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.