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.