Indonesian AML and counter terrorist financing efforts

In February, the Financial Action Task Force placed Indonesia on its list of jurisdictions with strategic anti-money laundering deficiencies. Despite the potential impact on financial aid the listing could have, Indonesia is still unable to pass effective rules on counter terrorist financing. The FATF recommended Indonesia address three specific points:

(1) Adequately criminalising terrorist financing (Special Recommendation II);
(2) Establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and
(3) Amending and implementing laws or other instruments to fully implement the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I).

In March, Indonesian police officers from the notorious and elite Detachment 88 anti-terrorist squad. Officers shot and killed five suspected terrorists, who were funding planned attacks through armed robbery, targeting gold dealers and currency exchangers. This typology is well aired among the Indonesian banking compliance unit and the arrests put Indonesia’s CTF efforts on global news wires.

INCSR analysis

The US Department of State’s International Narcotic Control Strategy Report also highlighted endemic corruption as a chink in Indonesia’s AML/CTF armour.

Indonesia has a weak AML/CFT regime, according to the INCSR assessment, a cash-based economy, weak rule-of-law and ineffective law enforcement institutions, the presence of major indigenous terrorist groups combined reduce the impact of international standards and national law.

Non-drug related crimes generate the majority of money laundering activity: corruption, illegal logging, theft, bank fraud, credit card fraud, and maritime piracy, sale of counterfeit goods, gambling and prostitution.

Banks are already required to follow enhanced due diligence procedures for both foreign and domestic PEPs. Although the FATF recommendation on this was only made official in February this year, many financial institutions in Asia, perhaps influenced by other industry groups, had already adopted monitoring domestic PEPs as best practice.

KYC covered entities: Banks, finance companies, insurance companies and insurance brokerage companies, pension fund financial institutions, securities companies, investment managers, providers of money remittance, and foreign currency traders. NB High value goods dealers and lawyers are not covered by KYC rules.

Convictions and the law

There were four convictions for money laundering between January and October 2011.

In October 2010, the Government of Indonesia enacted a new AML law that partially complies with international standards. To meet international standards and ensure effective implementation and enforcement of the law, INCSR recommends staff in both the executive and judicial branches should receive more training on AML/CTF.

The PPATK – Indonesia’s Financial Intelligence Unit  – needs a significant increase in staff to meet its responsibilities under the law. In an effort to place some of the legal burden on industry and bank partners, PPATK plans to open three AML centers in different regions of Indonesia to serve as resource centers for organizations that must comply with the new regulations. There is hope that this will place some of the legal burden on AML/CTF on to practitioners and bank partners. How this will happen remains to be seen and will be a focus of discussion at the 4th Annual ACAMs Conference in early April.

Despite a reported high-level commitment to the action plan developed to address some of the persistent gaps in its AML/CFT legislation, the government has not met its projected timeframes. Essential draft CFT legislation will not be submitted to parliament until at least early 2012.

The October 2010 AML legislation only provides for the temporary suspension of terrorist assets linked to the UN list of designated terrorists and terrorist organizations and does not allow for an immediate and ongoing freeze.

Corruption, particularly within the police ranks, impedes effective investigations and prosecutions. Prosecutors and judges should be given additional training on tracing and documenting financial flows and presenting this evidence convincingly in court.

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