Is central bank really monitoring foreign exchange?

Friday, March 23, 2007 Vincent Lingga, The Jakarta Post, Jakarta

We now worryingly doubt Bank Indonesia's capability to monitor foreign exchange (forex) flows to and from the country.

This doubt arose after the recent disclosure of state-owned Bank Negara Indonesia (BNI)'s failure to report to the central bank the transfer of over US$10 million of Hutomo "Tommy" Mandala Putra Soeharto's money from the London branch of BNP Paribas to Indonesia through the BNI Tebet, South Jakarta, branch office, in June, 2005.

Yet more confusing are the remarks made by Bank Indonesia's executives about the transaction, as quoted by Koran Tempo in its March 21 issue.

Bank Indonesia spokesperson Filianingsih Hendarta was quoted as saying that Bank BNI might consider it unnecessary to report the money transfer to the central bank because there might have been nothing suspicious about the transaction.

One found it too flabbergasting that Filianingsih seemed entirely unaware of a ruling issued by Bank Indonesia in March 2000 that required bank customers in Indonesia, including foreigners holding stay permits and Indonesians residing overseas, to submit to the central bank, through their banks, detailed reports on every foreign exchange transaction in excess of US$10,000.

The Bank Indonesia ruling, which enforces the 1999 Foreign Exchange Flow Law, also requires that such reports disclose the remitter and recipient of funds, the type and purpose of the transaction and financial relationships between the transactors.

The explanation given by Wimboh Santoso of Bank Indonesia's directorate for banking development to the same newspaper is even more dumbfounding.

Santoso said banks were not required to report any financial transactions to the central bank but should report suspicious transactions to Indonesia's financial intelligence unit or the Financial Transaction and Report Analysis Center (PPATK).

The compulsory reporting on forex transactions was designed to keep Bank Indonesia apprised of capital flow to and from the country and to enable it to implement a more effective monetary policy.

Banks are obliged to keep detailed accounts of forex transactions they conclude for themselves and their customers because they have to submit a monthly report on their forex deals to the central bank.

Indonesia has held firmly to the regime of open capital account that allows free flow of foreign exchange to and into the country.

However, the financial crisis that set off massive runs on the rupiah and a massive capital flight out of the country between mid-1997 and 1998 made the government suddenly aware of the need to make sure the monetary authority was kept posted on foreign exchange flows.

During that crisis the central bank was completely in the dark about foreign exchange flows.
Hence, the birth of the 1999 foreign exchange flow Law. Up-to-date reporting provides the central bank with accurate, comprehensive and timely data on forex deals to enable it to have a better view of the position of the external balance and to anticipate speculative attacks on the rupiah.

The March 2000 ruling was supplemented with another Bank Indonesia regulation in July 2005, which limits foreign exchange derivative transactions with foreign counterparts against the rupiah to a maximum $1 million, down from a previous total of $3 million, and caps dollar purchases in outright forward transactions and swaps at $1 million.

The foreign exchange policy measure also imposes a three-month minimum investment hedging period on foreign exchange transactions. This means that investors with underlying investments in Indonesia must keep their funds in the country for at least three months.

The question is, though, how could Bank Indonesia ensure the proper implementation of the latter ruling on such complex forex deals if it miserably failed to detect even such a simple transaction as the $10 million transfer through the Bank BNI Tebet branch?

The central bank also seemed unable to properly enforce a regulation that requires commercial banks to know their customers with regards to detecting suspicious transactions.

The fact that Tommy's money was transferred not to his own account, nor to the account of a company he owned, but to an account in the name of a directorate general at the Justice and Human Rights Ministry meant that BNI completely ignored the "know-your customer" regulation. This also violated the provisions of the 2002 Anti Money Laundering Law that called for tough scrutiny of suspicious transactions.

The BNI should have been suspicious about the transfer and should have reported it to the PPATK because the transfer "looked strange" and was not supported by any underlying transactions.

The transfer should have caused BNI executives to ask what was the business of the Justice and Human Rights Ministry with the BNP Paribas branch in London.

The BNI cannot hide behind the banking secrecy clause for its failure to report to Bank Indonesia the transfer of Tommy's money and to inform the Indonesian financial intelligence unit of that suspicious transaction for further analysis.

If the conduct of BNI, a state-owned bank that is listed on the Jakarta stock exchange, is any guide, then we should really be worried how hopelessly feeble our anti-money laundering efforts have been.

Indonesia could face the bigger risk of being internationally blacklisted again as a haven for dirty money and a high-risk country for financial transactions.