Combating money laundering and terrorist financing

Anwar Nasution, Senior Deputy Governor, Bank Indonesia, Jakarta

Bank Indonesia is performing a number of roles to help combat money laundering and terrorist financing. The first is to improve our regulations by embracing and adopting the internationally recognized rules and regulations on the matter. Second, to upgrade its capacity to implement them. The third role is to take a lead in disseminating the new rules and regulations to the general public. The fourth is to provide information to law enforcement agencies, while the fifth is to help establish the financial intelligence unit (PPATK) and support its operations.

Combating money laundering and terrorist financing has been our primary concern since the economic and political crises erupted in 1997. We are serious in eradicating such criminal activities, both because of our domestic needs and to meet our international commitments. We need to eradicate criminal acts because the domestic crises occurred mainly due to corruption, collusion and nepotism -- fundamental weaknesses that are basically homegrown problems.

Money laundering has distorted our market and ruined our financial system, destabilized our economy and severely narrowed our links to the international community.

The combating of money laundering has been made more difficult by the introduction of a wide range of international and domestic deregulations and by rapid changes in technology. Long before Indonesia deregulated the banking system in 1988 and reformed its trade and industrial policies in the 1990s the country had, in the early 1970s, adopted a liberal capital account transactions and free exchange rate system.

Despite benefits, the liberal system and technological progress have also led to abuse by predators of money laundering and terrorism for their domestic and transnational criminal activities. Control of criminal activities is more difficult for the country, given its strategic geographic location.

Moreover, the difficult transition from an authoritarian regime to a democratic political system, and from a centralized government to a decentralized system, are expected to add to already complex problems.

The strengthening of prudential rules and regulations is essential to rebuild the banking industry. The central bank has established time-bound targets to adopt and implement the Basel rules and regulations on banking supervision. Transmission of market information is improved by upgrading the accounting standards and improvements in the legal system.

Bank Indonesia now thoroughly investigates the sources of bank capital and checks the background, track records and the technical expertise of controlling shareholders and management of banks. Banks are required to monitor their customers' accounts and transactions.

The legal foundation for such close monitoring of suspicious transactions of bank customers is found in Bank Indonesia's regulation, Know Your Customers (KYC), issued in June 2001 and amended in December 2001. Last month, the chairman of the Capital Market Supervisory Agency (Bapepam) and the minister of finance issued decrees applying the same principles to capital market transactions and nonbank financial institutions.

The KYC regulations require banks and other financial institutions to set up policy and procedure guidelines for customer identification, suspicious and cash transaction reports and monitoring, customer data and profile updating, risk management and staff training.

Each financial institution must set up a special unit, assign a manager to implement KYC principles and report suspicious transactions to the relevant authorities.

Financial institutions are able to identify customer profiles to ensure that the sources of funds are not derived from illegal activities. The financial institutions must report suspicious transactions to the relevant authorities for further investigation.

Judging from its assets and branch network, the banking system is now the core of the country's financial system. The monitoring of accounts and transactional activity through the banking system is thus crucial in monitoring money laundering and terrorist financing in Indonesia.

At present, all of the 145 national commercial banks have applied standard guidelines, as required by the KYC regulation. Some banks need more time to update information on their existing customers, pending the modernization of their information technology and training of their staff.

The House of Representatives (DPR) ratified the International Convention on the Suppression of Financing for Terrorism early last year and passed Law No. 15 on money laundering in April 2002. The law identifies 15 crimes such as money laundering and punishable criminal acts, including corruption, bribery and terrorism.

The law on money laundering prescribes that suspicious transactions are to be reported to the newly established financial intelligence unit (the Center for Financial Transaction Reports and Analysis, or PPATK) for further investigation, and to the relevant law enforcement agencies. PPATK should be operational within six months of its chairman being installed last December.

Furthermore, PPTAK exchanges information on suspicious transactions with its counterparts in leading countries. It also takes the lead in improving deficiencies in the money-laundering law. The required revisions in the law include its extended coverage to nonfinancial service providers such as rural banks, money transferors, remittance businesses, exchange houses and travel agents.

The threshold for the proceeds of crime, currently Rp 500 million, should be dropped, and needs to be redefined to cover broader criminal activities. Witnesses and reporting parties of criminal activities should be legally protected. The time for submitting suspicious transactions should be shortened to seven days from the present 14.

Implementation of KYC principles by the banking industry is supervised by the Special Unit for Banking Investigation (UKIP) of Bank Indonesia. UKIP was established in 1997 to investigate banking crimes during the crisis in 1997 and 1998. The targets of its investigations are commercial banks and rural banks.

UKIP works closely with the police, the Attorney General's Office and other law enforcement agencies, and employs retired police officers and prosecutors as consultants to guide its work. The special unit has analyzed and investigated 141 suspicious transaction reports, as reported by 20 commercial banks.

I would like to make two requests to all of you who represent friendly nations. Implementing the new regulations and legislation on money laundering and terrorist financing requires upgrading of our capacity to implement them.

The second request is to remove Indonesia from the list of noncooperative countries and territories (NCCTs) drawn up by the Financial Action Task Force on Money Laundering (FATF) from the Organization of Economic Cooperation and Development. In its meeting to be held next week, FATF will consider the progress made by Indonesia in this field.

We have made significant improvements in the KYC and the money-laundering law. We are also serious in correcting the defects in our criminal law and regulations and in upgrading our capacity to implement them, including the capacity to supervise our financial system and to identify its customers.

Being on the list of the NCCTs has raised the premium for Indonesian economic agents in conducting transactions in the international financial markets. This has increased costs for rebuilding the already shattered economy.

The above is abridged from Prof. Dr. Anwar Nasution's address to a number of ambassadors at the Ministry of Foreign Affairs, in Jakarta on Feb. 10.