Combating Corruption in Indonesia since 1997

Prof. Dr. Anwar Nasution Chairman, The Audit Board of Indonesia

A slide presentation prepared for the Second Meeting of the INTOSAI's Working Group "Fight against International Money Laundering and Corruption FAIMLAC" Cairo, Egypt, 29-31 July 2008

Background
1. Indonesia is one of the world's most corrupt countries and ranks 143rd on the list of British-based Transparency International's global corruption index. Booz-Allen Hamilton survey of 1988 and McKinsey & Co in 2001 indicated low rank of corporate governance indexes of Indonesia;
2. The Asian Crisis in 1997-98 was much more severe in Indonesia than in other crisis-hit countries in terms of: a. the loss in output and employment; b. the drop in external value of domestic currencies; c. the cost of bank recapitalization that amounted to 50 percent of its annual GDP in 1988.
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Four reasons for paying bribes

There are four reasons for bribing government officials and politicians in Indonesia, namely: 1) To pay, above the formal user charges, for basic government services or public goods, such as identity cards, security, protection and justice from the corrupt government officials; 2) To secure licenses and concessions for natural monopolies including exploitation of natural resources and benefits from government procurements, subsidized credit from state-owned banks, purchase of low prices of goods and services from government-run companies and privatization of state-owned enterprises; 3) To breach rules and regulations, avoid paying taxes, excises and customs, bribes corrupt legal system from the police, military, prosecutors, judges and prison wardens; 4) To bid for lucrative official positions in the state bureaucracy including Governor of the Central Bank and management of state-owned enterprises. 'Money politics has increased sharply in the multi-party elections and has contaminated corrupt politicians.
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Five Policies to Combat Corruption

Indonesia has adopted five policy measures to overcome the crisis and combat corruption: 1) through eliminating rent-seeking activities by adopting orthodox supply side economic policy. This was part of policy reforms introduced under the IMF stabilization program in 1997-2003; 2) through replacing the authoritarian political system with democracy. This ended direct engagement of the armed forces and police in politics; 3) through replacing the centralized government system by granting broad autonomy to local government at the sub-province levels (districts and municipality). This devolves expenditure responsibility to local governments. Main taxing power, however, remains at the hands of the central government; 4) through restoring the independence and autonomy of BPK as the State Audit Institution; 5) through establishing, in 2003, an independent the Corruption Eradication Commission (KPKKomisi Pemberantasan Korupsi), a powerful super body to deal with corruptions. KPK is authorized to prosecute corruptors, to take preventive measures such as examination of wealth and gratification reports, and to engage in anti-corruption education. A special court for corruption has also been established to process corruption cases. The Indonesian Financial Transaction Reports and Analysis Centre (PPATK) was established under Law 25 of 2003 to strengthen its anti-money laundering regime.
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The Supply Side Economic Policies

The supply side economic policies include: 1) the use of market mechanism; 2) the promotion of free competition by deregulation of business permit and licensing system. These include reform of military procurement and business as well as its foundations (yayasans); 3) the replacement of non-tariff barriers (NTB) with tariffs and reduces tariff rates; 4) the improvement in transparency and accountability of the fiscal system, including government procurement; 5) the elimination of program lending with subsidized interest rates at stateowned banks; 6) the corporatization of SOEs and privatize state assets. Previously, during President Suhartos administration, privatization of SOEs was only transfer of ownership from the state sector to politically well-connected business groups.
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Reforms of Fiscal System

The fiscal system reform was started with the issuance of a Presidential Decree on Government Financial Accountability in 2000. Major reforms were introduced with the promulgation of the three laws on state finance in 2003 and 2004: 1) Law No. 17 of 2003 on State Finance; 2) Law No.1 of 2004 on State Treasury; 3) Law No. 15 of 2004 on Auditing the Management and Accountability of State Finance.

Elements of the Fiscal Reforms

The fiscal reforms include measures to: 1) unify government budget by ending separation between routine and development expenditures; 2) incorporate non-budgetary funds and quasi fiscal activities into the State Budget (APBN); 3) adopt a double entry and accrual accounting system and multi-years performance based budgeting; 4) use an integrated and computerized accounting system; 5) adopt a single treasury account; 6) clarify the role and responsibility of all state institutions at all levels; 7) decentralize the accounting implementation in a hierarchical manner by each accounting unit both at the central and sub-national levels; 8) promote a transparent and accountable process of preparation, implementation and reporting of state budget and use a tight time-frame for the accountability report; 9) improve transparency and accountability of financial transaction among government agencies in central and regional level or between the government and SOE, Regional Governments' owned enterprises and private company obtaining subsidy from the state.
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Restoring BPKs Autonomy and Independency

In line with the Lima Declaration of INTOSAI of 1997, the Law No. 15 of 2006 restores independency and autonomy of BPK as the State Audit Institutions. BPK is independent in: 1) auditing all public sector. BPK is mandated to audit the three layers of governmental system which is consisted of central government, 33 provinces and local governments (373 Districts and 100 Municipalities). BPK also audit over 150 SOEs and enterprises owned by provincial and local governments. However, the tax law prohibits BPK from auditing tax revenues and the Supreme Court refuses to disclose its collection of court fees; 2) financing matters as its budget is now directly comes from the Parliament. Prior to this BPK financing came from the government; 3) organization. Previously, any change in BPK organization needed approval from the government; 4) making decisions with regard to auditing; 5) personnel policy matters even though the staff still belong to civil servant corps.
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Strenghtening BPKs Capacity

BPK's Strategic Plan and Implementation Plan for the years of 2006-201 0 provide a roadmap for strengthening its capacity to fight corruption, enhance transparency, improve performance and efficiency and ensure the accountability of the three levels of government in Indonesia; The roles of BPK at present and in the future is depicted in Diagram-1.

Diagram-1 Roles of BPK at present and in the future

Assisting the people and decision makers to take future alternative choices

Scrutinizing public policy and its problems Evaluating and providing recommendations for the improvement of the effectiveness of and the efficiency of government policies and compliance with environmental regulations and sustainable development Assisting the Government in restructuring SOEs and public service organizations such as schools, universities and hospitals Assisting the Government in implementing the package of three laws on the state finance of 2003-2004 comprising: a) Incorporating non-budgetary funds and quasi fiscal activities into the State Budget (APBN); b). Clarifying the role and responsibility of state institutions at all levels; c). Promoting a transparent and accountable process of preparation, implementation and reporting of state budget. d). Improving transparency and accountability of financial transaction among government agencies in central and regional level or between the Government and SOE, ROE and private company obtaining subsidy from the state

Corruption eradication by reporting criminal suspected cases to the law upholders: Police, Attorney General I Tastipikor and Corruption Eradication Commission

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BPK Audit Reports

BPK gave a disclaimer opinion on the Financial Reports of both central and many local governments for the past four years, 2004 to 2007; The three layers of the Government are required to present their financial reports to be audited by BPK maximum three months at the end of the fiscal year in December. BPK is given another two months to prepare its Audit Reports to the Parliaments and the House of Regional Representative Council; The BPK Audit Reports are immediately made available to general public through its website as soon as they are presented to the Parliaments and the House of Regional Representative Council; Suspicious or alleged criminal cases are reported directly to law enforcement agencies for further investigations: . a. the Police, b. the Attorney General Office; and c. the Corruption Eradication Commission
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BPK Initiatives to speed up the fiscal reforms

BPK has taken four initiatives to speed up the fiscal reforms by: (1) encouraging improvements of government internal control systems by requiring all government agencies to present management representation letters to BPK; (2) requiring each government institution to present detailed action plan with definite time schedule on how to improve audit opinion of BPK. The plan include measures to: (a) meet the Government Accounting Standard of April 2005, (b) adopt single treasury account, (c) improve and integrate government computer system, (d) improve records on public sector assets and liabilities, (e) meet the strict time table for financial reporting and auditing, and (f) train accounting staffs at local universities; (3) advising the Central, provincial and local governments not to haphazardly issue conflicting and vague policies with multiple interpretations; . (4) suggesting the three layers Parliament and the Regional Representative Council to establish Public Accounts and Audit Committees
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Regressing to old bad habits.

While many institutional reforms look good on paper, they have in fact remained quite limited. a) States influence remains strong particularly on state-owned enterprises (SOEs), including banks. As the state still holds 'golden share', managements of the SOEs are still appointed by and accounted to the government. This has prevented the needed corporate government reforms that would enhance transparency and accountability, protect minority share holders and remove the old practices of crony capitalism. b) The legal system remains rotten and corrupt. This makes enforcement of contract, accounting standards virtually absent and bankruptcy resolutions insufficient

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Regressing to old bad habits.

d) Both governance of Bank Indonesia (BI), the central bank, and implementation of bank's prudential rules and regulations have been markedly deteriorating during the past four years. The report prepared by the State Audit Board of Indonesia (BPK) to Corruption Eradication Commission (KPK) indicates a serious accounting manipulation or fraud and alleged bribery by Bank Indonesia in 2003: i. In June 2003, there was a number of withdrawals of funds by Bank Indonesia amounted to Rp100 billions (roughly equivalent to over USD1 00 millions at the exchange rate Rp9,290 to the US dollar) from its training foundation (YPPI). The withdrawals funds were nether recorded in YPPIs book as expenditures nor recorded as revenues in Bank Indonesia's balance sheet; ii. The funds was withdrawn in cash from the account of YPPI at BI. This circumvented the know your customer (KYC) regulations and law on anti-money laundering (LML). The withdrawal scheme deliberately planned to breaches the KYC and LML regulations by the Heads of Accounting and Legal Directorates of BI; iii. Of the Rp100 millions, Rp68.5 million were allegedly used to influence prosecutors at the Attorney General to drop the cases of former Directors of Bank Indonesia who managed the central bank during the time of crisis in 1997. The former officials might also have been involved in other alleged criminal cases with regards to shady enforcements of capital adequacy ratio, legal lending limits and net open positions that had led to the banking crisis. In addition, there were alIegation of their involvements with the misuse of export credit facility during the crisis in 1997-98; iv. The other Rp31.5 billions were allegedly used to bribe some of Parliamentarians for influencing hearings with the central bank so that the procedure became lenient with regards to selection of its Board of Governors and the amendment of laws related to BI and its accountability.

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Regressing to old bad habits.

e) During their terms in office, Bank Indonesia was directly involved in many transactions of NV Indover of the Netherland that can be classified, using today's terminology, as money laundering. The money laundering includes the refinancing of PT Bank Duta that was collapsed due to foreign exchange speculation in 1990. In the beginning, Indover injected USD115 millions to rescue the bank with full guarantee from Bank Indonesia. The loan was repaid by four cronies of the former President Suharto who injected USD425 million to Yayasan Supersemar, one of the three foundations controlled by the President which owned the bank. Part of the injected funds was originated from credit received by the cronies from the now defunct stateowned bank, PT Bank Dagang Negara. Until now the credit has not been repaid. Fully owned by Bank Indonesia, NV Indover is a commercial bank based in Holland. Its main source of funds comes from the placement of external reserves of Bank Indonesia in that bank;

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Regressing to old bad habits.

f) Compliance with prudential rules and regulations of the banking industry has also been sharply eroded recently. Those who seriously violated prudential rules and regulations governing the banking system before and after the crisis in 1997-98 are now being allowed to become controlling shareholders and manage banks and even sit in the Supervisory Board of Bank Indonesia; g) Tax laws prohibit BPK from auditing tax collection. Nobody supervise the excessive powers of the tax office to set tax policy, collect taxes and supervise tax collection. Tax revenue in Indonesia remains very low at 13.5 percent of GDP. Of the over 230 million of its population, only around 6 million are effective taxpayers. News reports inundated with allegedly highly organized and institutionalized tax frauds, transfer pricing and corruption with regard to tax refunds. Media also reported a widespread corruption at the custom office and other public service institutions including immigration, car registration and police protection.
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