Despite Indonesia's overall success in eradicating the country of Islamic terrorists and implementing tougher AML and counter terrorist financing (CTF) laws, it continues to be closely monitored by the Financial Action Task Force (FATF). The country faces particular challenges in combating its large-scale illegal timber trade, which is not only important in relation to anti-money laundering efforts but also in relation to Indonesia's efforts to assist in combating climate change.
Indonesia is the world's fourth largest country and also an island-state comprising 13,466 islands is amongst the so-called Next Eleven or N-11 countries, which includes: Bangladesh, Egypt, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam. These were identified by Goldman Sachs in 2005, as having a high potential of joining the BRICS (Brazil, Russia, India, China & South Africa), in becoming the world's largest economies in the 21st century. Indonesia, the world's fourth most populous nation, is the largest Islamic country in the world, although it is a secular state. Even though the country suffered significant terrorist attacks 10 years ago, the country's political and economic climate have succeeded in combating the problem and providing a more stable and secure environment.
The following article looks at the country's progress in implementing a best-practice AML and CTF regime, focusing in particular on the risks of money laundering, specifically within the forestry sector.
Anti-Money Laundering Legislation
Between 2001 and 2005, Indonesia was listed amongst the FATF's Non-Cooperative Countries and Territories. Since then, and also as a result of a process of political democratization following the Suharto regime, the country has made significant progress in its attempts to improve its AML practices, as well as to combat money laundering and terrorist financing.
Nonetheless, Indonesia remains a jurisdiction, which according to the FATF, still has significant strategic AML/CTF deficiencies. According to a report entitled Improving Global AML/CFT Compliance: On-going Process, published by the FATF on 25 June 2010, Indonesia needs to continue to improve the following aspects of its AML/CTF regime:
- adequately criminalizing money laundering and terrorist financing
- establishing and implementing adequate procedures to identify and freeze terrorist assets
- amending and implementing laws or other instruments to fully implementing the 1999 International Convention for the Suppression of Financing of Terrorism.
On 5 October 2010 the Indonesian House of Representatives passed a revised Anti-Money Laundering Law, amending the 2002 Money Laundering Law and giving greater powers to anti-corruption officials. One of the significant amendments made in the new piece of legislation (Law No. 8 of 2010) is that reports published by the Financial Transaction Reports and Analysis Centre (PPATK), one of the main bodies responsible for combating money laundering in Indonesia, will now also be made available to other government institutions, including the Corruption Eradication Commission (KPK). Previously, PPATK reports were reportedly sent only to the Attorney General's Office or the police, who decided whether or not to further investigate or prosecute. The legislation has also been reported to allow the PPATK to examine a wider range of documents, as well as to freeze the bank accounts of those involved in suspicious financial transactions.
According to the legislation, money laundering is a criminal act whereby illegal proceeds are acquired through the following criminal actions: corruption, bribery, trafficking in narcotics and psychotropics, manpower trafficking, migrants trafficking, criminal acts in banking, criminal acts in capital market, criminal acts in insurances, criminal acts in customs and duty, human trafficking, illegal arms trading, terrorism, abduction, theft, embezzlement, fraud, currency counterfeiting, gambling, prostitution, criminal acts in taxation, criminal acts in forestry, criminal acts in environment, criminal acts in maritime and fisheries, and other criminal acts that are subjected to four years or more imprisonment. The legislation also applies not only to criminal acts, which are committed in the territory of the Republic Indonesia, but also to those committed outside the territory of the Republic Indonesia.
The Forestry Sector an Industry at Risk
According to the UNODC,1 Indonesia is home to the world's third largest tropical rainforest following Brazil and the Democratic Republic of Congo. The Indonesian forests amount to some 10 percent of the global forest cover. As a result, Indonesia has become one of the world's largest timber suppliers.
Growing demand in the timber market, as well as falling supplies and inadequate law enforcement and management, has led to Indonesia becoming a major source for illegally produced and exported timber. The Indonesian Ministry of Forestry estimates that Indonesia has been losing 1.6-2.8 million hectares annually (equivalent to 3-5 hectares a minute) to illegal logging and land conversion due to a lack of effective management and law enforcement. This in turn has been a major contributor to the greenhouse gas emissions affecting global climate change.
Beyond the environmental damage, and as reported by Human Rights Watch in a report published in late 2009, an estimated $2 Billion USD are lost in revenue by the Indonesian state annually from timber companies evading taxes, receiving under-the-table subsidies, and logging without the proper permits.2
According to a working paper published by Transparency International in 2011, major timber exporting countries, including Indonesia, have an illegal logging rate of at least half of their total timber production. The report claims that illegal timber finds its way into the consumer markets, often unchecked or unidentified by timber importing countries and industries. As a result, it has been estimated that 20 percent of wood-based products entering the EU for example are likely to be illegally sourced.3
Given that one of Indonesia's most problematic areas in terms of criminal activity is the illegal timber business, it is therefore also one of the most important areas in terms of money-laundering prevention, in particular because the negative effects not only impact Indonesia itself, but also have far-reaching international ramifications. In 2002 criminal acts in forestry were thus included as a predicate crime for money laundering in Indonesian legislation.
The Risk of Terrorism
In 2005 the Council of Foreign Relations4 published a report in which it outlined its concerns regarding terrorism in Indonesia. The article claims, that due to the fact that it is the world's most populous Muslim country, that it has a vast archipelago with porous maritime borders, a weak central government, separatist movements, corrupt officials, a floundering economy, and a loosely regulated financial system it was a fertile ground for terrorist groups. The report noted that U.S. officials and terrorism experts were concerned about al-Qaeda using Indonesia as a base for a Southeast Asian front in its campaign against "infidels," Jews, and the United States. The terrorist threat in Indonesia has, however, decreased significantly since the Bali bombings in 2002 when the Indonesian government started to crack down on local militants suspected of having ties to al-Qaeda. Successful counter terrorism efforts have succeeded in capturing and killing most of the terrorist leaders resulting in a weakening of the country's terrorist cells in recent years, in particular of the al-Qaeda-affiliated Jemaah Islamiah.
According to an article, published in Time Magazine in April 2011, the country is however, once again facing another wave of individual jihad ('jihad fardiya') attacks by extremists. Some analysts are worried about what they term as a pattern of 'do-it-yourself jihad' as the recent bombings have targeted individuals rather than large groups.5
Although Indonesia has made great progress in terms of combating money laundering and terrorism, it continues to lag behind and therefore it is under close scrutiny by FATF in terms of implementing the 40 + 9 FATF Recommendations.
One of the main criminal threats facing Indonesia is illegal logging. As noted on the web site www.illegal-logging.info, illegal logging and the international trade in illegally logged timber not only causes environmental damage, but also costs governments of developing countries billions of dollars in lost revenue. It furthermore, promotes corruption, as well as undermining the rule of law and good governance and funding armed conflict. Due to this background, AML professionals have an important role to play in combating illegal logging and its subsequent trade.
Also, given the risk of money laundering in the Indonesian forestry sector it is of great importance for those undertaking KYC due diligence to take these issues into consideration. AML professionals should rate any companies in the Indonesian forestry sector as high risk and thus ensure that enhanced due diligence is undertaken. AML professionals should also consider procedures developed by The Centre for International Forestry Research to assist banks in applying due diligence mechanisms for customers operating in forest-related businesses.6