Court and three ad hoc judges appointed by the president “with the counsel of the head of the Supreme Court.”  Decisions can be appealed to the high court and finally to the Supreme Court.

Pak Erry’s priorities in tackling corruption would be to start with judges and prosecutors, then the police, the military and finally the financial sector – tax collectors and the customs service.

He suggested that as an example, cleaning up the judiciary would start with the arrest of some wrongdoers (see more detail below) that would trigger the beginning of a change in paradigm.  Other reforms, such as more transparent financial systems, better salaries, cleaner recruitment procedures and retirement policies would suggest that the plan of attack includes shock, reform and attrition.  For the judiciary, Erry suggested that simply to get an audio/video recording of proceedings would go a long way toward transparency.  In current practice there is no stenographer or tape recording.  To find out what a witness testified the questioning party must ask one of the lawyers.

Some new laws working their way through parliament may also help: a freedom of information bill, “whistleblower” protection legislation, a provision for plea bargaining and others.

Results:  Three Cases

Abdullah Puteh, the former governor of Aceh, is now behind bars on a conviction of embezzling government money. [It is not clear what the KPK role in this case involving the highest ranking government official thus far convicted of corruption.]

The General Election Commission (KPU) was embroiled in bribery cases stemming from the 2004 elections.  Several commissioners as well as the secretary general have been convicted.  Mr. Erry said that the KPK got a search warrant for the KPU offices and “caught someone running away with $100,000.”  [In an interesting footnote, Van Zorge and Heffernan consultants have reported that Mr. Erry was considering a commendation to businessman Probosutedjo in this case, presumably for having tipped off the KPK.]

The Supreme Court was involved in another case, also involving Probosutedjo (the step brother of former President Suharto).  Five mid-level court officials were arrested in an alleged bribery scheme regarding the sentence of Probosutedjo for violating forest regulations in 2002.  The sentence was under appeal to a special panel of the Supreme Court.  [This case was widely reported by Tempo magazine, and for a time at least, threatened to involve the Chief Justice Bagir Manan.  According to Tempo, Court officers approached Probosutedjo’s lawyer with a scheme to lower the businessman’s sentence in return for a bribe intended for, according the officers, Bagir Manan.  The alleged bribery attempt was reported by Probosutedjo, who seems to be attempting to transform himself from defendant to whistle-blower.  In any case, the alleged plot was foiled, and the Supreme Court has since declined to reduce Probosutedjo’s sentence.]

Other speakers offered various comments.

Homi Kharas, chief economist for East Asia and the Pacific region of the World Bank, saluted the work of the KPK and noted it has been active in bureaucratic reform.  He said the greatest impact of reform activity may be to increase the probability of detection, citing procedural improvements that have been implemented.  He noted that since the “dual budget system” has been unified beginning in 2005 (presumably a World Bank program), “two billion dollars in duplicate expenditures” were uncovered.

He reported a Bank survey of 1000 private firms in 2003.  Forty percent of respondents said that corruption was a major constraint; respondents said that government regulations were interpreted in “unpredictable” ways, and that management reported spending 15 percent of their time dealing with officials.  “These figures are worse than those in Thailand or the Philippines,” he said.

“There is an emphasis in Indonesia on the executive branch to solve problems.  I want to suggest that the private sector also has a role,” as whistle blowers and models of proper ethics.  He called for leadership from the top echelons of private corporations.

Dr. Leonard Ginocchi, a USINDO member and career official in the U.S. Customs and Border Protection agency, commented on a survey he had authored and conducted with members of USINDO and the American Indonesian Chamber of Commerce.  Of 269 respondents (168 in English, 101 in Indonesian) 52 percent of English-language respondents said they had personal experience of corruption, compared with 33 percent of Indonesian-language respondents.  Administrative (government bureaucrats) corruption was seen as the biggest problem.  “Facilitation payments” were seen as a tolerable business expense by 50 percent of English speakers, while 82 percent of Indonesians said these payments were not tolerable.  This suggests that the Westerners take a more pragmatic approach and view payments as a business expense, while Indonesians take a moral view that corruption is a violation of public trust.  The latter view may of course reflect the politically correct response in the current era of reform.

Joe Babiec, leader of the international financial sector resilience practice at Booz Allen Hamilton consultants, suggested that, aside from moral or financial implications, the burden of corruption seriously compromises Indonesia’s competitiveness in the global market.  “Corruption and money laundering are insidious beyond mere ‘transaction costs,’” he said.  They are a deeper threat to the productivity of the economy and the creation of competitive industries that create wealth for the country.”

A more transparent, more interdependent economy means fewer secrets and more vulnerability to investigation and possible prosecution.  This is not an option in a globalized world, Babiec said, and must be faced.  Indonesia must come to accept that its cultural peculiarities mean international competitive disadvantage.  The “intense energy” required to making markets and regulations clear and transparent is not being spent by the government, he said.  But, he added, government cannot do it all.  The private sector (business) as well as civil society must also play a role.  The corporate sector is more adept at knowing the international system but there is reluctance in Indonesia to accept it fully.  The civil sector is important in keeping the other two honest, he said.

A questioner asked how the increasing use of the informal Islamic financial service sector would affect competitiveness.  He answered that no one has yet figured out how to make these services work in a formal, transparent manner.  “Indonesia could figure this out and export this indigenous service with the result of increasing its global competitiveness,” he said.