International Survey: Compliance – Country Report: Indonesia

By: Darrell R. Johnson, Andini H. Dewi and Christina N. Soela

I. Compliance in Indonesia

Compliance is an important issue for foreign investment companies doing business in Indonesia. As

international organizations, foreign investment companies are not only required to comply with the

laws and regulations of the country of origin of their parent companies but also with relevant laws and

regulations in Indonesia. Due to the Indonesian Capital Investment Coordinating Board (Badan Koor-

dinasi Penanaman Modal or “BKPM”), which supervises all foreign investment activities in Indone-

sia, foreign investment companies are often more strictly scrutinized than wholly owned Indonesian

companies in terms of compliance with Indonesian laws and regulations. Foreign investment compa-

nies are required to obtain BKPM approval before carrying out certain actions such as share transfers,

capital increases and business expansions. Foreign investment companies must also submit an invest-

ment activities report to the BKPM. This report must be submitted quarterly for companies that have

not obtained a Business License (i.e., they have not yet commenced commercial production or opera-

tions) and each semester for companies that have obtained a Business License (i.e., they have com-

menced commercial production or operations). Private Indonesian companies (in Indonesian known

as PT biasa) are not required to register with the BKPM.1

There is no unifying legal instrument governing compliance in Indonesia. Various laws and regula-

tions contain provisions on compliance. Article 4 of the Company Law stipulates that in addition to

the Company Law, companies are required to comply with the Articles of Association (“AOA”) or

bylaws of such companies and other applicable laws and regulations of Indonesia. Article 15 of the

Investment Law sets forth requirements for companies operating in Indonesia. Those requirements are

to: (i) implement the principle of good corporate governance; (ii) carry out corporate social responsi-

bility programs; (iii) submit investment activities reports with the BKPM (see above); (iv) honour the

cultural traditions of the communities where the companies operate; and (iv) comply with all applica-

ble laws and regulations. The Capital Market Supervisory Board (Badan Pengawas Pasar Modal or

“Bapepam”)2 issued Circular Letter No. SE-03/PM/2000 dated May 5, 2000 regarding the Formation

of Audit Committees by Issuers and Public Companies, which requires that all listed companies in

Indonesia have an Audit Committee within their organization. The duties and functions of an Audit

1 Not all private Indonesian companies are required to register with the BKPM. Only those that intend to obtain facilities from the Government must register with the BKPM. These companies are known as domestic investment companies, or PT PMDN companies, as opposed to foreign investment companies, or PT PMA companies. 2 Bapepam’s functions are now being carried out by the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”).

Committee include reviewing a company’s compliance with all laws and regulations that are relevant

to the company’s activities.

A related compliance issue in Indonesia is the implementation of good corporate governance princi-

ples. Similar to compliance, good corporate governance principles have not been compiled into a sin-

gle legally binding instrument. In 2006, the National Committee of Governance Policy (Komite Na-

sional Kebijakan Governance or “KNKG”)3 issued the General Guidance on Indonesian Good Corpo-

rate Governance (Pedoman Umum Good Corporate Governance Indonesia or “General Guidance on

Corporate Governance”).4 This is not a binding legal regulation but merely offers guidance for com-

panies in implementing the principles of good corporate governance in Indonesia. Furthermore, it

does not provide sanctions or penalties for non-fulfilment of the recommendations provided there-

under.

As is also true in other jurisdictions, the non-existence of a legal instrument listing all the compliance

obligations of companies in Indonesia forces businesses themselves to identify the compliance regula-

tions to which they must adhere. It is not easy for companies to build such a general list of compliance

regulations that they must follow. While such a list must include sectoral laws and regulations, most

foreign investment companies in Indonesia will first focus on, among others, the Investment Law, the

Company Law, anti-corruption regulations, tax laws and labour regulations.

II. The Most Relevant Fields of Law in Indonesia that a Business Will Have to Cover with

its Compliance Management Activities

As mentioned above, the lack of a single unifying legal instrument governing compliance in Indonesia

requires that companies in Indonesia create their own database of compliance regulations to which

they must adhere. At the end of the day, a company must adhere to all the laws and regulations in

Indonesia. One of the fields of law that attracts much attention from foreign investment companies in

Indonesia is anti-corruption. In the 2013 Corruption Perspective Index, issued by Transparency Inter-

national, Indonesia was ranked 107th (tied with Djibouti and Argentine) out of 175 countries, under-

lining that Indonesia still has a serious problem with corruption. In addition to corruption, the follow-

ing are the most relevant fields that foreign companies should consider in their compliance activities

in Indonesia:

3 The KNKG assumed the functions of the National Committee of Good Corporate Governance (Komite Nasional Kebijakan Corporate Governance or “KNKCG”), which was established to implement good corporate governance principles in Indonesia. The KNKCG was established under Coordinating Minister for the Economy, Finance and Industry (“MEFI”) Decree No. KEP/31/M.EKUIN/08/1999, while the KNKG was established under Minister of Economy Affairs Decree No. KEP/49/M.EKON/11/2004. 4 General Guidance on Good Corporate Governance in Indonesia is available at <http://www.bapepam.go.id/pasar_ mod-al/publikasi _pm/info_pm/Pedoman%20GCG%20Indonesia%202006.pdf> (as of May 14, 2014).

A. Investment Law

Main Relevant Laws and Regulations:

• Law No. 25 of 2007, dated April 26, 2007 regarding Investment (“Investment Law”)

• Presidential Regulation No. 39 of 2014, dated April 24, 2014 regarding List of Busi-

ness Fields that are Closed and Open with Certain Conditions in the Investment Sector

(“Negative Investment List”)

• Chairman of BKPM Regulation No. 5 of 2013, dated April 8, 2013 regarding Guide-

lines and Procedures on Capital Investment Licensing and Non-Licensing, as amended by

Chairman of BKPM Regulation No. 12 of 2013, dated September 18, 2013

Any foreign party intending to invest in Indonesia should first refer to the Investment Law. Under the

Investment Law, foreign investment may only be conducted through a limited liability company (in

Indonesia known as a Perseroan Terbatas or “PT”). Article 12 of the Investment Law stipulates that

any field of business is open to foreign investment, unless it is stipulated as closed or open under cer-

tain conditions by the government. Occasionally, the Indonesian government issues and amends a list

of business activities that are closed to foreign investment or that are only open to foreign investment

under certain conditions. This is known as the Negative Investment List.

In brief, the Negative Investment List sets out fields of business that are (i) closed for both domestic

and foreign investment, and (ii) open under certain conditions (e.g., business fields that are 100%

open to domestic investment, are open to foreign investment to a certain percentage or require a spe-

cial license). The latest Negative Investment List expressly states that business fields not listed in its

Attachments I and II are open to investment with no conditions. This was not expressly stated in earli-

er Negative Investment Lists, though it was generally understood to be the case. However, it was

sometimes still necessary to submit a Letter of Intent to the BKPM to confirm whether a business

field not set out in the Negative Investment List was open to 100% foreign investment without any

conditions. It remains to be seen whether this will still be the case, despite the express statement to the

contrary.

As briefly discussed above, all investment activities in Indonesia are supervised by the BKPM. To

establish a domestic or foreign investment company, investors must first obtain approval from the

BKPM. Such approval is currently known as a Principle License. The Principle License is an initial

license for a company established in Indonesia, and is followed by the execution of the company’s

deed of establishment. To receive BKPM approval a company must meet certain requirements. One is

the minimum investment requirement, i.e., foreign companies must invest more than 10 billion rupiah

(approximately US$790, 500 at current exchange rates).

In addition to the Principle License, companies must obtain a Business License once they are ready to

commence commercial operations or production. For certain sectors, the Business License must be

accompanied by technical license(s) from the relevant ministry/ministries supervising the company’s

area of business. For example, a PMA pharmaceutical manufacturing company in Indonesia needs a

Business License from the BKPM and a Pharmaceutical Manufacturing Business License from the

Ministry of Health. In other sectors the Principle License need not be followed by a Business License

from the BKPM, but only by a technical license from the relevant ministry. For example, a PMA min-

ing company is only required to have a Mining Business Permit from the Ministry of Energy and

Mineral Resources after it obtains a Principle License from the BKPM for its establishment.

B. Company Law

Main Relevant Law:

• Law No. 40 of 2007 dated August 16, 2007 regarding Limited Liability Companies

(“Company Law”)

A PT (hereinafter referred to as a company) must be established by at least two shareholders, as well

as be based on a notarial deed of establishment in the Indonesian language. The deed of establishment

contains the Articles of Association of the company. This deed of establishment must be approved by

the Ministry of Law and Human Rights (“MOLHR”), which also maintains the public records of the

company. A company obtains legal entity status once the MOLHR approves its deed of establishment.

Indonesian companies have a two-board system, consisting of a Board of Directors (“BOD”) and a

Board of Commissioners (“BOC”). The BOD manages the company, as its members are the day-to-

day operating officers of the company. The BOC serves a supervisory function in the company. The

BOD and BOC must consist of at least one Director and one Commissioner. However, companies

whose business activities are related to mobilizing and/or managing public funds, among others, are

required to have at least two Directors and two Commissioners.

C. Anti-Corruption

Main Relevant Laws and Regulations:

• Law No. 31 of 1999, dated August 16, 1999 regarding the Eradication of Criminal

Acts of Corruption (“1999 Anti-Corruption Law”), as amended by Law No. 20 of 2001, dated

November 21, 2001 (“Amendment to the 1999 Anti-Corruption Law”) (collectively, the

“Anti-Corruption Law”)

• Law No. 28 of 1999, dated May 19, 1999 regarding State Organizers that Are Clean

and Free from Corruption, Collusion and Nepotism (“KKN Law”)

• Government Regulation No. 71 of 2000, dated August 21, 2000 regarding Procedures

for Getting Citizens Involved and Granting Awards in the Prevention and Eradication of

Criminal Acts of Corruption

• Government Regulation No. 53 of 2010, dated June 6, 2010 regarding Discipline for

Government Officials

Corruption remains one of the biggest compliance issues facing foreign companies operating in Indo-

nesia. One of the challenges facing organisations involves finding a balance between honouring local

customs and written laws. It is customary in Indonesia, as it is in many jurisdictions, to offer gifts at

wedding receptions or religion celebrations such as Eid al-Fitr or Christmas. On the other hand, the

Anti-Corruption Law stipulates that any “payment”, “gift”5 or “gratification” 6, among other acts, to a

Government Official due to his position or authority is illegal. The Anti-Corruption Law applies to

Government Officials as well as to private persons and entities that give such payments, gifts or

gratifications to Government Officials.

A corporation and its management can be charged with violating the Anti-Corruption Law if any per-

son connected to that corporation, based on any relationship, acts for or on behalf of the corporation

and commits one of the following acts, among others:

1. gives or promises something to a Government Official or State Organizer7 with the

aim of persuading him to do something, or not to do something, that is in violation of his ob-

ligations due to his position;

5 The Anti-Corruption Law itself does not define the term “gift”. It states that the term gift has “… a broad meaning” and provides several examples: money, goods, discounts, commissions, interest-free loans, travel tickets, lodging, travel and free medical care. 6 The Amendment to the 1999 Anti-Corruption Law introduced “gratifikasi” as a concept to the Anti-Corruption Law. Literally, the word “gratifikasi” translates as “gratification”. In English, the term “gratification” means a “gratuity, a recompense or reward for services or benefits, given voluntarily, without solicitation or promise” (Black’s Law Dictionary). The term is thus meant to suggest any consideration of any kind, whether requested or not. In this regard, it is difficult to see any meaningful difference between a “gift” and a “gratification”. 7 Pursuant to the KKN Law, State Organizers are defined as state officials who carry out an executive, legislative or judicial function or other officials whose functions and main duties relate to state organizations under prevailing laws and regulations.

2. gives something to a Government Official or State Organizer because of, or in rela-

tion to, something that violates his obligations, whether or not it is done because of his posi-

tion.

The sanctions for committing the aforementioned acts include imprisonment ranging from one year to

five years and a maximum fine of 250 million rupiah (approximately US$ 19,760 at current exchange

rates). These sanctions also apply to the Government Official or State Organizer that receives such a

gift or promise.

The harshest sanctions under the Anti-Corruption Law apply to gratifications made to a Government

Official or State Organizer (Article 12b of the Anti-Corruption Law). Every gift or gratification given

to a Government Official or State Organizer is considered a bribe if it is related to the position of such

Government Official or State Organizer and is contrary to his duties or obligations. The penalty for a

Government Official or State Organizer receiving a gratification that is considered a bribe is a sen-

tence of from four years’ imprisonment to life imprisonment, and a fine from 200 million rupiah (ap-

proximately US$15,800 at current exchange rates) to 1 billion rupiah (approximately US$79,050 at

current exchange rates). However, the Anti-Corruption Law allows Government Officials to avoid

criminal liability for taking bribes if they report said bribes to the Commission for the Eradication of

Criminal Acts of Corruption (Komisi Pemberantasan Korupsi or “KPK”) within a certain period of

time as prescribed by law.

D. Anti-Monopoly Law

Main Relevant Laws and Regulations:

• Law No. 5 of 1999, dated March 5, 1999 regarding the Prohibition on Monopolistic

Practices and Unfair Business Competition (“Anti-Monopoly Law”)

• Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha or “KPPU”) Regulation No. 6 of 2010, dated April 9, 2010 regarding Guidelines on Article 25 (Abuse of Dominant Position) of the Anti-Monopoly Law

• KPPU Regulation No. 3 of 2011, dated June 7, 2011 regarding Guidelines on Article 19 Point D (Discrimination Practice) of the Anti-Monopoly Law

• KPPU Regulation No. 4 of 2011, dated July 7, 2011 regarding Guidelines on Article

5 (Price Fixing) of the Anti-Monopoly Law

• KPPU Regulation No. 11 of 2011, dated September 28, 2011 regarding Guidelines on

Article 17 (Monopolistic Practices) of the Anti-Monopoly Law

There are two types of violations of the Anti-Monopoly Law: violations of the Per Se Rule and viola-

tions of the Rule of Reason.

An act is classified as a Per Se violation if it unconditionally prohibits an activity or agreement. In this

context, unconditionally means that no proof of anti-competitive effect is required for an action or an

agreement to constitute a violation. There are seven acts categorized as Per Se violations under the

Anti-Monopoly Law. These are Price Fixing (Article 5), Price Discrimination (Article 6), Boycotting

(Article 10), Closed Agreements (Article 15), Conspiracy to Hamper the Production or Marketing of

Competitors (Article 24), Abuse of Dominant Position (Article 25) and Majority Share Ownership in

Similar Companies (Article 27).

An act is classified as a violation of the Rule of Reason if it is found to have a prohibited anti-

competitive effect. Thus, evidence is necessary for such a violation of law. There are 18 Rule of Rea-

son violations under the Anti-Monopoly Law. These are Oligopoly (Article 4), Price Discount (Article

7), Agreement to Re-supply at Lower Price (Article 8), Division of Territory (Article 9), Cartel (Arti-

cle 11), Trust (Article 12), Oligopsony (Article 13), Vertical Integration (Article 14), Agreement with

Foreign Parties (Article 16), Monopoly (Article 17), Monopsony (Article 18), Market Control (Article

19), Predatory Pricing (Article 20), Fraud in Production Costs (Article 21), Tender Conspiracy (Arti-

cle 22), Conspiracy to Obtain Classified Information of Competitors (Article 23), Interlocking or

Double Positions (Article 26), and Mergers, Dissolutions and Acquisitions (Article 28).

Violations of the Anti-Monopoly Law may result in administrative and criminal sanctions.

E. Money Laundering

Main Relevant Law:

• Law No. 8 of 2010, dated October 22, 2010 regarding Money Laundering (“Anti-

Money Laundering Law”)

Under the Anti-Money Laundering Law, the following constitute criminal acts:

1. placing, transferring, expending, paying, granting, depositing, carrying overseas,

changing, exchanging to other currency or commercial papers, or any other acts involving

assets8 known or which should have been reasonably known by the actor to constitute the

results of criminal acts9 with the purpose to hide or conceal the origin of such assets;

2. hiding or concealing the origin, source, location, allotment, transfer rights or true

ownership of assets known or which should have been reasonably known by the actor to

constitute the results of criminal acts; and

3. receiving or controlling the placement, transfer, payment, grant, donation, deposit,

exchange or use of assets known or which should have been reasonably known by the actor

to constitute the results of criminal acts.

A company will be subject to sanctions under the Anti-Money Laundering Law if one of the acts of

money laundering stipulated above is: (i) committed or ordered by a person in charge of the com-

pany10; (ii) committed to meet the purposes and objectives of the company; (iii) committed in accor-

dance with the duties and functions of the actor or the person who ordered such acts; or (iv) commit-

ted for the company’s benefit.

For such violations, the company may be subject to a maximum fine of 100 billion rupiah (approxi-

mately US$7,905,000 at current exchange rates) and additional sanctions, including revocation of its

business license and dissolution of the business. To help prevent criminal acts of money laundering,

the Anti-Money Laundering Law requires financial service providers11 to report certain financial

transactions to the Centre for Financial Transactions Reporting and Analysis (Pusat Pelaporan dan

Analisis Transaksi Keuangan or “PPATK”). Failing to comply with this obligation will result in the

financial service provider being subject to administrative sanctions.

F. Data Protection

8 This includes assets generated from the criminal acts committed in the jurisdiction of the Republic of Indonesia, or outside the jurisdiction of the Republic of Indonesia if said criminal acts also constitute criminal acts under Indonesian law. 9 Such criminal acts are: corruption, bribery, the sale or distribution of narcotics or psychotropics, worker smuggling, migrant smuggling, criminal acts in the banking sector, capital markets sector, insurance sector, customs sector, excise sector, taxation sector, for-estry sector, environmental sector and maritime affairs and fisheries sector, human trafficking, illegal weapons trade, terrorism, kidnapping, theft, embezzlement, fraud, banknote counterfeiting, gambling, prostitution or other criminal acts subject to imprisonment of 4 (four) years or more, committed inside or outside the territory of the Republic of Indonesia and such criminal acts are deemed criminal acts according to Indonesian law.

10 Any person having the power or authority to set the company’s policies or having the authority to implement the company’s policy without having to obtain authorization from his or her superior. 11 Any individual or corporation formally or informally providing services in the financial sector or other services related to finance, such as banks and organizers of payment instruments using cards, is categorized as a financial service provider.

Main Relevant Laws and Regulations:

• 1945 Constitution

• Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata)

• Indonesian Criminal Code (Kitab Undang-Undang Hukum Pidana)

• Indonesian Criminal Procedure (Kitab Undang-Undang Hukum Acara Pidana)

• Law No. 39 of 1999, dated September 23, 1999 regarding Human Rights (“Human

Rights Law”)

• Law No. 11 of 2008, dated April 21, 2008 regarding Electronic Information and

Transactions (“ITE Law”)

• Law No. 36 of 2009, dated October 13, 2009 regarding Health (“Health Law”)

• Government Regulation No. 82 of 2012, dated October 12, 2012 regarding the Im-

plementation of Electronic Systems and Transactions

Data privacy concerns exist wherever personal data is collected or stored. The Indonesian Govern-

ment generally provides for the protection of its citizens’ data in the 1945 Constitution. In reference to

Indonesia’s commitment to data protection, the Human Rights Law broadly provides that each indi-

vidual has the right to privacy. Pursuant to Article 21 of the Human Rights Law, each individual has

the right to privacy and a person may not be the subject of an investigation without his approval.

Thus, collecting the personal data of a customer or employee requires his prior consent.

Article 32 of the Human Rights Law further provides that the freedom and secrecy of communications

by letter or any electronic media may not be disturbed or interrupted except upon the instruction of a

judge or other lawful authority.

In addition to the 1945 Constitution and the Human Rights Law, Indonesia has enacted laws relating

to data protection in a number of specific areas, including the following:

1. Electronic Transactions: The ITE Law prohibits the use of any personal data transmit-

ted through electronic media without the consent of the relevant person. Personal data falls under

protected privacy rights. Such rights are: (i) the right to enjoy personal life and be free from any inva-

sion of privacy; (ii) the right to communicate with other persons without surveillance; and (iii) the

right to control access to information relating to one’s personal life.

Without the proper clearance and permission, changing, adding, reducing, transmitting, destroying,

eliminating, transferring or hiding electronic information and/or electronic documents owned by an-

other person or owned by the public is prohibited. Failure to comply with this provision can lead to up

to 10 years’ imprisonment and a maximum fine of 10 billion rupiah (approximately US$790,500 at

current exchange rates). Additionally, should there be any evidence that the disclosure of personal

data was intended to defame a person, the individual or company responsible for said disclosure could

be charged with defamation under Article 310 of the Indonesian Criminal Code and subject to impris-

onment and a fine.

2. Indonesian Criminal Procedure: While Indonesian Criminal Procedure generally re-

spects civil rights, there is an exception involving data protection in the area of criminal law. Indone-

sian Criminal Procedure authorizes the police to open personal mail delivered through the post office

or electronic media with a court order. However, the police are required to keep confidential the con-

tents of mail and other lawfully intercepted communications except as used as evidence in criminal

proceedings.

3. Health Sector: The Health Law provides for a degree of data protection and privacy.

Under the Health Law, personal health details can only be disclosed under certain conditions, includ-

ing upon obtaining the consent of the person concerned.

Companies are well advised to seek the consent of customers and employees for the collection, reten-

tion, disclosure, use and transmittal of any personal data through private agreements that are made

contractually between the parties involved. There are no provisions preventing the making of such

private agreements. These agreements can regulate the collection, treatment and retention of personal

data and are covered by the principle of freedom of contract under the Indonesian Civil Code.

G. Product Safety

Main Relevant Laws and Regulations:

• Law No. 8 of 1999, dated April 20, 1999 regarding Consumer Protection (“Consumer

Protection Law”)

• Minister of Trade Regulation No. 67/M-DAG/PER/11/2013, dated November 26,

2013 regarding the Requirement to Affix Labels in the Indonesian Language on Goods, as

amended by Minister of Trade Regulation No. 10/M-DAG/PER/1/2014, dated January 30,

2014 (“Language Label Regulation”)

Consumers have the right to comfort, safety and security when consuming goods and/or using the

services of any business actor. To ensure these consumer rights, business actors (manufacturers or

importers) must provide accurate, clear and honest information regarding the condition and warranty

of their goods and/or services, and provide an explanation regarding the use, repair and maintenance

of goods. Business actors must also guarantee that the quality of their goods and/or services meet

applicable standards. If consumers suffer any losses from the consumption or use of goods and/or

services, business actors must compensate them. Such compensation may be through cash refunds or

the replacement of goods and/or services of the same type or value, or through providing them with

health care and/or compensation in accordance with the prevailing laws and regulations.

In addition to the above, the Consumer Protection Law requires business actors to provide a descrip-

tion of goods in the Indonesian language that contains the information required by law and to provide

information and/or directions on the use of such goods, also in the Indonesian language. Failure to

meet these requirements may result in the relevant business actor being imprisoned for up to five

years and fined up to 2 billion rupiah (approximately US$158,100 at current exchange rates). These

requirements are further detailed in the Language Label Regulation.

Manufacturers and importers of certain goods (for example, electronics and telecommunication prod-

ucts) are required to affix an Indonesian-language label to the goods they manufacture or import for

sale in Indonesia. The label must provide information on the goods and the identities of the manufac-

turer and importer. It must also provide consumer and environmental health and safety information,

including the proper method of use and hazard symbols and/or warnings. Manufacturers and import-

ers must show they have met the labelling requirements of the Language Label Regulation by obtain-

ing a Certificate of Affixing Label in the Indonesian Language (Surat Keterangan Pencantuman La-

bel Dalam Bahasa Indonesia or “SKPBLI”) from the Ministry of Trade.

Manufacturers or importers that do not meet the labelling requirements under the above regulation

will be required to recall their goods from the Indonesian market. The sanctions provided for viola-

tions of the Consumer Protection Law include imprisonment and fines, and may be applied to manu-

facturers and importers that fail to comply with the labelling requirements of the Language Label

Regulation.

H. Environmental Law

Main Relevant Laws and Regulations:

• Law No. 32 of 2009, dated October 3, 2009 regarding Environmental Protection and

Management (“Environmental Law”)

• Government Regulation No. 27 of 2012 regarding Environment Licenses

• Government Regulation No. 82 of 2001, dated December 14, 2001 regarding Man-

agement of Water Quality and Control of Water Contamination

• Government Regulation No. 7 of 2001, dated November 26, 2001 regarding Man-

agement of Hazardous and Toxic Waste

• Minister of Environment Regulation No. 3 of 2013, dated February 28, 2013 regard-

ing Environmental Audits

• Minister of Environment Regulation No. 2 of 2013, dated February 22, 2013 regard-

ing Guidelines on the Imposition of Administrative Sanctions in Environmental Protection

and Management

• Minister of Environment Regulation No. 5 of 2012, dated April 12, 2012 regarding

Types of Business Plans and/or Activities which Must Obtain an Environmental Impact

Analysis

Environmental compliance in Indonesia is implemented mostly through licensing, permits and

reporting to the authorized government authority, the Ministry of Environment (“MOE”). The MOE is

responsible for the legislation, and overall implementation, of environmental measures, including the

stipulation of environmental quality standards.

Essentially, the Environmental Law obligates business entities to manage waste and hazardous and

toxic substances so as not to exceed stipulated environmental quality standards. Environmental

approval must be obtained for certain types of projects prior to the issuance of any business license for

such project. Failure to comply with environmental regulations may result in the suspension or

cancellation of the business or operating license of a company.

Of particular note is the “strict liability principle” of the Environmenal Law. This principle means that

any party responsible for carrying out activities that have a major impact on the environment due to

their use and/or production of hazardous and toxic materials will be strictly responsible for any envi-

ronmental damage that results and obligated to pay compensation directly and immediately at the time

the pollution and/or environmental damage occurs. This means that “fault” does not have to be proved

by the prosecutor as the basis for payments for damages.

I. Labour Law

Main Relevant Laws and Regulations:

• Law No. 6 of 2011, dated May 5, 2011 regarding Immigration (“Immigration Law”)

• Law No. 2 of 2004, dated January 14, 2004 regarding Industrial Relations Dispute Settlement,

as amended by Government Regulation in Lieu of Law No. 1 of 2005 dated January 13, 2005 regard-

ing the Postponement of Law No. 2 of 2004 on Industrial Relations Dispute Settlement

• Law No. 13 of 2003, dated March 25, 2003 regarding Labour (“Labour Law”), as amended by

Constitutional Court Decision No. 012/PUU-I/2003, dated October 2, 2004

• Law No. 21 of 2000, dated August 4, 2000 regarding Labour Unions

• Law No. 1 of 1970, dated January 12, 1970 regarding the Implementation of Management

Systems for Work Health and Safety

• Government Regulation No. 31 of 2013 regarding the Implementing Regulation of Law No. 6

of 2011, dated April 16, 2013 regarding Immigration

• Minister of Manpower and Transmigration Regulation No. 19 of 2012, dated November 19,

2012 regarding Conditions for Outsourcing Work to Other Companies

• Minister of Manpower and Transmigration Regulation No. 50 of 2012, dated April 12, 2012

regarding the Implementation of Management Systems for Work Health and Safety

Matters such as minimum wages, work hours, labour unions, employees’ annual leave, pension pro-

grams and severance pay are governed by Indonesian labour laws and regulations. The use of foreign

labour by Indonesian companies is subject to additional compliance requirements. Providing and ar-

ranging the appropriate documentation is the responsibility of the employer of expatriate workers. In

addition, workplace health and safety issues are governed by separate regulations. Recently, the Min-

ister of Manpower and Transmigration (“MOMT”) passed a regulation that imposes various condi-

tions on the outsourcing and sub-contracting of work to third parties.

J. Trade Law

Main Relevant Laws and Regulations:

• Law No. 7 of 2014, dated March 11, 2014 regarding Trade (“Trade Law”)

• Minister of Trade Regulation No.36/M-DAG/PER/9/2007, dated September 4, 2007, as

amended by Minister of Trade Regulation No. 39/M-DAG/PER/12/2011, dated December 9,

2011 regarding the Issuance of Trading Business Licenses

• Minister of Trade Regulation No. 11/M-DAG/PER/3/2006, dated March 29, 2006 regarding

Provisions and Procedures for the Issuance of a Registration Certificate for Agents or Dis-

tributors of Goods and/or Services

Every business actor in Indonesia that intends to engage in any trade or trade-related activity must

obtain the necessary licenses from the Ministry of Trade (“MOT”). Such licenses, as stipulated in the

Trade Law, include a business license and a special license. In addition, for some trade-related activi-

ties businesses are required to register with, and obtain an acknowledgement or approval from, the

MOT. This requirement may be waived if the business is classified as a micro-business.

The Trade Law also regulates e-commerce. It requires that anyone providing goods and/or services

electronically submit information to the relevant authority. This information includes: (i) proof of

status as a producer or distributor, (ii) technical details of the goods and/or services being traded, (iii)

the price of such goods and/or services and (iv) the methods of payment and delivery of the goods

and/or services. Failure to comply with these requirements will result in the loss of the business li-

cense.

Product registration is also required by the Trade Law. The Trade Law requires that any manufacturer

or importer that produces or distributes products related to health, safety, security or the environment

register its products with the MOT before distributing such products in the Indonesian market. The

MOT will issue a registration number for these products which must be included on each product that

is distributed in the Indonesian market. This requirement does not apply to products that have previ-

ously been registered under other regulations, i.e., (i) household products, (ii) foods and beverages,

(iii) medicines, (iv) cosmetics, (v) medical equipment and (vi) goods that have already been subject to

import duty.

As discussed in Point G regarding Product Safety, any goods distributed in Indonesia must contain

Indonesian-language labels that set out the products’ specifications, names of the distributors and

manufacturers, instructions for use and other relevant information.

K. Tax Law

Main Relevant Laws:

• Law No. 6 of 1983, dated December 31, 1983 regarding General Taxation Provisions and

Procedures, as last amended by Law No. 16 of 2009, dated March 25, 2009 (“General Taxation Provi-

sions and Procedural Law”)

• Law No. 7 of 1983, dated December 31, 1983 regarding Income Tax, as last amended by Law

No. 36 of 2008 September 23, 2008 (“Income Tax Law”)

• Law No. 8 of 1983, dated December 31, 1983 regarding Value-Added Tax for Goods and

Services and Sales Tax for Luxury Goods, as last amended by Law No. 42 of 2009, dated October 15,

2009 (“Value-Added Law”)

There are literally hundreds of laws and regulations that have been issued pursuant to the above laws

and their predecessors. Due to their great number, they must be reviewed in connection with a particu-

lar tax issue.

An important issue for many foreign investors in Indonesia regards how payments made by an Indo-

nesian subsidiary to its foreign parent company are taxed. Generally, any payment made by an Indo-

nesian party to a foreign party is taxed at a flat rate of 20% (Article 26 of the Income Tax Law). This

flat rate is subject to certain reductions if the recipient resides in a country which has a tax treaty with

Indonesia. Indonesia currently has 60 tax treaties with partner countries.

In general, companies in Indonesia are subject to various taxes such as corporate income tax, with-

holding tax on dividends, interest, royalties and employee payrolls, branch remittances and VAT on

the provision of goods and services. Individuals in Indonesia are subject to a steeply progressive in-

come tax rate that ranges from 5% to 30%. In contrast, the corporate income tax rate in Indonesia is a

flat rate of 25% (Article 17 of the Income Tax Law). Any provision of goods and services is subject to

a VAT of a flat rate of 10%. Companies that possess land and buildings are required to pay annual

land and building tax.

There are several administrative requirements that taxpayers in Indonesia must fulfil. First and fore-

most, they must obtain a Tax Identification Number (Nomor Pojok Wajib Pajak or “NPWP”). Any

taxpayer, whether corporate or individual, that fails to register for an NPWP will be subject to impris-

onment for up to six years and a fine of up to four times the unpaid tax (Article 39 of the General

Taxation Provisions and Procedures Law). Taxpayers are also required to submit a tax return. De-

pending on the relevant laws and regulations, the tax return must be submitted annually or periodi-

cally. The corporate annual tax return, for example, must be submitted no later than by the end of the

fourth month after the relevant tax year has ended. Thus, if a company’s tax year commences in Janu-

ary and ends in December, it must submit its corporate annual tax return by the end of April of the

following year.

The aforementioned tax laws and regulations are the most common regulations to which any foreign

investment company must adhere. There are also several regulations that apply to certain sectors and

with which compliance is also required. These regulations include Government Regulation No. 73 of

1992, dated October 30, 1992 regarding Insurance Business Conduct, as amended by Government

Regulation No. 39 of 2008, dated May 19, 2008, which stipulates that insurance companies must con-

duct their business based on the principle of good corporate governance. In the banking sector, a good

corporate governance requirement is set forth in Bank Indonesia Regulation No. 8/4/2006, dated

January 30, 2006 regarding Good Corporate Governance for Banks, as amended by Bank Indonesia

Regulation No. 8/14/PBI/2006 dated October 5, 2006 (“BI Reg. No. 8/2006”). BI Reg. No. 8/2006

expressly requires banks to prepare an annual report detailing how they have implemented good cor-

porate governance and provides sanctions for violations. In the capital markets sector, good corporate

governance requirements include the obligation of public companies to have an independent commis-

sioner, an audit committee and a corporate secretary within their organisation.

III. Liability of Businesses, Management and Shareholders for Non-compliance Occurring

during the Course of Business

The types of sanctions imposed for non-compliance with Indonesian law are stipulated within the

relevant laws and regulations alleged to have been violated. Indonesian laws and regulations generally

provide for two types of liability, i.e., (i) administrative liability, which results in administrative sanc-

tions, such as the revocation of a business license or payment of fines to government agencies, and (ii)

criminal liability, which results in imprisonment and/or payment of fines to the State Treasury.

Although most of the laws and regulations discussed above do not result in parties found to be in non-

compliance being held civilly liable, civil liability does in fact exist for such offences. Civil liability

may arise if a party has suffered losses due to another party’s non-compliance with a law or regula-

tion.

A. Liability of the Business

1. Criminal Liability:

As noted, a company may be held liable under Indonesian criminal, administrative and civil law. Un-

der several Indonesian laws and regulations, a company may be subject to criminal sanctions. Such

laws and regulations include the Anti-Corruption Law, the Anti-Money Laundering Law and the En-

vironmental Law. Although such laws and regulations provide that companies may be subject to

criminal sanctions, in practice criminal prosecutions have been rare.12

2. Administrative Liability:

A company which is held administratively liable is given an administrative sanction for non-

compliance with a legal or regulatory requirement. Such sanctions will impede or stop its business 12 One example of a company being held criminally liable is the case of PT Giri Jaladhi Wana. This company was found to have violated the Anti-Corruption Law. In Decision No. 04/PID.SUS/2011/PT. BJM, dated August 10, 2011, the Court of Appeals confirmed a District Court decision that imposed criminal sanctions on PT Giri Jaladhi Wana in the form of a fine in the amount of Rp1,317,782,129 (approximately US$104,170 at current exchange rates).

operations and include suspension or revocation of a business license, an order to withdraw goods

from the market or prohibition from participating in tenders.

Under most laws and regulations, companies receive warning letters from the relevant government

authorities prior to having their licenses revoked. If the company complies with the warning letter, no

further action is normally taken.

3. Civil Liability:

Civil liability in Indonesia is recognized under the Indonesian Civil Code. Parties held civilly liable

must compensate a damaged party for their losses. An Indonesian court must determine liability, cau-

sality and loss.

B. Liability of Management

Under the Company Law, the BOD manages the company in accordance with the company’s pur-

poses and objectives. In performing their managerial duties, members of the BOD are jointly and sev-

erally empowered to represent the company in its external relations unless specifically restricted by

the company’s AOA or in the event of a conflict of interest. Subject to the terms of the company’s

AOA, the BOD may manage the company’s assets, bind the company contractually and otherwise

generally represent the company.

In Indonesia, directors may grant a written power of attorney to one or more employees or to another

person, which allows said person to act for and on behalf of the company in undertaking certain legal

actions. However, directors remain legally responsible for all actions taken by those appointed to act

for and on behalf of the company. Thus, if an employee or third party violates the law while carrying

out activities which the employee or third party had the authority to undertake due to a power of at-

torney received from the directors, the relevant directors will be liable for the actions of the employee

or third party. To limit such exposure, powers of attorney are normally specific in nature. If a general

power of attorney is given by the BOD it may be considered an unlawful delegation of authority.

Because the management of the company represents the company both legally and in its day-to-day

operations, directors can be sued or prosecuted for non-compliance with relevant laws and regula-

tions. One such example involves the Anti-Money Laundering Law. Article 6 of the Anti-Money

Laundering Law stipulates that if a criminal act of money laundering is committed by a company,

criminal sanctions will be imposed on the company and/or the persons in charge of the company. The

Anti-Money Laundering Law further provides that in the event that assets of the company are insuffi-

cient to pay any fine imposed, members of the BOD will be jointly liable for the outstanding amount.

Similarly, the Anti-Corruption Law stipulates that criminal sanctions may be imposed on the man-

agement of a company found to have committed a criminal act of corruption. Specifically, Article 20

of the Anti-Corruption Law states that if a criminal act of corruption is committed by or on behalf of a

company, the company and/or its management may be subject to criminal sanctions. The term “man-

agement” refers to the organs of a company that manage the company in accordance with the com-

pany’s AOA, and that have the authority to determine company policies. Examples of management

include the BOD and BOC.

Under the Indonesian Company Law, each member of the BOD is fully and personally liable for

losses suffered by the company if the member concerned was negligent in carrying out his managerial

duties. However, members of the BOD will not be held personally liable if they can prove that:

(i) the losses were not the result of their negligence;

(ii) they managed the company prudently, in good faith and in the interests of the company;

(iii) the losses were not due to conflicts of interests which affected their managerial responsibili-

ties; and

(iv) they took action to prevent said losses from occurring and continuing.

Shareholders that hold at least 1/10 (one-tenth) of the total voting shares may file a claim on behalf of

the company with the District Court against members of the BOD who, due to their negligence, have

caused losses to the company. The BOC has the right to file a claim on behalf of the company against

members of the BOD for the same.

C. Liability of Shareholders

In Indonesia, shareholders may only be held liable for violations of the Company Law. In general, the

Company Law provides that shareholders are not responsible for any commitments made by the com-

pany, nor for losses of the company that exceed the nominal value of the shares subscribed by each

individually. Thus, the liability of shareholders is limited.

However, shareholders may be held personally liable to third parties for commitments made on behalf

of the company if one of the following applies:

(i) the requirements of the company to become a legal entity have not been or were not fulfilled

when the act occurred;

(ii) the relevant shareholders, either directly or indirectly, acted in bad faith and took advantage

of the company for their personal interests;

(iii) the relevant shareholders were involved in unlawful acts committed by the company; or

(iv) the relevant shareholders, either directly or indirectly, unlawfully used the company’s assets,

resulting in the company’s assets being insufficient to settle the company’s debts.

In addition, if for any reason a shareholder becomes the sole shareholder of the company for more

than six months, said shareholder becomes personally liable for all of the company’s commitments or

losses that occur after the six-month period has ended.

IV. Defence by Demonstrating Adequate Compliance-Management Activities

Under Indonesian law, there is no defence that can be used by a company, its shareholders or BOD to

release them from liability for non-compliance with corporate governance legal requirements. Fur-

thermore, the establishment of internal measures to prevent the occurrence of non-compliance cannot

eliminate or reduce a company’s sanctions for non-compliance. Indonesian law prescribes minimum

and maximum sanctions that may be imposed by the courts. Such minimum and maximum sanctions

serve as guidance for the courts when deciding what sanctions to impose. The courts may consider the

evidence and facts presented during court proceedings when determining what sanctions to levy.

Under the Indonesian Civil Code, courts have discretion to determine the amount of compensation to

be awarded to the plaintiff once the defendant has been held liable. Courts are not allowed to order the

payment of more compensation than is sought by the plaintiff, nor can the courts grant relief not re-

quested by the plaintiff.

Although there is no certain bar to measure the adequacy of company compliance in Indonesia, in

practice Indonesian companies will set forth the limited liability of their shareholders, BOD and BOC

in their AOA. There are several standard articles that provide the authorities and powers vested in

members of the BOD and BOC in Indonesian companies. These standard articles can be amended by

the companies to fit their individual needs and wants, e.g., setting a ceiling in terms of the amount of

company spending the BOD can approve, with BOC approval required to breach such ceiling. Other

clauses can be inserted to limit the authorities and powers of the BOD and BOC. As long as the BOD

and BOC comply with such limitation in the AOA, they can build a defence that they cannot be held

liable for certain actions by the company. Below is a standard AOA table of contents used by Indone-

sian companies:

As for the corporate governance policy of the company itself, as we briefly discussed above, the Gen-

eral Guidance on Corporate Governance provides guidance for companies in implementing good cor-

porate governance principles in Indonesia. One such guidance under the General Guidance on Corpo-

rate Governance is the minimum matters to be covered in a company’s Good Corporate Guidance.

[This part is intentionally left blank]

1. Name and Domicile 15. Meeting of the Board of Commissioners

2. Duration of the Company 16. Work Plan, Financial Year and Accounts

3. Purposes and Objectives 17. General Meetings of Shareholders

4. Capital 18. Annual General Meeting of Shareholders

5. Shares 19. Extraordinary General Meeting of Shareholders

6. Share Certificates 20. Place and Notice of General Meeting of

Shareholders

7. Duplicate Share Certificates 21. Chairperson and Minutes of the General

Meeting of Shareholders

8. Register of Shareholders and Special Register 21. Quorum, Voting Rights and Resolutions

9. Transfer of Rights of Shares 23. Appropriation of Profits

10. Board of Directors 24. Use of Reserve Fund

11. Duties and Powers of the Board of Directors 25. Amendments to the Articles of Association

12. Meeting of the Board of Directors 26. Merger, Consolidation, Acquisition and

Demerger

13. Board of Commissioners 27. Dissolution and Liquidation

14. Duties and Powers of the Board of Commissioners 28. Concluding Provisions

V. Treatment of Non-compliance by the Authorities

The sanctions that the Indonesian authorities may impose for non-compliance depend on the laws and

regulations alleged to have been violated by the company and/or its management. For example, if a

company and/or its management are found to have committed a criminal act of corruption under the

Anti-Corruption Law, the Anti-Corruption Law will determine the range of sanctions that may be

imposed by the court. The imposition of these sanctions does not mean the administrative agency

concerned may not also impose its own sanctions.

Government agencies often have their own policies to determine the sanctions that may be imposed

for non-compliance. For example, the Ministry of Trade’s regulation on Indonesian-language label-

ling requirements stipulates that companies that violate the regulation may be prohibited from further

trading in goods. The regulation does not specify the procedures involved in levying such a sanction,

nor the steps for prohibiting the violator from trading goods in the market. Such procedures and steps

may be regulated internally by the Ministry of Trade under its internal written policy.

With regard to civil sanctions, as discussed above, such sanctions will be determined based on the

court’s decision following the filing of a civil lawsuit by a party that feels it has suffered losses due to

the actions of the party being sued.

To implement Good Corporate Governance (“GCG”), each company shall prepare its own GCG policy with reference to the General Guidance on Corporate Governance and other sec-toral guidance, if any. The CGC policy shall at least consist of the following:

1.1 Vision, mission and values of the company;

1.2. The position and function of the General Meeting of the Shareholders, BOC, BOD, supporting committee for the BOC and internal auditor;

1.3. Policies that ensure the implementation of GCG by every organ of the company;

1.4. Policies that ensure accountability, effective internal controls and correct financial record keeping;

1.5 Code of conduct based on the values of the company and business etiquette;

1.6 Facilities for shareholders and other stakeholders to access information; and

1.7. Policies that perfect the company’s regulations in support of GCG.

Situations that may trigger the intervention of Indonesian authorities include reports from another

party or from the non-compliant party itself, media reports, market conditions and the filing of a law-

suit against the non-compliant party.

In addition to the police, the Attorney General’s Office and administrative investigators in some min-

istries, several government agencies have been established to investigate and, in some cases, examine,

hear and decide cases in specific fields. These fields are set out in the following:

A. Corruption:

The Commission for the Eradication of Criminal Acts of Corruption (Komisi Pemberantasan Korupsi

or “KPK”) was created by Law No. 30 of 2002 dated December 27, 2002 to deal with criminal acts of

corruption. As mandated by the Anti-Corruption Law, the main goal of the KPK is to eradicate cor-

ruption in the government. The duties of the KPK include investigating and prosecuting criminal acts

of corruption.

In performing its investigative and prosecutorial duties, the KPK may investigate and prosecute

criminal acts of corruption that:

(i) are committed by government officials or persons who work in law enforcement;

(ii) are matters of public interest; and/or

(iii) result in losses to the state of at least 1 billion rupiah (approximately US$79,050 at

current exchange rates).

As indicated in the KPK’s 2013 annual report, the KPK has handled and processed 81 cases at the

preliminary investigation stage, investigated 102 cases and prosecuted 73 cases, with 40 cases having

received a final and binding decision.

The Court of Criminal Acts of Corruption (Pengadilan Tindak Pidana Korupsi), established under

Law No. 46 of 2009 dated October 29, 2009, is the only court with competence to examine, hear and

decide cases involving criminal acts of corruption. This court is located in the capital of each of the

provinces in Indonesia.

Corporate practices in compliance with the Anti-Corruption Law: Many companies incorporate in their code of conduct for employees the following prohibited acts and/or restrictions in engaging with government officials: 1. Offering or giving items of value to a government official in order to influence the official. In

some companies, payment to a philanthropic entity at the request of a government official or the use of the company’s assets to support a political party or candidate are also restricted;

2. Providing incentives for a government official to ease the administrative process such as in

obtaining a visa or work order. Employees shall contact the company’s legal division before providing any incentives to ensure such action is lawful; and

3. Preparing an inaccurate financial report to hide or manipulate an invalid transaction. Some companies provide a brief explanation of the United States Foreign Corrupt Practices Act, which prohibits US companies, their subsidiaries and affiliates throughout the world to grant, offer or promise items of value to government officials with the expectation, hope or intention of influencing the decision of the government officials. In addition, companies also provide Anti-Corruption, Anti-Bribery (“ABAC”) training for employees, which covers not only the Indonesian Anti-Corruption Law but also ABAC rules prevailing in other countries such as the United States and the United Kingdom. Further, they may also have an ABAC clause to be included in any agreement they enter into with any party.

B. Antitrust Law:

The KPPU is an independent body established to supervise the implementation of the Anti-Monopoly

Law. The KPPU is independent from the influence and control of the government or any other parties

and reports directly to the Indonesian President. The KPPU’s duties include:

(i) receiving reports from the public and/or business actors regarding suspected monopolistic

practices and/or unfair business competition;

(ii) investigating business activities and/or the actions of business actors that may result in mo-

nopolistic practices and/or unfair business competition;

(iii) investigating suspected cases of monopolistic practices and/or unfair competition that public

or business actors report, or that is found by the KPPU itself during one of its investigations;

(iv) determining whether a business is engaged in monopolistic practices and/or unfair business

competition;

(v) determining whether losses suffered by other business actors or the public are the result of

monopolistic practices and/or unfair business competition; and

(vi) imposing administrative sanctions on business actors that violate the Anti-Monopoly Law.

One of the biggest anti-monopoly cases in Indonesia involved the Temasek Group,13 which owned

shares of two Indonesian telecommunications companies, PT Indosat Tbk. (“Indosat”) and PT Tele-

komunikasi Seluler (“Telkomsel”). This case was first investigated, heard and decided by the KPPU,

before being brought to the District Court of Central Jakarta on appeal. It was then finally decided by

the Supreme Court. The Supreme Court declared, among other things, that Temasek Group had vio-

lated Article 27(a)14 of the Anti-Monopoly Law. As a result, the Supreme Court required that Te-

masek fully divest its shares in either Telkomsel or Indosat, or in the relevant companies in Temasek

Group, until its collective ownership in Telkomsel and Indosat was less than 50%. The Supreme Court

13 Temasek Holdings, Pte. Ltd., Singapore Technologies Telemedia Pte. Ltd., STT Communications Ltd., Asia Mobile Holding Company Pte. Ltd, Asia Mobile Holdings Pte. Ltd., Indonesia Communication Limited, Indonesia Communication Pte. Ltd., Singapore Telecommunications Ltd. and Singapore Telecom Mobile Pte. Ltd. 14 A business actor is prohibited from owning a majority of shares in several similar companies conducting business activities in the same field in the same market, or establishing several companies with the same business activities in the same market if such ownership causes one business actor or a group of business actors to control over 50% of the market share for a certain type of good or service.

also imposed a fine of 15 billion rupiah (approximately US$1,185,770 at current exchange rates) for

each of the 10 Temasek-linked companies involved in the case.

Corporate practices in compliance with the Anti-Monopoly Law:

Many companies in Indonesia require their employees to observe the following matters in a work

context:

1. Requirement to obtain internal approval before communicating or meeting with a competitor.

Many companies prohibit employees to discuss or to have planned communication with a competitor

unless for a valid purpose and if such discussion or communication has been approved by the compa-

nies’ senior management or legal department. If the employee cannot determine whether discussion

on a particular topic may lead to anti-monopoly practices, the employee is encouraged to consult his

company’s legal department.

In addition, employees are prohibited to start a conversation concerning matters that may lead to pro-

hibited arrangements or agreements such as market allocation, covenant on the volume of production,

price determination, customer allocation, tenders, dumping, discount and sales conditions and other

matters relating to unfair competition. If an employee finds himself in a situation where such matters

are brought up by the competitor, the concerned employee shall cease to discuss with the competitor

and report the matter to the company’s senior management, advisor or legal department.

2. Internal reporting mechanism for conduct that may lead to violation of the Anti-Monopoly

Law.

Some companies provide a dedicated phone line (hotline) for the implementation of the companies’

code of conduct or code of ethics, where employees may, among other things, report any code of con-

duct violations that they witness concerning compliance with Anti-Monopoly Law.

In addition to a code of conduct for employees, companies may also require suppliers to comply with

the Anti-Monopoly Law. Companies may also require suppliers to comply with the companies’ guide-

lines to prevent the suppliers from engaging in monopolistic or unfair practices.

C. Consumer Protection:

The Consumer Protection Law gives the Consumer Dispute Settlement Agency (Badan Penyelesaian

Sengketa Konsumen or “BPSK”) the authority to handle and resolve disputes between business actors

and consumers. The BPSK, in particular, was established to provide an alternative to the courts for

business actors and consumers engaged in dispute resolution related to consumer protection. Consum-

ers or business actors may choose to resolve their disputes through the relevant District Court or

through the BPSK. However, the BPSK’s authority in resolving consumer protection cases is limited

to imposing administrative sanctions.

Corporate practices in compliance with the Consumer Protection Law:

1. Many companies incorporate within their code of conduct a prohibition on providing inaccu-

rate and false information in advertising their products. Any employee of the company who

finds an alleged violation of such prohibition may report to the committee of the company

that supervises the implementation of the code of conduct.

2. Companies generally have policies regarding the condition of goods that can be sold to con-

sumers. For example, some companies have a policy not to sell milk products with an expiry

date of less than three months.

3. Online shopping providers shall enable customers to inquire about the details of products

before making a purchase;

4. Online shopping providers generally ensure that the products offered on their websites are not

close to their expiry date.

VI. 4 Typical Country-Specific Mistakes Made by Foreign Investors.

In general, compliance has not been a focus of the Indonesian Government. Nonetheless, severe

criminal and administrative sanctions can be imposed for violations of certain laws and regulations. It

is safe to say that the Anti-Corruption Law and its enforcement have drawn much attention from both

the Indonesian Government and companies. The establishment of the KPK as an independent body

with the power to investigate and prosecute corruption in Indonesia plays an important role in the

enforcement of the Anti-Corruption Law.

While other laws may not be as vigorously enforced as the Anti-Corruption Law, companies must still

take their overall compliance strategy seriously or risk fines and the loss of licenses. The following

are common mistakes that foreign companies make with regard to compliance in Indonesia.

A. Anti-Corruption:

One of the characteristics of Indonesia’s anti-corruption regulations is “zero tolerance”. The Anti-

Corruption Law does not allow the practice of facilitating payments as described by the Foreign Cor-

rupt Practices Act (“FCPA”) of the United States of America. The FCPA defines a facilitating pay-

ment as a payment to a foreign official, political party or party official for routine governmental action

in order to expedite performance of duties.15 This payment is not intended to influence the outcome of

the official’s action, but it influences the time needed to conduct or not to conduct an action.16 Such

facilitating payments are excluded from anti-bribery prohibitions of the FCPA.

Under Indonesian law, any payment made to a government official, regardless of the expected out-

come of the payee, may be deemed a criminal act of corruption. It is important that foreign investment

companies have a sufficient understanding of the Indonesian legal framework in order to localize their

internal policies. In our experience, internal policies designed by the parent companies of Indonesian

foreign investment companies may be ineffective due to the unique nature of the Indonesian legal and

regulatory regime. It is important for multinational companies to evaluate their internal policies so

they reflect compliance requirements under Indonesian anti-corruption regulations.

B. The Use of Expatriate Manpower

The Indonesian Government does not prohibit the employment of foreign workers by foreign invest-

ment companies. However, said employment of foreign workers is subject to several requirements.

First and foremost, foreign employees must obtain a limited stay permit and a work permit. The proc-

ess is initiated by obtaining a Limited Stay Visa (Visa Izin Tinggal Terbatas or “VITAS”). A VITAS

is a temporary document permitting the holder to enter Indonesia for the purpose of obtaining a Lim-

ited Stay Permit (Kartu Izin Tinggal Terbatas or “KITAS”). A VITAS is thus a prerequisite visa for

obtaining a KITAS. A KITAS allows a foreigner to live in Indonesia for up to two years. After a KI-

TAS is obtained, an application for a work permit, known as an “IMTA”, can be processed and ob-

tained. There are a number of other processes and conditions that relate to this process which are be-

yond the scope of this paper.

Under the Indonesian Immigration Law, there are several types of visas that can be used for business

purposes. Such visas include a Multiple Entry Visa, a Single Entry Visa and a Visa on Arrival. Gener-

ally speaking, foreigners are permitted to enter Indonesia to investigate business and investment op-

portunities. They may attend meetings under business visas but are not permitted to work. The lack of

a precise definition of work has led to a number of difficulties and care must be taken to avoid using a

business visa to work in Indonesia.

15 Deming, Stuart H, The Foreign Corrupt Practices Act and the New International Norms, Illinois: American Bar Association, 2005, p.15. 16 Ibid

The Immigration Law stipulates that an expatriate can be imprisoned for up to 5 years and fined up to

500 million rupiah (approximately US$39,525 at current exchange rates) if he intentionally misuses or

engages in activities that are not in accordance with the purpose and objectives of his KITAS and

IMTA.

A common compliance issue arises in the use of third-party agents to obtain a VITAS, KITAS and

IMTA. Such agents help in the obtainment of the immigration and foreign employment documents

and approvals necessary for companies to employ expatriate manpower. This includes an Expatriate

Labour Utilization Plan (“RPTKA”), approval from the Ministry of Manpower and Transmigration,

visa recommendations, the IMTA and the KITAS. Third-party agents may make illicit payments to

the relevant government officials without the knowledge of the principal. Such illicit payments are

generally made to speed up the bureaucratic process. It is important that companies ensure they have

engaged a credible third-party agent. It is suggested that an anti-corruption clause be included in any

agreement signed by the company and the agent. Such clause should state that both parties must com-

ply with prevailing corruption laws and regulations, and specifically that the agent agrees not to make

any payment to a government official in the course of providing its services. While the KPK and other

governmental agencies have not been aggressive in prosecuting such cases, these provisions should

nonetheless help insulate the principal from charges of criminal corruption. The company, however,

may need to go further in order to comply with the FCPA and other foreign legislation.

C. Data Protection:

A patchwork data protection regulatory framework and enforcement issues have resulted in violations

of personal privacy being more common in Indonesia than they should be. Data protection issues in

Indonesia often relate to the use of personal data for promotional activities without the consent of the

data owner. According to news reports, the personal data of 25 million telecommunications subscrib-

ers in Indonesia was leaked in 2011. The Indonesian Consumer Foundation (Yayasan Lembaga Kon-

sumen Indonesia or “YLKI”) alleged that telecommunications operators may have been involved in

these leaks for commercial purposes. Personal data that contained telephone numbers was allegedly

traded to national banks so that the banks could market their services as elaborated in the paragraph

below.

Another common data protection issue involves customers providing a bank with their personal in-

formation when opening an account. Such data is sometimes used by other units within the bank to

solicit other business. There have been cases of banks using standard form customer contracts or

documentation used to open bank accounts which give such banks the right to use customers’ personal

information for the banks’ business purposes. The most common example of the use of personal in-

formation without the consent of the relevant individual for promotional purposes is banks’ sales staff

making telephone calls and sending text messages offering personal loans without collateral and in

some cases regarding totally unrelated services. Similar calls and text messages are also common

from insurance companies offering personal policies.

In addition to the above, websites sometimes require subscribers to approve the use or disclosure of

their personal information in order to use the website. This may be deemed a violation of Article 26 of

the ITE Law, which requires that the use of any personal information conveyed through electronic

media be based on the consent of the relevant person. Customers could potentially allege that their

rights have been violated and file a claim for damages suffered as a result of their personal informa-

tion being used without their consent.

D. Tax Compliance:

Indonesia has a “self-assessment” tax collection system that allows taxpayers to self-calculate, remit

and report taxes owed.

The self-assessment system allows taxpayers to interpret the relevant tax laws and regulations in cal-

culating their tax payments. However, their interpretations may be rejected by the Indonesian tax au-

thorities. Disputes may arise from good faith differences of opinion. However, disputes may also arise

from the misapplication of tax principles by the tax authorities, sometimes deliberately, to encourage

settlements with the tax officials concerned for their personal benefit. A number of Indonesian tax

officials and taxpayers have been prosecuted for criminal acts of corruption. Special care must be

taken to ensure that tax calculations are made in strict compliance with the law, even if this means the

taxpayer may be subject to an audit and required to litigate its tax assessments.