INDONESIA 2008-2009 INCSR PART II, MONEY LAUNDERING AND

UNCLAS JAKARTA 002251 DEPARTMENT FOR EAP/MTS, INL, SCT, EEB/ESC/TFS TREASURY FOR FinCEN and T.RAND SINGAPORE FOR S. BAKER JUSTICE FOR AFMLS, OIA and OPDAT E.O. 12958: N/A TAGS: KCRM EFIN KTFN SNAR ID SUBJECT: INDONESIA 2008-2009 INCSR PART II, MONEY LAUNDERING AND FINANCIAL CRIMES Ref: (A) Juncker-Silensky/Wyler/Williams/Bezek/Ott e-mail (B) State 10381 ¶1. The following information was previously relayed via unclassified e-mail with tracked changes from the 2007-2008 INCSR (ref A),as requested by ref B. ¶2. As noted in ref A, report provided the USD equivalent figures reflecting an exchange rate of IDR 12,000/USD. The rupiah has been extremely volatile as a result of the current financial crisis and the equivalent USD figures should be updated prior to final publication to reflect the prevailing exchange rate. ¶3. Begin text: Indonesia Although neither a regional financial center nor an offshore financial haven, Indonesia is vulnerable to money laundering and terrorist financing due to gaps in financial system regulation, cash-based economy, the lack of effective law enforcement, and corruption. Most money laundering in the country is connected to nondrug criminal activity such as gambling, prostitution, bank fraud, theft, credit card fraud, maritime piracy, sale of counterfeit of goods, illegal logging, and corruption. Indonesia also has a long history of smuggling, a practice facilitated by thousands of miles of un-patrolled coastline, weak law enforcement and poor customs infrastructure. The proceeds of illicit activities are easily parked offshore and only repatriated as required for commercial and personal needs. In April 2002, Indonesia passed Law No. 15/2002 Concerning the Crime of Money Laundering, making money laundering a criminal offense. The law identifies 15 predicate offenses related to money laundering, including narcotics trafficking and most major crimes. Law No. 15/2002 established the Financial Transactions Reports and Analysis Centre (PPATK),Indonesia's financial intelligence unit (FIU) to develop policy and regulations to combat money laundering and terrorist financing. Law No. 15/2002 stipulated important provisions to enhance Indonesia's anti-money laundering regime, such as: obligating financial service providers to submit suspicious transactions reports and cash transaction reports; exempting reporting, investigation and prosecution of criminal offenses of money laundering from the provisions of bank secrecy that are stipulated in Indonesia's banking law; placing the burden of proof on the defendant; establishing the PPATK as an independent agency with the duty and the authority to prevent and eradicate money laundering; and establishing a clear legal basis for freezing and confiscating the proceeds of crime. In September 2003, Parliament passed Law No. 25/2003, amending Law No. 15/2002, to further address FATF's concerns. Law No. 25/2003 provides a new definition for the crime of money laundering, making it an offense for anyone to deal intentionally with assets known, or reasonably suspected, to constitute proceeds of crime with the purpose of disguising or concealing the origin of the assets. The amendment removes the threshold requirement for proceeds of crime. The amendment further expands the scope of regulations by expanding the definition of reportable suspicious transactions to include attempted or unfinished transactions. The amendment also shortens the time to file a suspicious transactions report (STR) to three days or less after the discovery of an indication of a suspicious transaction. However, there is no clear legal obligation to report STRs related to terrorist financing. The amendment makes it an offense to disclose information about the reported transactions to third parties, which carries a penalty of imprisonment for a maximum of five years and a maximum fine of IDR one billion (approximately U.S. $83,500). Additionally, Articles 44 and 44A of Law 25/2003 provide for mutual legal assistance with respect to money laundering cases, with the ability to provide assistance using the compulsory powers of the court. Article 44B imposes a mandatory obligation on the PPATK to implement provisions of international conventions or international recommendations on the prevention and eradication of money laundering. In March 2006, the GOI expanded Indonesia's ability to provide mutual legal assistance by enacting the first Mutual Legal Assistance (MLA) Law (No. 1/2006),which establishes formal, binding procedures to facilitate MLA with other states. A proposed second amendment to the AML law was submitted to the parliament in October 2006. If passed, it would require nonfinancial service businesses and professionals who potentially could be involved in money laundering, such as car dealers, real estate companies, jewelry traders, notaries and public accountants, to report suspicious transactions. The amendments also would include civil asset forfeiture and give more investigative powers to the PPATK, as well as the authority to block financial transactions suspected of being related to money laundering. Despite these provisions, the draft amendments appear to have remaining gaps when measured against current AML/CTF international standards. The amendment continued to be discussed in Parliament in mid-2008. On April 17, 2007, Indonesia adopted a National Strategy 2007-2011 for the prevention and eradication of money laundering. The GOI held two National Coordination Committee meetings in December 2007 and May 2008 to coordinate implementation of the national strategy. Indonesia's FIU, PPATK, established in April 2002, became operational in October 2003 and continues to make progress in developing its human and institutional capacity. The PPATK is an independent agency that receives, analyzes, and evaluates currency and suspicious financial transaction reports, provides advice and assistance to relevant authorities, and issues publications. As of end-October 2008, the PPATK had received 20,741 (STRs) from 118 banks, 14 rural banks, and 103 nonbank financial institutions. Approximately 8,700 of these STRs were received during 2008. The agency also reported that it had received a total of over six million cash transaction reports (CTRs) from 133 banks, 55 moneychangers, 51 rural banks, nine insurance companies, and three securities companies. PPATK have submitted a total of 612 cases to various law enforcement agencies based on their analysis of 1,215 STRs. Nineteen cases involving the money laundering offense have been successfully prosecuted to date. Sentences included imprisonment of up to six to eight years and fines up to IDR 500 million (about U.S. $41,700). STRs have triggered prosecution of additional cases involving corruption, banking fraud and other financial crimes. The Transnational Crime Coordination Center reports that the Indonesia National Police have conducted 133 inquiries in 2008 (through September) of financial crimes which have money laundering as an element. PPATK reports there has been one case which has resulted in successful prosecution to date in 2008. The case, brought in central Jakarta court in January 2008, involved money laundering and banking fraud and included three defendants. Defendant I (Sefrie Roring) received 12 years imprisonment and a fine in the amount of IDR 10 billion (about U.S. $835,000). Defendant II (Sahat Mangasi Sianipar) received 8 years imprisonment and a fine in the amount of IDR 10 billion. Defendant III (Hengky Martinus Roring) received 10 years imprisonment and a fine in the amount of IDR 10 billion. These defendants collected funds from customers without a license from Bank Indonesia and did not return the funds to the victims. Therefore they were suspected of laundering the proceeds of fraud. The PPATK actively pursues broader cooperation with relevant GOI agencies. The PPATK has signed a total of 22 domestic memoranda of understanding (MOUs) to assist in financial intelligence information exchange with the following entities: Attorney General's Office (AGO),Bank Indonesia (BI),the Capital Market Supervisory Agency - Financial Institutions (BAPEPAM-LK),the Directorate General of Taxation, Director General for Customs and Excise, the Ministry of Forestry Center for International Forestry Research, the Indonesian National Police, the Supreme Audit Board (BPK),the Corruption Eradication Commission, the Judicial Commission, the Directorate General of Immigration, the State Auditor, the Directorate General of the Administrative Legal Affairs Department of Law and Human Rights, the Anti-Narcotics National Board, the Province of Aceh, the Commodity Futures Trading Supervisory Agency, Elections Supervisory Body, Banking University Perbanas Surabaya, University of Surabaya, and Gajah Mada University. Bank Indonesia (BI),the Indonesian Central Bank, issued Regulation No. 3/10/PBI/2001, "The Application of Know Your Customer Principles," on June 18, 2001. This regulation requires banks to obtain information on prospective customers, including third party beneficial owners, and to verify the identity of all owners, with personal interviews if necessary. The regulation also requires banks to establish special monitoring units and appoint compliance officers responsible for implementation of the new rules and to maintain adequate information systems to comply with the law. BI has issued an Internal Circular Letter No. 6/50/INTERN, dated September 10, 2004 concerning Guidelines for the Supervision and Examination of the Implementation of KYC and AML by Commercial Banks. In addition, BI also issued a Circular Letter to Commercial Banks No. 6/37/DPNP dated September 10, 2004 concerning the Assessment and Imposition of Sanctions on the Implementation of KYC and other Obligations Related to Law on Money Laundering Crimes. BI is also preparing Guidelines for Money Changers on Record Keeping and Reporting Procedures, and Money Changer Examinations to be given by BI examiners. Currently, banks must report all foreign exchange transactions and foreign obligations to BI. Similar regulations for non-bank financial institutions have also been implemented. The decree of the head of the Capital Market and Financial Institutions Supervisory Agency No. KEP-313/BL/2007, dated August 28, 2007, amended Regulation No. V.D.10 to strengthen KYC principles. PPATK and Bapepam-LK, in collaboration with the MCC Threshold Program and USAID, carried out an extensive KYC campaign for non-bank financial institutions in 2008. With respect to the physical movement of currency, Article 16 of Law No. 15/2002 contains a reporting requirement for any person taking cash into or out of Indonesia in the amount of 100 million Rupiah or more, or the equivalent in another currency, which must be reported to the Director General of Customs and Excise. These reports must be given to the PPATK in no later than five business days and contain details of the identity of the person. Indonesia Central Bank regulation 3/18/PBI/2001 and the Directorate General of Customs and Excise Decree No.01/BC/2005 contain the requirements and procedures of inspection, prohibition, and deposit of Indonesia Rupiah into or out of Indonesia. The Decree provides implementing guidance for Ministry of Finance Regulation No.624/PMK. 2004 of December 31, 2004, and requires individuals who import or export more than IDR 100 million in cash (approximately U.S. $8,500) to declare such transactions to Customs. This information is to be declared on the Indonesian Customs Declaration (BC3.2). The cash declaration requirements do no cover bearer negotiable instruments as required by FATF's Special Recommendation IX. In addition, cash can only be restrained if the passenger fails to disclose or a false declaration is made. In most cases, the cash is returned to the traveler after a small administrative penalty is applied. There is no clear authority to stop, restrain or seize money that is suspected of promoting terrorism or crime or constitutes the proceeds of crime. As of end-October 2008, the PPATK has received more than 2,764 reports from Customs on cross border cash carrying issues. The reports were derived from airports in Jakarta and Denpasar, the seaports of Batam and Tanjung Balai Karimun, Bandung, Batam, Denpasar, Medan and Dumai. Despite these reports, detection capacity remains weak and criminal penalties are limited and are not being applied. Indonesia's bank secrecy law covers information on bank depositors and their accounts. Such information is generally kept confidential and can only be accessed by the authorities in limited circumstances. However, Article 27(4) of the Law No. 15/2002 expressly exempts the PPATK from "the provisions of other laws related to bank secrecy and the secrecy of other financial transactions" in relation to its functions in receiving and requesting reports and conducting audits of providers of financial services. In addition, Article 14 of the Law No. 15/2002 exempts providers of financial services from bank secrecy provisions when carrying out their reporting obligations. Providers of financial services, their officials, and employees are given protection from civil or criminal action for making required disclosures under Article 15 of the anti-money laundering legislation. There is a mechanism to obtain access to confidential information from financial institutions through BI regulation number 2/19/PBI/2000. PPATK has the authority to conduct supervision and monitoring compliance of providers of financial services. PPATK may also advise and assist relevant authorities regarding information obtained by the PPATK in accordance with the provisions of this Law No. 15/2002. The GOI has limited formal instruments to trace and forfeit illicit assets. Under the Indonesian legal system, confiscation against all types of assets must be effected through criminal justice proceedings and be based on a court order. Banking legislation pending with the House of Representatives would allow BI to take freezing action on its own authority. BI officials expect this legislation to be approved in 2009. The GOI has no clear legal mechanism to trace and freeze assets of individuals or entities on the UNSCR 1267 Sanctions Committee's consolidated list, and there is no clear administrative or judicial process to implement this resolution and UNSCR 1373. While the BI circulates the consolidated list to all banks operating in Indonesia, this interagency process is too complex and inefficient to send out asset-freezing instructions in a timely manner. In addition, no clear instructions are provided to financial institutions as to what will happen when assets are discovered. Banks also note that without very specific information, the preponderance of similar names and inexact addresses, along with lack of a unique identifier in Indonesia, make identifying the accounts very difficult. Attempts to use a criminal process are confusing and ad hoc at best, and rely on lengthy investigation processes before consideration can be given to freezing or forfeiting assets. Indonesia has a draft asset forfeiture bill, which, if enacted, would give a wide range of powers to investigating officials to identify and trace property. Comprehensive figures for assets frozen, seized and/or forfeited are not compiled in a central location. The Corruption Eradication Commission reports that it seized, froze or confiscated assets in corruption-related cases in the amount of IDR 404 billion (about U.S. $33.7 million) in 2008, through October 31. This compares to assets of IDR 45 billion (about U.S. $3.8 million) in 2007 and IDR 12.7 billion (about U.S. $1.06 million) in 2006. Article 32 of Law No. 15/2002, as amended by Law No. 25/2003, provides that investigators, public prosecutors and judges are authorized to freeze any assets that are reasonably suspected to be the proceeds of crime. Article 34 stipulates that if sufficient evidence is obtained during the examination of the defendant in court, the judge may order the sequestration of assets known or reasonably suspected to be the proceeds of crime. In addition, Article 37 provides for a confiscation mechanism if the defendant dies prior to the rendition of judgment. In August, 2006, the GOI enacted Indonesia's first Witness and Victim Protection Law (No. 13/2006). Members have been chosen in 2008 for a new Witness and Victim Protection Body, established by this law. Indonesia's AML Law and Government Implementing Regulation No. 57/2003 also provide protection to whistleblowers and witnesses. An additional implementing regulation, No. 44/2008, issued May 2008, addressed provision of compensation, restitution and assistance to witnesses and victims. The October 18, 2002 emergency counter-terrorism regulation, the Government Regulation in Lieu of Law of the Republic of Indonesia (Perpu),No. 1 of 2002 on Eradication of Terrorism, criminalizes terrorism and provides the legal basis for the GOI to act against terrorists, including the tracking and freezing of assets. The Perpu provides a minimum of three years and a maximum of 15 years imprisonment for anyone who is convicted of intentionally providing or collecting funds that are knowingly used in part or in whole for acts of terrorism. However, the terrorist financing regulation appears to suffer from a number of deficiencies. For example, the terrorist financing offense must be linked to a specific act of terrorism and the prosecution must prove that the offender specifically intended that the funds be used for acts of terrorism. This regulation is necessary because Indonesia's anti-money laundering law criminalizes the laundering of "proceeds" of crimes, but it is often unclear to what extent terrorism generates proceeds. Terrorist financing is therefore not fully included as a predicate for the money laundering offence. In October 2004, an Indonesian court convicted and sentenced one Indonesian to four years in prison on terrorism charges connected to his role in the financing of the August 2003 bombing of the Jakarta Marriott Hotel. The PPATK issued Decision No. Kep.13/1.02.2/PPATK/02/08, dated February 4, 2008, regarding Guidelines on Identification of Suspicious Financial Transactions related to Terrorism Financing for Financial Service Providers. The GOI has begun to take into account alternative remittance systems and charitable and nonprofit entities in its strategy to combat terrorist financing and money laundering. Bank Indonesia issued circular letter 8/32/DASB, issued December 20, 2006, requiring registration of non-bank money remitters since January 1, ¶2007. BI intends to issue another circular in 2008 which will replace this registration system with a licensing system, effective January 1, 2009. Currently 13 non-bank money remitters have registered with BI, and several others have pending registration applications. The PPATK has issued guidelines for nonbank financial service providers and money remittance agents on the prevention and eradication of money laundering and the identification and reporting of suspicious and other cash transactions. The PPATK issued Decision no. KEP-47/1.02/PPATK/06/2008, dated June 2, 2008, regarding Guidelines on the Identification of High Risk Products, Customers, Business and Countries for Financial Service Providers. The GOI has initiated a dialogue with charities and nonprofit entities to enhance regulation and oversight of those sectors. BI also issued the following provisions concerning money changers to improve implementation of Recommendation 5 on Customer Due Diligence and Record Keeping: BI Regulation No. 9/11/PBI/2007, dated September 5, 2007; BI Circular Letter No. 9/23/DPM, dated October 8, 2007, concerning the permit procedure, implementation of KYC principles, supervision, reporting and imposition of sanctions for non-bank money changers; BI Circular Letter No. 9/36/DPND, dated December 19, 2007, concerning the permit and reporting procedures for banks which perform business activity as money changers; and BI Circular Letter No. 9/38/DPBPR, dated December 28, 2007, concerning the permit and reporting procedure for rural banks and sharia rural banks which perform business activity as money changers. PPATK and BI carried out an authorized money changer awareness campaign during the second half of 2007 and the first half of 2008, in collaboration with the Millennium Challenge Corporation Threshold Program and USAID. BI has effective legal powers and policies in place to ensure that shell banks are not permitted, although there is no explicit legislative prohibition on establishing a shell bank in Indonesia. The bank licensing procedures followed by BI effectively precludes establishment of a shell bank and BI Regulation 3/10/PBI/2003 as amended by 5/21/PBI/2002 provides that banks in Indonesia are required to refuse to open an account and/or conduct transactions with any prospective customer incorporated as a shell bank. Bearer shares appear to remain a feature of the Indonesian financial system, as the law previously permitted both bearer and registered shares. The new Limited Liability Company Law (Law 40/2007),August 16, 2007, prohibits bearer shares. This provision, in conjunction with the new Investment Law, prevents parties from making nominee arrangements. Complete implementing regulations have not yet been issued for the new law and the process for removing bearer shares from the system is not clear. Previously issued bearer shares appear to remain valid. The Indonesian government has established a number of special economic zones to attract both foreign and domestic investment. In 2007, the House of Representatives approved establishment of FTZs in the Batam, Bintan and Karimun islands. The GOI established a Batam- Bintan- Karimun Free Trade Zone Council and has made preparations for the implementation of free trade zone regulations. Batam Island, located just south of Singapore, has long been a bonded zone in which investment incentives have been offered to foreign and domestic companies. In 2007, 973 foreign companies and joint ventures had invested more than U.S. $1 billion in the zone. Numerous Indonesian authorities perform supervision over firms located in the special economic zones (the Investment Coordinating Board, the Ministry of Laws and Human Rights, the Ministry of Manpower, the Ministry of Finance). Supervision includes confirming identities of investors. In Batam, other authorities exercising supervision include the Batam Industrial Development Authority and the Municipality of Batam. The GOI is currently in the process of drafting regulations providing wider authority for Customs & Excise officials to regulate the flow of goods through the new Batam FTZ, given the FTZ's vulnerability to smuggling. Indonesia is an active member of the Asia/Pacific Group on Money Laundering (APG),and currently serves as the co-chair. The APG conducted its second mutual evaluation of Indonesia in November 2007 and the report was discussed and adopted at the APG Annual Meeting in July 2008. In June 2004, PPATK became a member of the Egmont Group. The PPATK has pursued broader cooperation through the MOU process and has concluded 27 MOUs, 25 of which were with other Egmont FIUs. The PPATK has also entered into an Exchange of Letters enabling international exchange with Hong Kong. Indonesia has signed Mutual Legal Assistance Treaties with Australia, China and South Korea. Indonesia joined other ASEAN nations in signing the ASEAN Treaty on Mutual Legal Assistance in Criminal Matters on November 29, 2004, though the GOI has not yet ratified the treaty. The Indonesian Regional Law Enforcement Cooperation Centre was formally opened in 2005 and was created to develop the operational law enforcement capacity needed to fight transnational crimes. The GOI has enacted Law No. 7/2007 to implement the 1988 UN Drug Convention, to which it is a party. The GOI also has enacted Law No. 22/1997 Concerning Drugs and Psychotropic Substances, which makes the possession, purchase or cultivation of narcotic drugs or psychotropic substances for personal consumption a criminal offense. The GOI is a party to the UN International Convention for the Suppression of the Financing of Terrorism and a party to the UN Convention against Corruption. The GOI has signed but has yet to ratify the UN Convention against Transnational Organized Crime. Indonesia is ranked 126 of 180 countries ranked in Transparency International's 2007 Corruption Perception Index. While the Government of Indonesia has made progress in constructing an AML regime, efforts to combat terrorist financing have been weak. Sustained public awareness campaigns, new bank and financial institution disclosure requirements, and the PPATK's support for Indonesia's first credible anti-corruption drive has led to increased public awareness about money laundering and, to a lesser degree, terrorist financing. Increased prosecution of high-profile corruption cases in 2008 was an important advance in the GOI's efforts to eradicate pervasive corruption. Further investment in human and technical capacity and greater interagency cooperation are needed to develop an effective anti-money laundering regime. The highest levels of GOI leadership should continue to demonstrate strong support for strengthening Indonesia's anti-money laundering regime. In particular, the GOI must continue to improve capacity and interagency cooperation in analyzing suspicious and cash transactions, investigating and prosecuting cases, and achieving deterrent levels of convictions. As part of this effort, Indonesia should review and streamline its process for reviewing UN designations and identifying, freezing and seizing terrorist assets, and become a party to the UN Convention against Transnational Organized Crime. End text. ¶4. Post point of contact for the draft text is Economic Officer Debra Juncker (JunckerDA@state.gov; Tel: 62-21-3435-9074; Fax: 62-21-3435-9935. HUME