Anti-Corruption in Indonesia

Managing Risk | Maximising Opportunity

Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG. Control Risks Group Limited (the Company) endeavours to ensure the accuracy of all information supplied. Advice and opinions given represent the best judgement of the Company, but subject to Section 2 (1) Unfair
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Copyright: Control Risks Group Limited 2013. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company.
Table of contents
Introduction 1

Part 1: Domestic context 2

Part 2: Where is the rub? 4

Part 3: Recommendations and strategies 8

Indonesian civil society in fighting corruption 11

By Transparency International - Indonesia
Anti-Corruption in Indonesia

Introduction

Graft is a way of life here. And it is getting worse at a time when head office has never had greater expectations from us.
Corene Crossin, European Senior Executive, Jakarta, November 2012.
Managing Director
of South East Asia, For companies seeking new growth opportunities at a time of persistent global economic uncertainty, Indonesia appears to be a bright
Control Risks star. Over the next 20 years, Indonesia is anticipated to enter the top ten of the worlds largest economies; this optimism is fuelled by an
existing pool of 45 m potential consumers that is set to grow by a further 90 m by 2030. Indonesias striking economic outlook provides a
much-needed good news story for boards and executive committees across Europe, America and beyond.

At the same time, the majority of international companies seeking opportunities in Indonesia have pledged to comply with commitments
Martin Brown to comply with strict extraterritorial anti-corruption legislation, including the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery
Senior Consultant, Act. While Indonesias government has significantly improved measures to combat corruption over the past ten years, corruption remains
Global Client Services, a major impediment for foreign investment. According to global anti-corruption watchdog Transparency International (TI), perceptions of
Control Risks corruption in Indonesia are worsening. In the 2012 Corruption Perception Index, Indonesia was ranked at 118 (out of 180 countries, with
the first country being the least corrupt). In 2011, Indonesia was ranked at 110.

The question for international companies, then, is whether it is possible to take full advantage of tantalising economic opportunities and
apply effective zero tolerance anti-bribery and corruption policies and procedures in Indonesia.
Steve Norris,
Senior Analyst, There is a tension between stringent anti-corruption compliance and sustained financial growth for international companies operating in
Asia and the Pacific, Indonesia. Drawing on confidential interviews with senior Indonesia-based executives from international companies across a broad
spectrum of sectors, Indonesian civil society, the Indonesian Anti-Corruption Commission (KPK), law firms and representatives from the
Control Risks
international diplomatic community in Jakarta between September and December 2012, this White Paper seeks to generate debate on
whether companies can resolve the tension between compliance and growth in Indonesia.

1
Control Risks
Anti-Corruption in Indonesia
The Paper commences with an overview of the context of the
corruption risk environment in Indonesia. In particular, we highlight
recent progress made by the Indonesian KPK amid deep structural
impediments to reform. We then move on to explore specific areas of
concern highlighted by executives interviewed during research, and
underline the pressure felt by senior managers to increase sales and
profits on one hand, and to be rigidly compliant with anti-corruption
policies and procedures on the other. The Paper concludes with
practical recommendations for international companies on how to
effectively manage corruption risks in Indonesia.
Part 1: Domestic context
Under Suharto it was easy to predict when and where you would be
asked to pay bribes. Now it is much worse. It is like dealing with
roving bandits: you can never be sure when or where demands will
come from.
Indonesian political economy expert, Jakarta, December 2012.
supporting anti-corruption legislation, and enacting regulations that
empower the Corruption Court system. As a demonstration of this
commitment, Yudhoyonos government enacted Indonesias Law
Number 20 of 2001 on the Eradication of Corruption, which criminalises
corruption in the domestic public sector. The law is comprehensive
and on the rare occasions when it is properly enforced provides
sufficient scope for the investigation and prosecution of public-sector
corruption cases.
Genuine commitment and progress on corruption will only emerge
when elected legislative- and executive-branch officials embrace
measures to combat corruption. As has been made clear by
Yudhoyonos administration, political enthusiasm to curb corrupt
behaviour by politicians and public officials waxes when corruption
dominates the electoral calculations of voters and wanes when
voters attention shifts to other matters.
In this section we examine prospects for the KPK to continue to
investigate and prosecute high profile corruption cases in the lead up
to the 2014 election period. We also explore whether the activities of
the KPK alone will be sufficient to generate a meaningful change in
the corruption risk environment.
The KPK story so far
Since its establishment in 2002, the KPK has evolved, under the
leaderships of successive commissioners, into a fiercely independent,
resilient, popular and effective institution in the investigation and
prosecution of corruption among public officials. The attempts of other
arms of administration such as the legislature, police and judiciary to
weaken and discredit the KPK attest foremost to the commissions
success in making entrenched flagrant abuses of power a far riskier
undertaking for their perpetrators than was the case before its existence.
An undimmed level of public support for the KPK will continue to provide
a degree of insulation from such attacks, especially in the pre-2014
election period, during which any overt attempts to kneecap the
popular commission would surely undermine the aggressors polling
prospects. The KPK will also resist politicisation: KPKs investigations

Corruption in Indonesia is undoubtedly pervasive. The process of KPK Corruption Convictions

decentralisation that commenced in 2001 marked a period during
POSITION 2004 2005 2006 2007 2008 2009 2010 2011 2012 TOTAL
which corruption encountered by international businesses -
particularly those interacting with officials in poorly-governed districts Parliamentary Members 0 0 0 2 7 8 27 5 16 65

- was exacerbated. Grand corruption scandals play a large role in Ministers/ Heads of
0 1 1 0 1 1 2 0 0 6
Minister Level
Indonesian domestic politics, with political groups attempting to use
Ambassadors 0 0 0 2 1 0 1 0 0 4
such issues to undermine their political opponents. Recent corruption
scandals attest that involvement in corruption does not need to be Commissioners 0 3 2 1 1 0 0 0 0 7

proven to be politically damaging. Corruption is so widespread and Province Governors 1 0 2 0 2 2 1 0 0 8

the legal system so easily manipulated that the Indonesian public
Regent/City Mayors 0 0 3 7 5 5 4 4 3 31
cynically assumes that most allegations have at least some truth
Government Officials 2 9 15 10 22 14 12 15 7 106
behind them. As we discuss in Part 2, the prevalence of day-to-day
corruption is a pressing concern and significant constraint for foreign Judges 0 0 0 0 0 0 1 2 2 5

businesses in Indonesia. Prosecutors 0 0 1 0 0 2 5

0 0 2

Private Sectors 1 4 5 3 12 11 8 10 15 69
Anti-corruption has been a key theme of President Susilo Bambang
Yudhoyonos tenure. While his government recognises that corruption Others 0 6 1 2 4 4 9 3 2 31

is an impediment to foreign investment and a huge cost to the national Total 4 23 29 27 55 45 65 39 45 332
economy, Yudhoyonos support for domestic anti-corruption initiatives
has been motivated by the need to placate voters through steadily Source: KPK (2012)

Control Risks
Anti-Corruption in Indonesia 2
of senior figures from the ruling Partai Demokrat (PD) may well see
President Yudhoyonos party booted from office in 2014. However, the
KPK will not be fully immune to future attacks, which will slow but not
derail continued efforts to build capacity and assemble cases against
even the highest-level officials across the political spectrum.
The ruling partys once uniquely clean credentials at present seem to
have been irreparably tainted by scandals exposed by the KPK, notably
in the last two years. Yet for the PD and Yudhoyono, perhaps the only
viable path to avoiding defeat or at least retaining significant
parliamentary influence in 2014 is to throw full weight behind a
broader reformist agenda within which the KPK plays a central role.
Yudhoyono has shied away from this so far, and indications are that
advocates of such a course do not currently hold sway in his
government. It may require an internal crisis in mid-2013 a result of
further scandals and dismal public approval ratings to force a
reshuffling of DP priorities.
Without such recalibration, the KPKs insulation will remain fallible.
Moreover, and unfortunately, for all its splash, KPK exertions to date
constitute no more than a drop in the anti-corruption ocean.
And the 2013 chapter
The coming year looks set to be another busy one for the KPK, with
several high-profile cases on its horizon. The highest-profile scalp may
be DP Chair Anas Urbaningrum, in connection with a long-running
investigation of budget manipulations and kickbacks allegedly spawned
by a sports complex development project in West Java. The KPK in
December 2012 named Youth and Sports Minister Andi Mallarangeng
as a suspect in the case, provoking his swift resignation. Both
Mallarangeng and Urbaningrum became the subject of corruption
rumours following the trial in 2011 of DP Treasurer Muhammad
Nazaruddin, who reportedly alleged that they and other senior DP
figures including Yudhoyonos relatives were involved in the sort of
activities that led to his own downfall.
The Nazaruddin affair cast light on rifts within the fault lines that suggest
the president would be content to distance himself from the likes of
Urbaningrum, and be disinclined to look to shelter such errant
colleagues from KPK scrutiny. Some keen observers, however, assert
3
Control Risks
Anti-Corruption in Indonesia
that the possible implication of close family members in corruption
cases will deter Yudhoyono from extending any unequivocal backing of
the KPK in 2013. This would, in turn, undermine DP election prospects
and leave the KPK more vulnerable to operational harassment from
other institutions, notably the police, especially given the open conflict
between the two law-enforcement bodies currently in play.
Illustrating this combat, KPK Deputy Chairman Busyro Muqqodas in
December 2012 stated that the terms of 13 police investigators seconded
to the KPK including Novel Baswedan, described as one of the
commissions stand-out operatives would not be extended. Baswedan
had been heavily involved in an investigation of Police Inspector-General
Djoko Susilo the highest-ranking serving officer to darken the KPK
radar in connection with alleged procurement scandals. Within days,
the president signed a new regulation that, according to Justice and
Human Rights Minister Amir Syamsuddin, prohibits the withdrawal in
future instances of seconded investigators while active in casework.
That will blunt one of the more common weapons deployed by the
KPKs opponents when looking to hamper the commissions work.
Others weapons remain available, such as investigations into KPK
personnel, which automatically trigger their suspensions and have been
deployed as a retaliatory measure on seemingly spurious grounds in
the past. Legal challenges, such as to the constitutionality of KPKs
designated courts (Tipikor) and the advisability of its perceived excessive
powers, will also probably be wheeled out in the coming years in a bid
to dilute its effectiveness. Despite an overarching resilience, the KPK
has taken and will continue to take knocks from such affronts.
Storm clouds ahead?
A 2006 Constitutional Court ruling that Tipikor courts create a dual
track justice system in violation of the constitution has weakened the
KPK courts, forcing the systems decentralisation (courts are now
located in various provinces, whereas previously resources were
concentrated in Jakarta) and discretion to replace the once obligatory
inclusion of three ad-hoc judges on five-member ruling panels. Tipikor
courts are now ruling on non-KPK corruption cases and a greater
number of decisions are issued by ruling panels comprising a majority
of career judges, rather than ad-hoc experts, seen as less prone to
manipulation, bribery and case-brokering. The concern is that the KPK
will, as a result, become a steadily less formidable prosecutorial
machine than it was pre-2011. That year, the Tipikor courts system lost
its 100% conviction rate, and acquittals have grown in number since.
Even if politicians seeking to kneecap the KPK outnumber those
looking to tap into its strong public trust, they would find it hard to go
beyond operational harassment and piecemeal dilution of some of its
prosecutorial effectiveness. The neutering of the KPK law that some
urge, principally through stripping the commissions most potent
powers wiretapping without court approval, travel bans and asset
freezes among them will likely prove beyond the reach of KPK
antagonists. Beyond the political battleground and beneath the
higher-profile cases noted above, the KPK will be occupied mainly
with cases of politicians siphoning off state funds to assist their
parties election campaigns.
A drop in the ocean
For all the positivity around the KPK, its impact on the corruption
battle in Indonesia should not be overstated. The KPK handles only
a very small percentage of total corruption cases brought in the
country, below 5%, with the Attorney Generals Office (AGO) and
police still the dominant players. These institutions have far lower
conviction rates and typically hand out more lenient punishments
than the KPK, and are frequently accused of case-brokering and
various other derelictions.
An Australian law academic focused on Indonesia sums up the
challenge:
Corruption is so endemic within the justice system that the system is
often referred to as the justice mafia. In most types of cases,
including corruption cases, police can be persuaded to drop an
investigation, lose important evidence, or charge a suspect with a
lesser offence. In return for a bribe, prosecutors often drop a
prosecution, present their case poorly at trial, or seek a lenient penalty
... The result is, in essence, immunity for those whose cases are
handled by ordinary law-enforcement institutions and who are willing
and able to bribe their way out of trouble.
Simon Butt, Anti-corruption reform in Indonesia:
An obituary, November 2011
 building broader-mandated, better-equipped corruption-fighting
International attention on Indonesia bodies exist. Sustainable improvements will require stronger political
A number of foreign companies have been investigated and charged under the US FCPA and other international anti-corruption will than that currently displayed by the Yudhoyono team,
laws for activities in Indonesia. appointments of future commissioners that match the strong
credibility of (most of) those to have served to date and arguably of
The most recent case involves Allianz, which was charged with violating the FCPAs book and records provisions by the Security most importance parallel reforms of key institutions such as the
and Exchange Commission (SEC) in December 2012. It is alleged that Allianz made improper payments through agents to bureaucracy, judiciary and police that serve to deter disincentivise
secure 295 insurance contracts with state-owned enterprises between 2001 and 2008. graft. The KPK, despite the higher visibility of its investigative work, is
partly dedicated to developing longer-term preventative measures or
Other companies who have faced scrutiny under the FCPA include Daimler (for the provision of gifts, travel and entertainment recommendations: this area must be afforded greater prominence if
to officials to secure contracts and lower tax obligations through local affiliates between 1998 and 2006), Monsanto (for the corruption challenges are to be effectively confronted, and in
improper payments made to incentivise the repeal of environmental laws in 2002) and Avery Denison, who in 2005 uncovered ways that are realistically sustainable in the decades that will be
problems involving the use of petty cash to make improper payments to government officials in two businesses it had acquired required to effect change.
in Indonesia.

The KPK works co-operatively with international counterparts. In 2010 Innospec pleaded guilty to charges of bribing employees Part 2: Where is the rub?
of Pertamina to secure contracts in London and was fined USD 12.7m. During the same period Innospec agreed to pay US
authorities a settlement for FCPA violations in Iraq, and number of senior executives, including the Asia Pacific regional sales All senior executives interviewed by Control Risks acknowledged that
director and the global sales and marketing director, were charged with offences under UK law. In 2010 the KPK began its own corruption presents a persistent headache when doing business in
investigation into Innospecs activities in Indonesia. Indonesia. Making a profit in a way that meets head office expectations,
while remaining compliant with domestic and international law and
Investigations and prosecutions for potential violations of the Australian Criminal Code in Indonesia by Note Printing Australia company policy, was universally described as a continuous challenge.
and Securency continue: it is alleged these companies used an intermediary in Indonesia to secure contracts with Bank Equally challenging is the communication of the day-to-day prevalence
Indonesia. The Australian Federal Police is reported to be still investigating the activities of Tenix Defence in Indonesia and the of corruption to head office and the tempering of expectations about
Philippines between 2001 and 2008. It is reported that potential activities were discovered during due diligence into Tenix by achievable growth in light of the complex operating environment.
BAE Systems prior to its acquisition in 2009.
The following section provides an overview of areas senior executives
and experts identified as being problematic. We start by examining
Despite the KPKs menace value, it can only catch a fraction of the reduction in corruption risks, for all the KPKs exertions. Cases in the types of corruption encountered by companies who frequently
improprieties that will continue to occur, and is certainly nowhere these priority areas will be largely removed from areas populated by interact with government officials.
close to having the reach and resources to make the eradication of foreign businesses, and have limited positive implications for the
corruption an even semi-credible prospect. Its necessarily narrow typical international investor. At the same time, the KPK in late 2012 The daily grind
focus will remain trained on high-value targets and cases involving demonstrated willingness to prosecute foreigners caught on the Day-to-day corruption risks for foreign investors typically arise out of
heavy state losses. Priority scrutiny will go to individuals and state wrong side of the corruption battle, with its conviction of a Japanese routine interactions with government officials. Indonesian civil
ministries with the largest budgets, such as agencies overseeing national for bribing a judge adjudicating on a labour dispute involving servants have access to a host of legal and illegal sources of income,
tax, energy and mineral resources, infrastructure, health and his company. Cases involving foreigners will remain a minority, but will including allowances to attend meetings, facilitation payments
education portfolios. by no means be an impossibility. (speed money), kickbacks on contracts, tax avoidance and per
diems for site inspections. What they receive depends on their
The experiences of companies in Indonesia presented elsewhere in The long view: prevention is better than prosecution relationships with the power brokers within their government agency
this paper attest to the fact that there is little to suggest a tangible What the KPK does illustrate is that the tools and knowhow for and the department they work for. Matters are complicated for

Control Risks
Anti-Corruption in Indonesia 4
foreign companies by Indonesias decentralised system of
government. Regulatory decision-making powers devolved to
provincial- and local-level government officials provide local
government officials with considerable opportunities to demand illicit
payments from companies when processing routine applications
and implementing regulations.
For example, it is estimated that to obtain KITAS (work visas) for foreign
workers between 10 and 14 facilitation payments will be expected to
be paid in cash to officials in the Department of Immigration at central
and provincial levels at a cost of anywhere between USD 600 and
USD 5,000 per application (depending on the job function and location
of employment). Control Risks research indicates that these
payments, which are usually made through third-party agents, are a
key source of supplementary income for officials, with tiered amounts
Pressure points
AN
SI N EX
O NE TIO
D U P
IN RR
CO
L
ME AND IONA
from payments being distributed within departments in line with
seniority. Companies concerned about the cash payments involved in
obtaining KITAS told Control Risks that the officials involved do not
routinely provide receipts. At the same time officials do not necessarily
recognise cash payments to facilitate KITAS and other permitting
processes as wrong or illegal; one manufacturing firm reported that
staff attempts to resist cash facilitation payments without receipts for
routine permits by referring to the companys anti-corruption policies
were met with blank stares by the officials involved.
Even companies with well-publicised zero tolerance anti-corruption
policies in Indonesia face challenges in determining whether or not
payments to government officials are legal. One international
company interviewed said it had spent months searching for an
official schedule of tariffs or fees for permit applications without
H
PE
CT Q
AT
IO
NS
Is the legal net closing on facilitation
payments?
Facilitation or expediting payments to officials in order to
speed up routine and non-discretionary government
actions is an area of controversy and confusion for some
international companies operating in environments where
demands for such payments are commonplace. While
both the US FCPA and the Australian Criminal Code
currently provide a very narrow exception for companies
for facilitation payments (where they are accurately
recorded in books and records), under the 2010 UK
Bribery Act there is no exception. Equally, there is no
facilitation payment exception under Indonesian criminal
law. There are signs that the exception will be reviewed in
the US and Australia, and the Organisation for Economic
Co-operation and Development (OECD) has also called
for an end to legal exceptions that allow for corrosive
facilitation payments. As such, a best practice anti-
corruption policy should contain a blanket prohibition on
bribes of any kind and any size no exceptions.
success. Another extractive industry company told Control Risks it
faces persistent problems with requests for per diems from
government officials carrying out site inspections. While Ministry of
Finance Regulation number 113/PMK.05/2012 stipulates that
officials carrying out government duties on company sites are

WS

entitled to per diems, there is no guidance under the law regarding

CO
LA
T

MP whether the government or the company is responsible for paying.

NA

IC
ER

ET
ST

The regulation does not provide guidance on whether a company

INT

ITI
can refuse to make per diem payments over the course of a weekend
ON
DO

for officials who insist they can only carry out site inspections on
Monday mornings.

PRESSURE
At Indonesias ports, corruption is often hidden under the guise of
processing hold ups for discrepancies in customs documentation
particularly for imported goods. A freight forwarder commented
that even minor issues in paperwork can result in containers
being held up at port for considerable periods of time unless a

5
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Anti-Corruption in Indonesia
fine (i.e. a direct payment to a customs official) is made. Simply
returning with the correct paperwork is not a viable option. One
importer deals with this issue when it arises by returning its
containers to their port of origin and resending them with perfect
documentation. For exporters, getting trucks into a port can be a
question of payment of illicit entry fees particularly when there
is congestion.
The persistence and pervasiveness of facilitation payment
demands will be a key source of concern for managers of
international companies in Indonesia for the foreseeable future.
The concern is particularly acute for companies caught under the
UK Bribery Act. According to one country manager, no-one
wants to pay. But applying absolute zero tolerance overnight will
kill our business.
Chamber of commerce and industry
sector initiatives
Corruption and bribery are issues of significant concern for
foreign diplomatic missions and chambers of commerce,
and the subject of frequent complaint by their members.
The British Chamber of Commerce in Indonesia recently
launched an Anti Bribery & Corruption Position Paper in
conjunction with the Head of Prosperity & Economics
Section of the British Embassy; the chamber holds round
table sessions for members to discuss issues in relation to
this theme. Meanwhile the American Chamber of
Commerce in Indonesia supports a multinational
committee for the assessment of facilitation payments.
This is a multi-sector initiative focused on three key areas:
work permits, per diems for government officials and
customs/excise matters. Sector-specific groups, some
more formal than others, have also been formed with the
aim of putting pressure on the government to address the
issue of corruption more comprehensively, and of sharing
information on best practice.
Lunch, dinner and corporate social responsibility (CSR)
Expectations for gifts and entertainment by government officials
affect some sectors more than others. In particular, companies
engaged in marketing and sales of products or services to
government agencies or state-owned companies reported that the
provision of dinners and other forms of entertainment were frequently
expected during negotiations. Likewise, company employees in
charge of procurement were often offered invitations for lunch and
dinner by suppliers. However, the majority of companies interviewed
for this Paper seemed confident their policies were sufficient and
understood by employees, and believed this did not present a
significant risk exposure. That said, a number of interviewees
admitted that their policies on entertainment were something they
needed to continually reinforce, particularly for new employees or
those involved in business development.
Requests for charitable donations were identified as an area
requiring additional scrutiny by several interviewees. All managers
interviewed recognised the value of genuine corporate social
responsibility initiatives in Indonesia, and cited successful
examples of supporting local sports teams, building capacity at
local schools and improving domestic sanitary conditions.
Problems arose where companies were invited to provide support
to charities by local partners without checking how the funds
would be managed, and who was behind the charity in question.
In one example provided to Control Risks, a company was invited
by an Indonesian partner to provide a donation to a childrens
charity. When the company looked at the management structure
of the charity it discovered that the wife of a manager at the partner
company had established the organisation, and that it conducted
limited charitable activities.
Exposure varies
Exposure to demands for facilitation payments (or operational
bribes) is dependent on a companys sector of operation, business
structure, the stage of investment, the frequency and type of
interactions with government agencies and the size and profile of the
investment. For example, an international consulting firm with a small
representative office in Jakarta may have minimal exposure to
corruption. In contrast, an international manufacturer of food
products seeking to open a factory with a new local partner with no
anti-corruption policies is likely to begin to encounter corruption risks
from government officials and private parties at the pre-investment
and at the outset of the investment stage.
The mining sector provides an illustration of how foreign companies
face pressure to make illicit payments at every stage of the business
cycle. Companies can expect demands for unofficial payments
(often in cash) when applying for all mining-related permits, approvals
and certificates from central and district level officials at the Ministry
of Energy and Mineral Resources, Ministry of Forestry and the
Indonesian Police. Interviewees reported that in practice they will
typically experience initial co-operation from authorities when
making applications. However, several weeks later no progress will
be made and the government office in question will report it has
found a problem that will take a few weeks to resolve. More time will
pass with no progress, with government officials being obstructive in
providing answers about the reason for the delay and status of the
application. At this point, frustrated companies will then consider
obtaining external assistance from third parties, including agents.
Our research indicates that delaying tactics and rent seeking are
repeated at every stage within the Indonesian bureaucracy at district,
provincial and national levels.
Exposure to demands for facilitation
payments (or operational bribes) is
dependent on a companys sector of
operation, business structure, the
stage of investment, the frequency
and type of interactions with
government agencies and the size
and profile of the investment.
Control Risks
Anti-Corruption in Indonesia 6
Third parties
Senior managers interviewed by Control Risks were aware that
demands for illicit payments are customary in interactions with
government agencies. However the majority believed they were
effectively managing the risk by using third parties. When we
asked whether they could be confident that the third parties were
not paying bribes on their behalf, one executives answer was
typical of the response of other corporate interviewees: We do
due diligence, but frankly I dont want to know what they are doing
on our behalf. This is a particularly high-risk approach to dealing
with corruption: extraterritorial anti-corruption law prohibits wilful
blindness of wrongdoing.
Vested political and business interests play a key role in the
pervasiveness of corruption in Indonesia. To this end, third parties,
whether they be local partners, agents, suppliers, distributors or
subcontractors, were frequently identified as being both the source
and the solution to corruption risks in Indonesia. Without careful local
partner selection, international companies can find themselves
unstuck by hidden interests. One senior manager spoke of the
challenge he faces in meeting his employers aim to grow through the
acquisition of an Indonesian manufacturing company: We are really
struggling. Even when we find something that looks ok on paper,
when we look beneath the surface and uncover political interests, our
compliance guys kill the deal.
A related challenge identified by companies was the difficulty of
effectively influencing third parties to be compliant with company
anti-corruption policies and procedures. Selecting a good local partner
is one thing; having it comply with international anti-corruption best
practice is another. The enormity of the challenge of ensuring that
Indonesian agents, suppliers, distributors and others are genuinely
committed to zero tolerance was too much for the majority of managers
interviewed. We include anti-corruption clauses in our contracts and
get them to read our policy. There is not much else we can do.
A collection of interviewees also discussed the complex integrity
issues involved in cleaning up non-compliant behaviour and
dissolving partnerships with local companies. A country manager
at an international company in the service sector told us that when
7
Control Risks
Anti-Corruption in Indonesia
he first arrived in Jakarta in 2011 he conducted his own assessment not held accountable to the same international anti-corruption
of potential corruption problems within the Indonesia business. He standards as laid down in the FCPA and UK Bribery Act. There are
was keen to remove a senior level manager he suspected of being two playing fields: one for us, one for them. We cant compete as we
too close to a number of suppliers, but had to act with caution as cannot do what they can.
he feared retaliation particularly as the manager had family ties to
members of the judiciary. This country managers concerns were As an example, an executive from a manufacturer and distributor of
echoed by other senior executives interviewed who had personally machinery said that local competitors sales teams have a clear
experienced or heard of cases where attempts to end business advantage by having no restrictions on gifts or entertainment. This
relationships or dramatically clean up corrupt practices had led to proved particularly challenging during tenders for contracts with
threats of violence and intimidation, political interference and state-owned companies or large Indonesian firms. We can promote
judicial action. ourselves on quality, price and service but not much else. These guys
[competitors] can throw everything they like to win a tender.
Surviving the competition
One of the most pressing concerns expressed by a number of senior How do I tell head office what is really going on here?
executives was their ability to meet internal expectations amid a A recurrent theme during our interviews with senior managers of
business environment where many Indonesian and other competitors international companies was the persistent difficulty in working out
(mainly from countries with weakly enforced anti-corruption laws) are how or whether they should be communicating the complete story
of the integrity challenges their Indonesian businesses faced to head
UK Bribery Act and FCPA compared office. The people in [head office] compliance would be shocked if
they saw what goes on in Indonesia. So I do what I can to make sure
US FOREIGN we comply. But I dont tell them everything, said one manager at an
CORRUPT UK BRIBERY
IS IT AN OFFENCE?
PRACTICES ACT American company.
ACT
Senior managers we spoke to in Jakarta were aware they could face
individual liability under laws such as the FCPA and the UK Bribery
Bribery of foreign public officials Act. At the same time, several managers expressed concern that the
reality of Indonesias complex risk environment was often divorced
from head office expectations. While well-known foreign companies
have successfully used their brand and advanced compliance
Private sector bribery systems to reduce their exposure to corruption risks, smaller
companies and those at the beginning of the journey towards zero
tolerance said they were worried by the enormity of the challenge.
One financial officer of a European manufacturing company said, we
Facilitation payments want to do the right thing. No one wants to make facilitation payments.
limited exception But we need practical help to get us through this without [compliance]
killing our business.
Third party liability With this plea in mind, the final part of this White Paper provides a
summary of practical risk mitigation actions that companies can
implement to reduce their exposure to corruption risk in Indonesia.
Part 3: Recommendations and strategies
The tension between compliance and achieving growth in Indonesia
can be resolved. Companies that have successfully done so in
Indonesia have used a combination of creative problem solving,
consistent communication on company policy, and the intelligent
selection and active management of third parties to reduce their
exposure to corruption risk. These companies typically have had the
clear support of head office that comes in the form of tangible financial
assistance for compliance functions as well as acknowledgement
that to do things right in Indonesia will take longer than in other, less
complex markets.
The UK Bribery Act 2010 Guidance, and in particular the six principles
comprising the Adequate Procedures defence for the offence of
failing to prevent bribery, are widely recognised by senior managers
of international companies operating in Indonesia that were
interviewed for this paper. Similarly, US-regulated firms were also
broadly familiar with the Hallmarks of Effective Compliance
Programs as set out in the Security and Exchange Commission
(SEC) and Department of Justices (DOJ) 2012 Resource Guide to
the U.S. Foreign Corrupt Practices Act. In line with these guidelines,
the majority of interviewees confirmed that their company had in
place comprehensive anti-corruption policies and procedures. All
interviewed confirmed they conduct due diligence on third parties,
carry out anti-corruption training and ensure that anti-corruption
clauses are incorporated into contracts with third parties.
ease of reference, we have structured this in line with the six main
aspects of adequate procedures as set out in the Guidance to the UK
Bribery Act.
1. Tone from the top
Implementing a zero tolerance anti-corruption programme in
Indonesia is not for the faint-hearted. In Indonesia the tone set by
country managers and their teams is the first crucial step towards
success. Leaders need to be tenacious in their commitment to zero
tolerance, courageous in the face of persistent pressure from those
who say that corruption is a way of life in Indonesia, and committed to
supporting those employees at the front line who will be tasked with
saying no. Managers must also put in place strategies for the
implementation of zero tolerance, and carefully consider the potential
complications of introducing such a regime. All too often Control
Risks has been made aware of companies who failed to do so and
Adequate Procedures
MONITORING AND REVIEW
were left wondering what happened when they implemented zero
tolerance with insufficient contingency planning.
In this context, the tone from the top includes ensuring all senior
managers act with integrity: this sets the expectation that all other
employees must do the same. Companies whose leaders clearly
position anti-corruption compliance as a matter of professional
personal responsibility for all employees are far better positioned to
identify and diagnose corruption problems early.
Finally, and perhaps most importantly, in order for Indonesia-based
senior leaders to set the right tone and actively implement company
anti-corruption policies, it is essential they have head office buy-in.
Leaders need to have the support and space to discuss specific
challenges faced on-the-ground in Indonesia. Equally, the commercial
implications of genuine zero tolerance need to be mapped out. It is
TOP LEVEL COMMITMENT

COMMUNICATION
Yet, several managers interviewed expressed concern that PRINCIPLES OF INTEGRITY RISK ASSESSMENT
AND TRAINING
policies, procedures and training programmes set at a
RISK MANAGEMENT
headquarters level did not necessarily help them solve complex
integrity problems in their day-to-day operations in Indonesia.
Equally, interviewees expressed frustration when attempting to
reconcile the significant resource requirements of implementing
adequate anti-corruption procedures against pressure to cut
costs, increase sales and grow margins.

Given these concerns, what can be done to effectively combat DUE DILIGENCE PROPORTIONATE
corruption? The following is a summary of key lessons learned from AND SCREENING PROCEDURES
companies seeking to implement zero tolerance in Indonesia. For

Control Risks
Anti-Corruption in Indonesia 8
possible to successfully operate in Indonesia without paying bribes,
but it takes considerable time and effort for the right anti-corruption
compliance structures to be put in place.
2. Proportionate procedures
The majority of international companies operating in Indonesia apply
anti-corruption policies and procedures that have been drafted at a
headquarters level by central legal or compliance functions. The
flexibility and complexity of anti-corruption procedures varies
considerably between companies in different sectors; some are far
better suited to doing business in high risk environments than others.
Frequently the one size fits all approach to anti-corruption
compliance falls short, either because procedures fail to provide
sufficient guidance on grey areas, or do not sit well within the
complexities of the Indonesian corruption risk environment. The SEC
and DOJs 2012 guide confirms this, stating: Effective compliance
programs are tailored to the companys specific business and to the
risks associated with that business. They evolve as the business and
the markets change. While there may be limitations on how the
Indonesian division of an international company can influence
centrally controlled policies, it is important that senior leaders
communicate constructive feedback to head office. After all, anti-
corruption procedures can only be proportionate and effective if they
accord with risks the business is exposed to.
use corruption risk assessments to genuinely find out where their
business and employees are under pressure are invariably better
placed to address risks than those who adopt a generic, tick the box
approach. This is particularly true in Indonesia, where we have found
that integrity risks are generally not uncovered until there is a
concerted effort to map and openly discuss potential issues.
Often the most effective corruption risk assessments will incorporate
sensitively conducted discussion with employees at different levels
tasked with responsibilities for dealing with government officials and
other companies. This, combined with other forms of research, can
yield important information on gaps in existing policies, procedures
and training, as well as providing invaluable information for managers.
A thorough corruption risk assessment can also be a powerful
mechanism for senior managers to use in conversations with head
office about the challenges of doing business in Indonesia. One
Corruption risk assessments
MAP BUSINESS IDENTIFY
UNIT ACTIVITIES HIGH-RISK AREAS
AND INTERACTIONS (IN SECTOR/ INDONESIA)
senior executive who had conducted a thorough review of company
exposure to corruption said, It was painful but worth it. You cant
solve a problem you havent diagnosed.
Assessing corruption risk takes courage and commitment, particularly
as the identification of risks may warrant follow-up action (such as
additional due diligence where questions are raised about the
activities of third parties) and legal advice. However, the consequences
of failing to honestly examine vulnerability to corruption in Indonesia
can be significant: international law requires companies make a
conscious effort to uncover the truth.
4. Due diligence
Managers, compliance officers and legal counsel charged with the
responsibility for conducting due diligence into third parties commonly
confront the question how far do we need to go? As is the case with
CONSIDER
VULNERABILITIES
AND POSSIBLE GAPS

3. Risk assessment
When asked where is your business most exposed to corruption
risks? the majority of managers of international companies in
Indonesia interviewed for this Paper were able to identify broad areas
of potential problems. Approximately half of the executives interviewed
confirmed their companies undertook regular corruption risk
assessments of their Indonesia business.

The Guidance to the UK Bribery Act includes advice that risk COMMUNICATE,
REVISE POLICIES
assessments should be proportionate, take into account sectoral TRAIN, MONITOR,
& PROCEDURES
RESPOND
issues as well as the type of transactions and third relationships a
company is involved with. This is useful, but generic, advice, and has
led to companies of different sizes adopting a wide variety of
approaches to conducting risk assessments. Those companies that

9
Control Risks
Anti-Corruption in Indonesia
all aspects of effective anti-corruption compliance, proportionality
and pragmatism trump excessive spending on third-party due
diligence programmes. In Indonesia in particular, a risk-based
approach to due diligence can assist in identifying where to focus
attention as companies across a broad range of sectors are reliant on
multiple third parties to operate in the country.
For example, if you are seeking a new joint venture partner then an
extremely detailed investigation of the partners ability to do business,
in a way that is acceptable to you, with people who are desirable to
do business with, has a logic that does not need anti-corruption
legislation to recommend it. There is often a fear that such deep
examination of a company or individuals probity, reputation and
track record will inevitably produce information that will be a deal
killer every time it takes place. Issues may be identified but more Successful anti-corruption communication strategies take into account
often than not these can be resolved with a slight change in
contractual terms, an agreed change in behaviour or, in more
extreme circumstances, the exclusion of one of the company
principals from involvement in the new entity.
Clearly, minor suppliers would not need this kind of treatment and
most information now exists in the public domain. Furthermore,
Indonesian companies are increasingly comfortable with providing
detailed disclosures of their shareholders, officers, subsidiaries,
charges, etc, that can then be independently corroborated quickly
and cheaply.
Some further good news is that a growing number of Indonesian
companies recognise they have a competitive advantage in
providing corruption-free services to international companies.
Thus, when seeking new partners and issuing tenders in Indonesia,
it is worth highlighting that you are seeking companies with proven
anti-corruption credentials.
Finally, it is worth noting that the type of information that can be
obtained during due diligence can also be useful should a business
relationship turn sour. Companies that are armed with up-to-date
information about their business partners position are in a far stronger
position to conduct accurate scenario planning and manage risks
associated with ending relationships in Indonesia.
5. Communication and training
Consistent and clear internal communication on company anti-corruption
commitments is a key pillar of compliance. Equally, unambiguous
external communication of company policies and expectations to
business partners, government officials, and third-party agents, suppliers
or distributors is vital particularly in Indonesia where corruption is a part
of daily life for the vast majority of the population and also seen as the
normal way of doing business. Strong and reinforced communication
on a companys position can reduce the prevalence of demands for illicit
payments by educating those asking for the payments that they are, in
fact, illegal. In some circumstances this approach may also help a
company demonstrate it has done all it possibly could to limit exposure
to corruption risk.
at the beginning of training sessions. Other companies encourage open
the position and influence of these key stakeholders, and use different
tactics to ensure messages are understood. In practical terms, this
means that communicating company policy and expectations with
third party agents acting on behalf of a company should include face to
face meetings with senior officers followed by written communication.
Several companies interviewed for this Paper said that in communicating
company policy to government officials, reinforcing company
commitment to Indonesian law (as opposed to international laws) also
helped get the message across. Communication should also be
supported by contractual terms binding third parties to company
standards. Finally, when a third party acting on behalf of a company
may itself be exposed to pressure to make illicit payments, it may be
appropriate to provide compliance training for third-party employees.
Internal anti-corruption training will ideally cover all employees in
Indonesia, and those in high-risk functions should receive additional
guidance. E-learning and the use of multimedia presentations are
popular with companies in Indonesia looking at cost-effective ways of
conducting generic anti-corruption training. However, employees in
high-risk functions (such as procurement, business development and
government relations) benefit from face-to-face training using real life
scenarios. To this end, companies that are able to incorporate training
exercises focused on real life challenges gleaned from corruption risk
assessments often find that employees come away empowered and
better equipped to resist bribery and report problems.
6. Monitoring and review
Adequate anti-corruption programmes will focus on the prevention of and
the response to problems. Consequently, having in place effective
mechanisms to detect problems is crucial. As it is common for most
internal investigations to be prompted by complaints from employees, it is
essential that companies create a culture and mechanisms that support
employees who wish to report concerns. Several executives in charge of
operations and projects in remote locations of Indonesia said this was a
real problem, particularly in light of a culture where respect for elders is
reinforced by hierarchical workforce structures. There are no quick fixes
here, but a number of companies draw on elements of traditional and
modern Indonesian culture to drive home messages of support for those
who report problems. For example, one company shows a screening of
segments of the anti-corruption movie Kita Vs. Korupsi (Us vs Corruption)
employee dialogue with managers on a wide range of issues (such as the
environment) to gradually engender confidence to report concerns.
The provision of confidential whistle-blowing lines, together with
options to report concerns to managers, is useful, provided that
companies also have a well-defined policy for complaints and
protecting the people who make them. One way to increase whistle-
blower protection is to have a strong and independent audit function
within the company that can, and does, audit transactions by teams at
any point in the business cycle. Such flash audits are then viewed as a
procedure rather than a punishment for any perceived wrongdoing,
but they also act as a reminder that the company is prepared to go
beyond policy statements to manage anti-corruption risk.
Conclusion
Control Risks recognises that complying with strict anti-bribery and
anti-corruption policies in a country like Indonesia can be a significant
challenge, in terms of time, resources and headquarter expectations.
However we are pleased to note a number of positive initiatives,
brought about by industry groups, chambers of commerce and
individual companies, both international and Indonesian. We hope
this Paper will act as a stimulus for further discussion by showing
that there are a number of practical measures companies can take to
reduce their exposure to risk in this area, and thereby contribute to
the steady progress to which this paper draws attention.
Control Risks
Anti-Corruption in Indonesia 10
 Indonesian civil society in fighting corruption:
a spotlight on Transparency Internationals work with PLN
BY Transparency International (TI) Indonesia

Civil society plays a vital role in anti-corruption advocacy and education in Indonesia. Control Risks invited TI-Indonesia to discuss
work they have been doing with PLN as part of research for this Paper. This is an example of pioneering anti-corruption work led by
Indonesian civil society.

PLN ( Perusahaan Listrik Negara), the Indonesian national electricity company, is the sole provider of electrical energy for an archipelago with more
than 17,000 islands and almost 240 m people. These simple statistics already describe the complexity that PLN has to face in running its business.
Adding to this, PLN operates in a country with entrenched corruption and low level of professionalism in the bureaucracy. Facing these odds, PLN
needs a robust corporate governance standard for them to be recognized as a professional company adhering to high international standards.

To improve corporate governance, PLN has begun to develop a strategy to prevent bribery and corruption and to improve their quality of its
public service. This strategy was passed on to PLNs new CEO Nur Pamudji when former CEO Iskan Dahlan retired from his position to become
a Minister of State Owned Companies. Pamudji then asked Transparency International- Indonesia (TI-Indonesia) to help PLN achieve this goal.
As a result, on February 2012, PLN signed a memorandum of understanding (MOU) with TI-Indonesia for a joint programme to develop a good
corporate governance and anti-corruption system.

The MOU covers two objectives. The first objective is to improve PLNs procurement system, and the second objective is to improve the
quality of its public service. For the first objective, TI-Indonesia has facilitated meetings between PLN and Indonesian Ombudsman Body and
the KPK. With support from TI-Indonesia and KPK, PLN has now established a whistle-blowing mechanism which is integrated with KPKs
corruption case reporting mechanism.

To improve the procurement mechanism, TI-Indonesia has facilitated PLN to hire an international expert on corporate governance and procurement
system. This expert will conduct an assessment of the existing procurement system within the company, and assist the company to develop a more
robust system. Also, TI-Indonesia assists PLN and its vendors, ranging from international electrical companies like Siemens or Alstrom to local
manufacturing companies, in a collective action initiative. This initiative aims to develop consensus between PLN and all its companies, to conduct a
clean, transparent process. It was launched at the end of the year 2012, where all stakeholders involved in this initiative made an integrity pact.

In assisting PLN to improve the quality of its services to the public, TI-Indonesia works together with the Indonesian Foundation for Consumer
Rights ( Yayasan Lembaga Konsumen Indonesia ). They have since conducted a quick assessment of PLNs public services in several areas
around Indonesia, and are now developing recommendations based on their findings.

It is worth noting that this initial work between PLN and TI-Indonesia and other organisations is in a very early phase. Although there are several
challenges faced by this collaboration, mainly from within the PLN mid-level management and some of its vendors who have expressed doubt about
the seriousness of this programme, some positive progress has been made. Indeed, more and more people from within the company and vendors
have shown an interest in the programme. In the World Banks Doing Business Survey in 2012 in Indonesia, indications of getting electricity show
significant improvement. TI-Indonesia hopes that this collaboration can have a significant and permanent impact so that PLN can continue their
herculean task of ensuring effective electricity distribution throughout Indonesia and in promoting good corporate governance within the company.

11
Control Risks
Anti-Corruption in Indonesia
For more information on our expertise in Indonesia or to schedule
a discussion with our experts, please contact Martin Brown at:

martin.brown@controlrisks.com
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