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«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»

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d. The interests of justice in a civil case between the bank and its customers;

e. Exchange of information between banks;

f. Request, consent or authority of depositors that is made in writing;

g. Demand of the legal heirs of deceased depositors; and h. Related to investigation on money laundering.

While Article 41 of the Banking Law stipulates that "For tax purposes, the management of Central Bank at the request of the Minister of Finance is authorized to issue a written order to the bank in order to provide information and show written evidence and any papers regarding the financial situation of certain depositors to the tax authorities", it is difficult to actually execute this because the request must be submitted and approved by a minister, or leaders of the FSA (which is necessary for point a-c above).114 Therefore, the Ministry of Finance, through the Directorate General of Taxation demands bigger access to banks’ customer accounts, not just for the purpose of criminal cases, but rather to increase the target of income tax revenues, which have always been under target.

Indonesia’s tax ratio to GDP is considered low compared to its peer economies, at around 12-13%, while other Southeast Asian countries are mostly above 14%, and the developed world’s ration reaches 40% or beyond. The current government sets 16% tax ratio during its tenure. The revenues from taxation remain high potential, because tax compliance is also low, and it is estimated that over 50% untapped tax payments is potential, both from personal and corporate income taxes.115 For these aforementioned reasons, the Directorate General of Tax issued Regulation No.

PER-01/PJ/ 2015 regarding the obligation of banks to report the amount of tax deducted on deposit and saving interests on 26 January 2015. This regulation requires banks to submit a more detailed evidence of tax cuts of the customers’ bank accounts, unlike the current practice, where only general evidence of tax cuts must be submitted to tax authority.116 The consequence is that tax authorities will hence know how many accounts are hold by a customer. This will narrow down the space for an individual to conceal his/her tax payments.

However, private sector and banking industry in particular have shown fierce opposition against this regulation, by citing the potential violation of this regulation toward Banking Law provisions on bank secrecy and confidentiality of clients. Banks fear that big customers will be fleeing the country if such regulation is put into effect, as Sigit Permadi, the National Banks Association (Perbanas) said in an interview, “This is about bank secrecy. If bank’s secrecy is bothered, it might potentially encourage people to move their money. What we worried is that they flee the money abroad.”117 OJK as the financial sector authority is also hesitative to support the regulation, because it sees such regulation as a violation of the Banking Law. Mulya Siregar, Deputy Commissioner of Banking Supervision, says that "If it does not violate the Banking Law, it is okay, but if it breaks the Law, it'll be a problem because the bank secrecy of the third party funds has to be maintained, and if the data was requested, what is being asked, the name? What else?".118 OJK prefers harmonization of the regulation with the Banking Law, meaning the Banking Law must be amended first in the parliament prior to applying the regulation.

-47In fact, almost all political parties in the Indonesian Parliament also have initiated a proposal to undertake an amendment to the Banking Law, among others on the bank’s secrecy clause, and banks’ foreign ownership. The plan to amend such clause had been started to be discussed during the 2009-2014 period and is scheduled to be continued by the Parliament in the period of 2014-2019. Specifically, an MP made a statement that they aim to finalize the amendment process in 2015.119 In the latest development, due to lack of preparedness of tax officials and the banking industry, as well as reluctance of the OJK and opposition from the business world, -as pointed out by the Indonesian Trade Chamber120, the ‘controversial’ regulation is cancelled in March 2015.121 Nevertheless, many analysts remind that sooner or later, Indonesia, as a member of G-20, should follow G-20 recommendation to end bank’s secrecy in each member country by 2018.122 Another issue in Indonesia regarding banking transparency involves interest rates for consumers’ housing mortgage. Indonesia’s relatively high population growth has caused the decent housing issue to becomemore important. According to Indonesian Statistics or BPS (2014),123 about 12.16% of the Indonesian households still face housing insecurity. While housing can partly be provided by the government and the market, the ever rising level of urbanization is difficult to build along with. Housing development grows only less than half compared to the growth in new households every year. As a result, competition to acquire a house becomes tougher.124 Banks, as one of the economy’s intermediaries, provide people with housing credit or mortgage. Since the demand for affordable housing is rising, and the supply is much lower, developers and banks have more liberty to ‘play’ around with the lack of housing available. As such, the KPR scheme (people’s housing credit), offered by most banks for people to buy a house in relatively low cost installments, has often been seen by consumers as a solution to have a house. However, what was supposed to be a facility to ease consumers from paying a huge burden, actually became a burden, because the banks that offer such credit tend to be playing around with the interest rate.125 Yayasan Lembaga Konsumen Indonesia (YLKI) or the Indonesian Consumer Association, has raised this issue for some years. Consumers are concerned that every time the Central Bank’s (BI) interest rate increases, it does not take a long time for the KPR interest rate to follow, while when the BI rate is declining, the rate does not follow accordingly. There is an indication that the KPR only benefits the developers and banks, while consumers are those who lose the most.126 The practices still take place although there is a Law on Consumer Protection and OJK Regulation Peraturan OJK or FSA Regulation No. 1/POJK.07/2013. This law requires FIs to increase transparency and to provide disclosure on their benefits, risks and costs of products and/or services, and a simpler procedure for consumers to file complaints and dispute resolution on product and/or service. Also, Bank Indonesia (BI) with its Central Bank Regulation No.7/6/PBI/2005 requires banks to provide written information in Indonesian, clear (incl. risk) on each bank product, include transparency in lending rate. Yet, such practice remains unperformed.127 YLKI cited that complaints about KPR interest rates ranked third in the number of complaints it received from total number of complaints about banks. In general, complaints about banks remained on top of the YLKI annual recap of complaints over the years, until 2014.128

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Regarding Transparency & Accountability, all banks assessed, except Panin and BCA, publish their Sustainability Report that contains (a number of) Standard Disclosures of the GRI G4 Sustainability Reporting Guidelines. The three foreign banks have their Sustainable Reports verified. For national banks, only BNI, CIMB-Niaga and Danamon have their Sustainable Reports verified. In light of compliance to regulation, banks in Indonesia must produce their Annual Report according to FSA regulation. However, banks are not required to have a separated Sustainability Report. A section/chapter on sustainability in their Annual Report is considered sufficient for the reporting requirement. That’s why even though BCA and Panin, two of the banks assessed do not have sustainability reports, they do not breach the reporting requirement.

Regarding ESRM (Environment and Social Risk Management) System, BNI, Danamon, CIMB-Niaga, OCBC-NISP, HSBC, Citibank and MUFG, describe their ESRM policies, but at different levels of detail. As such, while HSBC, Citibank and MUFG have quite detailed sector policies and clearly present the scope of such policies, BNI only mentions one specific sector policy -palm oil. Danamon and CIMB-Niaga only mention that they refer to national laws and regulations on specific issues.

-49It is worth to note that three local banks being BNI, Danamon and CIMB-Niaga refer to PROPER rank 129, a national sustainability ranking for companies/industries whose main businesses impact the environment and communities. PROPER is developed by the Ministry of Environment, and the ranking is developed based on a rather meticulous scientific study and field inspections (e.g. taking samples of companies’ pollution level etc). However, the limitation of PROPER is that it covers only a limited number of companies in Indonesia. BNI even states that it will not invest or reconsider its investment in companies that receive a poor rank in PROPER.

HSBC (holding) does not publish the names of companies it invests in, but it publishes loans under Equator Principles III by mandate, category, region, and industrial sector. HSBC Indonesia branch is the only financial institution assessed that mentions companies to which it has granted significant amount of credit during the year. For national banks, the state-owned banks BNI, Mandiri and BRI publish the names of companies they invest in, especially the other state-owned companies as related party transactions - a form of accountability to the government as the main owner. Of the private banks, only BCA publishes the names of companies in which it invests. Citibank (holding) discloses consolidated information on project finance deals and project related corporate finance deals, including the information required by the Equator Principles III in its Annual Report.

All banks provide a breakdown of their loans portfolio based on the Bank Indonesia industrial classification in their financial statements, which is quite detailed. However, Panin, which has the poorest average score in the baseline assessment, provide a less detailed loans portfolio than required by Bank Indonesia. This hence brings the issue of enforcement from financial industry regulator into question.

Relating to Taxes & Corruption, no banks provide information on country-by-country reporting.

It is only HSBC that reports tax payments (figures) in each priority growth markets, but not in all countries that they operate. Citibank for instance, states that “the company is subject to the income tax laws of the U.S. and its states and municipalities, and the foreign jurisdictions in which it operates”, but only lists 9 major tax jurisdictions in which Citi and its affiliates operate and the earliest tax year subject to examination, with no breakdown figures per country.

Similarly, MUFG also states that “the MUFG Group is subject to ongoing tax examinations by the tax authorities of the various jurisdictions in which it operates”, but no country-to-country figures are available in its reports. Most national banks only report their tax payments in Indonesia on their financial statements.

A number of banks have branches in ‘tax havens’ such as Bahamas, Cayman Islands etc, but not clearly reporting their local activities and financial condition. Citibank for instance, reports its activities in Cayman Islands that are mostly philanthropy type of activities, aside of the investments, but there are no reports on other similar branches like in Bahamas or Jersey (Channel Island) for instance. Of the national banks that have operations in Cayman Islands (such as BRI, Mandiri, Panin), only Mandiri reports its Cayman Island branch’s expenses, although not the amount of tax paid in that jurisdiction.

Regarding transparency issues in other banking issues, all banks include internal operational policy related to prohibition on offering, promising, giving and requiring, either directly or indirectly, bribes and other undue advantages in order to acquire and to maintain assignments and other undue advantages. This statement usually can be found in their ethical organizational values or Code of Conduct for both national and foreign banks. Almost all national banks have AML policies, mostly due to strict requirements from the government of the US, which impose such policy (strengthened by BI policy accordingly) for banks that have operations related to the US financial institutions and using the US’ currency.

-50Transparent banks are expected to publish their responsible investment and finance policy as part of their ESRMS. Banks such as BNI, HSBC, Citibank and MUFG publish their investment policies about prohibition on corruption, bribery but only HSBC and Citibank require companies to include immediate action that can be taken if employees or suppliers are guilty of corruption or tax evasion in their management system.

None of the banks assessed require the companies they invest in to report their participation related to the decision-making processes of international norms and legislation (lobby practices). Citibank only has a policy applicable to its own lobby activities, not to the companies it invests in.

For Indonesian national banks, because the financial sector authority has clear guidance about reporting beneficial owners, such information about banking group’s beneficial owners can be found in their Annual Reports, which include full name, date of birth, nationality, and categories of shares, and the proportion of shareholding or control (or the combination of 1-3 of those information). Yet, none of the banks requires such information from the companies they invest in.

5.4 Best practices

Among the international banking groups, Mitsubishi-UFJ Group (MUFG holding) has set some good practices in transparency. Namely, MUFG provides its voting rights in its subsidiaries or in the companies it merged with, and publishes a proportion of voting interests in all of its subsidiaries globally. MUFG Jakarta Branch also reports on its complete business group structure in Indonesia.



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