INDONESIA
Summary
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Sanctions:

None

FAFT AML Deficient

No

Higher Risk Areas

 

Non - Compliance with FATF 40 + 9 Recommendations

US Dept of State Money Laundering Assessment

Not on EU White list equivalent jurisdictions

Corruption Index (Transparency International & W.G.I.)

Failed States Index (Political Issues)(Average Score)

Medium Risk Areas

Weakness in Government Legislation to combat Money Laundering

World Governance Indicators (Average Score)

 

 

ANTI-MONEY LAUNDERING

 

FATF Status

Indonesia was removed from the FATF List of Countries that have been identified as having strategic AML deficiencies on 26 June 2015.

 

FATF Statement: 26 June 2015

The FATF welcomes Indonesia’s significant progress in improving its AML/CFT regime and notes that Indonesia has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2010. Indonesia is therefore no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process. Indonesia will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.

 

Compliance with FATF Recommendations

The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Indonesia was undertaken by the Financial Action Task Force (FATF) in 2008. According to that Evaluation, Indonesia was deemed Compliant for 4 and Largely Compliant for 8 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for 5 of the 6 Core Recommendations.

 

APG Yearly Typologies Report - 2015

Emerging Trends; Declining Trends; Continuing Trends (INCSR)

The banking industry is still being used by ML perpetrators to launder their proceeds of crime. However, it is a declining trend. As indicated in recent research, transfer via ATM, cash deposit and cash withdrawals are still used as transaction patterns. However, the increasing strictness of the regulation regarding banks created a new trend for ML, such as using mainly cash transactions (for example, using cash for asset purchase), and the use of non-banking financial industry, especially money changers and money remittance businesses.

Recently, the predicate crime of fraud and taxation is increasingly associated with ML, even though corruption is still the predicate crime mostly associated with ML.

 

US Department of State Money Laundering assessment (INCSR)

Indonesia was deemed a Jurisdiction of Primary Concern by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR).

Key Findings from the report are as follows: -

 

Perceived Risks:

Indonesia has a growing formal financial sector with approximately 120 commercial banks. While not a major regional financial center, the country remains vulnerable to money laundering and terrorist financing due to gaps in financial system legislation and regulation, a cash-based economy, weak rule of law, and ineffective law enforcement institutions. Additionally, indigenous terrorist groups, which obtain financial support from both domestic and foreign sources, are present in the country. These include Jemaah Islamiyah (JI), and a loose network of JI spin-off groups, including Jemaah Anshorut Tauhid and others, such as the Eastern Indonesia Mujahedin.

Most money laundering in Indonesia is connected to drug trafficking and other criminal activity such as corruption, tax crimes, illegal logging, wildlife trafficking, theft, bank fraud, credit card fraud, maritime piracy, sale of counterfeit goods, illegal gambling, and prostitution.

Indonesia has a long history of smuggling of illicit goods and bulk cash, made easier by thousands of miles of unpatrolled coastlines, sporadic and lax law enforcement, and poor customs infrastructure. Proceeds from illicit activities are easily moved offshore and repatriated as needed for commercial and personal use. While Indonesia has made progress in combating official corruption via its Corruption Eradication Commission, endemic corruption remains a significant concern and poses a challenge for AML/CFT regime implementation.

Indonesia first appeared on the FATF Public Statement in February 2012. The FATF removed Indonesia from this statement in February 2015, based on Indonesia’s passage of key legislation criminalizing the finance of terrorism, and its implementation of terrorist asset freezing pursuant to UNSCRs 1267 and 1373.

 

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SANCTIONS

There are no international sanctions currently in force against this country.

 

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BRIBERY & CORRUPTION

 

Index

Rating (100-Good / 0-Bad)

Transparency International Corruption Index

37

World Governance Indicator – Control of Corruption

38

 

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INVESTMENT CLIMATE - Executive Summary (US State Department)

While Indonesia’s population of 245 million, growing middle class, and stable economy remain attractive to U.S. investors, investing in Indonesia remains challenging. This report focuses on the challenges foreign investors face in Indonesia rather than the range of investment opportunities.

Factors such as a decentralized decision-making process, legal uncertainty, economic nationalism, and powerful domestic vested interests create a complex and difficult investment climate. The Indonesian government’s requirements, both formal and informal, to partner with Indonesian companies and purchase goods and services locally, restrictions on some imports and exports, and pressure to make substantial, long-term investment commitments, also factor into foreign investors’ plans. While the Indonesian the Corruption Eradication Commission continues to investigate and prosecute high-profile corruption cases, some investors cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to investment include poor government coordination, the slow rate of land acquisition for infrastructure development projects, poor enforcement of contracts, an uncertain regulatory environment, and lack of transparency in the development of laws and regulations. New regulations are at times difficult to decipher and often lack sufficient notice and socialization for those impacted. The lack of coordination among ministries creates redundant and slow processes, such as securing business licenses and import permits, and at times, conflicting regulations.

Indonesia restricts foreign investment in some sectors with a negative investment list. The latest version, issued in 2014, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of sectors. Some of the restricted sectors include: telecommunications, pharmaceuticals, film and creative industries, and construction. Of note, the energy and mining sector face significant investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaty agreements (BITs) in February 2014, allowing the agreements to expire as soon as they allow. While the United States does not have a BIT with Indonesia, the Indonesian government’s action reminds foreign investors of the unpredictability of Indonesia’s investment climate.

Despite these challenges, Indonesia continues to attract foreign investment. Private consumption is the backbone of the economy and the middle class is growing, making Indonesia a promising place for consumer product companies. Indonesia has ambitious plans to improve its infrastructure and the “connectivity” of its provinces, which includes building roads, railways and airports, as well as improving telecommunications networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers, such as consumer electronics and automobile companies. For many companies, Indonesia’s investment grade rating, growing middle class, and young population make the country an attractive destination for long term investment.

Foreign investors are watching closely the July 2014 presidential elections, anticipating the changes brought by a new Administration that will take office in late 2014. Analysts expect a peaceful and fair election and continuity of economic policies; economic nationalism remains popular across parties.

 

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FURTHER REPORTS

Extract from IMF Report:  Indonesia: Staff Report for the 2013 Article IV Consultation:

'Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). In February 2013, a new CFT law was enacted that focused on the criminalization of terrorist financing. However, Indonesia is still included on the Financial Action Task Force’s (FATF) list of jurisdictions that have not made sufficient progress in addressing strategic shortcomings in their AML/CFT framework, as the law does not fully address identified deficiencies, particularly with regard to the framework for identifying and freezing terrorist assets. These concerns should be addressed as quickly as possible in order to protect Indonesia’s financial sector from heightened scrutiny from foreign financial institutions, avoid possible countermeasures, and facilitate an exit from the FATF monitoring process.'

Read Full Report (pdf file)