T

he Financial Services Authority (OJK) is now fully operational after the task of banking supervision was officially released by Bank Indonesia (BI) in January.

Business conglomerates in the financial-services industry are publicly known to have been the motivating factor of this new integrated supervision model.

Banks have subsidiaries operating as stockbrokers, investment managers and even insurance companies. Investment funds are channeled through banks. Bank subsidiaries are now selling insurance products linked with investment options.

The lines between sectors in the financial-services industry are less apparent, however.

So should the line between the former regulators. The OJK'€™s president director, Muliaman D. Hadad, recently confirmed that an OJK regulation was on its way to specifically guide the supervision of conglomerates.

Apart from the above, another reason for the establishment of the OJK is to provide more comprehensive supervision of the financial sector, whether in the prevention or uncovering of financial crimes.

On the prevention side, the regulator must ensure a synergy between the once-separate regulators, especially when it involves data and information exchanges.

Take, for example, the case of the financially distressed Bank Century (now renamed Bank Mutiara) in 2008. Behind the bailout controversy was a criminal case involving its affiliated company, Antaboga Deltasekuritas Indonesia (ADI).

Bank Century was used by ADI to sell the latter'€™s unregistered investment products to the bank'€™s clients, who were mostly lured by artificially high returns and their long relationships with the bank.

In fact, the money was managed more like a Ponzi scheme and its demise in 2009 burned Rp 1.4 trillion (US$114.81 million) of investors'€™ money.

In this case, the dual regulatory regime '€” the former Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) and the central bank, BI '€” was systematically incapacitated.

The exchange of information between regulators under the old regime did not run smoothly. The capital market regulator did not comprehend the operations at the bank and vice versa.

Given this limited understanding, regular compliance audits failed to detect the existence, let alone the magnitude, of the Ponzi scheme.

It is understandable that a professionally orchestrated fraud scheme is designed to avoid detection. Nevertheless, the new integrated supervisory mechanism is expected to prevent this kind of scheme in the future.

Periodic monitoring and risk analysis should take into account interaction and affiliation between
industry sectors that previously stood alone.

It will be interesting to see how the new OJK regulation deals with this issue, particularly considering the current OJK'€™s organizational structure, which maintains separate supervision for each industry/sector at its executive level.

By looking at the published structure, the supervisory function for its three major industry sectors (capital market, non-bank financial institution and banking) is separated into different executives.

While this is similar to a number of other organizations, it raises the questions as to whether the separation should be made at this level and how will the supervision be integrated in practice.

The integrated supervision model will aid criminal investigations into capital market cases. Capital market investigations often hit a brick wall when gathering evidence related to banking transactions. One of the impediments is banking secrecy.

The need of banks to maintain discretion is paramount to the banking industry, which is built on an understanding of trust that depositors'€™ personal financial data will be stored privately.

Generally, no one would want to expose his or her financial records as such information could be misused.  

The banking act does authorize specific law enforcement agencies to gain access to banking records. The procedure is actually there.

Nonetheless, existing red tape makes it inefficient for investigators to proceed, which forces them to look in other directions.

In a capital market crime investigation, the ability to access banking transactions is indispensable.

Article 90 of the Capital Market Law prohibits anyone from directly or indirectly deceiving another party in securities trading in order to make a profit or avoid a loss. Proving deception, through various means, is to fulfill one element of the crime.

Another one is to prove profit/loss as a result of the crime. To sufficiently satisfy the latter, evidence of the flow of money through the banking system is essential.

A forensic audit to accurately calculate profit/loss cannot solely rely on securities transactions without sufficient evidence in financial records.

Moreover, given that financial crimes are driven by money, financial records can be of valuable assistance in establishing and proving motive.

Another example is market manipulation (Article 92), which is conducted to create a false impression of the price/trading of securities.

It can be executed in a number of ways, such as cornering (obtaining sufficient market control over particular shares), pump and dump (artificially raising a stock'€™s price to reap profits from new investors), or marking the close (buying stock at the very end of the trading day at a significantly higher price).

These unlawful practices likely involve dozens of nominee accounts, where the money flows from one to another. In the absence of banking records, it is virtually impossible to show how the perpetrators control these accounts.

Analyzing the movement of securities in the absence of fast access to banking transactions may hinder effective law enforcement.

One of the main challenges for the integrated supervision model with regard to the enforcement of the capital market rules is to streamline access to financial records, especially if they are related to criminal allegations.

This time of transition should be used by the regulators to make the division of supervision between industries seamless.

The upcoming OJK rules on the supervision of financial conglomerates should facilitate the exchange of information from one executive to another within the whole OJK system and allow for easier access to financial records.

The writer is observer of capital market enforcement and human resources development officer at the Finance Ministry. The views expressed here are personal.