Bank Century Scandal Threatens Government

A few weeks back I wrote a commentary entitled “Indonesia’s Watergate” that discussed a feud between Indonesia’s police and Attorney General’s office on one side, and members of the Anti-Corruption Commission(KPK) on the other, centered on a bribery case. The two KPK Deputy deputy chairman falsely accused of soliciting bribes have now been reinstated by the President. It was the public airing of taped conversations at a Constitutional Court hearing , demonstrating the corrupt relationships that often exits in the country’s judicial system, that sparked my comparison. Although the case isn’t completely closed, it was an important test of the President’s commitment to eradicate corruption that he seems to have passed.

No sooner did SBY get on top of this situation then a second “scandal” emerged involving the November 2008 bailout of Bank Century, a medium-sized private bank. Its actually an ongoing scandal that may prove to be more of a parallel to Watergate since it implicates two of the most important members of the President’s reform team: Vice President Boediono and Finance Minister Sri Mulyani. Even President SBY himself has warned of forces trying to topple his government.

Background
Seeking to avoid a contagion that could have brought down 23 banks and sparked a run on the rupiah during last fall’s worldwide financial meltdown (shades of 1998), Indonesia’s Central Bank Governor Boediono (now VP) and Finance Minister Sri Mulyani decided that the insolvent Bank Century deserved a cash infusion. The initial $68 million mysteriously burgeoned to $706 million. Some of this extra amount is now suspected to have been embezzled by the bank’s leading shareholders (now on the lam) to protect the accounts of depositors who were also important supporters of the President’s reelection bid, as well as several state owned institutions. Bank Century (now called Bank Mutiara) was fraudulently managed, and possibly a front for nefarious purposes. Among other questionable practices a state audit discovered a $17 million account that held the proceeds of a US Agriculture Department grant that would normally be placed in one of the state-owned banks. After almost a year investigations have finally begun to determine how money was siphoned out of the bank even after it was taken over by federal authorities. Indonesia’s deposit insurance program would have covered only a fraction of the total ($119,000 per depositor) but yet certain depositors were able to withdraw their full amounts.

The link between the Bank Century case and the case of the arrested Corruption Commission deputies is a tape recording on which the Chief of Detectives is heard offering to arrange for a big depositor to get his money out of the troubled bank (for a cool million) even after its assets were frozen. Just about everyone in Indonesia now believes that the police have grown tired of the KPK getting in the middle of their “business” and needed to put them in their place by arranging to make them look corrupt. Some of these same elements seem to be exerting their influence through friendly bureaucrats and Parliamentarians as well.

Current Investigations
Already the Supreme Audit Agency has issued a report critical of how Boediono and Sri Mulyani handled the matter and Indonesia’s Parliament has voted to open a formal investigation, a process many suspect will not be conducted impartially. Some of the audit report’s premises are also being called into question since the report’s author is a former Director General for Taxation axed by Sri Mulyani in 2006. Basically, its a stormy mess.

There are numerous interest groups that would love to see Boediono, and especially Sri Mulyani fall: politicians, bureaucrats, companies, and individuals who benefit from rent-seeking networks. Many sources in Jakarta report that under the guise of a transparent Parliamentary investigation there is intense pressure on the President to have at least Mulyani removed. Rumors of all kinds of deals being offered to back off are circulating. The President must call their bluff and cede nothing. At the moment she has not backed down either. Two years ago, he declined to accept Sri Mulyani’s offer to resign when she would not de-list Bumi Resources, the influential company tied to Aburizal Bakrie, a senior minister. Hopefully SBY will maintain his support.

Boediono and Sri Mulyani deny any wrong doing and each welcomes a full investigation. Their explanation hinges on procedures whereby once a bank is determined to be in need of funds a separate agency (Deposit Insurance Agency) handles the details. The focus of the investigation needs to be at this level rather than the ministers. It is correct for investigators to determine if Boediono and Sri Mulyani they knew more about what was going at Bank Century after the initial bailout decision was rendered than they have said publicly. Suggesting that they were also fronting for the economic interests of friends of the President without evidence is highly suspicious. The bailout was a reasonable reaction to an unfolding financial calamity that now appears to have been partly responsible for Indonesia weathering the crisis better than many countries. But, as highly educated technocrats neither minister has a political constituency, and they are dependent on the President’s confidence for cover.

Implications
The real question is if they were not directly involved with all the decisions, is there enough of a whiff of impropriety to take them down. If so, those openly pushing for their resignation --who at the moment seem to be highly motivated to prevent systemic changes in how Indonesia operates-- may be able to achieve their goals. The cost to Indonesia’s overwhelming need for institutional reform as well as infrastructure-directed foreign investment could be very high indeed.

(these views do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)