Corruption stokes malpractice in Indonesia’s palm oil industry

The combination of weak antigraft policies, lack of transparency, revolving-door politics, and the prevalence of politically exposed persons within companies makes Indonesia’s palm oil industry highly prone to corruption, a new report says.

Published by anticorruption NGO Transparency International Indonesia (TII), the report evaluates the top 50 palm oil companies in Indonesia, the world’s biggest producer of palm oil. It focuses in particular on their disclosure practices with respect to their anticorruption programs, lobbying activities, company holdings, and key financial information.

The report then scores these companies on six criteria on a scale of 0-10, with 0 being extremely not transparent and 10 being very transparent.

The report found that, on average, the 50 companies only scored 3.5 out of 10.

This means there’s a general lack of transparency in palm oil companies’ political activities and how they can interfere with government policies, according to TII program officer Bellicia Angelica. In short, any government lobbying they carry out is done without much scrutiny and monitoring, leading to policies and regulations that are favourable to them, she said.

“This should serve as a warning for the government, the private sector and civil society to regulate the management of the palm oil industry more seriously,” Bellicia said.

The highest-scoring company in the report, at 7.2, is PT Sinar Mas Agro Resources and Technology (SMART), one of the palm oil arms of Indonesia’s billionaire Widjaja family, presiding over dozens of plantations and oil-processing mills across Indonesia.

Yet even SMART’s score doesn’t necessarily reflect strong anti-corruption measures, Bellicia said: Of the 50 companies, SMART has the highest number of politically exposed persons working for it, she noted.

Akhmad Kamaluddin, a plantation researcher at environmental NGO Auriga, noted that a former vice president of SMART was caught bribing a pair of provincial legislators from Central Kalimantan in 2018. The bribes were meant to head off an investigation into the alleged pollution of a lake by palm oil processing waste and pesticides.

“So it’s very ironic,” Akhmad said. “From this one case, we can see the face of the palm oil industry in Indonesia.”

Agus Purnomo, a director at SMART, said the problem of corporate corruption plagues all industries across in Indonesia, with local officials often seeing companies operating in their jurisdictions as prime targets for extortion.

“If we become an honest actor” — that is, refuse to pay bribes — “we will become an enemy of all stakeholders, from public officials to local communities,” he told Mongabay. “If there’s a rich person, it’s obligatory to pay for various things like sports and religious events, and that’s deemed normal.”

Agus said it’s this culture of permissiveness that needs to be changed, because it nurtures corruption. He added that the government, community leaders and organisation leaders should lead the change.

Before that change comes, however, companies will continue to feel like they have no option other than to comply with demands for money from stakeholders.

“People always assume that companies are evil [because] they bribe [officials] to get permits. While such cases may exist, most [companies] are afraid to say no [to extortion] because the risks are high,” Agus said. “Will you dare to say no if it’s locals who demand [money]? No, because if you do, then the road [to your company] will be blocked. If that’s the case, will you dare to clear the blockade?”

In compiling their report, researchers from TII first looked at the 50 companies’ anticorruption policies.

They found that 24 of the companies, nearly half, don’t have an anticorruption commitment that applies to all staff members, including high-level board members.

The second aspect they analyzed was whether the companies offered anticorruption training to staff. On this measure, they fared even worse: 46 of the companies don’t provide anticorruption training to all of their employees, including executives and directors.

Twenty-six companies don’t have whistleblower systems in place for employees to flag illegal or fraudulent activities anonymously without fear of retaliation. And even when a whistleblower channel was present, it didn’t necessarily protect whistleblowers from retaliation.

The report cited the case of PT Inti Indosawit Subur, a subsidiary of the Asian Agri group, controlled by the billionaire Tanoto family. In 2006, Asian Agri’s then-comptroller, Vincentius Amin Sutanto, was reported by the company to the police for allegedly embezzling US$3.1 million. Vincentius then revealed to the media and the country’s anticorruption agency, the KPK, that Asian Agri, had committed tax evasion from 2002 to 2005.

Despite Inti Indosawit Subur having a whistleblower system in place that should have followed up on Vincentius’s allegation, Asian Agri pressed ahead with its criminal charges against him. Vincentius was eventually convicted in court and sentenced to 11 years in prison in 2008. And in 2013, Asian Agri threatened Vincentius with a defamation lawsuit.

Asian Agri itself was in 2012 convicted of tax evasion and ordered by a court to pay US$205 million in fines.

The TII report also assessed the extent of the 50 palm oil companies’ lobbying practices. It found 41 of them lacked responsible lobbying policies or procedures. In particular, these companies don’t forbid donating to political figures.

The report also found that 49 firms, nearly all of them, don’t publish the details of their political donations.

Irresponsible lobbying practices increase the risk of corruption as there’s no transparency in the relationship between companies and policymakers, according to TII. This could result in corrupt practices like bribing policymakers in exchange for favourable policies for the companies.

The report cited the case of PT Wilmar Nabati Indonesia, a subsidiary of Singapore-listed agribusiness giant Wilmar International. Master Parulian Tumanggor a member of its board, claimed he often attended government meetings that determined the allocation of money from the state palm oil fund.

The state fund, which is collected from export tariffs levied on palm oil producers for every shipment of crude palm oil that they sell abroad, is meant to be reinvested in the industry for farmer training, research and development, replanting ageing trees with newer and more productive ones, building infrastructure, and promoting palm oil.

But most of the money collected has instead gone toward palm oil-derived biodiesel, both to subsidise producers and to artificially lower the price of biodiesel at the pump, to make it more competitive with conventional diesel. Between 2015 and 2021, the fund collected 139.17 trillion rupiah (US$9.64 billion) in revenue, and handed 80 per cent of it to biodiesel producers — and less than 5 per cent to small farmers for a replanting program.

Wilmar is the biggest recipient of Indonesian government subsidies to biodiesel producers. In 2017, it received 55 per cent of the total US$530 million distributed by the government to five palm oil companies, or triple the amount it had paid into the fund.

“What PT Wilmar Nabati Indonesia did can be perceived as irresponsible lobbying practices,” TII said in its report.

TII’s Bellicia said there should be an investigation into the company’s role and influence in the fund’s meetings.

“This is what we have to investigate,” she said. “With Master attending those meetings, did it result in more beneficial policies to big companies, resulting in the government siding with corporations instead of people in need?”

However, Indonesia doesn’t have rules banning irresponsible lobbying practices or requiring companies to be transparent about their lobbying activities, Bellicia said.

“In our opinion, lobbying has to be regulated because it’s a doorway to corruption,” she said.

In January, Master was convicted and sentenced to one and a half years in prison for conspiring with a trade ministry official to ensure that four palm oil companies, including Wilmar, could skirt their obligations to allocate a quota for the domestic market.

“This is a concrete example of how corruption will be a never-ending problem [in Indonesia] if things like lobbying are not regulated,” Bellicia said.

Another aspect assessed in the TII report is the revolving-door phenomenon that sees officials in charge of regulating the industry going on to take jobs in it, and vice versa.

Government agencies typically hire industry professionals to take advantage of their private sector experience and influence within corporations. Their presence can also help governments gain political support such as donations and endorsements from private firms.

“These individuals [hired by the government] also tend to have biased view in formulating policies and they tend to be in favour of policies that benefit companies but harm people,” the TII report said.

In the other direction, companies also gain an advantage when they hire the very officials previously responsible for overseeing their industry. This allows them to seek favourable legislation and government contracts in exchange for high-paying employment offers, and also to gain inside information on policy discussions.

Unlike some other countries that have issued laws regulating the revolving-door issue, Indonesia has no such restrictions. And in the palm oil industry, the practice is very common: according to the TII report, only two out of the 50 companies assessed are aware of this practice, and none has regulations addressing it.

One example of a regulation used elsewhere to prevent conflicts of interest is the “cooling-off period,” in which former public officials are prohibited from accepting employment in the private sector for a given time period after leaving office.

The report also looked at the presence of politically exposed persons within the 50 companies.

Known as PEPs, these are individuals who hold a prominent public position or function, such as a political party official, industry regulator, law enforcer, or a family member of such a person. PEPs are widely seen as being more prone to bribery, corruption or other potential financial irregularities.

The TII report identified 80 PEPs in 33 companies, including six each at SMART and PT Multi Agro Gemilang. Agus from SMART is one of these. He served as a special assistant to former president Susilo Bambang Yudhoyono from 2010 to 2014, just before joining SMART in 2014. He was also a special adviser to the environment minister from 2004 to 2009.

The report characterises Agus as an example of both a politically exposed person and a revolving-door player.

“Am I a politically exposed person? I don’t know. It doesn’t seem like it,” Agus told Mongabay. “But if I didn’t go to the company I currently work in, there are many other companies that want my assistance.”

He added it’s not fair if a politically exposed person is automatically perceived as something of a liability.

“If [the report] gives a score, then it looks like the report is judging [politically exposed persons]. Don’t judge, just prove” that PEPs bring risk to a company, Agus said. “Because people can become a bad actor without them having served in the government before.”

The report noted that the presence of politically exposed persons within a company doesn’t necessarily translate into a bad thing.

“But there really needs to be extra monitoring because politically exposed persons are closely tied to conflicts of interests and trading in influence,” Bellicia said.

The report also looked at how many of the palm oil companies were certified, either under Indonesia’s mandatory palm oil certification scheme, the ISPO, or under the voluntary Roundtable on Sustainable Palm Oil (RSPO), the world’s largest association for ethical palm oil production.

It found that only seven of the 50 companies have RSPO and/or ISPO certification that covers not only the parent companies, but also all their subsidiaries.

Yet even RSPO/ISPO certification can’t guarantee that a certified company is free from illegal and unsustainable practices, the report said. An assessment by Greenpeace of 100 RSPO members found that each had more than 100 hectares (250 acres) of illegal plantations inside forest areas in Indonesia, with eight of them having more than 10,000 hectares (24,700 acres).

Greenpeace also identified 252,000 hectares (623,000 acres) of ISPO-certified oil palm plantations inside forest areas, which aren’t permitted under Indonesian zoning laws.

The final aspect assessed in the TII report was data disclosure — whether the companies revealed information on corporate structure, plantation ownership, tax and income, and beneficial owners.

Data transparency can be an effective tool in preventing illicit financial flows and tax evasion, according to the report. But palm oil companies in Indonesia are still largely opaque in this regard, the report said.

For instance, only 34 out of the 50 assessed companies reported who their beneficial owners were to the government, despite this being a mandatory disclosure under a 2018 presidential regulation.

Lack of clarity on corporate ownership makes it difficult for the government and people affected by corporate activities such as deforestation or tax evasion to demand accountability from the company.

The report also found only five companies that disclosed detailed data on their tax payments.

“This opens up room for tax evasion,” Bellicia said.

The Tanah Merah project in Indonesia’s easternmost region of Papua is an example of how obscure corporate structures and beneficial ownership can increase the risk of corruption, according to the report.

Spanning 280,000 hectares (692,000 acres) in the heart of the largest tract of primary rainforest remaining in Asia, nearly twice the size of Greater London, the project is set to become the world’s largest oil palm plantation.

A 2018 investigation by Mongabay and The Gecko Project revealed that the investors behind the project have employed all the tools of corporate secrecy to hide their identities: shell companies with front addresses, fake and proxy shareholders, and offshore secrecy jurisdictions.

The investigation also revealed that key documents relating to the project were signed by a politician while he was in jail on the island of Java, and that key permits have been hidden from public scrutiny.

Responding to the TII report, Roro Wide Sulistyowati from the corruption prevention department at the country’s antigraft agency, the KPK, said her office has been pushing for palm oil companies to commit to anticorruption practices.

She added that the KPK has also issued a corruption prevention guideline for companies.

“This year, we want to push [the guideline] to palm oil companies so that they have an anticorruption commitment and antibribery system,” Roro said.

In 2016, the KPK carried out an analysis of the palm oil industry and found a raft of problems, such as tax evasion and the lack of an accountable system to prevent corruption in the issuance of permits.

In 2019 and 2022, the country’s financial audit agency, the BPK, carried out its own assessment of the industry. The 2019 audit found that 81 per cent of oil palm plantations in Indonesia are operating in violation of numerous regulations, including excess size, noncompliance with the ISPO standard, failure to allocate sufficient land for smallholder farmers, and lack of relevant operating permits.

The BPK has already finished the 2022 audit, but refused to disclose the findings. Following this latest BPK audit, the government recently announced that it had formed a task force to improve governance in the palm oil industry, including on permits and taxes.

Despite the series of findings from the KPK and the BPK, there’s been little to no improvement in the management of the palm oil industry, Bellicia said.

“If there have been changes [since the 2019 audit], there’s no way the score would be 3.5,” she said. “This score should be a wake-up call for the government.”

Tags: corruption, anticorruption programs, transparent, Indonesia, Industry, palm oil, Companies