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.