Money laundering and terrorist financing

Money laundering and terrorist financing

Anwar Nasution, Senior Deputy Governor, Bank Indonesia

Combating money laundering in Indonesia is more difficult with
the introduction of a wide range of international and domestic
deregulation and the rapid changes in technology. Long before
Indonesia deregulated the banking system in 1988 and reformed the
trade and industrial policies in the 1990s, the country adopted a
liberal capital account transactions and free exchange rate
system in early 1970.

Aside from producing benefits to the economy, these liberal
system and technological advancement also allow the predators of
money laundering and terrorism to abuse them for transnational
criminal activities. Control of such activities is more difficult
for the country like Indonesia given its strategic geographic
location.

The currently difficult and noisy transition from
authoritarian regime of the past to democratic political system
and the transition from centralized government to decentralized
system are expected to add to already difficult problems.

Strengthening prudential rules and regulations is an essential
part of the efforts to rebuild the banking industry that had
collapsed during the crisis in 1997-1998. Along this line, the
central bank sets up a time bound specific 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.

To implement the new rules of the game, Bank Indonesia now
thoroughly investigates the sources of bank capital, check the
moral background and the technical expertise of the controlling
shareholders and management of the banks and check the suspicious
transactions made by their customers. Improvements in the
regulatory system help prevent the banking industry from being
used as a mean and target of criminal activities.

The legal foundation for closely watched suspicious
transactions of the banks' customers is laid down in Bank
Indonesia's regulation on Know Your Customers (KYC) issued on
June 18, 2001 and amended on Dec. 13, 2001. The KYC regulation
requires banks to set up policy and procedure guidelines for
customer identification, suspicious and cash transaction report
and monitoring, customer data and profile updating, bank risk
management and staff training.

Each bank is obliged to set up a special unit and to assign a
manager to implement the KYC principles and report suspicious
transactions to the relevant authorities. Through implementing
the KYC principles, banks are able to identify its customer
profile and make sure that the source of funds are not coming
from illegal activities. The banks are obliged to report
suspicious transactions to Bank Indonesia for further
investigation and to be reported to the relevant authorities.

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

To comply with its international commitments, Indonesia, on
April 17, 2002, passed the Law No. 15 on Money Laundering Crime
and will be followed by the implementing regulations. The law
identifies 15 predicated crimes as money laundering and
punishable criminal acts, namely: corruption, bribery, smuggling
of goods, smuggling of workers, smuggling of immigrants, banking
offenses, narcotics offenses, psycotrophic substance offenses,
slavery and trade in women and children, illegal trading in arms,
kidnapping, terrorism, theft, embezzlement, and fraud.

The law prescribes that suspicious transactions are to be
reported to yet to be established PPATK (the Center for Financial
Transaction Reports and Analysis) for further analysis,
investigation and reported to the relevant law enforcement
agencies. The PPATK should be in operations six months after the
inauguration the head of PPATK or utmost October 2003. Being the
implementer of international commitments on the KYC principles,
Bank Indonesia has been active in the drafting of the Law of
Money Laundering.

Indonesia is in the process of addressing the deficiencies in
its KYC regulation and the Law on Money Laundering to make
combating money laundering effective. A number of required
improvements have been identified for the revision of the KYC
regulation and amendment of the Law on Money Laundering. These
include extension of their coverage to non-bank institutions and
non-financial service providers such as rural banks, money
transfers and travel agents.

The threshold for the proceeds of crime, presently at Rp 500
million, should be dropped, and need to be redefined not only
covering 15 predicate crimes but will cover broader criminal
activities. Witness and reporting parties of the criminal
activities should be legally protected. The time for submitting
the suspicious transactions should be shortened to seven days
from the present 14 days. The improvements in the KYC and the Law
of Money Laundering and their implementation will hopefully
remove Indonesia from the list of the Non Cooperative Countries
and Territories (NCCTs) of Financial Action Task Force (FATF) of
the OECD (Organization for Economic Cooperation and Development).

Being on the list of the NCCTs has raised premium for
Indonesian economic agents in doing transactions in international
financial markets. At the same time, such improvements in the
criminal law, financial supervision and customer identification
will meet the requirement of the Patriot Act of the United
States.

Bank Indonesia regulation on the KYC principles is implemented
by its Special Unit for Banking Investigation (UKIP). The UKIP
works closely with the police, attorney general office and other
law enforcement agencies and employs retired police officers and
prosecutors as consultants to guide its works. The Law on Money
Laundering stipulates that the UKIP shall act as a financial
investigation unit for suspicious transactions until the
commencement of operations of the PPTAK.

In cooperation with other law enforcement agencies, Bank
Indonesia helps forward the Attorney General Office' order to
banks operating in Indonesia to detect and trace the accounts of
those persons and entities in the list of the United Nation
Security Council. So far, none of the person or and entity whose
name appeared on the list has opened an account in Indonesian
banks.

At its own initiatives, the Special Investigation Unit (UKIP)
of Bank Indonesia has analyzed and investigated 135 suspicious
transaction reports (STRs) as reported by 20 commercial banks.
Nine out of these STRs of six banks have criminal indications and
last month Bank Indonesia reported these STRs to the police for
further investigation. Three out of these nine STRs have
indications related to cross border terrorist financing.

In cooperation with other government agencies, Bank Indonesia
has been active organizing seminars and training sessions all
over the country to disseminate the KYC regulation and the Law on
Money Laundering to general public.

Implementing the new regulations and legislation on money
laundering and terrorist financing requires upgrading of our
capacity to implement them.

The article is an excerpt from a speech presented in Bali at
The Conference on Combating Money Laundering and Terrorist
Financing on Dec. 17-18, 2002.