Can money-laundering law catch illegal loggers?

Can money-laundering law catch illegal loggers?

Bambang Setiono, Policy and Financial Analyst, Center for International
Forestry Research (CIFOR), Bogor

The writers JM Winer and TF Roule in their January paper The
finance of illicit resource extraction, state the need for a
genuine drive to link efforts at preventing the illegal
exploitation of natural resources with antimoney-laundering
initiatives currently on the increase throughout the world.

Such initiatives have so far focused more on efforts to combat
terrorism, drug trafficking and corruption. In their opinion, the
spoils of illegal extraction of natural resources have helped
finance undemocratic and corrupt governments, armed rebellions
and terrorist and criminal organizations. Such illegal
exploitation has also contributed to poverty, the spread of
disease, people's displacement and environmental destrcution.

Of course the illegal exploitation of timber, gold, oil and
gas occurs here too. Here, gains are used in part to finance the
lifestyles of corrupt officials, partly to finance criminal
organizations and also for "money politics."

The spoils of this illicit exploitation are used by those who
could not get public support through legal means to retain their
power, geographical areas or the resources themselves. Thus, the
aim of reformasi to enforce people's sovereignty will remain
rhetorical if this illegal exploitation of natural resources is
not quickly stopped. The above writers believe this can be done
through an effective antimoney-laundering regime.

The government and the legislature has named forestry crime,
marine crime and environmental crime as predicate offenses in its
new regulations on money laundering. Indonesia is the first
country in the world to do so. This will have a far-reaching
impact on eradicating such crimes -- if the regulations are
actually enforced.

Under the UN convention on transnational organized crime,
member nations must promote cooperation to prevent and combat
transnational organized crimes.

One such transnational crime is illegal logging. It causes
annual losses of approximately Rp 30 trillion in Indonesia and,
according to the Ministry of Forestry, illegal logging allegedly
involves importing countries such as Malaysia and Singapore.

With the revised money laundering law passed in September,
there is now an international financial mechanism to make
requests to, or even exert pressure on foreign governments to
help the Indonesian government prevent the laundering of gains
from illegal logging in Indonesia.

The spoils from the illegal exploitation of natural resources
pass through national and international finance systems also used
by those who launder drug money, as well as those who carry out
their business legally.

Therefore, banks and other financial institutions have a
critical role in preventing and eradicating laundering of such
spoils. Financial service providers are obliged by the G-7's
Financial Action Task Force (FATF) to identify their customers,
undertake effective reporting systems and report any suspicious
financial transactions to their financial intelligence units.

In Indonesia, such reports are filed with the Reporting and
Financial Transaction Analysis Center (PPATK).

Financial service providers are not expected to understand the
intricacies of natural resources crimes. However, they must be
able to identify suspicious financial transactions connected to
them. Banks are expected to implement effective checks and
balances to evaluate financial transactions involving natural
resources.

Do financial service providers have an incentive to report
suspicious financial transactions involving natural resources
crimes to the PPATK? Before the money-laundering law was revised,
there were no incentives for financial service providers to
report such transactions.

When the original law was passed in April 2002 and before the
PPATK came into full operation, banks were obliged to report
suspicious transactions to the banking activities investigation
unit of Bank Indonesia, the central bank.

In spite of illegal logging stories appearing daily in the
media, as of now not one suspicious financial transaction dealing
with natural resources crime has been followed up.

Does this new money laundering regulation offer incentives for
Indonesian financial service providers to prevent and combat
laundering of gains from the criminal exploitation of natural
resources? Such providers are now obliged to understand
different types of suspicious transaction associated with
forestry, marine and environmental crimes.

Nevertheless, the PPATK may not be strong enough. The
legislature did not ratify the proposal to grant it the power to
impose sanctions on financial service providers that break
applicable rules on money laundering.

Thus, PPATK cannot force banks to be proactive in combating
money-laundering crimes. It also has to use the bureaucracy, and
thus may find it difficult to maintain its integrity and
independence, as has happened with other government institutions.

Finally, PPATK failed to change its name to Agency for the
Prevention and Eradication of Money Laundering -- a change aimed
at improving coordination in eradicating money laundering between
government agencies. If PPATK cannot make financial service
providers proactively combat money laundering crimes, the final
hope rests with Bank Indonesia and other financial regulators.

These regulators are expected to see natural resources as
long-term national assets that require careful management. Bank
Indonesia, the Capital Market Supervisory Board (BAPEPAM) and the
Directorate General of Financial Institutions in the Ministry of
Finance, need clear policies to regulate financial service
providers so they have incentives and the capacity to report
suspicious natural resources financial transactions to the PPATK.

The success of national and international monetary systems to
report suspicious transactions involving natural resources to the
PPATK is only the first step in ending illegal exploitation of
natural resources.

The next step depends on the effectiveness of law enforcement.
Attempts by financial service providers and the PPATK will be to
no avail without significant improvement in law enforcement here.

Nevertheless, the antimoney-laundering regime prioritizes the
eradication of corruption. Financial service providers can report
suspicious financial transactions by corrupt law enforcement
officers to the PPATK. In turn, the PPATK can ask the president
to form a special commission to examine the case.

Pessimism with regard to the new regulation on money
laundering will not save natural resources and society.
Establishing a special commission on law enforcement is obviously
not a new idea and perhaps remains as elusive as ever.

Building social stability and democracy is an enormous task.
The sad reality is there is no easy path to solving the problems
facing the Indonesian people and their natural environment.