Part 1 of 2 Banks can stop illegal logging if they want to
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).