East Asia & The Pacific
Indonesia risk report
Indonesia's business environment suffers from widespread corruption. 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 licenses. Corruption is also rampant in the natural resources sector owing to weak oversight. The Law on Eradication of Criminal Acts of Corruption criminalizes 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. Corruption legislation is poorly enforced and does not address facilitation payments.
Judicial system Very high risk
While formally independent, Indonesia's judiciary is rife with corruption and is subject to political influence (BTI 2016, ICS 2016). Bribes are taken at all levels of the judiciary, including in court verdicts and appeal courts (BTI 2016). However, less than one in every ten surveyed Indonesians reported paying a bribe to the courts in the past twelve months (GCB 2017). Corruption limits the judicial system's professionalism and objectivity; however, special corruption courts show a high degree of independence and often prosecute and convict Indonesian public officials for corrupt acts (BTI 2016). Dispute settlement mechanisms are inefficient and many laws are open to interpretation by judges; particularly the commercial code is inconsistently applied, due to corruption and training deficiencies for judges, prosecutors, and defense lawyers (ICS 2016). Businesses do not have sufficient confidence in the efficiency of the legal framework regarding dispute settlement and the ability to challenge regulations (GCR 2016-2017). However, only a small percentage of companies identify the courts as a major constraint to their ability to do business (ES 2015). The Supreme Court has opened a whistleblowing portal where demands for bribes or other irregularities in the judiciary may be reported.
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. In 2014, Mochtar was found guilty and received a life sentence for corruption (FitW 2016). In January 2017, another Constitutional Court judge was arrested on suspicion of taking a bribe (Reuters, Jan. 2017).
Indonesia is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is also a member state to the International Centre for the Settlement of Investment Disputes (ICSID).
Police Very high risk
The Indonesian police are plagued by corruption, and bribery is widespread, presenting companies with high risks. Police officers solicit bribes on every level, ranging from traffic violations to criminal investigations (HRR 2016). Two out of five people perceive most or all of the police to be corrupt and one in four Indonesians report having paid a bribe to the police services in the past 12 months (GCB 2017). Businesses do not report sufficient trust in the reliability of police services and businesses do attribute some costs to crime and violence (GCR 2016-2017). About one in seven firms identify crime as a major constraint to their ability to do business and over a quarter of firms pay for private security (ES 2015).
In January 2015, President Jokowi nominated Budi Gunawan for the post of head of the national police while he was under investigation for taking bribes, including from lower-ranking police officers looking for a higher post (The Economist, June 2016). The corruption probe was dropped a few months later and Gunawan was installed as deputy head of the national police (The Economist, June 2016).
Public services Very high risk
Companies should be aware of a high-risk of corruption when dealing with Indonesia's public administration. Businesses report that bribes and irregular payments made to public officials are common (GCB 2015-2016), and one in five businesses report expecting to give gifts in order to 'get things done' (ES 2015). A quarter of Indonesians report having paid a bribe to obtain ID documents and one in seven report having paid a bribe to the utility services in the past twelve months (GCB 2017). Recruitment of civil servants is often not based on merit; positions are 'sold' to applicants or given to associates and relatives (BTI 2016). The quality of public services in Indonesia remains low; rampant corruption has kept Indonesia's public infrastructure, including electricity generation and provision of clean water, from developing (BTI 2016). Companies cite the inefficiency of government bureaucracy as one of the most problematic factors for doing business in Indonesia (GCR 2016-2017). Regulatory and transparency problems hinder businesses and the process of decentralization has introduced an additional layer of costly red tape for businesses to navigate (ICS 2016). Laws and regulations are often vaguely worded, resulting in uncertainty and rent-seeking opportunities (ICS 2016).
The time it takes to get an electrical connection, as well as the costs involved, are below the regional average (DB 2017). Starting a business takes eleven steps, an average that is significantly higher than the regional one, yet the total time these procedures require is slightly lower compared to other neighboring countries (DB 2017).
Land administration Very high risk
Corruption is a high risk within the land management sector in Indonesia. Nearly half of businesses report expecting to give gifts in order to obtain a construction permit (ES 2015). Property rights are inadequately protected due to corruption in the judiciary; courts in land rights cases frequently side with whoever provides the largest bribe to the judges (BTI 2016). A lack of clear land titles is a problem when doing business in Indonesia (ICS 2016); absence of credible maps combined with customary land rights for local people and competing laws and regulations sometimes allow multiple parties to make a legitimate claim to the same lands (HRR 2016).
The government has been accused of appropriating land for private development projects against the owner's wishes without fair compensation (HRR 2016). Central and local government officials have reportedly accepted kickbacks from mining and palm oil companies in exchange for access to lands (HRR 2016). In September 2016, the Jakarta Corruption Court found Ariesman Widjaja, General Director of Agung Podomoro Land, guilty of bribing a legislator in the Jakarta provincial assembly in order to influence two bills concerning two properties his company was developing. Widjaja was sentenced to three years in prison and a fine of IDR 200 million (Indonesia Investments, Sept. 2016).
The time required to register property in Indonesia is only a third of the regional average at 25 days, but the costs involved are twice as high as in other East Asian and Pacific countries (DB 2017).
Tax administration Very high risk
Corruption risks in Indonesia's tax administration are high. One in five companies expects to give gifts when meeting with tax officials (ES 2015). Companies regularly encounter corruption during routine interactions with Indonesian public servants, including tax officials (GCR 2015-2016). Over four in ten, Indonesians view most or all tax officials as corrupt (GCB 2017). A recent tax amnesty policy aimed at bringing more assets into the purview of the tax agency unearthed more than USD 360 billion of previously undeclared assets (Asia Times, Mar. 2017), indicative of the scale of tax evasion in Indonesia. Tax regulations and tax rates are frequently cited as problematic factors for doing business (GCR 2016-2017).
President Jokowi's brother has been put under investigation over allegations that he helped put businessman Ramapanicker Rajamohanan Nair in contact with tax officials who subsequently eliminated his tax debt (Jakarta Post, Feb. 2017). Nair paid a tax official named Handang Soekarna a bribe of IDR 1.9 billion in order to eliminate a tax debt of IDR 78 billion (Jakarta Post, Feb. 2017). Nair was found guilty of paying the bribe and got sentenced to three years' imprisonment (Jakarta Post, Apr. 2017).
Customs administration Very high risk
Corruption at Indonesia's borders is the most problematic factor for international trade (GETR 2016). High incidence of corruption hampers the efficiency of Indonesia's customs administration and procedures related to importing and exporting goods are highly opaque (GETR 2016). Irregular payments and bribes are commonly demanded by customs agents (GETR 2016). A common way in which bribes are extorted is by imposing arbitrary delays (Norton Rose Fulbright, June 2016). In the same vein, nearly half of companies expect to give gifts when obtaining an import license (ES 2015). The cost of documentary compliance with import regulations is significantly higher than the regional average and takes nearly twice as long (DB 2017).
Public procurement Very high risk
The public procurement sector carries high corruption risks for companies. Corruption and favoritism are pervasive (GCR 2016-2017). A third of companies indicate that they expect to give gifts in order to secure a government contract (ES 2015). Likewise, companies report that bribes and irregular payments are common in the awarding of public contracts and licenses (GCB 2015-2016). Companies report frequent diversion of public funds as well as favoritism in the decisions of government officials (GCR 2016-2017). Formally, foreign companies compete with state-owned enterprises (SOEs) under the same terms, but in practice, the government shows a strong preference for SOEs (ICS 2016). A number of companies have been accused of colluding, including manipulating state tender processes (BTI 2016). Corruption in procurement costs Indonesia's government up to USD 4 billion per year (FCPA Blog, June 2014).
A corruption trial implicating a number of senior figures, including Indonesia's Justice Minister, former Interior Minister, and Parliamentary speaker, is currently underway. The defendants are accused of receiving kickbacks amounting to USD 170 million out of funds earmarked for a government project designed to issue new ID cards to the entire Indonesian population (Reuters, Apr. 2017). In another corruption case, the U.S. Department of Justice is investigating allegations that Maxpower Group, a power-plant builder controlled by London-based bank Standard Chartered, has paid bribes to Indonesian energy officials in order to obtain contracts (Wall Street Journal, Sept. 2016).
Natural resources Very high risk
Corruption in the natural resources sector is rampant in Indonesia. 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, fostering corruption in the extractive industries; the 2009 Mining Law eliminated a requirement for mining contracts to be publicly available (NRGI 2017). A variety of governments regulations has made doing business in the natural resources sector difficult; as a result, Indonesia ranks near the bottom (91st out of 109) of the world's mining countries in the Fraser Institute's Mining Policy Perception Index (ICS 2016). An absence of any central authority to issue licenses concerning natural resource development has led to a vast problem with overlapping licenses; at times up to four licenses for the same concession have been granted to palm oil, pulpwood, logging, and coal mining companies (The Guardian, Apr. 2016). Officials, particularly close to election time, have been known to exchange land rights for financial contributions to their campaigns (The Guardian, Apr. 2016).
Indonesia's anti-corruption enforcement agency, the KPK, has been investigating corruption in over 4,000 mines nationwide and has shut down 721 mines so far after instituting a requirement for a so-called 'clean-and-clear' certificate (Greenpeace, Feb. 2016). As of March 2017, 3,203 companies are still operating without such a certificate; although lack of communication between miners and local authorities has also been blamed for this process (Indonesia Investments, Mar. 2017). Part of the problem is the decentralization of government tasks; it led to officials issuing more than 10,000 licenses, possibly motivated by rent-seeking behavior, some of which overlapped (Indonesia Investments, Mar. 2017).
A weak institutional framework and widespread corruption limit the implementation of corruption-related legislation in Indonesia. The Law on Eradication of Criminal Acts of Corruption criminalizes 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. Private sector bribery is criminalized, but only when the bribe is of 'relatively large value'. Embezzlement, failure to report corrupt activities and gifts to public officials are punishable by Indonesia's Criminal Code; any gifts to public officials must first be approved by the Anti-Corruption Commission (KPK); undisclosed gifts are considered an offense. There is no facilitation payment exception under Indonesia's criminal law, and legislation does not specifically address bribery of foreign public officials. Private sector bribery in certain cases is criminalized under the Anti-Bribery Law in as far as the bribe causes someone to do something or refrain from duties or obligations impacting the public interest. The Law on Money Laundering criminalizes money laundering. Public official asset declarations are required under the Regulation on Asset Declaration. Corporations may face liability for the actions of their employees. Public procurement is addressed by the Presidential Regulation No. 54/2010, which requires competitive bidding and blacklisting of companies for violations. The Law on the Protection of Witnesses and Victims provides protection for public and private employees who report corruption. Various other government agencies have enacted their own whistleblowing systems. The KPK is highly popular and has booked recent successes in prosecuting members of the country's government and business elites (BTI 2016). As per June 2016, the KPK had a hundred percent conviction rate (HRR 2016). There are however frequent attempts by elements in the government, judiciary, and police to undermine the KPK's authority (HRR 2016).
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.
Indonesia's Constitution provides for freedoms of speech and press, but elements within the government seek to limit these rights using defamation and blasphemy laws (HRR 2016). The media environment is open and vibrant in comparison to other countries in the region; media reports on government policy are often highly critical (BTI 2016). Press freedoms are restricted by legal and regulatory provisions (FitW 2016). Treason and blasphemy laws are frequently used to suppress those criticizing the government and security forces (FitW 2016); causing some journalists to self-censor (FotP 2016). The private owners of many media outlets influence the tone of coverage (FotP 2016). Foreign ownership of broadcast media is forbidden, and journalists sometimes experience physical attacks and harassment by the state and non-state actors (FotP 2016). Blasphemy laws have been used against internet users by the government (FotP 2016). The media environment is considered 'partly free' (FotP 2016).
Indonesia has one of the most vibrant civil societies in Asia (BTI 2016). Civil society activism has markedly increased in recent years; most groups openly criticize government policies, protest against corruption, and provided representation for the poor (BTI 2016). Civil society groups comment on policies and are able to exert their influence (FitW 2016). However, organizations with views deemed 'extreme' are subject to government monitoring (FitW 2016).
- World Bank: Doing Business 2017.
- Natural Resource Governance Institute: Indonesia Country 2017.
- Transparency International: Global Corruption Barometer 2017.
- Skala News: "KPK Tahan Atase KBRI Malaysia Dwi Widodo", 21 April 2017.
- Jakarta Times: "Court Hears of Jokowi In-Law's Role in Tax Bribery Case", 18 April 2017.
- Indonesia Expat: "Illegal Gold Mining Sees Steady Rise In Indonesia", 12 April 2017.
- Reuters: "Indonesia's 'Marathon' Probe of Politicians to Test Graft Battle", 7 April 2017.
- Asia Times: "Tax Amnesty Reveals New Depths of Indonesian Corruption", 31 March 2017.
- Indonesia Investments: "Cleaning Up Indonesia's Chaotic Mineral & Coal Mining Sector", 28 March 2017.
- The Jakarta Post: "First Family Hit by Scandal", 17 February 2017.
- Reuters: "Indonesian Anti-Graft Agency Detains Constitutional Court Judge", 26 January 2017.
- Bertelsmann Foundation: Transformation Index 2016.
- Norton Rose Fulbright: Business Ethics and Anti-Corruption Laws: Indonesia 2016.
- World Economic Forum: Global Competitiveness Report 2016-2017.
- World Economic Forum: Global Enabling Trade Report 2016.
- Freedom House: Freedom in the World 2016.
- Freedom House: Freedom of the Press 2016.
- US Department of State: Investment Climate Statement 2016.
- US Department of State: Human Rights Practices Report 2016.
- The Wall Street Journal: "Standard Chartered Faces U.S. Probe Over Indonesian Investment", 27 September 2016.
- Indonesia Investments: "Corruption in Indonesia: Agung Podomoro Land Bribery Case", 9 September 2016.
- The Economist: "Law Enforcement in Indonesia: Time for Tito", 23 June 2016.
- The Guardian: "Greenpeace Reveals Indonesia's Forests at Risk as Multiple Companies Claim Rights to Same Land", 2 April 2016.
- Green Peace Energy Desk: "Comment: How Indonesia is Cracking Down on Coal Mine Corruption", 16 February 2016.
- World Economic Forum: Global Competitiveness Report 2015-2016.
- World Bank: Enterprise Surveys Indonesia 2015.
- FCPA Blog: 'Indonesia loses USD 4 billion annually to procurement fraud, study finds', 5 June 2014.