Indonesia: Where Did The Billions Go?
At first, it just looked like shoddy bookkeeping. But as auditors pored over Bank Indonesia's books in December, they kept coming across odd entries. According to the records, large sums of "assistance" had gone to "affiliated parties" of the central bank about two years earlier. As the financial sleuths from KPMG International and the Indonesian government dug deeper, their suspicions grew. At a time when banks at home were in desperate peril, the probe showed that substantial central bank funds had gone to an affiliate in the Netherlands. The Dutch bank then bought securities in Indonesian institutions, raising questions whether central bank funds were used inappropriately. What's more, auditors could not find records for millions in gold deposits at the central bank.
Investigators are still following tortuous paper trails to find out what really happened at Bank Indonesia during the chaotic years before and immediately after the 1998 downfall of President Suharto. Although the Finance Ministry is backing off of earlier suspicions that the central bank is billions of dollars in the hole, audits run by the government and the International Monetary Fund have raised questions about the institution's handling of funds intended to shore up local banks. The Indonesian attorney general is not involved in the probe, and no criminal charges have been filed. But Indonesia's Supreme Audit Board is launching another investigation, and Indonesian President Abdurrahman Wahid is pushing for the central bank governor's resignation.
The investigations are unfolding just as Wahid struggles to cleanse the government of officials close to former president Suharto, stem the power of the army, and lure back foreign investors. A thorough probe of the central bank could assure investors that Wahid is serious about forging a new era of openness. But more ugly revelations also could damage confidence, by exposing the flaws of an institution that many thought had resisted the pull of money politics under Suharto. Such an expose also could show just how monumental a task Wahid faces. As one local banker puts it: "Indonesia is bankrupt in both the moral and economic sense." If Wahid falters in tackling these ills, investors could stay away.
Officials at Bank Indonesia deny anything illegal or improper occurred. "There are some people who don't understand what the function of a central bank is," says Governor Syahril Sabirin of his critics. He adds: "I think I've done quite a lot during my stay at the bank." Sabirin has strengthened the central bank's independence from the Finance Ministry, reduced interest rates, and slowed inflation.
The central bank was set up decades ago by the so-called Berkeley Mafia of respected Indonesian technocrats, many of whom studied at that University of California campus. It has been supervised by what were regarded as the country's most honest civil servants. The bank's defenders blame its difficulties on Suharto's gross mismanagement of the economy, not on any misconduct.
Yet the questions remain. Business Week has not been able to interview the KPMG auditors involved in the probe, and it has not seen two 100-page reports prepared by auditors in December. But over the past two months, the magazine has interviewed officials involved with the audit, people who have seen the reports, and dozens of current and former Indonesian officials, foreign lenders, and businessmen knowledgeable about the bank's inner workings. They all echo concerns over how the bank was run.
Sources close to the probe say auditors are investigating whether the central bank used foreign branches of local banks to lend $1.4 billion to the Suharto-linked Texmaco group. They also are scrutinizing dealings with offshore companies controlled by the central bank that could explain how several more billion disappeared. At issue is whether the foreign deals were intended to skirt domestic regulations and redirect funds to politically favored concerns. "In the financial crisis, all institutions turned out to be bad," concedes Mohammad Sadli, 77, himself a Berkeley-educated former Minister of Mines & Energy. "Supervision by the central bank was completely absent. That's the gripping and traumatic truth of it." Yet current central bank officials stoutly defend their record. And no evidence has surfaced that members of the Berkeley Mafia personally profited from any of the dealings examined.
One transaction that has drawn special scrutiny involves Bahana Pembinaan Usaha Indonesia, a holding company for an asset management firm, brokerage, and venture-capital firm cobbled together in 1993 by Ali Wardhana, formerly Suharto's top economic adviser and currently an adviser to Wahid. The firm was backed by Bank Indonesia and the Finance Ministry to pursue the legitimate goal of creating liquid markets in the publicly traded shares of privatized state assets.
After Wardhana became Bahana chairman, PT Artha Investa Argha, a company owned by his longtime friend, Sudjiono Timan, was given the right to take a 40% stake in Bahana. It is unclear whether Wardhana had a stake in Timan's firm. Foreign and Indonesian financiers who dealt with Timan's firm say they were told by company officials that Wardhana was a major shareholder. Bahana executive Utomo Josodirdjo denies this. Wardhana and Timan did not respond to written questions and phone calls.
ON THE BRINK. In 1996, when the economy was flourishing, Bahana issued $322 million in medium-term notes. But by July, 1998, things had turned dark. As the Suharto regime crumbled, the rupiah collapsed and local banks and brokerages were pushed to the brink. Bank Indonesia was authorized to help the banks with emergency loans, but it had no authority to help nonbanks such as Bahana. Nevertheless, some of Bahana's paper was purchased by the "affiliated parties" of Bank Indonesia's records.
One of these parties was Indover bank in Amsterdam, which is controlled by Bank Indonesia. Investment bankers who have done business with Bahana say Indover's exposure to Bahana paper was around $50 million. Bahana executives say they are only aware of Indover buying up to $5 million of its notes on the secondary market just as the financial crisis was brewing. In addition, Indover received "assistance" from Bank Indonesia, says Sabirin. Indover General Manager D. van Leeuwan says funds were borrowed from the central bank to "secure East Asian and Indonesian risk assets." Van Leeuwan refused to say whether these assets included paper issued by Bahana. He says the loans have been partly repaid. On Feb. 14, the Indonesian paper Kompas quoted documents from the Supreme Audit Board that Bank Indonesia lent a total of $1.2 billion to Indover.
For the central bank to assist Indover is not illegal. But if the intent of the loan to Indover was to bail out a nonbank like Bahana, Indonesian banking experts say that would violate local banking law. Bahana, under pressure from the crisis, would certainly have benefited from having its paper in the hands of friendly investors who would not press for immediate payment.
"HUGE QUESTION." The assistance to Indover also raised red flags: It's unclear why the central bank would be sending funds to the Netherlands just when liquidity in Indonesia was so tight even viable manufacturers could not get financing. Yet Sabirin emphatically denies that Bank Indonesia bailed out Bahana. "There is no such thing as [Bank Indonesia] extending liquidity credits to nonbank companies," he says. Officials involved with the audit are unconvinced. "This poses a huge question over the role of the central bank," says one Western economist.
Bahana is now negotiating with the Indonesia Bank Restructuring Agency (IBRA) to restructure some $1.3 billion in debt. One of Bahana's foreign advisers says the firm is now earning enough to pay back some money to investors.
Perhaps the most troubling allegation was raised in parliamentary hearings last November. Investment Minister Laksamana Sukardi told a panel that the central bank, under Suharto, had funneled $1.4 billion in trade finance loans to Texmaco Group, a conglomerate run by Suharto confidante M. Sinivasan, in early 1998. Bank Indonesia lent the money to offshore branches of a state-owned commercial bank, Bank Negara Indonesia (BNI). Those branches in turn lent the money, in U.S. dollars, to Texmaco, government officials disclosed in parliamentary hearings.
The loans violated legal lending limits and a ban on preshipment trade finance, according to Laksamana. Soedradjat Djiwandono, Bank Indonesia governor at the time, told BUSINESS WEEK that he approved the loans to Texmaco under intense pressure from Suharto. "I was afraid. I have a family," says Djiwandono, who was fired as governor by Suharto in early 1998. Agus Darjanto, the BNI director in charge of corporate loans, denies BNI used offshore branches to pay out those loans. "BNI did not know [about] the relationship between former President Suharto and Texmaco in this scheme," he says. Texmaco did not respond to written questions.
Auditors are examining other actions by the central bank. In 1998, as inflation was beginning to take off, shopkeepers, companies, and consumers needed more notes to keep daily economic life going. Yet the IMF did not want the central bank to risk hyperinflation by increasing the paper money supply.
Bank Indonesia agreed. But several Jakarta bankers assert the central bank periodically "double-printed" bank notes with identical serial numbers to meet shortfalls. The extra bills had special ultraviolet markings, the sources say, so they could be easily spotted and taken back out of circulation. But bankers who say they were told of the "double printing" by central bank officials argue it almost triggered hyperinflation. Sabirin says he was aware counterfeit notes were in circulation, but denies the central bank was responsible.
That's just one of several issues that emerged in the KPMG audit that now are the focus of a second audit being conducted by the IMF. A senior official involved in the IMF audit says the same issues will be probed later this year by Jakarta's Supreme Audit Board. The auditors will be hunting for $200 million of Bank Indonesia's gold reserves for which KPMG could find no deposit certificates. Sabirin insists the central bank has its gold in the Bank of England and other "very reputable institutions." But the auditors, he asserts, "don't really understand" the bank's electronic record-keeping system.
What's clear is that the central bank found itself under heavy pressure in the closing days of the Suharto regime. "Wise men are politically not strong." says Radius Prawiro, who served as central bank governor from 1966 to 1973.
Where the probe is headed next, or whether it will lead to criminal charges, depends largely on what the next audits turn up. Sabirin is resisting Wahid's calls that he resign on the grounds that the central bank is supposed to be free of political influence. At any rate, it will take more than a change of personnel to fix all the damage. "Rebuilding the domestic bank system is not a question of money," says Senior Deputy Governor Anwar Nasution. "We have to change the domestic corporate culture." That could take many, many years.