Bank secrecy a vehicle for legalized crime?

Bank secrecy a vehicle for legalized crime?

The debt ridden Kanindo Group which is linked with two state
banks has come to the fore. Bank expert Laksamana Sukardi says it
is high time to revise the banking secrecy law.

JAKARTA (JP): The problem loan amounting to US$245 million (Rp
500 billion) extended to the Kanindo Group by Bapindo and Bank
Bumi Daya are evidence that prudential lending practices are not
being followed by banks in Indonesia.

Although this will never be openly admitted by either the
banks or by the monetary authority, the banking industry will
nevertheless draw its conclusions on the basis of existing facts
-- that is, that Robby Tjahyadi is a newcomer in the textile
industry and that he has a questionable track record.

This is a most important factor to be considered in the
application of prudential lending practices as followed by
professional bankers, but which was ignored in the extension of
credits to Robby Tjahyadi.

The rules concerning banking secrecy have added fuel to the
Kanindo controversy and have made things utterly confusing for
the public, particularly considering the oddities, which could
indeed be viewed as a stage play aimed at concealing the true
circumstances.

Among those oddities are:

1. Robby Tjahyadi's crying act a few months ago at the House
of Representatives (DPR), later followed by a statement from the
chairman leading the session affirming that there was no problem
involved in the credit extended to Kanindo, although neither the
lending banks (Bapindo and Bank Bumi Daya) nor the central bank
-- the parties most authorized and most informed -- dared to
issue a statement.

2. News about Kanindo's acquisition by Kim Johanes, as was
agreed upon by Robby Tjahyadi in Singapore (since he did not dare
return to Indonesia) is an abnormality which demonstrates that
the lending bank was being bamboozled and that it was not being
held in regard since its approval was never sought.

This argument is supported by the refusal of the Ministry of
Finance to endorse the deal because Kim Johanes had no clear
track record and was recently even reported to have defrauded
Bapindo by obtaining US$240 million in credit exports, extended
on the basis of a fictitious export certificate.

The factor of Robby Tjahyadi's unfavorable credit history in
addition to those controversial acts provide a strong clue
pointing towards the fact that the credit extension to the
Kanindo Group did not follow a prudential lending process and was
not covered by adequate protection for the lending bank in the
form of a credit agreement containing standard protective
covenants.

The latest development -- the take-over of Kanindo's shares by
the new investors GKBI and Texmaco -- does not solve the problem
altogether although it will secure the fate of thousands of
Kanindo workers. The mystery of Kanindo's bad debt is still
unsolved because a couple of unanswered questions remain: how
great is the loss which the public has to bear as a result of
Kanindo's bad debt? And who is responsible?

The banking industry and the monetary authority as well as the
public have to be reminded that the Banking Law also imposes
severe penalties on bank managers who manipulate the financial
statements of the banks under their authority, and this includes
giving false information to the public. This may occur for
example when problem loans arise as a result of fraudulent acts
through collusion between the bank and its debtors, forcing the
management to keep the matter secret (by calling bad credits
good) or by remaining silent, using the principle of banking
secrecy as an excuse.

The spirit of the law is to safeguard the rights of the public
as stake holders to be informed of the true state of the bank's
finances. In this case, the phrase covers both the quantity as
well as the quality aspects of the bank's finances, which means
the quality of the bank credit portfolio.

Without our being aware of it, the silence of the banking
authority in the case of the Robby Tjahyadi credit has caused
confusion in society because the public has been unable to obtain
the correct information on the condition of our state banks. This
implies a violation of the Banking Law and a violation of the
right of a sovereign people to be informed of the condition of
our state finances, which affects their well-being.

On the basis of the aforementioned arguments it seems that a
revision of the articles regarding banking secrecy is of the
utmost urgency.

The fact that Edi Tanzil and the Golden Key Group have
deprived Bapindo of more than US$650 million -- a fact which
initially was hard to uncover because of the articles on banking
secrecy -- followed by the reported extension of export credits
by Bapindo to Kim Johanes on the basis of a fictitious export
certificate, which presumably will cost the state bank US$240
million in losses, and others still uncovered because they are
protected by the Banking Law, are appalling realities that
suggest that the Indonesian banking industry is a instrument for
activities of legalized crime.

The two factors which should be the major points of
consideration for the monetary authority and for the banking
industry are: 1. the people's right to be well informed,
particularly concerning matters which affect their future and
well-being and which are part of the basic rights of the people
of any free country; and 2. preventing the transformation of the
function of our banks into vehicles for legalized crime due to a
false interpretation and wrong implementation of the principle of
banking secrecy aimed at the protection of the interests of
groups of economic predators posing as heroes of economic
development.

The obligation of banks and the monetary authority to keep
certain information secret must not be executed in negation of
the rights of the people as the holders of the sovereignty and as
the ultimate owners of our state banks.

The writer is former Vice President of Citibank, N.A. and
Managing Director of LippoBank. He currently serves as CEO of
Reform Consulting and director of Econit Advisory Group.