Conflict Of Interest in Indonesia

Jack Wiston

In recent years, the issue of conflict of interest has emerged as a significant concern in Indonesia, affecting both the public and corporate sectors. This problem is particularly acute in state-owned enterprises (SOEs, known as BUMN in Indonesian), where the dual roles of officials as both regulators and commercial operators create a fertile ground for potential conflicts. For instance, PT Aneka Tambang’s (Antam) involvement in both nickel mining operations and environmental regulation highlights the intricate balance between profit motives and regulatory duties.

The Indonesian government has recognized the gravity of this issue, leading to the introduction of comprehensive legal frameworks aimed at enhancing transparency and accountability. Notably, Government Regulation No. 23 of 2022 establishes stringent guidelines for the personal liabilities of directors and commissioners in SOEs, emphasizing the necessity for good faith actions and diligent disclosure of any conflicts of interest. Similarly, the Financial Services Authority (OJK) has implemented Regulation No. 42/POJK.04/2020, which mandates rigorous disclosure and independent appraisals for transactions involving conflicts of interest in public companies.

Despite these regulatory efforts, the enforcement of conflict of interest laws remains challenging, compounded by pervasive issues such as nepotism, favouritism, and political influence. High-profile cases, including those involving prominent political figures and their familial connections, have further eroded public trust in the judicial system and underscored the need for more robust oversight mechanisms.

This article explores the legal landscape governing conflicts of interest in Indonesia, examines the practical challenges in enforcing these laws, and offers recommendations to enhance transparency and accountability across sectors. By addressing these issues, Indonesia can work towards a more fair and transparent environment, bolstering public confidence in its institutions.

Defining Conflict of Interest

A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation or decision-making of that individual or organization. This situation often arises when personal interests interfere with professional duties and responsibilities.

 A “situation in which a public official has private-capacity interests which could improperly influence the performance of his or her official duties and responsibilities” – The Organization for Economic Cooperation and Development (OECD).

In Indonesia, the concept of conflict of interest encompasses various forms, including financial interests, family relationships, personal relationships, and other non-financial interests that could affect an individual’s ability to perform their duties impartially. The regulatory framework aims to prevent situations where these interests could compromise the integrity of decision-making processes in both public and private sectors​.

Legal Definition of Conflict of Interest in Indonesia

The Indonesian legal system provides specific definitions and guidelines for managing conflicts of interest. The primary sources include:

1. Law No. 30 of 2014 on Government Administration:

   • Definition: This law defines a conflict of interest as a situation where a public official has personal interests that could influence the execution of their official duties and responsibilities.
   • Mandates: It mandates that public officials must avoid and disclose any conflicts of interest to ensure that their decisions are made objectively and in the public interest.
     

2. Government Regulation No. 23 of 2022:

   • Scope: This regulation addresses the responsibilities and liabilities of directors and commissioners in state-owned enterprises (SOEs).
   • Provisions:  It includes provisions to manage conflicts of interest, requiring that any potential conflicts be disclosed and managed transparently.
   • Good Faith and Due Care: It emphasizes the importance of acting in good faith and with due care to avoid personal interests influencing official duties​.

3. OJK Regulation No. 42/POJK.04/2020:

   • Governance: Issued by the Financial Services Authority (OJK), this regulation governs affiliated party transactions and conflicts of interest in public companies.
   • Definition: It defines conflicts of interest as situations where the economic interests of the company and the personal interests of its directors, commissioners, or substantial shareholders differ, potentially causing harm to the company.
   • Requirements: The regulation requires that such transactions be disclosed and subjected to independent appraisal and approval by independent shareholders to ensure fairness and transparency​.

Legal Framework Governing Conflicts of Interest

Government Regulation No. 23 of 2022

Government Regulation No. 23 of 2022 represents a significant step forward in addressing conflicts of interest within Indonesian SOEs. This regulation amends previous legislation and provides comprehensive guidelines to ensure accountability and transparency. The key provisions include:

1. Personal Liability of Directors and Commissioners:
   • Directors and commissioners can be held personally liable if they fail to perform their duties with the required care and diligence or if they act in bad faith. This liability extends to actions that result in financial losses for the SOE.
   • The regulation introduces the business judgment rule, which protects directors and commissioners from personal liability if they can demonstrate that their decisions were made in good faith, were in the best interest of the SOE, and did not involve a conflict of interest.
2. Conflict of Interest Management:
   • Directors and commissioners must avoid situations where their personal interests conflict with their duties to the SOE. They are required to disclose any potential conflicts of interest and recuse themselves from decision-making processes where such conflicts exist.
   • The regulation emphasizes the need for transparent and independent oversight mechanisms, including external audits and community involvement in monitoring SOE activities.

OJK Regulation No. 42/POJK.04/2020

The Financial Services Authority (Otoritas Jasa Keuangan, OJK) issued Regulation No. 42/POJK.04/2020 to manage affiliated party transactions and conflicts of interest in public companies. This regulation provides a clear framework for ensuring that such transactions are conducted fairly and transparently:

1. Disclosure Requirements:
   • Transactions involving conflicts of interest must be disclosed promptly. The regulation mandates that information about these transactions be made public within two business days after the agreement is executed, ensuring timely transparency.
   • The regulation requires independent appraisal to determine the fair value of the transaction object and/or the fairness of the transaction, thereby protecting the interests of all shareholders.
2. Role of Independent Shareholders:
   • “Independent shareholders” are defined as those who do not have a personal economic interest in the transaction, are not part of the board of directors or commissioners, and are not substantial or controlling shareholders of the public company.
   • These independent shareholders must approve conflict of interest transactions, adding an extra layer of scrutiny to ensure the transactions are fair and do not unduly benefit insiders.
3. Exemptions and Specific Procedures:
   • While certain types of transactions are exempt from some of the requirements, they still need to be reported to the OJK. For instance, transactions between a public company and its 99% owned subsidiary are exempt from independent appraisal and public disclosure but must still be reported to the OJK within two business days.

Anti-Corruption Efforts

The Corruption Eradication Commission (KPK) plays a crucial role in addressing conflicts of interest that lead to corrupt practices. The KPK focuses on corruption involving state officials, but conflicts of interest can also be broader, involving nepotism and favouritism in business dealings:

1. High-Profile Cases:
   • Notable cases where officials have granted business favours to companies with which they had personal or political connections highlight the ongoing challenges in combating such practices. For example, former Minister of Maritime and Fishery Edhy Prabowo was implicated in granting export permits only to companies with close ties to him and the Gerindra Party.
2. Regulatory Enforcement Challenges:
   • Despite the introduction of the Online Single Submission (OSS) licensing system, which aims to centralize and streamline the issuance of permits, there are still reports of bribery and corruption at various levels of government. This includes local administrations demanding bribes for permits and licenses, further complicating the business environment.

Recent Controversies and Public Perception

Constitutional Court Decisions

Recent rulings by Indonesia’s Constitutional Court have highlighted the complex interplay of legal judgments, political influence, and conflicts of interest. One of the most controversial decisions involved the candidacy of Gibran Rakabuming Raka, the Mayor of Surakarta and the son of President Joko Widodo, in the 2024 Presidential Election. The decision, delivered by Chief Justice Anwar Usman, who is also Gibran’s uncle, allowed Gibran to be considered as a vice-presidential candidate despite not meeting the age requirement. This ruling sparked significant public outcry and allegations of judicial bias and conflict of interest.

The controversy surrounding this decision underscores the broader challenges faced by the Constitutional Court in maintaining its credibility and independence. The court’s perceived alignment with executive and legislative interests has led to a decline in public trust, with many Indonesians viewing the judiciary as susceptible to political manipulation. This perception is particularly damaging in a democratic society where the judiciary is expected to act as an impartial guardian of the constitution.

Impact on Public Trust

Public trust in government and judicial institutions is crucial for the effective functioning of a democratic society. In Indonesia, the prevalence of conflicts of interest and corruption has significantly eroded this trust. According to Transparency International’s Corruption Perceptions Index, Indonesia scored 38 out of 100 in 2021, indicating a high level of perceived corruption.

High-profile cases of nepotism and favouritism further damage public confidence. For example, during the COVID-19 pandemic, companies with no track record in healthcare but with political connections were awarded lucrative contracts for medical supplies, bypassing established procurement procedures. This not only undermines fair competition but also raises questions about the integrity of government decisions.

Political Influence and Nepotism

Political influence and nepotism are pervasive issues in Indonesia. Businesspeople often need to have close relationships with officials or politicians to succeed, leading to monopolies and oligopolies in various sectors. Former Minister of Maritime and Fishery Edhy Prabowo, for example, was found to have granted export permits for lobster seeds only to companies with close ties to him and his political party, illustrating how political connections can skew business opportunities.

This environment creates significant barriers for those without political connections, despite complying with all administrative requirements. Such practices not only stifle fair competition but also perpetuate a culture of dependency on political patronage, further entrenching corruption and conflicts of interest.

Effective Defences Against Conflict of Interest Accusations

1. Clear Disclosure and Transparency:

   • Documentation and Public Disclosure: Ensuring that all relationships and potential conflicts are fully disclosed and documented can help mitigate suspicions. Transparency in decision-making processes and maintaining thorough records can provide a solid defence against allegations.

2. Separation of Roles:

   • Divestment of Interests: Divesting from any financial interests that could pose a conflict of interest is crucial. For example, Luhut Pandjaitan’s sale of his shares in TBS Energi Utama, despite familial connections remaining, helped argue against direct personal gain from his governmental role.

3. Independent Oversight and Third-Party Reviews:

   • External Audits and Appraisals: Engaging independent auditors and third-party reviewers to assess decisions and transactions can provide objective evidence that actions were taken in good faith and without undue influence.

4. Track Record and Professional Integrity:

   • Proven Commitment to Public Service: A history of transparent and fair decision-making, as seen in Sri Mulyani Indrawati’s case below, can reinforce an individual’s defense against conflict of interest accusations. Demonstrating a consistent commitment to ethical standards and the public good helps build credibility.

5. Legal and Policy Compliance:

   • Adherence to Regulations: Ensuring compliance with relevant laws and regulations, such as Government Regulation No. 23 of 2022 and OJK Regulation No. 42/POJK.04/2020, can provide a strong legal defense. Following established guidelines and seeking prior approvals when necessary can demonstrate diligence and adherence to legal standards.

Successful Defenses Against Conflict Of Interest Allegations In Indonesia 

The Case of Luhut Pandjaitan and TBS Energi Utama (2017)

Luhut Pandjaitan, a senior Indonesian government official, was accused of a conflict of interest related to his former ownership of TBS Energi Utama, a company involved in the energy sector. Critics pointed out that despite selling his shares, his family members remained in significant positions within the company. However, Luhut defended himself by highlighting that he had divested his interests and that his involvement in government policies was strictly professional. The lack of direct evidence linking his governmental decisions to personal financial gain helped defuse the accusations​.

The Appointment of Sri Mulyani Indrawati as Finance Minister (2016)

Sri Mulyani Indrawati faced allegations of conflict of interest when she was reappointed as Indonesia’s Finance Minister after serving as the Managing Director of the World Bank. Critics argued that her policies might favor international financial institutions. However, she successfully defended her position by demonstrating a clear separation between her past role and her current duties. Her track record of transparency and reform in her previous terms as Finance Minister bolstered her defence, showcasing her commitment to Indonesia’s national interest over any personal or former affiliations​.

The Case of Sofyan Basir and PLN (2019)

Sofyan Basir, the former CEO of Indonesia’s state electricity company PLN, was accused of involvement in a corruption case related to the Riau-1 power plant project. He was alleged to have facilitated bribery between members of parliament and private companies. However, in 2019, the Jakarta Corruption Court acquitted Basir, citing insufficient evidence to prove that he had acted with criminal intent or had directly benefited from the transactions. Basir’s defence successfully argued that his actions were part of his official duties and were carried out in accordance with established procedures, highlighting the importance of intent and direct involvement in proving a conflict of interest​. 

Ensuring Transparency and Accountability

To effectively manage conflicts of interest, it is essential to implement robust mechanisms that ensure transparency and accountability within both public and private sectors. This involves several key practices:

1. Rigorous Disclosure Requirements:
   • Companies and government institutions should enforce stringent disclosure requirements for any potential conflicts of interest. This includes regular reporting and public disclosure of transactions that could pose a conflict.
   • Independent audits and third-party reviews can help verify the accuracy of these disclosures and ensure that they are made in good faith.
2. Independent Oversight Mechanisms:
   • Establishing independent oversight bodies is crucial to monitor and investigate conflicts of interest. These bodies should have the authority to conduct audits, investigate allegations, and enforce compliance.
   • The involvement of civil society organizations and community groups in monitoring activities can enhance transparency and accountability, providing an additional layer of oversight.

Strengthening Regulatory Enforcement

Regulatory bodies such as the Financial Services Authority (OJK) and the Corruption Eradication Commission (KPK) play a pivotal role in enforcing conflict of interest laws. Enhancing their effectiveness involves several strategies:

1. Enhancing Authority and Resources:
   • Regulatory bodies need adequate authority and resources to carry out their mandates effectively. This includes sufficient funding, staffing, and technical resources to conduct thorough investigations and enforce regulations.
   • Strengthening inter-agency cooperation can improve the efficiency and effectiveness of enforcement actions, ensuring that regulatory efforts are well-coordinated.
2. Policy Changes and Legal Reforms:
   • Continuous review and updates of existing regulations are necessary to address emerging issues and close loopholes. This includes amending laws to cover new types of transactions and relationships that may pose conflicts of interest.
   • Implementing stricter penalties for violations can deter unethical behaviour and reinforce the importance of compliance.

Improving Public Trust

Restoring and maintaining public trust is essential for the credibility of both government and corporate institutions. This can be achieved through the following measures:

1. Promoting Fair and Transparent Processes:
   • Ensuring that all business transactions and government decisions are conducted transparently and based on merit can help build public confidence. This includes fair and open bidding processes for government contracts and transparent appointment procedures for public officials.
   • Public awareness campaigns and educational programs can inform citizens about their rights and the importance of transparency, empowering them to hold institutions accountable.
2. Engaging Civil Society and Media:
   • Civil society organizations and the media play a critical role in monitoring and exposing conflicts of interest and corruption. Supporting these entities through legal protections and access to information can enhance their ability to contribute to transparency efforts.
   • Encouraging investigative journalism and whistleblower protections can help uncover and address conflicts of interest, promoting a culture of accountability.

Conclusion

Addressing conflicts of interest in Indonesia requires a multifaceted approach that combines robust legal frameworks, effective regulatory enforcement, and active engagement of civil society. By implementing stringent transparency measures, enhancing the capabilities of regulatory bodies, and fostering a culture of accountability and maintaining high ethical standards, individuals and organizations can build trust and demonstrate their commitment to fair and unbiased decision-making. This, in turn, will help restore public trust and support sustainable development and equitable business practices.