Economist.com: Free Exchange: Fraud and death in Indonesia
Apr 7th 2011, 11:19 by S.M. | JAKARTA
FOR a week now, Jakarta’s rich and connected have been appalled by twin scandals at Citibank’s Indonesia operations. A relationship manager at the bank’s wealth management division appears to have stolen Rp. 17 billion ($2m) from clients. In what must be a terrible coincidence, Citibank debt collectors also seem to have killed a customer—a local politician, it turns out—who disputed his credit card bill.
The Financial Times piece linked above focuses on the $2m fraud, presumably because embezzlement tends to have higher material impact to earnings, but the recent murder at Citi’s premises is arguably more damaging to the bank’s reputation. According to Irzen Okta, his bill was Rp. 48 million (around $5,500) but Citi claims the actual figure was Rp. 100 million. Mr Okta went to contest the bill at Citi’s premises but, after a seemingly grisly interrogation—the press has fixated on blood-stained curtains—he did not return.
Thuggish debt collection has been a fact of life in Indonesia since at least the 9th century, when Javanese creditors enslaved defaulters, but the central bank came off as sublimely callous last week when it washed its hands of such abuses. Budi Rochadi, a deputy governor at Bank Indonesia, said that current laws prevent the central bank from regulating debt collectors but that it had always urged banks to be ethical. This is weak, weak tea. Banks have incentives to hire the toughest debt collectors, who, in turn, are judged by how much money they can recover. Unless the central bank penalises those who break the rules, abuses continue.
Ironically, the central bank’s response to Citi’s $2m fraud is an example of good regulatory policy. It has ordered Citi to freeze new applications for certain credit cards and started a process to monitor Citi’s internal controls. Darmin Nasution, the head of the central bank, appeared to pre-empt criticism by blaming the fraud on Citi’s failure to “implement a process of employee rotation” that regulators once recommended. (There is a clear tension between building client trust and mandating employee rotation— and it is unclear whether a determined fraudster would be stopped by it.)
The central bank is unlikely to sympathise with such reasoning. Since 1997, it has feared instability in the financial sector, which it sees as a prelude to macroeconomic instability. This is why regulators spent $700m bailing out Bank Century during the difficult macroeconomic environment in 2008, and it is why Bank Indonesia is so aggressively mopping up part of the damage from the Citibank scandal today.
The broader ramifications are harder to predict. Banking fraud is central to post-Suharto Indonesian politics and every instance still spurs public rage like nothing else. The 1997 crisis is still fresh in the memory, with the public intimately aware of how the banks trashed public finances by loading up on short-term foreign currency debts, then lending to politically connected tycoons. More recently, the first year of President Yudhoyono’s new term was pure crisis management, pivoting, in part, around fake bonds sold by Bank Century. It is therefore not surprising that today one lawmaker has threatened to revoke Citibank’s banking license altogether (unlikely).
Both scandals at Citi threaten wider confidence in Indonesia’s banking sector, which in recent years was characterised by pockets of professionalism in a country normally bereft of it. Citi, too, was not just any bank. It charged a premium for its services and, with HSBC, was a market leader among an affluent, traveling set. For this crowd, Singapore bank accounts have never been difficult to open, and more are likely to appear in the coming weeks.
