Business Corruption in Indonesia

Indonesia's business environment suffers from widespread political corr Indonesia uption and weak enforcement of anti-corruption legislation. 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 licences. Illegal logging is threatening Indonesia's rainforests due to thousands of illegal logging permits being issued by public bodies. The Law No 31/1999 on Eradication of Criminal Acts of Corruption criminalises 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. The anti-corruption legal framework is deficient and does not address facilitation payments.

July 2015
GAN Integrity Solutions

Indonesian Judicial System

Indonesia's judicial system is susceptible to corruption as a result of ineffective regulatory mechanisms and conflicting legislation ( CCG 2014 ). The outcome of judicial proceedings - including criminal investigations and court verdicts and appeals - can be influenced through bribes ( BTI 2014 ). Corruption has deprived the judicial system of professionalism and objectivity; however, special corruption courts show a high degree of independency and often prosecute and convict Indonesian public officials for corrupt acts (BTI 2014). Dispute settlement mechanisms are inefficient and remain an area of concern for foreign companies (CCG 2014).

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. Mochtar was found guilty and received a life sentence for corruption ( Deutsche Welle , June 2014).

Indonesian Police

The Indonesian police is plagued by corruption, and bribery is widespread. Police officers solicit bribes on every level, ranging from traffic violations to criminal investigations ( HRR 2013 ). Indonesians consider the police to be the most corrupt public institution in the country ( GCB 2013 ).

One high-profile corruption case from 2013 involves an Indonesian police inspector general, Djoko Susilo, who was found guilty of corruption and money laundering and sentenced to 18 years in prison by the Jakarta High Court ( FitW 2014 ). Mr. Susilo was ordered to pay a fine of more than USD 2.6 million and is now prohibited from voting or running for public office ( Jakarta Globe , Dec. 2013).

Indonesian Public Services

Companies should be aware of a high-risk of corruption when dealing with Indonesia's public administration. The government's regulatory requirements are burdensome and implicate the process of obtaining permits and licences for foreign companies ( GCR 2014-2015 ). There are increased costs of establishing an international company in Indonesia, because informal payments related to licences and permits are a key source of income for Indonesian officials; for example, companies have to make between 10 and 14 facilitation payments and bribes to public officials at the Department of Immigration when trying to obtain work visas for their employees ( Control Risks , 2013). Indonesia's excessive red tape increases corruption risks for companies as there exist no clear legislative guidelines for facilitation payments.

Indonesian Land Administration

Corruption is rampant within the land management sector in Indonesia. Property rights are inadequately protected due to corruption ( BTI 2014 ). Bribery is rife in land disputes, and the largest bribe usually lands the favourable outcome, resulting in land rights of foreign investors being completely unprotected (BTI 2014). The cost of registering property in Indonesia is twice as high as in other East Asian and Pacific countries ( DB 2015 ).

Indonesian Tax Administration

International companies regularly encounter corruption during routine interactions with Indonesian public servants, including tax officials. Facilitation payments, kickbacks and bribes are a part of most inspections, in part due to Indonesia's decentralised government system and in part because of inconsistent implementation of legislation ( Control Risks , 2013). Foreign business owners experience extortion and discriminatory tax fees ( CatC 2012 ). However, most companies do not consider tax rates and regulations to be problematic for conducting business in Indonesia ( GCR 2014-2015 ). The government of Indonesia loses about half of its annual tax revenue as a result of rampant corruption within the tax-collecting agency ( Jakarta Post , Mar. 2012).

Indonesian Customs Administration

Corruption hampers the efficiency of Indonesia's customs administration. Procedures related to importing and exporting goods lack transparency and allow for customs officials to make demands for irregular payments ( GETR 2014 ). Corruption at Indonesia's borders is the most problematic factor for international trade (GETR 2014). Indonesia's ports are rife with corruption; the risk of extortion is particularly high when importing goods ( Control Risks , 2013). Companies report containers are held up at ports for long periods of time, even in cases of minor discrepancies in paperwork, and are only released in exchange for an illicit fee paid directly to a customs official (Control Risks, 2013).

Indonesian Public Procurement

Corruption and favouritism are pervasive in Indonesia's procurement sector. Lucrative contracts are allocated to firms associated with Indonesia's state officials, while foreign companies are often ignored in the tender process ( CCG 2014 ). Companies involved in the sale of services to state agencies or state-owned companies report regularly providing gifts, expensive dinners and entertainment to officials during negotiations and/or when closing deals ( Control Risks , 2013). Corruption in procurement costs Indonesia's government up to USD 4 billion per year ( FCPA Blog , June 2014). To strengthen monitoring of the procurement procedure and to counteract corruption in the sector, President Jokowi introduced Presidential Instruction (Inpres) No 7/2017 (which provides for an upgraded online system for procurement, purchasing, auditing and taxation) in 2015. The president has given the National Development Planning Board superior authority to monitor and evaluate the implementation of the Inpres and to coordinate corruption eradication efforts with law enforcement agencies ( Jakarta Post , May 2015).

In January 2014, the chairman of the ruling Democratic Party, Anans Urbaningrum, was arrested for alleged corruption and bribery in connection with the construction of a sports stadium in Hambalang. The arrest followed another corruption investigation involving former Youth and Sports Affairs Minister, Andi Alfian, who had accepted IDR 2.2 billion in kickbacks from a construction company in exchange for winning contract to build the stadium ( Jakarta Globe , Jan. 2014). Alfian was sentenced to four years in prison and ordered to pay a fine of IDR 200 million ( AsiaReport , July 2014).

Indonesian Natural Resources

Corruption and illegal logging are widespread in Indonesia. The forestry ministry is among the most corrupt institutions in the country ( Phys , Nov. 2013). According to Indonesia's Corruption Eradication Commission, the KPK, bribery in the process of obtaining permits is the most common act of corruption in the country ( AFP , Jan. 2014). 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, forstering corruption in the extractive industries ( NRGI 2014 ).

In May 2013, an Indonesian official was arrested for allegedly being in charge of an illegal logging ring worth USD 150 million ( AFP , Jan. 2014). In another case, the former Indonesian governor, Rusli Zainal, was sentenced to 14 years in prison and ordered to pay USD 90,000 for accepting large-scale bribes in exchange for illegally issuing logging permits in Riau, where a huge amount of the forest has been lost to palm oil producers ( Mongabay , Mar. 2014).

Indonesian Legislation

A weak institutional framework and widespread corruption limit the effectiveness of corruption-related legislation in Indonesia. The Law No 31/1999 on Eradication of Criminal Acts of Corruption criminalises 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. Embezzlement , failure to report corrupt activities and gifts to public officials are punishable by Indonesia's Criminal Code . The Law of the Republic of Indonesia No.8 criminalises money laundering. Public official asset declarations are required under the Regulation on Asset Declaration 2005 . Public procurement is addressed by the Presidential Regulation No. 54/2010, which requires competitive bidding and blacklisting of companies for violations. Law No. 13 of 2006 on the Protection of Witnesses and Victims provides protection for public and private employees who report corruption. There is no facilitation payment exception under Indonesia's criminal law, and legislation does not address bribery of foreign public officials. 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.

Indonesian Civil Society

Indonesia's Constitution provides for freedoms of speech and press. The media environment is open and vibrant in comparison to other countries in the region; however, press freedoms are restricted by legal and regulatory provisions ( FitW 2015 ). Foreign ownership of broadcast media is forbidden, and journalists experience physical attacks and harassment by the state and non-state actors ( FotP 2014 ). Independent reporters practice self-censorship to avoid criminal prosecution for libel and defamation, and legal restrictions lead to a number of broadcast media to operate illegally (FitW 2015). Journalists face threats of violence, and a growing number of journalists are being kidnapped and killed in Indonesia ( BTI 2014 ).

Civil society organisations (CSOs) are restricted and must receive a special approval at the Home Affairs Ministry to operate in Indonesia (FotP 2014). Freedom of expression is restrained, but Indonesian CSOs are able to exert some degree of influence on the political decision-making process (FitW 2015). CSOs actively engage in various social and political issues, including corruption, authoritarianism and good governance (BTI 2014).

Indonesia Information Network

Partner Embassies
Embassy of Denmark

jktamb@ um .dk

Tel: +62 21 576 1478
Fax: +62 21 576 1535

Local diplomatic mission of Denmark.
Embassy of Norway

emb .jakarta@ mfa .no

Tel: +62 21 2965 0000
Fax: +62 21 2965 0001

Local diplomatic mission of Norway.

Embassy of Sweden

Local diplomatic mission of Sweden.
British Embassy

UKCCU .Indonesia@ fco .gov .uk

Tel: +62 (21) 2356 5200
Fax: +62 (21) 2356 5350

Local diplomatic mission of the United Kingdom.
Embassy of Austria

jakarta-ob@ bmeia .gv .at

Tel: +62 21 23554005
Fax:+62 21 31904881

Local diplomatic mission of Austria.
Government
Corruption Eradication Commission (KPK) The KPK is the main public anti-corruption institution and is responsible for investigating and prosecuting corruption crimes committed by public officials.
Audit Board of the Republic of Indonesia An independent audit institution responsible for managing state finances.
National Portal of the Republic of Indonesia The official portal of the government of Indonesia offers information on the government and ministries, laws and regulations, and news on political issues.
Indonesian Financial Transaction Report and Analysis Centre (PPATK) Responsible for prevention and eradication of money laundering in Indonesia. Monitors reports of suspicious cash transactions and reports irregularities to law enforcement agencies.
Civil Society
Partnership for Governance Reform in Indonesia (Kemitraan) Ensures the implementation of political reforms and projects. Kemitraan also provides financial assistance to various organisations working with good governance.
Indonesia Corruption Watch (ICW) ICW is an anti-corruption organisation that works with advocacy, awareness-raising, research and analysis on issues of corruption in Indonesia.
Transparency International (TI Indonesia) Indonesian chapter of Transparency International.
Indonesia Business Links A resource centre for businesses. Promotes ethical business practices and raises awareness about business ethics and corporate social responsibility.

Indonesia Profile Sources