Jakarta Globe | Insight

Major Indonesian Corporate Scandals

Jakarta. Indonesia, as Southeast Asia’s largest economy, is an attractive market and lucrative investment destination due its abundant resources and large, young population.

But it is difficult to do business here in an honest way and avoid scandal, with corruption levels similar to those found in developing nations governed by despots. Lawmaker Fadli Zon of the Great Indonesia Movement Party (Gerindra) even went as far as saying on record that corruption is the grease of the country’s economy.

Some studies seemed to support the notion that corruption facilitates business and commercial activity. Nevertheless, more studies suggest that corruption will cost the country dearly in the medium or long term. Corruption distorts competition, scares away investment and pushes up prices of goods and services.

Moreover, corruption undermines the sustainability of businesses themselves. Business is based on trust. Companies or businesspeople found engaging in corrupt practices may be perceived as less trustworthy and eventually find it difficult to restore their damaged reputations. They could see their clients or business partners parting ways with them, prospective collaborators avoiding meetings, or customers choosing their competitors’ products and services.

Indonesia’s business landscape is littered with such examples, from home industries to giant multinational companies that stumbled over scandals involving financial embezzlement, fraud or ever-changing policies.

Here is a recap of some of the more notable recent corporate scandals that made headlines in the archipelago over the past decade.

Beef Import Quota Scandal

Former lawmaker Luthfi Hasan Ishaaq emerges from the offices of the Corruption Eradication Commission (KPK) in Jakarta after questioning. (SP Photo/Ruht Semiono)

As far as scandals go, this case seems to be straight out of a Bollywood blockbuster. It had it all, from hypocrite politicians to pretty celebrities and torrid sexual affairs.

Former lawmaker Luthfi Hasan Ishaaq was sentenced to a 16-year prison term in 2013 for money laundering and bribery. He used his influence as the president of Indonesia’s largest Islamic party at the time, the Prosperous Justice Party (PKS), to force the Ministry of Agriculture to grant Indoguna Utama the lion’s share of the country’s beef import quota.

The Corruption Eradication Commission (KPK) caught his top aide, Ahmad Fathanah, in a hotel with a college student, who was allegedly paid for sex. Ahmad’s subsequent confessions revealed details of an elaborate money laundering scheme that involved handing out jewelry and cars to 45 women, including female celebrities and an adult magazine model.

The scandal also resulted in two Indoguna executives being sentenced to separate prison terms and it forced the government to modify the way it handles imports of key commodities.

Umrah Scam

Customers wait for refunds at the offices of the now-defunct First Travel in Jakarta earlier this year. (Antara Photo/Sigid Kurniawan)

First Anugerah Karya Wisata, better known as First Travel, started making headlines in April this year when the agency, which sold low-cost pilgrimage packages, began to delay its customers’ departures to Saudi Arabia.

The travel agency, owned by Anniesa Hasibuan, a fashion designer known for her lavish lifestyle, and her husband Andika Surachman, had 11 branches in Indonesia and one in London.

The National Police arrested the couple on Aug. 9 for fraud after they allegedly swindled nearly 60,000 customers out of a total of around Rp 850 billion ($63 million).

The case sparked controversy in Indonesia, the world’s largest Muslim-majority country, prompting the government to review its control over tour operators to prevent similar incidents.

Investment Fraud

Suspects in the KSP Pandawa investment scam, along with evidence of their crimes, paraded in front of the media earlier this year. (Antara Photo/Yulius Satria Wijaya)

Part of the money First Travel allegedly swindled from customers was invested in savings and loan cooperative, the Pandawa Mandiri Group, owned by Salman Nuryanto, alias Dumeri.

The Pandawa Group Savings and Credit Cooperative (KSP Pandawa) collected money from investors with a promise of a monthly return of 10 percent – much higher than the annual rate of around 6 percent most banks pay on time deposits. Not even a stock market can guarantee such a high monthly profit.

The Financial Services Authority (OJK) subsequently declared that KSP Pandawa was not authorized to accept money from investors because this was not included in the company’s permit and that it was therefore in violation of the Banking Law.

KSP Pandawa targeted people with low levels of financial literacy living in areas on Jakarta’s outskirts. In one notable case, local media reported that the owners of a hawker stall had handed over their entire life savings, or made significant debt to invest in the scheme.

KSP Pandawa received around Rp 3 trillion in total from its estimated 28,000 investors. The money was disbursed as loans to other small and medium enterprises at a monthly interest rate of 20 percent. In comparison, state-controlled lender Bank Mandiri charges an annual interest rate of 18 percent on microloans.

Local media reported on Monday (11/12) that the Depok District Court in West Java sentenced Dumeri to 15 years in prison and a fine of Rp 200 billion. The state also seized his assets.

Executive Embezzlement 

Cipaganti lost two-thirds of its stock value after executives were found to have embezzled Rp 3.2 trillion from investors. (Antara Photo/Eric Ireng)

Cipaganti Citra Graha was a thriving transportation company in the mid-2000’s, operating in a lucrative niche market with its point-to-point shuttle bus service between Jakarta and Bandung, West Java, following the opening of a new toll road between the cities.

But less than a year after its 2013 initial public offering, the company found itself in hot water when its director, chairwoman and commissioner were accused of having embezzled Rp 3.2 trillion between 2008 and May 2014 from the Cipaganti Karya Guna Persada cooperative, which owns a 4.92 percent stake in Cipaganti Citra Graha.

Despite the management of Cipaganti Citra Graha insisting at the time that the fraudulent actions were not the company’s responsibility because the Cipaganti Karya Guna Persada cooperative was a separate entity, the scandal had a major impact on the company’s share price, wiping about two-thirds off the value over several months.

The company was later taken over by Hong Kong-based Terra Investment Holding and rebranded as Citra Maharlika Nusantara Corpora.

The Flashy Case of Malinda Dee

Citibank Indonesia found itself in center of a scandal after one of its relationship managers stole around Rp 45 billion from priority clients over several years to fund her lavish lifestyle. (JG Photo/Afriadi Hikmal)

Inong Malinda Dee, a former relationship manager at Citibank Indonesia, was sentenced to eight years’ imprisonment and a fine of Rp 10 billion in March 2012 after a Jakarta court found her guilty of having stolen around Rp 45 billion from her priority clients between January 2007 and February 2011 to fund her lavish lifestyle.

Citibank Indonesia said Malinda had committed fraud while the court said she has been proven of having “repeatedly engaged in banking and money-laundering crimes” by falsifying transfer documents, forging signatures and depositing money in a web of accounts owned by herself, her husband, sister and brother-in-law.

The case was rather memorable and did not only occupy the business pages of local newspapers, because Malinda’s lavish lifestyle – including her cosmetic surgery and expensive cars – also featured in the gossip columns.

The case prompted Bank Indonesia, the central bank, to revamp its regulations on how banks handle their wealth management and credit card clients.

Bank Century Bailout

Robert Tantular, the former president director of Bank Century. (Antara Photo/Wahyu Putro A)

Indonesia’s largest bank bailout since the 1998 Asian financial crisis is still surrounded in controversy.

At the height of the global financial crisis of 2008, publicly listed lender Bank Century became insolvent and required an immediate government bailout of Rp 6.7 trillion to prevent a collapse of Indonesia’s banking system.

However, investigations later revealed illicit practices at the bank and the House of Representatives questioned the legality of government’s decision.

Robert Tantular, the bank’s owner, was later found guilty of disbursing fraudulent loans and misusing depositors’ funds. Budi Mulya, a former Bank Indonesia deputy governor, was also sentenced to 10 years in prison for having received a Rp 1 billion loan from Robert just months before the government approved a short-term loan facility to the ailing lender.

The state sold the lender to Japanese financial firm J-Trust for Rp 4.4 trillion in 2014. The government has since revamped existing laws and passed new ones that establish protocols in dealing with failing banks.