Fighting dirty money

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.