Enhanced Due Diligence (EDD) in Indonesia : Challenges and how to overcome them

Jul 13, 2017 · 5 min read

In a climate of heightened concerns against money laundering and terrorist financing, regulators worldwide are pulling out all the stops to ensure that KYC and due diligence requirements are sufficient. In the minds of regulators, the operative word here is ‘more’- more counterparties to check, more enhanced due diligence (EDD) checks, more regular screening, more documentation to prove that you’ve done enough and most importantly, more fines when you do not.

One key part is the need to do Enhanced Due Diligence (EDD) on more counterparties than before. According to the Monetary Authority of Singapore (MAS), EDD (or Enhanced Customer Due Diligence) are measures banks must take when a customer is identified to have (but not limited to) 1) Customer risk, including being a politically exposed person (PEP) or an associate of a PEP and 2) Country or geographic risk, when the customer operates in a high risk jurisdiction prone to corruption and financial crime as outlined by reputable international benchmarks like the Transparency International’s Corruption Perceptions Index.

Unfortunately for banks operating in the region, majority of the Emerging countries in ASEAN continue to sit at the bottom of the aforementioned list. Indonesia ranks 90th while Vietnam, Cambodia and Myanmar are 113rd, 156th and 136th respectively.

Doing EDD in Emerging Markets hence pose specific challenges. In this post, we take a look at the key challenges of conducting EDD in Indonesia.

1. Hard to find information

When conducting EDD, reliable data on ultimate ownership and source of wealth is critical. In opaque jurisdictions like Indonesia, there is limited corporate data available online. Indonesia does not maintain an online corporate registry and the country’s lax tax regime also makes it difficult to access financial information on private entities. Most of the time, information would have to be manually retrieved from relevant authorities in Jakarta itself. Without well-placed local partners, this un-digitized data will be difficult and more importantly costly to retrieve.

2. Offshore holdings

It is no secret that many Indonesian companies often set up entities in the British Virgin Islands as holding companies in their group corporate structures. The Panama Papers leaks in 2016, included 3,000 Indonesian individuals and companies. Of those, prominent names include tycoons Anthoni Salim of Salim Group and Chairul Tanjung of CT Corp. In addition, in the aftermath of the Asian Financial Crisis in 1997, many Indonesian conglomerates moved their assets offshore to escape seizure by the Indonesian Bank Restructuring Agency (IBRA). Many of these assets are still being held in shell companies in Singapore and Hong Kong, widely known as shell companies hub in the region.

While these offshore holdings are not necessarily used for illegal means, they do warrant further investigation. Encountering opaque corporate structures with multiple offshore holdings further obfuscates the EDD process.

3. Assessing local reputation

According to MAS, EDD should also include a public domain search to gain a better understanding of the reputation of the company. They go further to say that in cases where there is not enough information to make an assessment, external intelligence reports should be commissioned. This highlights that regulators are expecting banks to go beyond traditional sanctions checks or negative news screening and acquire a thorough understanding of the reputation of the entity.

In Indonesia, a public domain reputation assessment is useful insofar as it is well-versed in the Indonesian business-politics context. For example, while not many Indonesian businessmen in the post-Suharto era would be flagged as being blacklisted or on official sanctions list globally, many of them still face potential legal exposure in relation to the highly politicized Bank Indonesia Liquidity Assistance (BLBI) scheme dating back to 1998. In the aftermath of the Asian Financial Crisis, many tycoons received bailout funds amounting to IDR 138 trillion (US$ 15.2bn) from the Indonesian government but did not fulfill their debt obligations. Some, like Gajah Tunggal Group’s Sjamsul Nursalim, fled to Singapore in order to flee prosecution and were later on controversially pardoned due to their political connections. The case has been largely dormant for 20 years, with authorities lacking the political will to go after powerful business figures. Recently, new leadership in the Corruption Eradication Commission (KPK) reignited discussion on the BLBI case when it indicated that it would re-question Sjamsul as a suspect in the case, despite the pardon he received from then president and wife of his good friend Taufik Kiemas, Megawati Soekarnoputri.

Legacy issues from the BLBI case remains a potent example of how in underdeveloped legal regimes like Indonesia, understanding the context is crucial in assessing a reputation of an entity.

At the end of the day, the best armor against hefty fines in flux regulatory environments would be in-depth EDD reports that go beyond traditional checks. How then should banks be expected to meet the regulators standards of EDD in opaque jurisdictions without blowing their budget?

Two words: Sharing Economy.

While banks vary on their internal risk management policies, the objective of EDD remains the same for all: pass regulator purview at the lowest cost as possible. We’ve seen the proliferation of the sharing economy in other forms through ride-share companies like Uber and Ofo but, it can also be applied to EDD knowledge. Internal teams conducting EDD spend a lot of time and money looking for hard to find data, using a wide range of tools to access publicly available information to make an assessment on a customer. They do so in isolation of other teams elsewhere who might be doing the same assessment on the same entity — sometimes at the same time. If we tap into knowledge sharing to do EDD, we could reach the insights that we need faster and at a smaller cost.

The Datarama platform leverages on the sharing economy by allowing users to conduct EDD queries on an immense number of companies and individuals in Emerging Asia. With every query a user does, our database grows, helping other users with their EDD queries as well. This keeps costs down, while allowing users exponential access to robust EDD-required data.

When it comes to financial crime, an often heard expression is that perpetrators will always be one step ahead of regulators when it comes to innovation. We think it’s high time both banks and regulators turn to knowledge sharing to boost transparency in the emerging markets.

Visit datarama.com for more information.

Written by Datarama Consultant Suhaidah.


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Datarama provides a #regtech platform that determines risk/opportunity assessments of emerging markets by combining human and technology-based solutions.

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