Fighting corruption: Strengthening the system for the sake of the whole

In terms of corruption, Indonesia performs poorly. In 2012 Transparency International ranked Indonesia 118th out of 176 countries, with a Corruption Perception Index score of 32 on a scale of 0-100. Endemic and systematic corruption is a major factor hindering development and is a bane to foreign investment.

Corruption has been responsible in crafting pandemonium in Indonesia, not only from an economic point of view, but also because it encourages most Indonesians to welcome corruption as a way of life. It is not difficult to see how Indonesia’s past financial crisis was caused by corruption, which has succeeded in increasing the country’s vulnerability to economic shocks. Since 1998 anti-corruption strategies have been a major component of Indonesia’s official reform programme, in a hope to restore the nation to stability.

At All Levels

In Indonesia corruption can be found at nearly all levels. There are many cases where high, middle or low-level government officials are found to be involved in either petty corruption or grand-scale schemes. The main weapon of the anti-corruption strategies is to reduce corruption through policy changes. Indonesia has ratified the UN Convention against Corruption. The country has also issued several regulations to eradicate corruptions, such as the Anti-Corruption Law, the Corruption Eradication Commission (Komisi Pemberantasan Korupsi, KPK) Law, and Anti-Money Laundering Law.

Despite the positive gains in combating corruption, there is a disturbing trend in the enforcement of the Anti-Corruption Law: criminalisation of civil and commercial matters. Most corruption cases prosecute defendants from the public or private sector involved in public sector projects, whereby defendants from both sectors will be simultaneously prosecuted and punished. Nevertheless, in the recent Chevron bioremediation case and Indosat Mega Media (IM2) case, the Anti-Corruption Law has been enforced only to defendants from the private sector. The Attorney General’s Office investigated and prosecuted the alleged corruption crime by employees of Chevron Pacific Indonesia (CPI), a wholly owned subsidiary of Chevron and IM2, itself a subsidiary of Indonesia’s telecommunication giant Indosat — controlled by Qatar Telecom.

Simultaneously, a criminal proceeding against Merpati Nusantara Airlines has also gained publicity for its criminalisation of business procedures.

Chevron Bioremediation Case

In the Chevron bioremediation case, the core issue has been a civil and commercial matter: the procurement of bioremediation work contracts and the recovery of the projects’ costs under a production-sharing contract (PSC) between the government (represented by SKK MIGAS) and CPI. The PSC governed the cost recovery mechanism in this arrangement, in which the oil contractor – CPI – is entitled to the recovery of operational costs in the oil production. The recovery is deducted from the total oil production from the operation. The PSC also regulates the mechanism for settling discrepancies or disagreement in the amount of recovered costs, from audit and correction, to arbitration.

The bioremediation projects are environmental projects designed to mitigate the environmental effect of crude-oil-contaminated soil, which have been developed and successfully implemented since 1998 by CPI.

In the executions of such projects, CPI employed the services of two independent contractors for the civil works, however, the projects are under full responsibility and constant supervision of CPI. The projects are reported and evaluated regularly by the Ministry of Environment, while procurement of the bioremediation contractors by CPI, as well as the costs for the bioremediation project, has always been reported and approved by SKK MIGAS — as the supervisory body for upstream oil and gas business activities.

The Attorney General’s Office of Indonesia received a complaint that the bioremediation projects in 2006-11 were fictitious. Since the projects’ costs are recovered by cost recovery mechanism under the PSC, such allegations would imply state losses were the projects indeed fictitious. In the unfolding of the case, seven individuals from CPI and the civil works contractors were named as suspects and later tried as defendants in the Corruption Court at the Central Jakarta District Court. However, the indictments carried no allegation of conspiracy for individuals from the public sector. Individuals from SKK MIGAS and the Ministry of Environment, the relevant authorised institutions, were only brought in as witnesses. This and other irregularities in the due process of law (i.e. that the facts the bioremediation expert presented by the Attorney General’s Office had a conflict of interest) ignited fury that this case was a criminalisation of civil and commercial matters.

IM2 Case

On October 6, 2011, Denny AK, a non-governmental organisation activist, filed a criminal report on the basis of suspected of corruption crime in the cooperation agreement between Indosat and IM2. The Attorney General’s Office initiated an investigation based on this report. On February 6, 2012, Denny sent a letter demanding that the president director of Indosat meet him and that if his demand was not met, he would proceed with his criminal report.

Indosat suspected Denny’s intention for blackmailing, which was later proven: Denny was caught by the state police in an operation blackmailing Indosat management. On October 30, 2012 the Central Jakarta District Court convicted him of the crime.

Despite Denny’s blackmail attempts, the case against IM2 proceeded. The president director of the firm, Indar Atmanto, was accused of having caused state losses as the cooperation agreement between IM2 and Indosat on broadband internet access of 3G/HSDPA network programme did not fully utilise permanent closed networks pursuant to the permit that was issued to it by the Ministry of Communication and Informatics. The Corruption Court declared Atmanto guilty in its verdict handed down on July 8, 2013.

The Ministry of Communication and Informatics issued two official letters stating that there has been no infringement in the cooperation between IM2 and Indosat. The ministry and the Indonesian Telecommunication Regulatory Agency reported in several press releases that there was a misunderstanding on the part of the investigators and prosecutors regarding regulations on telecommunications and technical aspects of specific business activities and IT in general related to this case. Both stated the danger of such misunderstanding to the development of the telecommunications industry in Indonesia. The biggest threat is posed against the 200 independent service providers that implement the same business model.

Merpati Case

Merpati Nusantara Airlines, a state-owned firm, entered a lease agreement with an American-based aircraft leasing company in 2006, by which Merpati paid a refundable $1m security deposit in the event the leasing company did not deliver the aircrafts. Following the leasing company’s failure to deliver the aircraft and refusal to return Merpati’s deposit, Merpati filed a claim before the US District Court for the District of Colombia in March 2007. The court granted Merpati’s claim for refund of the security deposit; however, the execution of the court’s judgment did not go smoothly, and Merpati had to pursue the company’s assets through two periods of boards of directors. On July 30, 2010, Merpati finally received a partial refund, but going forward the firm’s management decided to discontinue the pursuit due to financial issues.

In 2011 the Attorney General’s Office indicted Hotasi Nababan and Hendra Yospin, the directors of Merpati, with corruption on the basis that their management decision not to pursue compensation had led to state losses. Previously, the matter had been investigated by the State Financial Audit Agency (Badan Pemeriksa Keuangan, BPK), the Criminal Detection Unit of the state police, the Junior Attorney General for Special Crime and the Junior Attorney General for Intelligence at the Attorney General’s Office, and the KPK.

All previous investigations found no indication of corruption. The KPK even issued an official letter stating that the aircraft lease agreement and the security deposit issues do not qualify as corruption crime. Nevertheless, the Attorney General’s Office insisted on prosecuting the defendants before the Corruption Court. However, the defendants were proven and declared not guilty on February 19, 2013. During the examination, an ex-official from the Attorney General’s Office, the prosecuting institution, testified that the investigation of this matter should be terminated since it is not a corruption crime.

Finding A Better Balance

In Indonesia, defendants in corruption cases generally receive little or no sympathy from the public. However, in the Chevron bioremediation, IM2 and Merpati cases, much of the public sympathised with the defendants and criticised the examination process. The enforcement of the AntiCorruption Law was perceived with suspicion as the criminalisation of business as it involved the prosecution of individuals from the private sector without involving or extending prosecution to public officials.

Additionally, there has been a tendency for the AntiCorruption Law to be applied almost exclusively against the private sector in cases where business transactions involve losses to the state budget.

For example, in the Chevron bioremediation case, the main debate centred on whether the cost recovery for the bioremediation project was within the scope of the Anti-Corruption Law. The first argument was that cost recovery in the oil and gas industry is not deducted from the state budget, but from the total oil and gas production of the contractor’s operation. Second, a PSC is a civil contract between the government and a private entity that has provided the mechanism for settling discrepancies or disagreements regarding items and amount of cost to be recovered.

Therefore, even if there is a discrepancy in the future calculation of cost recovery for the projects, it should be settled according to the dispute settlement mechanism established under the PSC, i.e. through audit and correction of the calculation for the ongoing year. Furthermore, the examination of this case has led to scepticism regarding the authority and legitimacy of two government institutions – SKK MIGAS and the Ministry of Environment – calling into question their clearance, approval and statement of compliance.

Need For Clarity

In the Chevron bioremediation case there was change in the understanding of a PSC. The relationship between the state and the contractor is not limited only by contractual relations, but also by the scope of the Anti-Corruption Law. In the Merpati case, a wrong business judgment was qualified as a crime.

This is contradictory with the principle that no one shall be liable for a business judgment made with due care. Whatever outcome of such judgment, simple business risks shall not be criminalised. There are many other corporations exposed to the same criminalisation risk, but these cases have not yet escalated to court trials. Judging from the wave of requests for legal advice these businesses are seeking from local firms, more companies are losing confidence in the safety of the business they are doing if it has even the slightest connection to the state and/or state funds.

Whether or not the abovementioned cases are criminalised, one fact remains clear: the anti-corruption regulations lend themselves, and indeed have been applied, to the private sector, even without the simultaneous targeting or involvement of the public sector. This appears to confirm the notion that as long as the transaction could result in state losses, the anti-corruption regulations are applicable, despite the fact that the transactions are under the control and supervision of the authorised state institutions.

In the Chevron bioremediation case, officials from the Ministry of Environment and SKK MIGAS, which serve as the state’s supervisory institutions, have testified that there was no infringement on the part of CPI. As for the IM2 case, the Ministry of Telecommunication and the Indonesian Telecommunication Regulatory Agency likewise stated that no violation had been committed. Nevertheless, the cases have proceeded according to the legal interpretations of the prosecutors, which were later endorsed by the court, instead of deferring to the explanation provided by the institutions that issued the relevant regulations.

In light of these developments, it is important for investors in Indonesia to understand the implications of the anti-corruption regulations in the country, particularly if the investments involve use of public funds. Anti-Corruption Regulations: The main regulations used in corruption case proceeding are as follows: 1. Law No. 31 of 1999 on Eradication of Corruption, as lastly amended with Law No. 20 of 2001(Anti-Corruption Law); 2. Law No. 8 of 1981 on Criminal Procedure Law; 3. Law No. 28 of 1999 on the Corruption, Collusion and Nepotism Free State Governance; 4. Law No. 30 of 2002 on Corruption Eradication Commission (KPK Law); 5. Law No. 46 of 2009 on Corruption Courts ( Corruption Courts Law); 6. Law No. 8 of 2010 on Prevention and Eradication of Money Laundering; 7. Instruction by the president, Law No. 5 of 2004 on Acceleration of Corruption Eradication; and 8. Regulation No. 71 of 2000 on the Procedures of Public Participation and Reward for the Prevention and Eradication of Corruption Crime.

Defining Corruption

Needless to say, it is important to have clear and understandable definitions in ordinances. But for a crime most loathed by the public, the law is conspicuously missing a clear definition on what actions qualify as “corruption”. However, the spirit is clear, with the law intending to capture these creative white-collar criminal minds with their various and ever-changing methods in corrupting state fund. To this extent, the Anti-Corruption Law does categorise “corruption acts” into several types, as follows: 1. Acts that inflict a financial loss for the state, pursuant to Article 2 of the Anti-Corruption Law; 2. Bribery, pursuant to Article 5(1) part A and part B, Article 5(2), Article 6(1) part A and B, Article 6(2), Article 11, Article 12 parts A through D, and Article 13; 3. Embezzlement during services, pursuant to Article 8, Article 9, and Article 10 parts A through C; 4. Extortion, as per Article 12 parts E, G and H; 5. Fraud, pursuant to Article 7(1) parts A through D, Article 7(2) and Article 12 part H; 6. Conflict of interests during procurements, pursuant to Article 12 part I; 7. Gratification, pursuant to Article 12 B in conjunction with Article 12 C; and 8. Conspiracy on corruption, pursuant to Article 15 and Article 16. Moreover, the Anti-Corruption Law also governs other crimes related to corruption, as follows: 1. Interruption of the examination of a corruption case, pursuant to Article 21; 2. Refusal of a person to provide information or to deliberately provide misleading information regarding a corruption case, pursuant to Article 22 in conjunction with Article 28; 3. Refusal by a bank to provide information on the bank account of a corruption suspect, pursuant to Article 22 in conjunction with Article 29; 4. A witness or expert witness who declines to provide information or provides misleading information regarding a corruption case, pursuant to Article 22 in conjunction with Article 35; and 5. False information given by a person who holds occupational secrecy (rahasia jabatan) or where such person declines to provide any information, pursuant to Article 22 in conjunction with Article 36. From the abovementioned categories, Articles 2 and 3 get the most attention, as both are the easiest to interpret widely, and thus prone to the application for the criminalisation of civil and commercial matters.

Aside from irregularities in the due process of law, the Chevron bioremediation, Merpati and IM2 cases have one thing in common: their indictments are based on Article 2 and/or 3 of the Anti-Corruption Law . Pursuant to Article 2 and 3 of the law, to qualify someone as having committed a corruption crime, the following elements shall be met altogether: 1. A person enriches himself or others or a firm; 2. Where such act to self-enrich or enrich others is considered as unlawful (Article 2); 3. The act demonstrates abuse of authority, opportunity or means available to the actor with the intention of enriching himself or others; and 4. The act could inflict a financial loss to the state.

Gratification

Gratification is not an element of Article 2 and 3 of the Anti-Corruption Law, but is regulated under dedicated provisions in Article 12B and 12C of the law. Gratification is any kind of gift given to a public official or civil servant, including money, goods, discounts, commissions, loans without interest, travel tickets, accommodation facilities, travel expenses, free medical treatment, or other benefits or facilities.

Gratification constitutes as a bribe if it has anything to do with the recipient’s official capacity or is against his/her fiduciary duties and obligations. Gratification has been perceived as culturally acceptable in Indonesia, and only became a crime after the enactment of the amendment to the Anti-Corruption Law. Business actors shall be aware of the risk in giving any kind of gift to public officials. The KPK has provided a reporting mechanism for any public official receiving gifts, in which KPK will determine the status of the gratification based on objective examinations.

Judicial Authority

The state police, the Attorney General’s Office and the KPK all have the authority to investigate corruption crimes. However, only the KPK and Attorney General’s Office have the authority to prosecute corruption crimes. The state police and the Attorney General’s Office also have jurisdiction on crimes other than corruption, but the KPK is a special body with the main task and authority to coordinate and supervise corruption cases, including investigations (penyelidikan dan penyidikan) and prosecutions (penuntutan) pursuant to the prevailing law.

On December 27, 2002, the government enacted Law No. 30 of 2002, which was the legal basis for the establishment of the KPK Law and the commission itself. In carrying out the tasks and authorities granted to it, the KPK must be independent and free from the influence of any power. According to KPK Law, the KPK is responsible for coordinating with the authorities to combat corruption and conduct supervision over state institutions authorised to combat corruption (i.e. the police and the Attorney General’s Office); COORDINATION & COURTS: Theoretically, the KPK and other law enforcement bodies with authority to investigate and prosecute corruption crimes are partners and meant to coordinate. However, there are cases in which the suspects/defendants are individuals from the KPK’s partner institutions, creating friction among the Anti-Corruption Law enforcement agencies.

The KPK Law is also the legal basis for establishment of the Corruption Courts in Indonesia. The Corruption Courts were established on the basis of the general court environment (lingkungan peradilan umum), located in the Central Jakarta District Court and covering jurisdictions of the entire area of the Republic of Indonesia. The Corruption Courts also have jurisdiction over corruption cases conducted by Indonesians outside the area of the republic. The Corruption Courts are further regulated by the Corruption Courts Law.

Corruption & Money Laundering

The public often sees corruption as tied to money laundering activities. This view is reasonably correct, as assets that become the object of money laundering are often derived from corruption. Rationally, the corruptors try to hide their corruption-derived assets through any possible methods, making it difficult, if not impossible, for the law enforcers to track it down. On October 22, 2010 the government enacted Law No. 8 of 2010 to replace Law No. 15 of 2002 on Money Laundering, as amended by Law No. 25 of 2003. The Anti-Money Laundering Law identifies three different forms of money laundering: 1. An action of a person or company to place, transfer, assign, shop, pay, grant, deposit, carry out abroad, transform, exchange with other currencies or bonds, or other acts over an asset which is known or must reasonably be known to have resulted from the types of crime set out under Article 2 of Anti-Money Laundering Law (including corruption), with a purpose to hide or dissemble the origin of such asset. This action is subject to imprisonment of up to 20 years or a fine up to the maximum amount of Rp5bn ($500,000); 2. An action of a person or company to hide or dissemble the origin, source, location, designation, assignment of rights or original ownership of an asset known or reasonably known to have come from corruption. This action is subject to imprisonment of a maximum of 20 years or a fine in the amount of up to Rp5bn ($500,000); or 3. An action of a person or company to accept or control the placement, transfer, payment, grant, donation, deposit, exchange or usage of an asset that is known or must reasonably be known to have resulted from corruption. This action is subject to imprisonment of maximum 20 years or fine in the amount of up to Rp1bn ($100,000). However, this particular type of money laundering will not be applicable to the informants who conduct the reporting obligations set out in the Anti-Money Laundering Law.

Other Provisions

The Anti-Money Laundering Law also covers regulations on other conducts, such as the prohibition to carry cash abroad if it is of greater value than Rp100m ($10,000). As a further step to combat money laundering, the government established the Indonesian Financial Transaction Reports and Analysis Centre (Pusat Pelaporan dan Analisis Transaksi Keuangan, PPATK). The functions of this centre are as follows: a. To prevent and combat money laundering; b. To maintain data obtained by the centre; c. To supervise the compliance of informants; and d. To conduct analysis and investigation on reports and information regarding financial transactions having money laundering or corruption natures. In conducting its duties, the PPATK reports directly to the president of the republic, and all persons are prohibited from interfering with the duties and authority of the centre. The following rights are granted to the PPATK to carry out its task on the prevention and eradication of money laundering: a. To request information from government institutions and/or private entities having authorities to maintain data and information, including the ones receiving reports from specific professions; b. To stipulate the guidelines on identification of suspicious financial transactions; c. To coordinate the prevention of money laundering with relevant institutions; d. To provide recommendation to the government on the prevention of money laundering; e. To represent the government in front of various organisations relating to the prevention and eradication of money laundering; f. To organise education and trainings programmes on anti-money laundering; and g. To organise socialisation on prevention and eradication of money laundering. As part of its responsibility to provide legal protections, the authority and employees of the PPATK, including its related investigators, prosecutors and judges, are obliged to protect the identities of any informants.

The Anti-Money Laundering Law grants investigators, prosecutors and judges the right to freeze those assets known or reasonably known to have been the result of a crime conducted by a person who is a money-laundering suspect or defendant. The investigations and prosecution during a court proceeding, as well as the enforcement of a legally binding decision on a money laundering case must be carried out pursuant to the country’s prevailing regulations.

Obligations Towards Employees

Another matter that must be considered when an employee of a private company is being investigated, prosecuted or tried on corruption charges is the said employee’s rights as a worker. Law No. 13 of 2003 on Labour (the “Labour Law”) is the primary legislation at work in Indonesia that regulates such matters with Article 160.

During the criminal proceeding (including investigation, prosecution and court trial stages), the suspect/defendant is entitled to full and normal remunerations and benefits. The company’s obligation to pay the salary will cease and be substituted by the obligation to provide support to the suspect’s family only if the accused is detained in the course of the criminal proceeding. Article 160 paragraphs (1) and (2) of the Labour Law provide that the amount of support is proportional to the number of the employee’s dependents. The family is entitled to receive support in the amount of 25% of the employee’s salary if there is only one dependent, 35% for two dependents, 45% for three dependents and 50% if there are four or more dependents. The suspect/defendant is also only entitled to such support for maximum period of six months.

In sum, the rights of employees articulated in the Labour Law are the minimum standard that the company must provide to its employees. However, the firm may provide better rights to the employees under the employment agreement and/or the collective labour agreement. This is confirmed in the General Elucidation and Elucidation of Article 61 paragraph (5) of the Labour Law. Accordingly, the collective labour agreement must not provide fewer rights to the employees than the rights under the law. In case the collective labour agreement provides better rights to the employees, the firm is bound to fulfil the suspect/defendant’s rights according to the collective agreement.

No Work, No Pay

Furthermore, in the event that the suspect/defendant is found guilty by a final, binding court judgment and therefore must serve imprisonment, the company may terminate the employment. Nevertheless, if the company decides not to terminate employment, there is no obligation to provide any remunerations and benefits as the suspect/defendant will not be able to perform his or her work duties properly because of his/her faults (criminal offence). This is pursuant to the “no work, no pay principle” of Article 93 paragraph (1) of the Labour Law and its elucidation.

Need For Commitment & Clarity

Indonesia’s commitment to fight corruption is essential to create a favourable business environment. Such monitoring has always gained industries’ full support, and the concern for business criminalisation does not at all suggest any resistance to the state’s commitment to fight corruption. However, the fight must still establish its legitimacy by drafting clear rules or parameters in qualifying corruption crime and applying enforcement it consistently, so that the Anti-Corruption Law does not become counterproductive to investment. In short, the nation’s business environment requires a clear rule of law and principles with consistent applications in order to establish legal certainty for firms.

The disturbing trend of criminalising civil/commercial matters is alarming to both current and potential investors, which further engenders legal uncertainty and increases the risk for public-private partnerships in Indonesia. Furthermore, the negative impact of such a trend is not limited to the investment. Following the developments of the Chevron bioremediation case, oil operations in Indonesia shut down their bioremediation projects, which left crude-oil-contaminated soil – hazardous waste – untreated due to fear of criminal prosecution, creating additional environmental issues.

Negative Impacts

Hopefully, the trend to criminalise civil and commercial affairs will be outdated soon and replaced by a real effort to combat corruption by the law enforcement agencies. Fear of criminalisation on cost recovery practices as in Chevron bioremediation case may slow down the oil and gas business activity in Indonesia, which is counterproductive to the government’s plan to increase oil production. The IM2 case has spread fear among the growing information technology industry, and the Merpati case has made the officers of state-owned companies reluctant to make business decisions in fear of causing state loss. Public projects, which were once attractive projects because they carried government assurances, have become less desirable by private contractors as they involve state funds — which could be an entry point for corruption crime charges. As for ongoing projects, some stakeholders are questioning and re-evaluating the possibility of criminalisation for the business judgments made.

This situation is equally dire for Indonesia as a whole. The country still requires investments to keep the economy growing and build infrastructures. With this trend, investment frailty is an imminent threat, especially given that neighbouring countries are promoting a more conducive situation for investment. More importantly, the government is prone to be subject to investment claims due to the breach of investment protection warranties. This is ironic but true, given that the law enforcement agencies are part of the government structure that requested companies to invest in Indonesia and had promised to guarantee that their relationships would be governed by mutual benefit and the sanctity of the contractual relationship between the parties.