SBY'S ANTI-CORRUPTION PROGRAM DEALT A SETBACK

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 002392 SIPDIS SIPDIS DEPT FOR EB/IFD/OMA AND EAP/MTS TREASURY FOR IA - ANNA JEWELL, SUSAN BAKER MANILA FOR USED ADB COMMERCE FOR 4430/GOLICKE DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO DEPARTMENT PASS FEDERAL RESERVE AND EXIM BANK PACOM FOR J5 YAMAMOTO E.O. 12958: DECL: 02/22/2016 TAGS: ECON EFIN KCOR PGOV EINV ID SUBJECT: SBY'S ANTI-CORRUPTION PROGRAM DEALT A SETBACK REF: 05 JAKARTA 7424 - BANK MANDIRI SCANDAL Classified By: Finance and Development Officer Ruth Mary Hall, Reasons 1.4 b,d. ¶1. (C) Summary. In a verdict that took many observers by surprise, Indonesia's Anti-Corruption Court acquitted three former Bank Mandiri officials of corruption charges on February 20. The Attorney General reportedly stated that he wants to appeal the case to the Supreme Court, and President Susilo Bambang Yudhoyono (SBY) also reportedly expressed disappointment with the decision. The Attorney General told the Ambassador privately that he felt Neloe and his co-defendants had run a privately-funded, highly questionable propaganda campaign in the media and at universities while the case was ongoing. Mandiri is widely acknowledged as one of Indonesia's most corrupt institutions, and the failure to convict Neloe and his colleagues is a clear setback for Indonesia's anti-corruption campaign. End Summary. Former Bank Mandiri Officials Acquitted -------------- ¶2. (SBU) On February 20, Indonesia's Anti-Corruption Court acquitted former President Director E.C.W. "Eddie" Neloe and two other former Bank Mandiri officials of corruption charges. Neloe is a prominent political supporter of former President Megawati Sukarnoputri, and during his almost five years as President Director of Indonesia's largest state-owned bank, was in the top ranks of Indonesia,s business elite. The court's decision came as a surprise since prosecutors had sought a tough sentence of twenty years. The police arrested Neloe, former former director for risk management I Wayan Pugeg, and former director of corporate banking M. Sholeh Tasripan in May 2005 on corruption charges for alleged "lending irregularities" related to USD 1.3 billion in loans (reftel). ¶3. (SBU) Despite the very large amount of non-performing loans (NPLs) at Mandiri, prosecutors based their case on only one questionable transaction: a Rp 160 billion (USD 17 million) loan to the Medan construction firm PT Cipta Graha Nusantara/Tahta Medan. The court determined that prosecutors had not proven that the loan had caused "losses to the state" because NPLs are part of business risk and do not count as corruption. Under Section two of Law 31/1999 on Corruption Eradication, an individual is guilty of corruption if he enriches him/herself or others or a corporate entity in a manner that causes "losses to the state." Noting that the loan in question was restructured and should be repaid by September 2007, Judge Gatot Suhartono reportedly said "the defendants were not proven legally and convincingly to have committed graft." Saleh Says the AGO Will Appeal; SBY Disappointed -------------- --- ¶4. (C) Attorney General Abdul Rahman Saleh said publicly on February 21 that he would ask prosecutors to appeal the decision to the Supreme Court. He told the Ambassador the same day that he was "concerned and disappointed" with the acquittals. Saleh said he felt that Neloe and his fellow defendents had run a "propaganda campaign" funding seminars at universities and television interviews presenting their position on "state assets." Saleh related that the day before he had endured a marathon grilling by the House of Representatives, whose members had peppered him with detailed questions on the Neloe case. ¶5. (U) According to media reports, President Susilo Bambamg Yudhoyono was also disappointed, stating that, "I want transparency upheld concerning why, what and other things about Neloe and the two other defendants being acquitted of graft charges. The public has the right to know what went on." JAKARTA 00002392 002 OF 002 Blow to Anti-Corruption Campaign -------------- ¶6. (SBU) The media quoted several corruption watchers including Indonesian Corruption Watch and the Partnership for Governance reform in Indonesia who noted that the decision would be a setback in the GOI's anti-corruption drive. The GOI's willingness to go after Neloe was considered a bold move and a sign that President Yudhoyono was serious about anti-corruption, even when it involved well-connected members of the Jakarta elite. ¶7. (C) A U.S. bank analyst who has worked with Mandiri for several years told us the present Mandiri management is "disillusioned" with the acquittals. The analyst noted that Neloe is smart, would have covered his tracks well, hidden kickbacks effectively, and would have placed several layers between himself and the "brown envelope." He also noted that when analyzing questionable bank loans, absent direct evidence of kickbacks, it is hard to draw the line between bad judgment and willful misconduct. He said instead of going after the Cipta Graha case, prosecutors should have focused on transactions between Mandiri and other debtors such as pulp producer Raja Garuda Mas (RGM). RGM has excellent cash flow but has not repaid Mandiri and other banks before it, a fact that might have made it easier to prove that an experienced banker would not have lent to such a firm absent substantial kickbacks. Comment -------------- ¶8. (C) The GOI has not had good luck in its efforts to prosecute prominent former bankers on corruption charges since the 1997-98 financial crisis, and the Neloe case is no exception. The lack of a written court decision makes it difficult to assess the degree of damage to SBY,s anti-corruption efforts, but press statements by the judges and prosecutors indicate an extremely low level of understanding by both judges and prosecutors about banking operations. The case had a bit of unreality about it as prosecutors focused on whether there had been a "loss to the state" rather than on the kickbacks that, according to numerous sources, have long been a standard part of Mandiri,s corporate loan approval process. Unless the GOI gets lucky and wins on appeal, the verdict leaves the GOI in a very difficult position with respect to moving forward on other corruption cases in the banking sector. PASCOE