Indonesia

Indonesia Corruption Report

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Snapshot
Indonesia's business environment suffers from
widespread corruption. The efficiency of
business operations is restricted by a corrupt
judiciary, complicating the process of dispute
settlement and weakening property rights
protections. Extensive bribery in Indonesia's
public service is a reason for concern for
foreign investors: Corruption at the borders is cited by companies as a
problem, and public officials often exploit ambiguous legislation to extort
informal payments and bribes from companies in the process of registering a
business, filing tax reports or obtaining permits and licenses. Corruption is also
rampant in the natural resources sector owing to weak oversight. The Law on
Eradication of Criminal Acts of Corruption criminalizes major acts of corruption
- including active and passive bribery, abuse of office and extortion - and
Indonesia's Criminal Code forbids embezzlement and gifts to public officials.
Corruption legislation is poorly enforced and does not address facilitation
payments.
Last updated: June 2017
GAN Integrity

Judicial System
While formally independent, Indonesia's judiciary is rife with corruption and is
subject to political influence (BTI 2016, ICS 2016). Bribes are taken at all levels
of the judiciary, including in court verdicts and appeal courts (BTI 2016).
However, less than one in every ten surveyed Indonesians reported paying a
bribe to the courts in the past twelve months (GCB 2017). Corruption limits the
judicial system's professionalism and objectivity; however, special corruption
courts show a high degree of independence and often prosecute and convict
Indonesian public officials for corrupt acts (BTI 2016). Dispute settlement
mechanisms are inefficient and many laws are open to interpretation by
judges; particularly the commercial code is inconsistently applied, due to
corruption and training deficiencies for judges, prosecutors, and defense
lawyers (ICS 2016). Businesses do not have sufficient confidence in the
efficiency of the legal framework regarding dispute settlement and the ability
to challenge regulations (GCR 2016-2017). However, only a small percentage of
companies identify the courts as a major constraint to their ability to do
business (ES 2015). The Supreme Court has opened a whistleblowing
portal where demands for bribes or other irregularities in the judiciary may be
reported.

In 2013, a Constitutional Court Chief Justice, Akil Mochtar, was charged with
accepting a USD 260,000 bribe in exchange for fixing a court ruling. In 2014,
Mochtar was found guilty and received a life sentence for corruption (FitW
2016). In January 2017, another Constitutional Court judge was arrested on
suspicion of taking a bribe (Reuters, Jan. 2017).

Indonesia is a signatory to the 1958 New York Convention on the Recognition

and Enforcement of Foreign Arbitral Awards, it is also a member state to the
International Centre for the Settlement of Investment Disputes (ICSID).

Police
The Indonesian police is plagued by corruption, and bribery is widespread,
presenting companies with high risks. Police officers solicit bribes on every
level, ranging from traffic violations to criminal investigations (HRR 2016). Two
out of five people perceive most or all of the police to be corrupt and one in
four Indonesians report having paid a bribe to the police services in the past 12
months (GCB 2017). Businesses do not report sufficient trust in the reliability of
police services and businesses do attribute some costs to crime and violence
(GCR 2016-2017). About one in seven firms identify crime as a major constraint
to their ability to do business and over a quarter of firms pay for private
security (ES 2015).

In January 2015, President Jokowi nominated Budi Gunawan for the post
of head of the national police while he was under investigation for taking
bribes, including from lower-ranking police officers looking for a higher
post (The Economist, June 2016). The corruption probe was dropped a few
months later and Gunawan was installed as deputy head of the national police
(The Economist, June 2016).

Public Services
Companies should be aware of a high-risk of corruption when dealing with
Indonesia's public administration. Businesses report that bribes and irregular
payments made to public officials are common (GCB 2015-2016), and one in
five businesses report expecting to give gifts in order to 'get things done' (ES
2015). A quarter of Indonesians report having paid a bribe to obtain ID
documents and one in seven report having paid a bribe to the utility services in
the past twelve months (GCB 2017). Recruitment of civil servants is often not
based on merit; positions are 'sold' to applicants or given to associates and
relatives (BTI 2016). The quality of public services in Indonesia remains low;
rampant corruption has kept Indonesia's public infrastructure, including
electricity generation and provision of clean water, from developing (BTI 2016).
Companies cite the inefficiency of government bureaucracy as one of the most
problematic factors for doing business in Indonesia (GCR 2016-2017).
Regulatory and transparency problems hinder businesses and the process of
decentralization has introduced an additional layer of costly red tape for
businesses to navigate (ICS 2016). Laws and regulations are often vaguely
worded, resulting in uncertainty and rent-seeking opportunities (ICS 2016).

The time it takes to get an electrical connection as well as the costs involved are
below the regional average (DB 2017). Starting a business takes eleven steps,
an average that is significantly higher than the regional one, yet the total time
these procedures require is slightly lower compared to other neighboring
countries (DB 2017).

Land Administration
Corruption is a high risk within the land management sector in Indonesia.
Nearly half of businesses report expecting to give gifts in order to obtain a
construction permit (ES 2015). Property rights are inadequately protected due
to corruption in the judiciary; courts in land rights cases frequently side with
whomever provides the largest bribe to the judges (BTI 2016). A lack of clear
land titles is a problem when doing business in Indonesia (ICS 2016); absence
of credible maps combined with customary land rights for local people and
competing laws and regulations sometimes allow multiple parties to make a
legitimate claim to the same lands (HRR 2016).
The government has been accused of appropriating land for private
development projects against the owner's wishes without fair compensation
(HRR 2016). Central and local government officials have reportedly accepted
kickbacks from mining and palm oil companies in exchange for access to lands
(HRR 2016). In September 2016, the Jakarta Corruption Court found Ariesman
Widjaja, General Director of Agung Podomoro Land, guilty of bribing a legislator
in the Jakarta provincial assembly in order to influence two bills concerning two
properties his company was developing. Widjaja was sentenced to three years
in prison and a fine of IDR 200 million (Indonesia Investments, Sept. 2016).

The time required to register property in Indonesia is only a third of the

regional average at 25 days, but the costs involved are twice as high as in other
East Asian and Pacific countries (DB 2017).

Tax Administration
Corruption risks in Indonesia's tax administration are high. One in five
companies expects to give gifts when meeting with tax officials (ES
2015). Companies regularly encounter corruption during routine interactions
with Indonesian public servants, including tax officials (GCR 2015-2016). Over
four in ten Indonesians view most or all tax officials as corrupt (GCB 2017). A
recent tax amnesty policy aimed at bringing more assets into the purview of
the tax agency unearthed more than USD 360 billion of previously undeclared
assets (Asia Times, Mar. 2017), indicative of the scale of tax evasion in
Indonesia. Tax regulations and tax rates are frequently cited as problematic
factors for doing business (GCR 2016-2017).

President Jokowi's brother has been put under investigation over allegations
that he helped put businessman Ramapanicker Rajamohanan Nair in contact
with tax officials who subsequently eliminated his tax debt (Jakarta Post, Feb.
2017). Nair paid a tax official named Handang Soekarna a bribe of IDR 1.9
billion in order to eliminate a tax debt of IDR 78 billion (Jakarta Post, Feb. 2017).
Nair was found guilty of paying the bribe and got sentenced to three years'
imprisonment (Jakarta Post, Apr. 2017).

Customs Administration
Corruption at Indonesia's borders is the most problematic factor for
international trade (GETR 2016). High incidence of corruption hampers the
efficiency of Indonesia's customs administration and procedures related to
importing and exporting goods are highly opaque (GETR 2016). Irregular
payments and bribes are commonly demanded by customs agents (GETR
2016). A common way in which bribes are extorted is by imposing arbitrary
delays (Norton Rose Fulbright, June 2016). In the same vein, nearly half of
companies expect to give gifts when obtaining an import license (ES 2015). The
cost of documentary compliance with import regulations is significantly higher
than the regional average and takes nearly twice as long (DB 2017).

Public Procurement
The public procurement sector carries high corruption risks for companies.
Corruption and favoritism are pervasive (GCR 2016-2017). A third of companies
indicate that they expect to give gifts in order to secure a government contract
(ES 2015). Likewise, companies report that bribes and irregular payments are
common in the awarding of public contracts and licenses (GCB
2015-2016). Companies report frequent diversion of public funds as well as
favoritism in the decisions of government officials (GCR 2016-2017). Formally,
foreign companies compete with state-owned enterprises (SOEs) under the
same terms, but in practice the government shows a strong preference for
SOEs (ICS 2016). A number of companies have been accused of colluding,
including manipulating state tender processes (BTI 2016). Corruption in
procurement costs Indonesia's government up to USD 4 billion per year (FCPA
Blog, June 2014).

A corruption trial implicating a number of senior figures, including Indonesia's

Justice Minister, former Interior Minister, and Parliamentary speaker, is
currently underway. The defendants are accused of receiving kickbacks
amounting to USD 170 million out of funds earmarked for a government
project designed to issue new ID cards to the entire Indonesian population
(Reuters, Apr. 2017). In another corruption case, the U.S. Department of Justice
is investigating allegations that Maxpower Group, a power-plant builder
controlled by London-based bank Standard Chartered, has paid bribes to
Indonesian energy officials in order to obtain contracts (Wall Street Journal,
Sept. 2016).

Natural Resources
Corruption in the natural resources sector is rampant in Indonesia. The lack of
law enforcement in Indonesia promotes an enabling environment both for
irregular activities and for opaque financial reporting by petroleum and mining
companies, fostering corruption in the extractive industries; the 2009 Mining
Law eliminated a requirement for mining contracts to be publicly available
(NRGI 2017). A variety of governments regulations has made doing business in
the natural resources sector difficult; as a result, Indonesia ranks near the
bottom (91st out of 109) of the world's mining countries in the Fraser Institute's
Mining Policy Perception Index (ICS 2016). An absence of any central authority
to issue licenses concerning natural resource development has led to a vast
problem with overlapping licenses; at times up to four licenses for the same
concession have been granted to palm oil, pulpwood, logging, and coal mining
companies (The Guardian, Apr. 2016). Officials, particularly close to election
time, have been known to exchange land rights for financial contributions to
their campaigns (The Guardian, Apr. 2016).

Indonesia's anti-corruption enforcement agency, the KPK, has been

investigating corruption in over 4,000 mines nationwide, and has shut down
721 mines so far after instituting a requirement for a so-called 'clean-and-clear'
certificate (Greenpeace, Feb. 2016). As of March 2017, 3,203 companies are still
operating without such a certificate; although lack of communication between
miners and local authorities has also been blamed for this process (Indonesia
Investments, Mar. 2017). Part of the problem is the decentralization of
government tasks; it led to officials issuing more than 10,000 licenses, possibly
motivated by rent-seeking behavior, some of which overlapped (Indonesia
Investments, Mar. 2017).

Legislation
A weak institutional framework and widespread corruption limit the
implementation of corruption-related legislation in Indonesia. The Law on
Eradication of Criminal Acts of Corruption criminalizes the major acts of
corruption, including active and passive bribery, abuse of office and
extortion. Giving or accepting a bribe is a criminal act punishable by a fine of up
to USD 110,000 and imprisonment of up to 20 years. Private sector bribery is
criminalized, but only when the bribe is of 'relatively large
value'. Embezzlement, failure to report corrupt activities and gifts to public
officials are punishable by Indonesia's Criminal Code; any gifts to public
officials must first be approved by the Anti-Corruption Commission (KPK);
undisclosed gifts are considered an offense. There is no facilitation payment
exception under Indonesia's criminal law, and legislation does not specifically
address bribery of foreign public officials. Private sector bribery in certain cases
is criminalized under the Anti-Bribery Law in as far as the bribe causes
someone to do something or refrain from duties or obligations impacting the
public interest. The Law on Money Laundering criminalizes money laundering.
Public official asset declarations are required under the Regulation on Asset
Declaration. Corporations may face liability for the actions of their employees.
Public procurement is addressed by the Presidential Regulation No. 54/2010,
which requires competitive bidding and blacklisting of companies for violations.
The Law on the Protection of Witnesses and Victims provides protection for
public and private employees who report corruption. Various other
government agencies have enacted their own whistleblowing systems. The KPK
is highly popular and has booked recent successes in prosecuting members of
the country's government and business elites (BTI 2016). As per June 2016, the
KPK had a hundred percent conviction rate (HRR 2016). There are however
frequent attempts by elements in the government, judiciary, and police to
undermine the KPK's authority (HRR 2016).

Indonesia has ratified the United Nations Convention Against Corruption

(UNCAC). The National Strategy of Corruption Prevention and Eradication
2012-2025 seeks to curb governmental corruption and improve the state's
capacity to prevent corrupt practices and successfully implement mechanisms
for reporting.

Civil Society
Indonesia's Constitution provides for freedoms of speech and press, but
elements within the government seek to limit these rights using defamation
and blasphemy laws (HRR 2016). The media environment is open and vibrant in
comparison to other countries in the region; media reports on government
policy are often highly critical (BTI 2016). Press freedoms are restricted by legal
and regulatory provisions (FitW 2016). Treason and blasphemy laws are
frequently used to suppress those criticizing the government and security
forces (FitW 2016); causing some journalists to self-censor (FotP 2016). The
private owners of many media outlets influence the tone of coverage (FotP
2016). Foreign ownership of broadcast media is forbidden, and journalists
sometimes experience physical attacks and harassment by the state and non-
state actors (FotP 2016). Blasphemy laws have been used against internet users
by the government (FotP 2016). The media environment is considered 'partly
free' (FotP 2016).

Indonesia has one of the most vibrant civil societies in Asia (BTI 2016). Civil
society activism has markedly increased in recent years; most groups openly
criticize government policies, protest against corruption, and provided
representation for the poor (BTI 2016). Civil society groups comment on
policies and are able to exert their influence (FitW 2016). However,
organizations with views deemed 'extreme' are subject to government
monitoring (FitW 2016).

Sources

 World Bank: Doing Business 2017.

 Natural Resource Governance Institute: Indonesia Country 2017.
 Transparency International: Global Corruption Barometer 2017.
 Skala News: "KPK Tahan Atase KBRI Malaysia Dwi Widodo", 21 April 2017.
 Jakarta Times: "Court Hears of Jokowi In-Law's Role in Tax Bribery Case",
18 April 2017.
 Indonesia Expat: "Illegal Gold Mining Sees Steady Rise In Indonesia", 12
April 2017.
 Reuters: "Indonesia's 'Marathon' Probe of Politicians to Test Graft Battle",
7 April 2017.
 Asia Times: "Tax Amnesty Reveals New Depths of Indonesian Corruption",
31 March 2017.
 Indonesia Investments: "Cleaning Up Indonesia's Chaotic Mineral & Coal
Mining Sector", 28 March 2017.
 The Jakarta Post: "First Family Hit by Scandal", 17 February 2017.
 Reuters: "Indonesian Anti-Graft Agency Detains Constitutional Court
 Judge", 26 January 2017.
 Bertelsmann Foundation: Transformation Index 2016.
 Norton Rose Fulbright: Business Ethics and Anti-Corruption Laws:
Indonesia 2016.
 World Economic Forum: Global Competitiveness Report 2016-2017.
 World Economic Forum: Global Enabling Trade Report 2016.
 Freedom House: Freedom in the World 2016.
 Freedom House: Freedom of the Press 2016.
 US Department of State: Investment Climate Statement 2016.
 US Department of State: Human Rights Practices Report 2016.
 The Wall Street Journal: "Standard Chartered Faces U.S. Probe Over
Indonesian Investment", 27 September 2016.
 Indonesia Investments: "Corruption in Indonesia: Agung Podomoro Land
Bribery Case", 9 September 2016.
 The Economist: "Law Enforcement in Indonesia: Time for Tito", 23 June
2016.
 The Guardian: "Greenpeace Reveals Indonesia's Forests at Risk as
Multiple Companies Claim Rights to Same Land", 2 April 2016.
 Green Peace Energy Desk: "Comment: How Indonesia is Cracking Down
on Coal Mine Corruption", 16 February 2016.
 World Economic Forum: Global Competitiveness Report 2015-2016.
 World Bank: Enterprise Surveys Indonesia 2015.
 FCPA Blog: 'Indonesia loses USD 4 billion annually to procurement fraud,
study finds', 5 June 2014.

Topics: East Asia & The Pacific

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