15 Jan 2019
Corruption Court Sets Important Precedent by Finding Corporation Guilty of Tender Rigging
In our ABNR Legal Update titled Anticorruption Latest: Some Encouragement for Whistleblowers and KPK Launches Its First-Ever Prosecution of a Corporation, published on 8 November 2018, we reported on the Corruption Eradication Commission (KPK)’s prosecution of publicly listed PT Nusa Konstruksi Enjiniring Tbk (“Nusa Konstruksi”) for corruption related to its participation in a number of large public-sector construction projects, and highlighted how this was the first-ever prosecution by the KPK of a corporation on corruption charges using Supreme Court Regulation No. 13/2016 on Procedures for the Handling of Corporate Crimes.
This regulation plugged what was arguably a significant weakness in Indonesian criminal law, namely, the difficulty in prosecuting corporate crime due to the fact that the colonial era Criminal Code (Kitab Undang-undang Hukum Pidana / KUHP) confined criminal liability to “persons” (orang), which was usually interpreted by the Courts as encompassing only “natural persons (human beings) rather than “legal” persons (such as corporations). As a consequence, KPK prosecutors in the past focused on bringing company officers to book rather than their companies.
The Central Jakarta Corruption Court has now handed down its verdict in the Nusa Konstruksi case (3 January 2019), finding that the company had unlawfully benefitted to the tune of IDR 240.09 billion (approx. USD 17.1 million per 9 January 2019) from rigged tenders for eight separate construction projects. Nusa Konstruksi was fined IDR 700 million (USD 49,631) and ordered to pay IDR 85.49 billion (USD 6.07 million) in restitution to the state. It was also banned from participating in government procurement contracts for six months.
The financial penalties imposed were significantly less than had been sought by the Prosecution, which had urged that Nusa Konstruksi be fined IDR 1 billion (USD 71,000) and ordered to pay IDR 188.7 billion (USD 13.4 million) in restitution.
Nusa Konstruksi appears to have escaped relatively lightly given the scale of the offences, which formed part of a massive web of corruption orchestrated by disgraced former lawmaker Muhammad Nazaruddin, who was sentenced to a total of 13 years in prison following his conviction in two separate corruption cases. However, as the Nusa Konstruksi judgment has yet to be posted on the Court’s website, we are unable to provide a detailed analysis of the Court’s considerations in determining the financial penalties imposed.
The KPK has said it is considering an appeal, particularly as regards the length of the ban on the company’s participation in government procurements. Meanwhile, Nusa Konstruksi has announced that it does not plan to appeal.
The projects affected by the rigged tenders included the construction of an infectious diseases training hospital for Udayana University in Bali, a training hospital for Mataram University in West Nusa Tenggara, a regional hospital in Sungai Dareh, West Sumatra, a specialist cardiac unit and pavilion at Adam Malik Hospital in Medan, and a tropical medicine hospital for Airlangga University in Surabaya, as well as a maritime training center in East Java and the Jakabaring Athletes Village in Palembang, South Sumatra.
The conviction of Nusa Konstruksi sets a precedent that is likely to have consequences for other construction companies in Indonesia. While the penalties imposed may appear light given that a number of hospitals were involved, meaning that public health was directly affected, the real damage will be reputational.
Such reputational damage will not just taint companies that are convicted of corruption, but will also extend to all associated with them, including their shareholders, directors and commissioners.
Given frequent reports in the media of substandard construction work, the public can be forgiven for believing that corruption continues to be a serious problem in the construction industry. Indeed, two high-profile state-owned construction companies are now also facing corruption charges. With the Nusa Konstruksi verdict in its pocket, there appears to be little doubt that the KPK will go after more construction companies in its efforts to clean up the sector.
While we have focused on the construction industry in this update, the Nusa Konstruksi decision has implications for all companies in Indonesia. Armed with Supreme Court Regulation No. 13/2016, the KPK now has the ammunition it needs to successfully bring corporate prosecutions, rather than just going after individual executives or employees, as was the case in the past.
As we pointed out in our earlier update on the Nusa Konstruksi case, companies should, at a minimum, take the following steps to mitigate risk:
(a) promote a culture of honesty, probity, transparency and good corporate governance;
(b) establish a robust compliance program (including a whistleblower scheme), applicable at all levels of the company;
(c) diligently maintain key material records and documentation;
In the light of the Nusa Konstruksi verdict, however, we would now add the following:
(d) Given the lack of clarity in the formulation of certain corruption offenses and also as regards the precise scope of “state losses” (kerugian negara), the provisions of the anticorruption legislation should be interpreted in the broadest possible sense – should there be any ambiguity as to whether a particular course of action is legal or illegal, always err on the side of caution.
(e) adopt a specific anticorruption code of conduct;
(f) establish an effective due-diligence system and carry out regular audits of company operations so as to identify corruption risks;
(g) provide anticorruption training to executives and employees at all levels.
Without firm leadership from senior executives, the above measures will not, on their own, be sufficient to prevent corruption. But at the very least they would show that the company is aware of the problem and is serious about addressing it, thus potentially allowing the company to escape prosecution for the unauthorized actions of lower level employees, or to raise a solid defense in the event that it is prosecuted.
How ABNR Can Assist
With many years’ experience assisting companies comply with Indonesia’s corporate governance and anticorruption legislation, ABNR is in an ideal position to help should you require further advice or guidance on how to steer your company clear of the hazards posed by corruption in many areas of Indonesian business. We can advise on the interpretation of the legislation; designing codes of conduct and SOPs, anticorruption training programs, whistleblower schemes and audit methodology; the conducting of audits/due diligence; and all other measures necessary to safeguard your company’s interests and those of its shareholders, directors/commissioners, and employees.