Brief background to the KPK
The KPK was established in 2002, via Law No. 30 of 2002 (the KPK Law), as an independent government agency to investigate and prosecute corruption in Indonesia. The KPK has played a crucial role in investigating corruption among Indonesia’s state-owned companies, government agencies and private sector. Since its inception, it has generally been viewed as an independent and effective government agency for combating corruption in Indonesia. According to former KPK chairman Agus Rahardjo, the organisation launched 498 investigations and 433 prosecutions between 2015 and 2019, in which 608 individuals were named suspects.
The KPK’s effectiveness in conducting investigations and high conviction rate were attributed to its ability to conduct wire-tapping, searches and seizures without warrants. The KPK also had the ability to (i) instruct banks and financial institutions to provide information and to block the bank accounts of suspects; (ii) request the help of local police, Interpol and overseas law enforcement agencies to conduct searches and arrests; and (iii) instruct relevant agencies to issue travel bans on individuals. As an independent government agency, the KPK also had the autonomy to manage its own manpower and the salaries of its officers.
Legislative amendments regarding the KPK
Indonesia’s House of Representatives passed legislative amendments to the KPK Law in September 2019, which came into effect on 17 October 2019. It has been observed that in the year preceding these amendments, a significant number of the KPK’s investigations implicated Indonesian legislators. Also, there were earlier attempts by the House of Representatives to curtail the KPK’s powers or activities.
The primary amendments to the KPK Law include:
- Placing the KPK under the executive power of the government. This curtails the KPK’s autonomy to recruit and dismiss its own staff, in accordance with its internal policies. This means that all KPK staff and investigators are now members of the Indonesian civil service.
- The establishment of a ‘Supervisory Board’, which will supervise the KPK’s duties and conduct annual evaluations of the performance of KPK officials. The Supervisory Board reports to, and its members are appointed by, the Indonesian president.
- Any wiretapping, search and seizure conducted by the KPK must now first be approved by the Supervisory Board. This has been viewed in many quarters as significantly affecting the effectiveness of the KPK by slowing down investigations and exposing any KPK investigation to potential information leaks.
- Previously, the KPK was authorised to request and instruct financial institutions, law enforcement, and other agencies to provide assistance and/or information during the preliminary investigation, investigation and prosecution stages of a case. Post-amendment, the KPK’s authority to do so is limited to the investigation phase. This potentially affects the effectiveness of KPK investigations.
- The KPK no longer has the authority to carry out investigations and prosecutions of cases which attract “public attention”. What constitutes ‘public attention’ is, however, not defined, but has been predicted to dilute the KPK’s mandate to independently investigate matters involving powerful state company interests and political elites or those who are politically connected.
Preliminary observations
While corruption risks are generally known to exist in Indonesia, these developments relating to the KPK arguably heighten such risks in the Indonesian business climate.
With the dilution of the KPK’s powers and independence, companies may face higher levels of corruption risk in their business operations in Indonesia. For example, this may be the case for companies which are involved in public procurement activities in Indonesia. Transparency International reports corruption risk to be particularly problematic in this area; a third of the companies surveyed in Indonesia reported paying bribes to secure government contracts.
Accordingly, foreign companies conducting business in Indonesia, or considering entering the market, should be well prepared to deal with the attendant costs of managing such risks. This includes investing resources to ensure that internal compliance controls and policies are in place, performing due diligence on business partners and investment targets, and conducting investigations on the companies’ employees and business partners. This is especially important for foreign companies that are subject to anti-corruption laws and regulations in their home country, like the U.S. Foreign Corrupt Practices Act or the UK Bribery Act.
Please note that neither Reed Smith, Calvin nor Jasmine are licensed to advise on Indonesia law, and we work with local Indonesian law firms to advise on matters, as appropriate. However, if you have questions or would like additional information on the material covered in this Alert, please contact one of the authors – listed above – or the Reed Smith lawyer with whom you regularly work.
Client Alert 2020-098
