By Ferdian Yazid, Program Manager, Natural Resource Governance, Transparency International Indonesia
How Indonesian beneficial ownership advocates are helping fight corruption in extractive industries
22 March 2021
As a country with significant mineral reserves including gold, copper, tin and bauxite, Indonesia is considered an attractive location for investment.
The abundance of mineral reserves not only attracts investment, but also the attention of dishonest individuals seeking to plunder Indonesia’s natural riches. In a country where corruption is seen to be an ever-increasing problem, the risk of unbridled and harmful natural resource exploitation grows even greater.
Recent cases demonstrate that loopholes in the current system are allowing senior public officials to abuse their position and grant mining rights to benefit themselves and their “success teams”— their loyal political supporters. The current corruption investigation into Supian Hadi, the former regent of Kotawaringin Timur, East Borneo is one example.
The Indonesian Anti-Corruption Commission (KPK) allege that in exchange for bribes and abuse of his authority, Hadi awarded mining permits to three companies whose operations went on to cause significant environmental damage. Members of his political campaign team held shares and served as directors in one of the companies.
Because corporate ownership of the company was opaque, Hadi’s connection with that mining company only came to light through the KPK’s investigation. The KPK allege the former regent caused Indonesia significant environmental and economic losses. One estimate puts the losses in the Hadi case at 5.8 trillion rupiah (USD 400 million).
Progress on beneficial ownership transparency
The country’s progress on company ownership transparency is an important first step to prevent a repeat of this kind of corruption, as well as money laundering and terrorism financing. In late 2016, the Indonesian Extractive Industries Transparency Initiative (EITI) Multistakeholder Group developed a roadmap to achieving beneficial ownership transparency. To implement this plan and fulfil its commitments under the EITI, as well as the requirements imposed by the Financial Action Task Force (FATF), in 2018 the government of Indonesia issued Presidential Regulation Number 13 on beneficial ownership.
That regulation requires every company operating in Indonesia to report their beneficial owner(s), the individuals—natural persons, not legal persons—who own and are able to control the company. Starting in 2018, every company is required to implement the principle of Know your Beneficial Owner. The extractive, forestry, and plantation sectors were prioritised in the implementation of beneficial ownership transparency under the National Strategy on Corruption Prevention 2019 – 2020 that is binding on the ministries that have authority in these sectors. The Ministry of Energy and Mineral Resources (MEMR) also requires mining companies to declare their beneficial owner(s) as part of their application for a mining permit.
Civil society monitoring of progress
For TI-Indonesia along with other civil society organisations (CSOs) such as Publish What You Pay (PWYP) Indonesia and Auriga Nusantara, effective beneficial ownership transparency (BOT) is crucial to expose corrupt relationships between public officials and mining companies. With this in mind, in October and November 2020 we evaluated Indonesia’s progress on implementing the BOT agenda. Our CSO coalition presented the findings to the Indonesian Anti-Corruption Commission (KPK) and National Secretariat of Corruption Prevention (STRANAS PK) in November 2020.
Here are some of our key findings:
Low disclosure by companies
Based on our evaluation, only 10.75% of companies (106,283 out of 988,574) have reported their beneficial owner(s). There are many reasons for such a low compliance rate. Firstly, many companies are not familiar with the term “beneficial owner” and have difficulty in defining their beneficial owner(s). Aside from these well-meaning but uninformed companies, there are many companies that are registered specifically to facilitate crime, and they will avoid compliance as long as it pays to do so. Until the government enforces BO disclosure and penalises those companies that do not comply, these companies will not act.
Poor data integration between ministries
Another problem that is likely to create challenges is the limited potential for data integration between ministries because they do not use a uniform data format to store BO information. Lack of ‘interoperability’ makes it harder to cross-check different government databases which will also impede the verification of beneficial owner(s). Verification is critical step to ensure that information supplied by companies is correct and reliable.
Failure to use BO data
Our CSO coalition also found there was the risk that government ministries and agencies would view BO disclosure as a mere administrative requirement of data collection. This is a limited view – particularly considering that mining companies must declare their beneficial owners to the MEMR as part of their permit application. The identity of the applicant’s beneficial owners is relevant to the decision about whether the company should be granted the mining permit. Indonesia’s conflict of interest law makes it clear that public officials – like Supian Hadi – do not have the authority to make a decision about a matter related to their interests or the interests of their affiliates. BO data cannot just be collected and stored, it must utilised in permit decisions for the BOT agenda to realise its potential in the fight against corruption, that is, to prevent and detect conflicts of interest.
Advancing the BOT agenda in 2021
In the recently released National Strategy for Corruption Prevention for 2021 – 2022, STRANAS PK has set a high standard. It targets a 100% compliance rate of companies reporting their BOs. In addition to that, STRANAS PK also sets a verification target of 100% of beneficial owners disclosed as part of extractive licence applications by the ministries with the authority to issue the licence. As pointed out above, the lack of uniformity in data formats between ministries may complicate the verification efforts.
That said, the verification target could step up the game in the BOT agenda in Indonesia, and the ambition of STRANAS PK on this point should be acknowledged. However, the government also needs to improve the number of companies disclosing their BOs by introducing disincentives for non-compliance.
Furthermore, the government should make more fundamental policy changes in order to use beneficial ownership data more effectively. The government should forbid public officials from owning companies in the sector related to their ministry and also regulate revolving doors with the mining industry by setting up incoming and outgoing cooling-off periods to prevent conflicts of interest and undue industry influence.
Another area where the 2021-2022 National Strategy is lacking is the utilisation of beneficial ownership data to prevent conflicts of interest – the strategy makes no explicit mention of this important measure to prevent corruption in the mining sector.
Nevertheless, CSOs could take a bigger role to identify and expose beneficial owner(s) with a conflict of interest in various sectors. To help CSOs monitor extractive companies and uncover their links with government decision-makers, PWYP Indonesia, TI-Indonesia, and Auriga Nusantara are creating a guide on identifying BOs. Together, the efforts of CSOs and STRANAS PK make Indonesia an interesting case to watch in 2021.