Bank Indonesia (BI) deliberately deployed every means to underplay irregularities and fraud at embattled Bank Century, keeping crunch cost issues concealed in its closet, as hinted by the audit of the Supreme Audit Agency.
BPK chairman Hadi Purnomo disclosed Monday a long list of alleged violations committed by BI in deliberate attempts to keep the bank afloat regardless of its seriously deteriorating condition due to fraud and misappropriations.
“We’ve actually suspected the violations to have already existed since [late] 2004 when the bank was formed as a result of a merger between Bank CIC, Bank Pikko and Bank Danpac,” said Hadi after submitting the audit into the Bank Century bailout fiasco to lawmakers.
“In its treatment of Bank Century, BI has not embarked on a prudent approach in applying its own regulations.”
According to the audit, BI should have put the bank under special surveillance in early 2005 after its capital adequacy ratio (CAR) plunged to negative 132 percent, from the minimum requirement of 8 percent positive, due to dubious trading in securities owned by the bank and said to be worth US$203 million.
Banks under special surveillance are given up to nine months to recover from problems or risk closure.
However, the audit says, former BI officials Rusli Simandjuntak, now in prison for bribing lawmakers, and BI deputy governor Siti C. Fadjrijah refused to follow BI’s protocol on ailing banks by putting Bank Century under intensive surveillance without any time limit of recovery.
Whilst failing to act to solve the securities issue, BI also apparently gave to nod to Bank Century to attempt financial engineering to hide the risks involved, says the BPK.
These problems eventually led to Bank Century crashing triggering a controversial state-funded Rp 6.7 trillion ($705 million) bailout on Nov. 21 to help salvage Bank Century, then rebuilt as Bank Mutiara, according to the audit.
The BPK also highlighted the apparent ignoring of Bank Century’s purchase of further dubious foreign-denominated securities, interbank loans, and the irregular issue of letters of credit (L/Cs).
“Between 2005 and 2007, BI was actually aware the bank had committed a number of grave violations. But it did not impose any sanctions,” said Hadi.
The culminating and most damaging sin of omission, according to the BPK, was when BI intentionally kept most of this history of banking violations and risks to itself during the crucial meeting to decide on government approval for the bailout.
“BI did not provide factual, comprehensive and updated data to the government to help justify that the bank was worth a saving,” Hadi said.
The audit also revealed that BI had to revise to its own regulation on Nov. 14 on the channeling of its short-term liquidity support (FPJP) just to help keep Bank Century afloat in time for the bailout.
BI has revised its regulation to accommodate banks having a CAR of below 8 percent to justify central bank support, from the previous requirement of above 8 percent. At that time Bank Century was the only bank having a CAR below 8 percent.
BI spokeswoman Dyah Makhijani regretted the result of the BPK audit despite the central bank’s full cooperation in providing information.
“BI regrets that the audit has not entirely described the facts and the scope of the real problems as provided by the central bank,” said Dyah in a press statement.
She said the BPK audit had not looked thoroughly at the problem of the global crisis and its impact on the Indonesian economy which was the context for the rescue.
“The rescue of Bank Century should be seen in the context of salvaging the financial system and the economy in general which was on the verge of falling into a crisis as an impact from the global meltdown.”
“BI’s policies to declare Bank Century as a failed bank risking to pose a systemic risk was part of the central bank’s policy [and rationale]in preventing the impact of the global crisis,” she said. (bbs)
Other crucial findings
1. Around 91 percent of the Rp 6.76 trillion bailout fund was used to cover losses resulting from fraud and irregularities committed by Bank Century’s shareholders and management.
2. Around Rp 3.11 trillion of the bailout fund is used to cover losses resulting from alleged acts of shareholders Rafat Ali Rifzi and Hesham Al-Warraq from First Gulf Asia Holding.
3. Around Rp 3.06 trillion of the bailout fund is used to cover losses resulting from alleged (and proven) acts of shareholder Robert Tantular and colleagues.
4. The bailout injection worth Rp 2.88 trillion delivered after Dec. 18 was deemed not to be legally founded after lawmakers rejected the temporary law on the crisis.
5. The Deposit Insurance Corporation (LPS) allegedly revised its own protocol to engineer the channeling of additional bailout into Bank Century.
6. A withdrawal worth Rp 938.6 billion between Nov. 6 and Aug. 11 violated BI regulations on banks under special supervision.
7. Bank Century management’s decision to split a deposit owned by businessman Boedi Sampoerna worth US$42.8 million into 247 negotiable certificate deposits (NCDs) worth Rp 2 billion, using an ID card based on a Bank Century job-seeker application form, indicated a deliberate attempt to safeguard Boedi’s funds 100 percent should the authorities shut the bank for good. The government only guarantees deposits below Rp 2 billion.
8. BI and the government (Finance Ministry) had no established measurable criteria or benchmark to determine systemic impact in this case. Risk of systemic failure appears decided by subjective judgement.
9. The LPS until now has never issued an exact calculation on the financial needs of Bank Century. This is apparently contrary to LPS internal protocols which require this.
