Loan fraud hits state-owned Bank Rakyat Indonesia

Loan fraud hits state-owned Bank Rakyat Indonesia

Rendi A. Witular, The Jakarta Post, Jakarta

After wrapping up a successful initial public offering (IPO) a
month ago, state-owned Bank Rakyat Indonesia (BRI) has now put at
risk its credibility after the disclosure of a loan fraud worth
Rp 294 billion (US$34.5 million) at three of its branches.

The fraud underscores how fragile the internal control in
state-owned banks is as it is the second case reported in the
last two months, following the revelation of a massive Rp 1.7
trillion lending scam at Bank Negara Indonesia (BNI) in October.

BRI president Rudjito said that the bank had uncovered the
fraud in September, two months before the IPO, and had found the
alleged involvement of branch managers in Senen and Tanah Abang
(in Jakarta), and the Surya Kencana branch in Bogor.

"We uncovered the fraud in September and three of our branch
managers are now under detention at the Attorney General's Office
for further investigation," said Rudjito in a press briefing on
Wednesday.

The bank had reported the case to Bank Indonesia, the Capital
Market Supervisory Board and the prosecutors in October, he said.

The fraud centers on the channeling of loans by the three
branches to local companies backed by fictitious cash collateral
deposits.

The suspects colluded with bank officials to falsify deposit
accounts belonging to a number of customers, including Bank
Pembangunan Daerah Kalimantan, to be used as collateral for the
loans.

Director for Banking Supervision at Bank Indonesia Aris Anwar
said that based on the central bank's investigation, one of the
suspects was believed to be Yudi Kartolo, who is also known for
his alleged involvement in the Rp 1.1 trillion fraud at BNI in
2001.

"The suspects are 'old players.' They are all members of Yudi
Kartolo's syndicate. Every banker must be aware of his name,"
said Aris, adding that the "external" suspects were still at
large.

He warned that there was a possibility that such frauds could
reoccur in the future and that BI would not be able to prevent
them if banks ignored compliance rules and internal officials
were involved in the frauds.

Rudjito said that thus far the bank had managed to recover
around Rp 31 billion by freezing the bank accounts of the
suspects, and had set aside Rp 294 billion as a provision to
cover potential losses from the fraud.

He explained that BRI did not deliberately cover up the fraud
ahead of the IPO as the bank had explained the case in its final
circular before offering its shares to the public, meaning that
investors were already aware of the risk.

BRI, which mainly channels loans to farmers and small
businesses, raised Rp 4.17 trillion in cash after selling a 40.5
percent stake to the public in November, making it one of the
largest bank IPOs in Asia.

BRI shares ended down by 2.4 percent, or Rp 25, at Rp 1,025 on
the Jakarta Stock Exchange on Wednesday on news of the fraud.

Elsewhere, BI Governor Burhanuddin Abdullah said that he
regretted the fraud at BRI and ordered the bank's management to
resolve the problem.

"I have been informed of the case and have asked the BRI
management to settle it," said Burhanuddin after a hearing with
the House of Representatives' banking commission on Wednesday.

Meanwhile, banking analyst Pradjoto said that the government
should revise the internal control procedures at state-owned
banks, which allow a branch manager to grant loans without
requiring the approval of the boards of directors and
commissioners.

He explained that state-owned banks should adopt the system
applied by private banks, in which loans could not be channeled
without the consent of the boards of directors and commissioners.

He also urged the authorities to immediately track the flow of
the loans and freeze the accounts used to stash the money in
order to prevent the suspects using the money to bribe law
enforcement officials.