Money laundering, big issue in RI

Money laundering, big issue in RI

Less than a week after the government presented an anti-money
laundering bill to the House of Representatives late last month,
the Paris-based Financial Action Task Force (FATF) on money
laundering added Indonesia to its money laundering blacklist,
thereby placing financial transactions with the country under
closer international scrutiny. The Jakarta Post's reporters
Yogita Tahil Ramani, Tertiani Z.B. Simanjuntak and Riyadi Suparno
explore the extent of money laundering practices in the country.
Related article on Page 6

JAKARTA (JP): Local traders at Tanah Abang market, Central
Jakarta, say they have learned never to take foreigners at face
value.

Ikhsan, a textile trader in Tanah Abang, claims that he knows
many of his foreign customers use drug money to purchase textiles
from him and he often charges them higher prices.

"We often check into the background of our regular customers.
If they do drugs, we charge them more. They can afford it,"
Ikhsan told The Jakarta Post recently.

Purchasing textiles at Tanah Abang market with drug money is
certainly one way to launder dirty money, which is the conversion
of money derived from illegal business activities into legitimate
funds. Law enforcement agencies are all aware of these methods
used by criminals.

A veteran National Police detective for drug crimes, Sr. Comr.
Wilhelmus Laturette, said that he had alerted all relevant
government officials about the use of the textile trade as one of
the ways drug suppliers or distributors laundered their dirty
money.

Nevertheless, because of a poor legal framework for money
laundering, Indonesia could not effectively deal with money
launderers -- be they drug lords, white-collar criminals, tax
evaders, embezzlers, bank defrauders or professional gamblers.

Therefore, it is not surprising that Indonesia is included on
FATF's list of countries and territories considered uncooperative
in adopting measures to eradicate money laundering.

In addition to money laundering, Indonesia is still struggling
to tackle street crimes and other standard offenses.

"It is not difficult to imagine that Indonesia, which is still
facing many problems in dealing with street, traditional or
predatory crimes, now has to deal with white collar crime,
especially offenses involving international networks or advanced
technology," said Harkristuti Harkrisnowo, a legal expert from
the University of Indonesia, at a recent seminar on money
laundering.

She explained that the complex system of money laundering
generally involves three steps: placement, layering and
integration.

Placement involves money launderers placing their dirty money
within the financial system through banks, insurance companies,
securities firms and other financial institutions.

Then the launderers obscure the source of their dirty money
through a number of complex layering methods, usually using
friends, cronies and numerous foundations and companies.

These layering activities usually involve various funds
transfers from one bank to another or to other financial
institutions, often from one country to another.

After the layering process, the launderers then integrate the
already laundered money into their legitimate businesses and use
it as legitimate funds.

In the course of their activities, these money launderers hide
behind bank secrecy regulations, which are permitted under
Indonesia's banking laws.

Bank secrecy

The launderers exploit bank secrecy codes to transfer funds in
and out of financial institutions in order to clean and hide
dirty money. Under the Banking Secrecy Law, the launderers'
accounts remain confidential. Until the court or law enforcement
agencies order a bank to disclose information about an account,
no one can discover who owns the account, how much is deposited
or where the funds originated from.

Some have suggested that Indonesia's banking system is a haven
for money launderers as the banks are not subject to adequate
supervision or regulation. Several Indonesian banks have been
victimized in scandals that may have been prevented if adequate
safeguards had been in place.

The Bank Bali scandal, which helped bring down former
president B.J. Habibie, constitutes a prime example of complex
money laundering practices.

A 1999 report commissioned by the government found that nearly
US$80 million secretly withdrawn from Bank Bali was transferred
into the accounts of former Indonesian President Habibie's senior
aides, as well as his own political party.

The Bank Bali scam "entailed a large money laundering
operation aimed at hiding numerous beneficiaries," according to
the 1999 International Narcotics Control Strategy Report,
released in March 2000 by the Bureau for International Narcotics
and Law Enforcement Affairs of the U.S. State Department,
Washington DC.

Claims that Indonesia's banking system is used as a means to
launder money are supported by a FATF report, which states:
"Given the absence of appropriate legislation and the regime of
strict bank secrecy in Indonesia, money laundering is only part
of the financial crime that prevails there, essentially in the
shape of large-scale fraud and corruption."

The Indonesian banking authority, Bank Indonesia, responded to
the criticism by saying that it has regulations in place
requiring all commercial banks to report transactions involving
more than Rp 100 million (about US$9,000) or any suspicious
transactions to the central bank.

However, this regulation, dubbed by the central bank as "know
your customer", has failed to prevent money laundering practices
such as the Bank Bali scam.

Law enforcement agencies would argue that they lack legal
grounds to move against money launderers. A claim which has some
foundation.

In June, the Indonesian government presented a bill on money
laundering to the House of Representatives for deliberation.
The bill mandates the establishment of an independent commission,
which will have extensive powers to investigate and prosecute
anyone suspected of involvement in money laundering practices.

The commission will be answerable to the House of
Representatives.

The bill requires all financial institutions, including banks,
securities companies and insurance companies, to report all cash
transactions worth at least Rp 100 million to the commission
within 14 days.

The failure of financial institutions to report transactions
of Rp 100 million will be fined a minimum of Rp 250 million and a
maximum of Rp 1 billion.

The bill stipulates that people convicted of money laundering
could be jailed for between five and 25 years and be fined
between Rp 5 billion and Rp 15 billion.

Once the bill is passed into law and law enforcers are
effectively pursuing money launderers, some experts have warned
that Indonesia will see a huge capital outflow from the country's
financial system.

They contend that much of Indonesia's capital inflows
constitute dirty money being laundered in the country and warn
that, once the dirty money is withdrawn from Indonesia, the
country's economy will be severely affected.

However, those concerns are not warranted now as private
investors, especially legal multinational corporations and
financial investors, have already pulled out of the country
because of the economic and political crises.

The time seems to have arrived for Indonesia's law enforcers
to target money launderers, especially those involved in the drug
trade.

Moreover, according to a 1997-1998 FATF report, Indonesia,
along with Malaysia, is singled out as a country requiring
particular attention because of, among others, the increasing
number of gaming and gambling businesses, and cases of drug
trafficking.

Official National Police data confirms this trend. The police
recorded 3,478 drug-related cases last year, a huge jump from the
1,833 recorded in 1999. This year alone, 862 drug-related cases
were recorded as of March.

The challenge, however, does not stop here. Many corrupt
Indonesians launder their money using the help of master
financial transaction manipulators, employing an extensive and
complex money laundering system involving overseas banks, mostly
banks in tax havens such as the Bahamas, the Cayman Islands, the
Cook Islands and the Marshall Islands.

Some even use banks in countries such as Switzerland and
Austria to launder money, according to a National Police
detective for economic crimes.

"Economic criminals and drug lords tend to open Swiss or
Austrian bank accounts or what we call 'accounts in the islands'
which are on top of the list when it comes to secrecy and
security regulations," a police detective for economic crimes
said earlier this week, requesting anonymity.

Often, the overseas banks extend loans to these launderers,
with their money in the bank accounts held as collateral. The
criminals then open legitimate businesses using those loans and
effectively turn the dirty money into clean money.

In Indonesia, the detective added, the primary method for
money laundering in most cases is long-term deposits in banks
here.