Compliance challenges faced by foreign enterprises in Indonesia

Indonesia has always been an untapped source of potential for international businesses and investors due to its dynamic economic region, urbanisation and growing consumer population. Indonesia’s middle-class population is growing by roughly 8.5 million people per year. If this trend continues it will make Indonesia the world’s top consuming country by 2030.

This means that the country is quickly establishing itself as a prime destination for foreign entities to explore. With an increasingly competitive environment, low operating costs, cheap labour and a lot of natural resources, Indonesia has become one of Asia’s largest windows of opportunity.

Foreign companies have several options to consider when setting up a business in Indonesia. By appointing a local agent or distributor a foreign company does not need to have any presence in the country. There is also the option of setting up a representative office for initial entry or market research; however, the business might be subject to limitations such as not having the ability to conduct business transactions or receive sales payments in Indonesia.

When the business starts to grow, the company can then choose to establish a full business with the foreign direct investment status commonly referred to as Penanaman Modal Asing (PMA). Any company owning any amount of foreign shareholding is considered to be a PMA; this is the only legal company type allowed for foreign entities and it must take form as a limited liability establishment, also known as Perseroan Terbatas. It is important to note that most foreign companies need a local partner or at least a proportion of Indonesian shareholding in order to conduct business in Indonesia.

The process in setting up a PMA can be arduous, with the main concerns of the process being foreign ownership restrictions (which are determined by the Daftar Negatif Investasi (Negative Investment List)), determining minimum capital, shareholder and corporate structure, and the length of the registration process.

During these stages, a foreign company will be exposed to multiple chances of getting caught in corrupt practices or bribery. To obtain the necessary licences and KITAS (work visas), it is common that multiple cash facilitation payments will be expected to be paid to officials of the Department of Immigration to help speed up the process. These payments have no official schedule or rate and may vary, and receipts are rarely given.

Corruption runs wild in the country

Indonesia’s legal system and regulatory environment is flawed. There is a clear lack of transparency in deals, the legal system is easily manipulated and corrupt, and corruption is deeply embedded in the institutional and business culture of the Indonesian population. It is not uncommon to see acts that would usually be considered bribery or corruption go unnoticed by the authorities because in Indonesia these acts are simply not viewed as corrupt practices.

Corruption is so widespread in the country that there is always a fine balance between making a profit and sustaining financial growth while remaining compliant to the laws, both domestic and international. Large international companies and government officials are no exceptions when it comes to corrupt practices in Indonesia.

Key issue

Because corruption has such an influence on the business environment in Indonesia, simply applying a zero-tolerance compliance programme will negatively impact a business. When returning to a government office with the correct paperwork is a less-viable option than giving bribes, and paying for dinners, gifts and other forms of entertainment is part of the process during business deals or negotiations, it is difficult to implement any drastic regulations.

Selecting good local business partners is not a challenge, but having the partner comply with international law is certainly difficult. Having to comply with international regulations – like the FCPA or the UK Bribery Act – in an environment where local companies are not held accountable to the same standards creates two entirely different playing fields. Foreign companies will find it hard to compete against the local, more “immune” companies. Often, business deals fail under the pressure of foreign entities’ compliance departments due to uncovered political interests and other shady dealings.

Remediation

There is a need to enforce good corporate governance within a company. In Indonesia, setting an example through exemplary management is a vital step towards an effective compliance programme. Ensuring that leaders are acting with integrity will set an expectation that all others must do the same.

By mapping business unit activities and interactions leaders can identify high-risk areas and consider the vulnerabilities and possible holes in their system. A revised set of policies and procedures can then be implemented, such as educating the employees about the code of conduct. Regular training can also be held to communicate the importance of complying with regulations.

Conducting effective employee screening, due diligence, and vendor and social accountability auditing is crucial before doing business. In Indonesia, effective due diligence can assist in obtaining information that can be useful should the business fail due to compliance issues. Companies that are equipped with up-to-date detailed information about their partners or vendors are in a stronger position to mitigate risks than a company that deals blindly.


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The challenges are very significant for a foreign company attempting to take full advantage of the massive economic opportunities in Indonesia whilst applying effective anti-corruption and bribery policies. A robust corporate governance standard must be implemented, encouraging due diligence and the increase of transparency in business deals.

With the increasing concern and the growing realisation by the government of the necessity to combat corruption, Indonesia remains a desirable destination for foreign companies to conduct business. In order to reduce their vulnerability to compliance failures companies must be proactive when it comes to mitigating risks. A thorough risk-prevention plan will enable an effective response, recovery and resumption of business operations in case an incident occurs.

Companies must always look to minimise the potential impact – financially or reputationally – when looking to have a presence in Indonesia. The good news is that, in an era where organisations are increasingly under legal obligations towards their stakeholders, there is a growing number of companies that recognise that being compliant is a competitive advantage. International companies are always more likely to work with a company that provides corruption-free services with proven compliance credentials.

Explore how our products and services can help you manage risks and compliance. Visit at www.redflaggroup.com or email us at info@redflaggroup.com if you have any enquiries.

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