Fighting dirty money

Indonesia should immediately strengthen its anti-money laundering (AML) measures, otherwise it will remain on the Financial Action Task Force (FATF) blacklist of developed countries and could face harsh sanctions, which would hinder business transactions with foreign parties.

FATF will review Indonesia, which, together with 18 other countries, was blacklisted as a noncooperative country in 2001. A positive assessment would lift Indonesia from the blacklist, but a negative review would retain it within the category of noncooperative countries.

The developed countries grouped in the Organization for Economic Cooperation and Development may also classify Indonesia as a high-risk country, a category that imposes risk premiums on business transactions with Indonesia and may restrict or even ban Indonesian companies and banks from opening offices in OECD countries and vice versa.

Indonesia joined the international campaign against dirty money in April 2002 with the enactment of an AML law and the establishment of a politically independent Financial Transaction and Report Analysis Center, which in other countries is often known as a financial intelligence unit.

The center is in charge of analyzing and investigating reports on suspicious transactions and persons and financial institutions that allegedly fail to report suspicious financial transactions.

The law was then highly welcomed for its elaborate and strong provisions, which, among other things, provides protection of witnesses testifying against suspected money launderers and of the identity of those who report suspicious transactions.

The punishments are also heavy. People who receive money or other financial assets, which they know or reasonably suspect to be derived from criminal offenses, are liable to prison sentences of five years to 15 years and fines of Rp 5 billion to Rp 15 billion.

The legislation makes it compulsory for banks and other finance companies to report to the center any receipt of Rp 500 million (US$61,000) or more in cash or the equivalent sum in foreign currencies. Failure to do so is liable to fines of Rp 250 million to Rp 1 billion. Offenders are also punishable by the same range of fines if they do not report suspicious transactions.

The law even applies the "presumption of guilt" principle to money laundering cases, whereby defendants are required to prove that their wealth was not the result of ill-gotten gain.

However, FATF considers the measures stipulated in the law still fall below international standards and best practice, and since early this year has asked the government to strengthen the legislation.

First, the Rp 500 million threshold for transactions that are subject to the law is considered too high to be effective in combating money laundering.

The predicate crimes covered by the legislation, although they already encompass almost all major sources of dirty money gained through corruption, drug trafficking, smuggling, bribery, banking crimes, crimes related to psychotropic substances and terrorism, to trading in slaves, women and children, are seen as not broad enough. The international community demands the law also stipulates that proceeds from gambling be treated as dirty money.

Moreover, according to FATF, the 14-day deadline for compulsory reporting of suspicious transactions by financial institutions is too lenient, given the sophisticated information technology that now allows for transactions to move money around the globe within minutes.

Indonesia indeed needs to strengthen its AML measures, and amending the law to close any loopholes that can be exploited for laundering dirty money is an important step. After all, an effective money laundering system will also help beef up the anticorruption drive and the fight against other crimes, as it will make it extremely difficult for criminals to circulate their ill-gotten money into the legal financial system.

However, FATF should not be too harsh on Indonesia at its upcoming meeting. The developed countries should assess Indonesia more from its political determination to fight money laundering and not from the number of money laundering cases that have been brought to court, nor the current capacity of its law enforcement system.

Money laundering is still a new concept within the Indonesian financial system. Financial institutions have yet to be trained to avoid dealing with criminal elements, to check the identity and legitimacy of clients, especially new clients and those acting on behalf of others.

A "know your customer" or "due diligence" system has yet to be developed within the banking system, including the financial and capital markets.

Establishing an affective AML system takes time. AML programs have still to be prepared for all financial transactions, of different characteristics and different modes.

This work alone is already an uphill task, as it involves the formulation of policies, procedures and controls designed to prevent financial institutions from being used to launder money.