Kuala Lumpur, 20 September 2011

Presented by

Dr. Yunus Husein

Head of PPATK Indonesia

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PRESENTATION OVERVIEWPRESENTATION OVERVIEW

I. FATF approach and recommendation of an NPO

II. Abuse of NPOs and red flags

III.Identification red flags for NPOs’ involvement (Indonesia overview)

IV.Challenges to managing NPO sector (Indonesia experience)

3 3

FATF Approach and

Recommendation of an NPO

4 4

FATF DEFINITIONFATF DEFINITION

FATF definition of non-profit organisation (NPO):

A legal entity or organisation that primarily engages in

raising or disbursing funds for purposes such as

charitable, religious, cultural, educational, social or

fraternal purposes, or for the carrying out of other types

of “good works”.

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FATF Special Recommendation VIII

Countries should review the adequacy of laws and regulations that

relate to entities that can be abused for the financing of terrorism.

Non-profit organizations are particularly vulnerable, and countries

should ensure that they cannot be misused:

i. by terrorist organizations posing as legitimate entities;

ii. to exploit legitimate entities as conduits for terrorist financing,

including for the purpose of escaping asset freezing measures;

and

iii. to conceal or obscure the clandestine diversion of funds

intended for legitimate purposes to terrorist organizations.

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GENERAL PRINCIPLES UNDERLYING THE FATF GENERAL PRINCIPLES UNDERLYING THE FATF

APPROACHAPPROACH

It is vitally important to

preserve the integrity of the NPO sector, given the sector’s important social and economic

role.

Past and ongoing abuse of the NPO sector by terrorists and other

criminals demonstrates the need for protective

measures.

Legitimate charitable activities should not be

disrupted or discouraged.

The approach taken should be targeted and

flexible.

Co-operative relationships should be developed amongst the public, private and NPO

sector.

Effective action should be taken against NPOs that are exploited by or

actively support terrorists.

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Abuse of NPOs

and Red Flags

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NPOs – variety of forms and characteristics

Forms : depending on the jurisdiction and legal system

• Association

• Foundation

• Informal financing networks

• Nongovernmental organizations (NGOs)

• Charitable organizations

• others

Characteristics:

• A tax-exempt organization that serves the public interest

• In general, the purpose of this type of organization must

be charitable, educational, scientific, religious or literary

• Legally, a nonprofit organization is one that does not

declare a profit and instead utilizes all revenue available

after normal operating expenses in service to the public

interest

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Abuse of NPOs – methods (on ML)

Several methods and schemes involving the abuse of charities to

facilitate tax evasion, crime and money laundering:

• An organization poses as a registered charitable organization to

perpetrate a tax fraud;

• A registered charity wilfully participates in a tax evasion scheme

for the personal benefit of its organisers or directors;

• A registered charity is involved wilfully in a tax evasion scheme to

benefit the organization and the donors, without the assistance of

an intermediary;

• A registered charity is involved wilfully in a tax evasion scheme to

benefit the organization and donors with the assistance of an

intermediary;

• A charity is abused unknowingly by a taxpayer or a third party,

such as unscrupulous tax return preparer who prepared and

presented false charitable receipts;

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Abuse of NPOs – methods (on ML)

Several methods and schemes involving the abuse of charities to

facilitate tax evasion, crime and money laundering:

• Tax sheltered donations as part of a tax evasion scheme;

• Salaried employees concealed as volunteer workers;

• An organization registered as exempted from the VAT that is

performing taxed activities;

• The issuance of receipts for payments that are not true

donations;

• The issuance of receipts to individuals working for the

beneficiary organization;

• Criminals use names of legitimate organizations to collect money;

• Misuse of charity funds by charities; and

• Manipulation of the values of donated assets.

Source: OECD Report on Abuse of Charities for Money Laundering and Tax Evasion

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Abuse of NPOs – methods (on TF)

Possible fund flows through NPOs:

• The process begins with people from all over the world donating

funds to charity organizations.

• These organizations are able to collect large amounts of funding

because they are well recognized through advertising and

maintaining a high profile in the public domain.

• Some times these organizations may directly supply funding to

particular projects, but often they will pass on the funding to

lesser-known charity organizations. This is an efficient approach

enabling the prominent charity organizations to focus on the

collection of funds, leaving the lesser-known charity to focus on

the expenditure of the funds.

Source: APG Typologies WG Report on Abuse of NPOs

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Abuse of NPOs – methods (on TF)

Possible fund flows through NPOs:

• The lesser-known charities often focus on the distribution of the

funds. They will establish projects, such as the provision of

hospitals, schools, food and health supplies, housing and transport

and roads. It is expected that a large proportion of the funds by

most charities be spent on these projects in order to maintain a

good public profile. The remaining funds may then be sent on to

more obscure charities to support other projects.

• The more obscure charities will spend some of the funding that

they receive on organized projects that are in the public arena.

The remaining funds go to unidentified purposes. Due to the lack

of reporting requirements a charity or non-profit organization can

spend the funding in ways that are virtually untraceable by

authorities.

Source: APG Typologies WG Report on Abuse of NPOs

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Identification Red Flags

for NPOs’ involvement

(Indonesia overview)

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Type of Reports Filed to INTRAC/PPATK (Indonesian FIU)

Suspicious Transaction Reports

(STRs)

Cash Transaction Reports

(CTRs)

Cross Border Cash Carrying

Reports (CBCC)

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Reporting PartiesReporting Parties

•• FINANCIALFINANCIAL SERVICESERVICE PROVIDERSPROVIDERS::

Bank,Bank, FinancingFinancing Company,Company, InsuranceInsurance CompanyCompany andand InsuranceInsurance Broker,Broker, PensionPension Fund,Fund, SecuritiesSecurities Company,Company, InvestmentInvestment Manager,Manager, Custodian,Custodian, trustee,trustee, PostalPostal OfficeOffice providingproviding TransferTransfer Service,Service, MoneyMoney Changer,Changer, cardcard administrator,administrator, ee--money/emoney/e--walletwallet administrator,administrator, CreditCredit Cooperative,Cooperative, Mortgage/PawnMortgage/Pawn Shop,Shop, FuturesFutures CommodityCommodity Company,Company, MoneyMoney RemittanceRemittance CompanyCompany

•• PROVIDERSPROVIDERS OFOF GOODSGOODS ANDAND SERVICESSERVICES ::

PropertyProperty companies/propertycompanies/property agents,agents, car/motorcyclecar/motorcycle dealers,dealers, jewelryjewelry andand preciousprecious metalmetal dealers,dealers, andand auctionauction officeoffice..

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FINANCIAL ANALYSIS AND DISSEMINATION

Purpose: to establish whether the data contained

in the reports, substantiated as necessary by the

FIU, provide a sufficient basis to secured

transmitting the file for further investigation or

for prosecution (as the case may be)

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FINANCIAL ANALYSIS

PPATK’s sources:

• Reports filed to PPATK (database)

• Additional financial/other information from financial

institutions

• Relevant information requested to domestic agencies

• Relevant information requested to other FIUs

• Public information (newspaper, internet, etc)

INTRAC uses analytical tool that would describe

the network and inter-related among certain

individuals and entities involved in particular

case.

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FINANCIAL ANALYSIS

Two types of analysis conducted by PPATK:

One, Proactive analysis (Bottom up approach)

• On a basis of STRs filed to PPATK

• On a basis of public information, which can be

in-depth examined

• Product: Report of Analysis Result

Two, Reactive or On-request analysis

(Top down approach)

• On a basis of request from domestic law

enforcement agencies and other FIUs

• Product: Information of Analysis Result

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Analysis Results

send to Investigators

CBCC reports

send to FIU

Pre-Investigation &

Investigation of

Money Laundering

Crime

STRs & CTRs

send to FIU

Making Analysis Result

(Intelligence)

Documents

searching,

Evidence,

Clarification to

Banks party

$

Financial Service

ProvidersSTRs & CTRs

Analysis Results The Investigators

1

Making

STRs & CTRs

Customs &

Excise

2

Re-active,

Analysis

Result

Clarification

Pro-active

4

3

STRs & CTRs

Clarification

5

Analysis

Results

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Detecting Red FlagsDetecting Red Flags

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Decision of the Head of PPATK No.: KEP-2/4/KEP.PPATK/2003 of 15 October 2003 concerning the Guidelines on the Identification of Suspicious Financial Transactions for Financial Dealers;

Decision of the Head of PPATK No.: KEP-13/1.02.2/PPATK/02/08 of 4 February 2008 concerning the Guidelines on the Identification of Suspicious Financial Transactions related to Financing of Terrorism for Providers of Financial Services;

Decision of the Head of PPATK No.: KEP-47/1.02./PPATK/06/2008 of 2 June 2008 concerning the Guideline on the Identification of High Risk Products, Customers, Business, and Countries for Providers of Financial Services.

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Detecting Red Flags (by FSPs)Detecting Red Flags (by FSPs)

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ImplementingImplementing CustomerCustomer duedue diligencediligence properlyproperly

ObservingObserving typologiestypologies issuedissued byby PPATKPPATK (FIU)(FIU)

ExaminingExamining AMLAML NewsNews dailydaily issuedissued byby PPATKPPATK toto

financialfinancial servicesservices providersproviders.. AMLAML newsnews consistsconsists ofof

variousvarious articles/newsarticles/news fromfrom variousvarious sourcessources collectedcollected byby

PPATK,PPATK, whichwhich maymay includeinclude particularparticular NPOsNPOs

RespondingResponding requestrequest fromfrom PPATKPPATK

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FIGURES

STRs filed to PPATK as of 31 August 2011

Reporting parties Reporting parties Number of companiesNumber of companies Number of STRNumber of STR

Banks *) 160 42,045

Non-banks:

Securities 60 1,330

Money Changer 65 26,526

Pension Funds, Investments

Manager, and Insurance

42 2,903

Financing Companies 26 3,960

Money Remittance 6 59

Sub total non-banks 199 34,778

Total 359 76,823

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Period Number of STRs filed Average per month

2001 14 2

2002 124 10

2003 280 23

2004 838 70

2005 2,055 171

2006 3,482 290

2007 5,831 486

2008 10,432 869

2009 23,520 1,960

2010 17,348 1,446

Aug 2011 12,900 1,613

Data Series STRs Received

FIGURES

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Related to No of STRs filed No. of NPO involved

Money laundering 38 33

Financing of terrorism 7 7

TOTAL 45 40

FIGURES

STRs related to NPOs

Filing those STRs related to NPOs:

Self-detection by reporting parties, either when they applying CDD

measures or based on PPATK’s AML Newsletter and other sources

Based on PPATK request

Can be related to money laundering and financing of terrorism

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Challenges to

managing NPO sector

(Indonesia experience)

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APG Mutual Evaluation 2008

Indonesia was rated NC (Non Compliant)

Factors underlying the rating:

• Indonesia has not yet undertaken a review of its domestic NPO

sector;

• No ongoing strategy to identify and mitigate significant ML&TF

risks within Indonesia’s NPO sector;

• Limited outreach to the NPO sector by NPO sector authorities to

date;

• Weak transparency and good governance available on the NPO

sector as a whole;

• Very weak implementation of the existing legal regime to require

reporting of constitutional, programmatic or financial information;

• Indonesia lacks capacity to examine those NPOs that are suspected

of either being exploited by or actively supporting terrorist

activity or terrorist organisations;

• Inadequate mechanisms for information exchange with foreign

counterparts.

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APG Mutual Evaluation 2008 (cont’d)

Recommendation to remedy the deficiencies:

• Indonesia should institute a process to improve regulation and

oversight of charities as a priority

Indonesia should:

• Conduct a coordinated review of the domestic NPO sector;

• Support the implementation of a strategy to identify and mitigate

significant TF risks within Indonesia’s NPO sector;

• Include religious NPOs in effective controls to improve good

governance and ensure AML/CFT measures are effective in the sector;

• Conduct further outreach to the NPO sector or focus on TF risks by

NPO sector authorities to date;

• Conduct outreach and implement measures to improve transparency

and good governance within the NPO sector

• Implement measures, including existing laws relating to Foundations,

to ensure that all relevant NPOs operate within the terms of their

registration and make publicly available information on their activities,

their office holders and financial activities.

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APG Mutual Evaluation 2008 (cont’d)

Indonesia should (cont.d):

• Support sector-driven regulation, including the formation and

operation of self regulatory organizations in the NPO sector.

• Remove barriers to information sharing between the DG Tax and other

NPO regulators, POLRI, PPATK and other relevant CFT agencies

• Support improved mechanisms for information exchange with foreign

counterparts;

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National StrategyNational Strategy

•• OnOn 2525 MarchMarch 20092009,, thethe NationalNational CoordinatingCoordinating CommitteeCommittee forfor thethe PreventionPrevention andand EradicationEradication ofof MoneyMoney Laundering,Laundering, chairedchaired byby thethe CoordinatingCoordinating MinisterMinister forfor Political,Political, Legal,Legal, andand SecuritySecurity AffairsAffairs hadhad agreedagreed toto includeinclude thethe HandlingHandling ofof NonNon--ProfitProfit OrganizationOrganization SectorSector ComprehensivelyComprehensively intointo NationalNational StrategyStrategy FrameworkFramework toto bebe thethe 99thth StrategyStrategy..

•• StrategyStrategy NoNo.. 99 waswas authorizedauthorized byby MinisterialMinisterial DecreeDecree ofof CoordinatingCoordinating MinisterMinister forfor Political,Political, Legal,Legal, andand SecuritySecurity AffairsAffairs NoNo :: KEPKEP -- 343343/Menko/Polhukkam//Menko/Polhukkam/0909//20092009 concerningconcerning thethe NationalNational StrategyStrategy forfor thethe PreventionPrevention andand EradicationEradication ofof MoneyMoney LaunderingLaundering andand TerroristTerrorist FinancingFinancing

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Objective of Strategy No. 9:

To ensure that the roles and contributions of NPOs as

government partners in the development process of

Indonesia can be further enhanced by promoting

good governance (transparency and accountability)

and mitigating the abuse of NPOs as target and means

of money laundering and terrorist financing.

National StrategyNational Strategy

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Indonesia NPO Domestic ReviewIndonesia NPO Domestic Review

• In terms of following-up the implementation of Strategy No. 9, PPATK along with the Ministry of Foreign Affairs have established cooperation with the United Kingdom Charity Commission (UKCC) to perform mapping activity towards the NPO Sector in Indonesia

• The collaboration has successfully established Local Assessment Team (LAT), consisted of members from 9 government-agency representatives and 7 NPO Sector representatives, formalized by the Decree Letter issued by the Head of PPATK.

• The implementing mechanism was conducted through scrutiny by using assessment tools from the UKCC to measure the effectiveness of applied regulations for NPOs and the implementation on the field.

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Content of Domestic ReviewContent of Domestic Review

The content of Domestic Review provides general picture on the size of NPO Sector in Indonesia, encountered constraints and potential problems, regulations related to NPO Sector along with their implementation effectiveness, and some recommendations for improvement.

The review of NPO Domestic Sector was divided into four stages, as follow:

Sector Survey;

Assessment to Regulatory Framework;

Key Risk Analysis and Recommendations; and

Final Report.

The execution of Domestic Review on NPO Sector and all of the stages above have been completed by the Local Assessment Team (LAT) assisted by the LAT Secretariat.

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Indonesia FigureIndonesia Figure

More than 21,700 NPOs having legal status are officially

listed

It is predicted thousands of NPO, generally located in

the districts or remote areas, have not been registered

and do not have any legal status

Regulated by the Government of Indonesia (GoI)

pursuant to 26 laws and regulations consist of 15 laws,

4 Government Regulations, and 7 Ministerial Decrees

The implementation of such laws and regulations is

conducted by 10 government institutions consist of 8

ministries and 2 ministerial-level institutions.

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Key Risk Analysis and RecommendationsKey Risk Analysis and Recommendations

• Based on the analysis of LAT, at least 8 (eight) risks were discovered that can be used as strategic issues for NPO Sector, which needs serious attention from government agencies, as follow:

1.1. There is a complexity and disharmony on NPO legislations in There is a complexity and disharmony on NPO legislations in

Indonesia that could not afford to establish an effective legal system.Indonesia that could not afford to establish an effective legal system.

Recommendation: Recommendation: The mapping of NPO legislations of Indonesia The mapping of NPO legislations of Indonesia should be done should be done comprehensively comprehensively to address the complexity of the to address the complexity of the rules.rules.

2.2. Registration and validation of NPO as legal entity has not been Registration and validation of NPO as legal entity has not been

arranged well in crossarranged well in cross--ministerial level.ministerial level.

Recommendation: Recommendation: Simplifying the registration and approval of legal Simplifying the registration and approval of legal entity.entity.

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3. Monitoring & Evaluation of the NPO as a system of supervision and sanctions have not been implemented effectively.

Recommendation: Government needs to develop a compact and effective NPO registration procedure, so as to create a synergized segregation of duties and roles involving data collection and monitoring among ministries.

4. Oversight over foreign NPOs in Indonesia has not been done

effectively, thus it creates a number of infringements that potentially can interrupt national interest.

Recommendation: Increasing the effectiveness of supervision of

overseas NPO in Indonesia. 5. NPO database has not been managed in an integrated manner Recommendation: Development of management information systems

data management for NPO.

Key Risk Analysis and RecommendationsKey Risk Analysis and Recommendations

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6. Government and NPO have not applied the principles of disclosure of information effectively.

Recommendation: Increase the effectiveness of the disclosure of information by the government and the NPO.

7. Protection and support for NPO toward independence and public accountability is still actively carried out by the government

Recommendation: Increased protection for the NPO as a strategy to minimize the abuse of NPO and increase accountability.

8. Partnership government and the NPO has not optimally.

Recommendation: The development of partnerships between government and NPO.

Key Risk Analysis and RecommendationsKey Risk Analysis and Recommendations

Thank you Terima Kasih

Jl. Ir. H. Juanda No. 35 Jakarta 10120

Indonesia

Tel: +6221-3850455; +6221-3853922

Fax: +6221-3856809; +6221-3856826

E-mail: Contact-us@ppatk.go.id

www.ppatk.go.id