Cleaning up dirty money

Indonesia, which has so far been ranked among the most corrupt countries in the world, has now gained notoriety as a suspected conduit for money laundering. This is defined as the processing, through the banking system, of the proceeds of crime, in order to disguise their illicit origin.

The Paris-based Financial Action Task Force (FATF), an agency set up in 1989 by 29 developed countries to wage an international crusade against money laundering, added Indonesia last week to its blacklist of jurisdictions considered uncooperative in the crusade against money laundering.

There is no hard figure for the amount of illicit cash pumped through bank accounts by the underworld, but FATF has estimated it to be as much as US$1.5 trillion per year.

Intensive monitoring and investigation by international agencies has revealed that money laundering is much more widespread than previously thought: hitherto, it was seen as something that involved only drug dealers and unknown banks in banana republics located in tiny island states, such as those in the Caribbean and in Latin America.

In fact, as a recent report by the Democrats in the U.S. Senate disclosed, even a bank as well known as Citibank (Citigroup) had, in its aggressive efforts to attract wealthy customers in far-flung corners of the world, failed to crack down adequately on money laundering. Citigroup subsequently admitted its embarrassment over the failure, the report said, as quoted by the Economist weekly news magazine in its mid-April issue.

Likewise, the object of laundering is no longer limited to drug money, but also other ill-gotten gains obtained through corruption and tax evasion.

Insofar as domestic transactions are concerned, Indonesia has long been a haven for money laundering by residents, due to the absence of any surveillance of bank transactions. One can deposit or transfer any sum of money to or from one bank to another in Indonesia without any questions being asked about the source of the money. Even someone who brings in an unusually large sum of bank notes for deposit to a local bank rarely raises any suspicion. Bank staff seem afraid that by asking too many questions, customers might take their money elsewhere.

Only transfers of foreign exchange or rupiah into or out of Indonesia worth over $10,000 have to be reported each month by commercial banks to Bank Indonesia. Even this compulsory reporting requirement was enforced only last March, and was designed purely for monitoring purposes, to help the central bank design its monetary policies, and not to detect suspicious transactions.

But Indonesia has now entered the spotlight, especially as the international fight against money laundering has accelerated since the establishment of FATF in 1989.

To be effective, the drive against money laundering should be made world-wide because it has grown in parallel with the globalization of the financial market. The blacklist issued by FATF annually is a way of forcing countries to cooperate.

Blacklisted countries, especially flagrant offenders, could be subject to vetoes on licenses for overseas outlets of their banks, or entirely ostracized by the international financial market.

Globalization has indeed allowed money to be shifted in seconds between banks in different parts of the world, but it also has created huge opportunities for crooks to hide or "clean up" their money by shifting it around the globe.

Even though Indonesia has not yet been classified as a flagrant offender, it is nonetheless encouraging to note the quick and positive response from the government to the FATF warning.

A money-laundering bill was submitted recently to the House of Representatives, but it will take some time before entering the statute book. But Bank Indonesia has just issued regulations and guidelines on banking practices to curb laundering through what is now internationally known as the "know your customers" principle. The guidelines will help banks to detect any suspicious transactions.

The focus on bank transactions is indeed the right approach, because banks have widely been used as the main channel through which crooks try to "clean up" their hot money. Private banking has especially been targeted as a major laundering channel, as some of the clients can be extremely wealthy people who want their affairs to be handled very discreetly.

Banks should be forced to play a proactive role in rooting out money laundering by drawing up guidelines or protocols in order to establish a "know your customers" practice. This means that the bank should find out who it is that wants an account before he opens it, and where the money has come from and what will happen to it, but all without violating banking secrecy and breaching privacy.