282. Historically, Indonesia has maintained bilateral relations with DPRK and Iran.
Despite diplomatic missions and private sector presence, authorities consider the risk of exposure to the designated individuals/entities to be limited, whether it be through DPRK and Iranian nationals in Indonesia or where Indonesia is used for pass-through activity. Over the review period, direct import-export activities with DPRK were negligible, however, they may constitute a violation of UNSCR 2270, 2375, 2321, or 2371. Import-export flows with Iran were a minimal part of the overall Indonesia trade flows, accounting for an annual average of EUR 192 888 for imports, and EUR 217 140 for exports10. IFTI data shows very limited flows between each of Iran and DPRK and Indonesia. However, AT considers that potential PF exposure risks, in particular, sanctions evasion risks do exist, because of geographical proximity of Indonesia to DPRK and through the potential misuse of legal persons located in Indonesia or elsewhere. Use of front and shell companies, layered ownership and management structures and engaging multiple intermediaries removed from the actual owner are known typologies for evading sanctions and these risks exist for Indonesia as well.
283. DPRK and Iran diplomats work in Jakarta and they and their families have individual accounts at banks and transact at money changers/MVTS. Supervisors were informative as to the levels of Iranian/DPRK business in the sectors they supervise.
The OJK requires banks to monitor transactions and reject transactions if the beneficial owner is known to have originated from or be domiciled in Iran/DPRK and not to do business with prospective customers from these countries. Hence banks have not accepted new customers with Iranian or North Korean links since 2018. Indonesia did not provide the policy for opening new accounts, whether it be for newly arriving diplomats or business ventures. Authorities noted that the existing DPRK customers are diplomats and their families (seven bank accounts).
Existing Iranian customers come from diplomats, embassy staff, employees, professionals and business with activities in Indonesia (128 bank accounts). Based on OJK supervision data, there are no customers with DPRK/Iranian links in the capital market. There are no DPRK customers in non-bank financial institutions, and there are five accounts of Iranian customers in the life insurance sector. The relationships are subject to EDD.
284. The BI advised that the only Iranian/DPRK customers in the money changing and MVTS sectors are diplomats and their families. EDD is required if the provider intends to conduct transactions for new customers linked to these jurisdictions.
10 Indonesia Imports, Tariffs by country and region 2019 | WITS Data (worldbank.org)
285. CoFTRA’s records show that its licensees (VASPs) have 31 customers from Iran/DPRK. These customers are domiciled in Indonesia with residence or work permit, not included in the designated list, have limited trading activity and are all subject to EDD. All futures traders and most VASPs do not accept customers from Iran/DPRK. The PPATK and the MoF advised that no instances of persons from Iran and DPRK using services provided by DNFBPs were noted and that DNFBPs are required to monitor transactions and reject transactions if the customer or beneficial owner is known to have originated from or be domiciled in Iran/DPRK.
Implementation of targeted financial sanctions related to proliferation financing without delay
286. Indonesia has taken steps to address some shortcomings in the legislative framework for the implementation of TFS concerning the UNSCRs relating to the combating of financing of proliferation. However, the framework contains gaps in its enforceability because the obligation to freeze without delay the funds or assets of designated persons does not apply to all natural or legal persons. In addition, it neither requires reporting for attempted transactions, nor clearly prohibits the provision of funds or services to designated persons (see R.7). That has an impact on effectiveness. In October 2018, Indonesia listed into the domestic WMD list all Iranian individuals/entities on the UNSCR 2231 List (23 Iran individuals and 61 Iran entities). The PPATK communicated to the AT that prior failures to do so was the result of a misunderstanding relating to the Joint Comprehensive Plan of Action.
287. Over the review period, 17 individuals and 22 entities have been designated under UNSCR 1718. Indonesia has carried out these domestic designations without delay.
Table 4.5. Indonesia implementation of UN 1718 designations (2017-2022)>
Date and time of
UN listing (ET) Individuals/entities listed on
WMD listing (ET) Date and time of
WMD listing (ET) Date and time of financial institution reporting (Nil)
(ET)
Hours between UN communication and Indonesian implementation 22 Dec 17,
18:13
16 DPRK individuals and 1 DPRK entities
22 Dec 17,
19:34 23 Dec 17, 11:11 18 hours
30 Mar 18,
17:52 1 DPRK individuals and
21 DPRK entities 30 Mar 18,
20:17 31 Mar 18, 10:22 17 hours
288. Indonesia’s national strategy to counter illicit finance includes PF and Indonesia demonstrates a good understanding of its PF risks, both domestic and international.
289. The PF Joint Regulations of 2017 to implement UN TFS related to WMD proliferation do not explicitly identify the relevant UNSCRs that are to be implemented, however, Indonesia has shown that it can apply TFS under UNSCR 1718 and UNSCR 2231.
This is further strengthened by Article 11(1)-(2) of the PF Joint Regulation, which states that supervisors shall be authorised to conduct supervision of the implementation of provisions concerning freezing without delay. Further, in the event a supervisor finds deficiencies in the implementation of TFS without delay, they can impose sanctions in accordance with authority based on legislation.
290. Indonesia has a cross-government approach to countering proliferation and disrupting the procurement of proliferation-sensitive goods and PF. Indonesia’s WMD Task Force leads this effort and is charged with implementing the PF Joint Regulations and coordinating to prevent and eradicate WMD PF. The Task Force is led by the PPATK and includes the State Intelligence Agency (BIN) for intelligence, INP for investigations, the Ministry of Foreign Affairs, the Nuclear Energy Intelligence Agency (NERA), and the DGCE. Notably absent during the on-site visit discussions, however, was an office charged with developing and implementing policy, though the PPATK communicated that they actively fulfil this role in an unofficial capacity.
291. Under the PF Joint Regulations, UN DPRK listings are implemented domestically via the following process: Indonesia’s UN mission transmits the name and identifying information to the MoFA, which then notifies PPATK, the INP, the BIN, and NERA.
Each of these agencies, based on intelligence or other information contained in their own files, will make a recommendation to PPATK on listing in the national WMD List. PPATK then reviews the recommendations of the relevant agencies and decides to list domestically. The legal timing requirement to complete the listing process is at most one day.
292. The PF Joint Regulation requires supervisory agencies to communicate electronically and non-electronically to their regulated entities the listing, freezing, revocation of freezing, and delisting of listed persons/entities. There is no legal timing requirement, however OJK has developed an AML/CFT information system called SIGAP to automatically provide information to reporting entities about the WMD List. Similar to TF designations (See CI.10.1), Indonesia demonstrated its ability to immediately notify reporting entities of PF designations through multiple targeted and publicly available methods, including PPATK website. All FIs and DNFBPs are required to freeze without delay funds owned or controlled by persons on the WMD List. However, this obligation is not enforceable for DNFBPs (See R.7).
In addition, For OJK-supervised entities, the starting point of the legal requirement to freeze is not immediately from the designation but from the moment entities find a positive match on the WMD list, upon periodical exposure check (See R.7).
However, Indonesian authorities underlined that, in practice, every time a new designation is made by PPATK on the WMD list, FIs conduct immediate screening against the list. FIs conduct freezing without delay when there is a match from the designation. Moreover, FIs conduct periodical exposure screening to make sure that prospective customer, customer, or beneficial owner do not match the list.
293. Further, CoFTRA supervised entities are not explicitly prohibited from providing assets to designated persons. This is a major gap in the regulatory framework.
Identification of assets and funds held by designated persons/entities and prohibitions
294. As of the date of the on-site visit, Indonesia had not identified funds or other assets relating to designated persons/entities and therefore no assets have been frozen.
Indonesia indicated, however, that 197 PF related STRs had been filed by FIs to PPATK over the review period. Based on joint discussions with the Task Force of WMD and competent authorities, the majority of these STRs were predominantly made by banks and money changers and related to North Korean diplomats and relatives and a limited number of STRs related to Iranian citizens. Transactions reported from banks generally relate to business activities carried out by North Korean diplomats regarding the export/import of household goods. Banks’ KYC automatically identified the credit or debit movement in the account as a suspicious transaction. Meanwhile, transactions reported by money changers generally relate to foreign currency exchange by North Korean citizens. According to the results of the financial service providers' screening, no transactions had direct ties to designated persons or entities. As a result, none of the 197 STRs received by the PPATK led to freezing action.
Box 4.5. Wise Honest case
From at least November 2016 through April 2018, the Wise Honest was used by OFAC designated Korea Songi Shipping Company to ship DPRK imports and exports. Participants in the scheme attempted to conceal the Wise Honest’s DPRK affiliation by falsely listing different countries for the Wise Honest’s nationality and the origin of the illicit coal in shipping documentation. In 2018 MLHR received an MLA request from the U.S. of a potential ship-to-ship transfer between the MV Wise Honest and a South Korean flagged ship. SIA’s investigation revealed a network of Indonesian and North Korean nationals involved in the scheme. To run a parallel financial investigation, SIA passed the information to PPATK which then conducted a parallel financial investigation. These efforts collectively led to repatriation of the MV Wise Honest to the US. Indonesia imposed an IDR 400 000 000 (EUR 26 500) fine against the captain if the MV Wise Honest Vessel. (See IO.2).
295. Indonesia has investigated PF related schemes. For instance, in 2017 Indonesia’s WMD Task Force responded to a UNSC request for information regarding a DPRK related entity known as Glocom. Glocom was suspected to have ties with entities designated under UNSCR 1718. In addition to satisfying the inquiry, the BIN launched an investigation concurrently with a PPATK led financial investigation. PPATK found one Indonesian national and the entity for which he was beneficial owner, suspected to serve as a financial intermediary to facilitate DPRK interests in Indonesia. PPATK then successfully conducted network analysis to identify numerous other affiliated counterparties in Indonesia and abroad. The analysis found connections to DPRK diplomats stationed in Jakarta as well as further linkages to entities identified in the PoE report. Investigations showed that the Indonesian national was not involved in the Glocom case and that the case did not relate to entities designated under UNSCR 1718.
296. Customs authorities are not represented in the WMD Task Force. However, export control systems appear to be in place and are, in part, focused on curbing proliferation activity. From 2018 to 2022, the DGCE took enforcement measures to counter proliferation on 113 occasions, seizing assets for a total of IDR 2.68 billion (EUR 177 680). The activity related to Iranian and DPRK imports and exports and no link was established between these assets and the persons and entities listed in the WMD list.
FIs, DNFBPs and VASPs’ understanding of and compliance with obligations 297. Outreach to public and private partners has led to a current understanding of PF
typologies which are then disseminated to domestic relevant authorities.
Regulations and guidance have been issued by the OJK, the BI, CoFTRA and the PPATK in particular. The OJK has hosted 18 events for FIs since 2019. It has cooperated with the US State Department on CPF issues. In addition, OJK actively contributes to the Program Governance Committee (PGC) related to UNODC's cooperation with the Government of Indonesia. OJK and PPATK with support from a global research institute have conducted cooperation in the area of research, information sharing, training on topics related to CPF. CoFTRA has hosted 19 events for the private sector since 2017.
298. The WMD Task Force has conducted considerable outreach to the private sector, mainly to banks; this began six months prior to the on-site and complements the engagement by supervisory authorities. However, training appears to be focused on the list-based approach to mitigation which does not cover known typologies. The WMD task force meets nearly every quarter to discuss updated threat assessments and policy considerations. Meetings include international requests, as well as typology updates generated both domestically and through international private and public partners. The three major FI supervisors’ efforts on outreach and promoting understanding of PF obligations by FIs include written guidance, awareness raising session with financial institutions and focused group discussions.
These have been positive in raising the profile of PF and in increasing understanding by reporting entities.
299. In general, FIs are aware of the PF risks related to Iran and DPRK. Larger banks indicated an awareness of PF related risk, both through their exposure and existing mechanism to screen transactions against PEPs as well as due to the products and services they provide. Major FIs have demonstrated an understanding of sanction evasion risk, and they widely recognise the risk related to the trade finance.
Understanding in the banking, capital market and finance and insurance sectors is better than in the money changers and MVTS sectors.11
11 The findings in these paragraphs reflect the current situation in Indonesia. However, the assessment team did not take into account findings in relation to the understanding of PF risks by FIs/DNFBPs in the conclusions, weighting or rating of IO.11 since recent changes to the FATF Standards related to risk of PF sanctions evasion will not be assessed until FATF’s 5th round of Mutual Evaluations.
300. Smaller institutions and DNFBPs were less clear about their exposure to such risk and are not employing mitigating measures beyond list-based screening. In particular, DNFBPs were not in a position to differentiate between TF and PF considerations. Screening of clients at onboarding stage against the WMD list is done by FIs as a matter of course. Ongoing screening is performed to a lesser extent, with the DNFBPs’ lack of understanding and submission of the ‘nil reporting’
requirement to the PPATK. Screening by smaller FIs is, however, limited to the immediate client and does not extend to beneficial owners or other associated parties. VASP showed a reasonable understanding of risk related to the misuse of VA in PF.12
301. Major FIs have internal controls in place to comply with their PF TFS obligations.
While some banks indicated they would not provide financial services to DPRK or Iranian individuals living in Indonesia, others indicated they would, and outlined unique risk mitigation measures that aligned with their individual risk appetite.
Supervised entities are aware that they must freeze all assets associated with designated entities within 24 hours of designation and report identified activity within 72 hours. Indonesia demonstrated exposure checks are being conducted without delay. However, there were no reported cases of exposure at the time of the on-site visit leading to any freezing actions.
302. FIs, including small sectors such as money changers and MVTS receive updates regarding the PF list by means of supervisory e-mails. They immediately run a screening against their customer database and add the name to their on-going monitoring systems. In addition to supervisory emails, they mentioned several channels of notification regarding updates to the PF list, alerts from goAML application, SIGAP and SIPENDAR systems. They confirmed that the PF list is also available on PPATK’s and their respective supervisory authorities’ websites. They would proceed to immediately freeze if they find a hit. Moreover, FIs use commercial databases for the screening of sanctions. However, supervisors acknowledged that FIs’ sanctions screening failures have figured in a number of supervisory inspections, which creates a gap in PF TFS implementation. OJK and BI have taken steps to mitigate risks. Only one sanction was imposed by BI on entities for such a failure, in the form of written warning to the providers.
303. The identification related to the BO is still a challenge to some FIs, when international complex structures are involved or receive the benefit of a transactions. This impedes their ability to effectively guard against sanction evasions (See IO.4 and 5).
12 Id.
Competent authorities ensuring and monitoring compliance
304. OJK, the BI and the CoFTRA are aware of the importance of training their staff in relation to PF and each covers such training in their programmes. Since 2017, OJK has conducted 49 training programmes related to CPF for its staff. The PPATK has organised 11 such events since 2018. Outreach by supervisory authorities (see above) has directly contributed to ensuring compliance by FIs with PF requirements. There is limited outreach and targeted supervisory oversight on PF related TFS obligations for DNFBPs. Indonesia is conducting supervision through on-site inspections to FIs and some DNFBP sectors (see table below). All relationships between FIs and persons from Iran/DPRK noted by supervisors are subject to EDD.
Table 4.6. Number of on-site inspections to the FIs, VASPs and DNFBPs covering PF- TFS
2018 2019 2020 2021 2022 (July) Total
Conventional Banks (OJK) 89 80 66 63 41 339
Rural Banks (OJK) 1 744 1 704 1 656 429 182 5 715
Securities Companies (OJK) 15 20 18 15 33 101
Investment Managers (OJK) 9 12 15 6 4 46
Insurance (OJK) 24 16 5 10 6 61
Finance Companies (OJK) 29 10 15 15 10 79
Other FIs (OJK) 72 68 38 41 69 288
Non-bank money changers (BI) 130 173 128 164 8 603
Non-bank MVTS (BI) 14 25 27 32 96 194
Futures Traders (CoFTRA) 9 15 14 6 3 47
VASPs (CoFTRA) 0 0 0 1 26* 27
Real estate agents (PPATK) 0 44 25 35 12 116
Public Accountants and Public Accountant Offices (MoF) 156 152 156 175 107 746
*thematic inspection regarding the implementation of regulations
Table 4.7. Table of PF obligations breaches (number of entities)
2018 2019 2020 2021 2022 up to AT visit Total
Conventional Banks (OJK) 1 4 4 6 0 15
Rural Banks (OJK) 14 13 32 163 0 222
Securities Companies (OJK) 0 0 3 103 21 127
Investment Managers (OJK) 0 0 0 98 0 98
Insurance (OJK) 0 0 0 2 126 128
Finance Companies (OJK) 0 0 0 1 5 6
Other FIs (OJK) 0 0 0 113 0 113
Non-bank money changers (BI) 0 0 0 0 0 0
Non-bank MVTS (BI) 0 0 5 0 0 5
Futures Traders (CoFTRA) 0 0 0 0 0 0
VASPs (CoFTRA) 0 0 0 0 0 0
Real estate agents (PPATK) 0 44 25 35 12 116
Public Accountants and Public Accountant Offices (MoF) 0 0 0 0 0 0
305. The OJK demonstrated that during on-site inspections, it addresses PF compliance in a rounded way and does not only consider adequacy of screening. The OJK’s checks include the adequacy of policies and procedures; whether training materials cover PF; understanding by the firm of what is required under the obligations and sanctions evasion risks; analysis by the licensee of relationships and transactions in a PF context; consideration by the licensee of PF in relation to high risk products (including trade finance products) and that internal audit functions cover PF.
Inspections do not only cover controls (including screening) in relation to customers but also how risks in relation to beneficial owners and beneficiaries of transactions, as well as vessels used in transactions, are addressed. The OJK also requires firms to demonstrate the use of the screening system during inspections – this extends to the OJK selecting designated persons and ascertaining how the screening system operates in practice. Inspections have found some shortcomings related to internal policies and procedures, lack of focus on PF during internal audits or in periodic reports to board of commissioners/board of directors (BoC/BoD).
Over the review period, OJK imposed remedial actions on 875 entities for WMD violation but no sanction.
306. Following liaison with the PPATK, in 2020, the BI undertook five thematic on-site inspections of MVTS to assess adequacy of CFP measures. These FIs were regarded as high risk in relation to PF. The inspections (supported by terms of reference to guide the approach) reviewed monitoring and licensees’ ability to freeze funds of designated persons without delay and the overall adequacy of their use of the WMD list and systems, procedures and controls in relation to CFP requirements. The workplan for inspections refers to PF and inspection reports indicate that the inspections were of sufficient quality to detect failings. More broadly, on-site inspections routinely cover speed of reaction to the WMD list, screening and red flags for PF. Screening covers customers and beneficiaries of payments. While there have been some examples of poor internal procedures and controls (e.g., lack of effective management oversight, internal guidelines), the BI confirmed that the FIs inspected have had mechanisms in place to freeze without delay effectively. No instances of breaches of obligations for non-bank money changers in relation to PF were reported by BI. BI issued five written warning letters on for MVTS’ PF related TFS obligation’s violations in 2020, but no sanction.