Part 1 of 2 Banks can stop illegal logging if they want to
Sukowaluyo Mintorahardjo, Commission III, House of Representatives, Jakarta, and Bambang Setiono, Center for International Forestry Research (CIFOR), Bogor
What crimes spring to mind upon hearing the term "money laundering"? Drug trafficking, trafficking in women, smuggling, protection rackets? All of these, no doubt. But how many of us would think of "forest-related crimes"?
Fortunately, some of the more committed representatives in government are making the link between illegal forest practices and, under current laws, legal banking practices. More importantly, with proposed amendments to existing money laundering laws introduced in June to the House of Representatives, they are trying break the link.
But it remains to be seen if the changes will be ratified by the legislature, let alone succeed. Nevertheless, this embryonic measure from the government's Financial Transactions Analysis and Reporting Center may germinate into a major strategy to restore our rainforests, which are not only important domestically, but also globally.
One of the most prominent forest-related crimes is illegal logging, which costs Indonesia anywhere between US$1 billion to $3 billion a year in losses, in the market value of logs taken from the forest.
The government has already made numerous attempts to eradicate this crime including the Wanalaga and Wanabahari operations involving the military and the police. It is also undertaking initiatives against illegal logging with Britain, China, Japan, Malaysia and Singapore. The government also supports the World Bank-sponsored Forest Law Enforcement, Governance and Trade initiative (FLEGT).
Yet, illegal logging, along with timber trading, is still widespread here. Thus it is urgent that the government strives to break the links in the chain of forestry and environmental crimes.
One important link in the chain of illegal timber trading is Indonesia's banking and financial system. Banks often play the part of financial intermediaries not only for legal forestry transactions, but also in illegal forestry transactions.
The assumption is often made that illegal logging in Indonesia is carried out by small-scale actors working on a cash basis with little need for financing. But banks and other financial institutions play an important role in funding both legal and illegal forestry activities. Banks routinely provide working capital and long-term loans for logging activities, plantation investments and timber processing facilities.
Often, they guarantee the issue of bonds and commercial financial securities by forest-related companies, buy off forest- related debts from companies and, of course, accept deposits from forest concessionaires.
As the figures below demonstrate, the amount of money moving in and out of the forestry sector in Indonesia is enormous:
o The forestry industry generates more than $5 billion in exports annually
o More than $15 billion has been invested in the pulp and paper sector since the late 1980s
o Before selling the forest-related assets it controlled, the Indonesian Bank Restructuring Agency managed more than $2.75 billion in forest company debts and $6.25 billion in the form of disposable forest company assets
o Bank Mandiri currently controls more than $1.25 billion of forestry company debts, including debts from timber businesses Barito, Djajanti and Bob Hasan groups
o The Ministry of Forestry suffers $1 billion in losses annually from illegal logging
Before the financial crisis began in 1997, almost all of Indonesia's forestry conglomerates owned their own banks, thus allowing them to guarantee the provision of funds to finance their illegal forestry activities. Their banks were nothing more than shop-fronts for behind-the-scenes financial transactions in the forestry sector.
Indonesia's Banking Law already lays out the obligation of banks to help protect the environment. However, banks and the Bank of Indonesia, in its supervisory role, have yet to meet these obligations.
The requirement to protect the environment is found in Banking Law No. 10/1998 amendments to Banking Law No. 7/1992: "In the extension of credit or financing based on sharia principles, banks shall take into account the findings of environmental impact assessments for large-scale and high-risk companies, so that projects being financed continue to protect the sustainability of the environment."
The fact that the banks continue to finance an industry that requires six times the amount of legally harvested timber is a very clear indication of how they are contravening the credit extension regulations.
Sukowaluyo Mintorahardjo, a legislator with the Indonesian Democratic Party of Struggle, is a member of Commission III of the House of Representatives (DPR), which oversees issues related to agriculture and forestry, among others. Bambang Setiono is a financial analyst at the Center for International Forestry Research (CIFOR).