Corporate compliance key to corruption prevention

Sechabudin and Imelda Napitupulu

Law No. 17/2003 on state finances, as affirmed by Constitutional Court Decision No. 62/PUU-XI/2013, stipulates that state-owned enterprises (SOE) shall be considered state assets. As a consequence, the stipulation, “unlawfully or intentionally enriching oneself or another person or corporation causing state losses” in articles 2 and 3 of Law No. 31/1999, as amended by the 2001 Corruption Law, also cover losses suffered by SOEs.

The scope of state losses covered under the Corruption Law has had a significant impact on the organizing of SOEs. The management of SOEs, particularly the board of directors, face two crucial issues, pursuing profit and avoiding losses, which may be considered a criminal act of corruption, regardless of whether losses in a particular field of business are unpredictable. As a result, Indonesian courts have handed down several verdicts involving the directors or managers of SOEs.

First, Hotasi Nababan, the former president director of PT Merpati Nusantara Airlines was declared guilty by the Supreme Court for his role in a corruption case concerning an aircraft lease deal that caused US$1 million in states losses. This verdict annulled a previous verdict by the Jakarta Corruption Court.

The Supreme Court found Hotasi guilty on the grounds that, (i) the lease made by Hotasi and the Thirdstone Aircraft Leasing Group (TALG) had commenced but was not included in the company’s budget plan (RKAP), (ii) Hotasi did not report or resubmit the RKAP containing the leasing plan to the general meeting of shareholders (GMS) for approval, as regulated under Article 22 of Law No 19/2003 regarding SOEs (SOE Law) and its implementing regulation, and (iii) the security deposit payment conducted prior to the execution of the lease agreement was made through a cash mechanism rather than a letter of credit (LC) or escrow account, which violated Finance Ministerial Decree No. 1169/KMK.01/1991 and the principles of professionalism, efficiency, transparency, independency, accountability, responsibility and fairness, as outlined in Article 5 paragraph (3) of the SOE Law.

Hotasi argued that the losses caused by the security deposit payment to TALG were purely a business risk, and therefore, argued the decision could not be deemed an unlawful act as it had been taken transparently, prudentially, on good faith, with no conflict of interest and in accordance with good corporate governance principles.

Second, Fachrudin Yasin and Roy Ahmad Ilham, former corporate relationship group head and former credit approval group head of PT Bank Mandiri were declared guilty of corruption by the Supreme Court for causing state losses of $5.8 million by providing refinancing to PT Arthabima Textindo and PT Arthamustika Textindo without taking the necessary prudential action, as initially the loan status of the debtors was classed as a non-performing loan, meaning the refinancing should not have be approved.

Fachrudin and Roy submitted new evidence in the second review that purported to show that necessary prudential action had been taken in 2002, by inter alia (i) explaining that the debtors should be considered qualified debtors, and that (ii) Bank Mandiri had included the debtors on its list of those qualified for refinancing. In the end, the Supreme Court in the second review declared Yasin and Ilham not guilty. The state losses incurred through Bank Mandiri were not considered corruption.

Lastly, Karen Agustiawan, former president director of oil company PT Pertamina, was found guilty regarding her decision to invest in the Basker Manta Gummy (BMG) Block in Australia. Karen was declared guilty by the Jakarta Corruption Court for corruption causing Rp 568 billion ($39 million) in state losses. The court deemed that the investment in BMG overseen by Karen was unlawful as such an investment (i) disregarded the investment procedures, which require due diligence and risk analysis to be carried out, and (ii) the investment decision was made without prior approval from the board of commissioners.

Karen argued that the losses suffered by Pertamina were purely a business risk as the upstream gas business was often unpredictable. Moreover, she said she had made her best efforts to ensure that all risks arising were covered in the sale and purchase agreement.

In those verdicts, the determination of the criminal act of corruption causing state losses took into account corporate compliance aspects and business judgment rules.

Corporate compliance in the above cases may be defined as a set of actions or guidelines to ensure that the policy, provision, system, procedure and activity of a company complies with the prevailing laws and regulations. From a director or manager’s standpoint, corporate compliance may be defined as all action that must be taken by the relevant directors or managers of SOEs, as stipulated under articles of association, code of conduct or laws and regulations, prior to making a business decision.

The breach of corporate compliance may be considered an indication of an unlawful act.

Article 97 paragraph (5) of Law No. 40/2007 concerning limited liability companies accommodates the business judgment rule concept by stipulating that members of the board of directors shall not personally be liable for losses suffered by a company if the relevant directors can prove that inter alia (i) such losses were not caused by their mistakes or negligence, (ii) that they carried out their management in good faith and with prudence in accordance with the purpose and objectives of the company and that (iii) there was no direct or indirect conflict of interest pertaining to the management actions that caused such losses.

A breach of corporate compliance may be an indication that directors or managers have not run a company in good faith, or with prudence, skill and care. As such, the business judgment rule is no longer applicable.

Finally, directors or managers of SOEs may use corporate compliance as preliminary warning in the event that state losses have occurred. The upholding of corporate compliance serves as a sign that state losses will not be considered a criminal act of corruption. Meanwhile, a breach of corporate compliance serves as a red flag, based on which a court is likely to rule that state losses are criminal acts of corruption.


Sechabudin and Imelda Napitupulu are legal consultants based in Jakarta.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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