Keywords

Bank Executive, Banking Crime, Officers Responsibility, Bail In, Bail Out, Deposit Insurance, Systemic Risk.

Introduction

Bank holds an important role in economic growth of a state. The main duties of a bank in Indonesia are to gather fund from the people in any forms of savings products and to distribute fund back to the people in any form of loan products. These two main duties of a bank in turn bring impact to economic growth of a state. If banks perform then the economic growth may increase easier but in contrary if banks underperform then the economic growth may decrease and the state may suffer the systemic impact of any issue caused by certain bank.

Bank in its daily business is closely related to other aspects such as third party fund, other bank, and economic stability. Third party fund is a sum of money that is placed in a bank under any savings product p.e. savings, cash deposit, etc. (Sari & Murni, 2017). This third party fund is then distributed to any financial activity such as investment, as well as lending to another party as bank’s debtor. Debtor may come from a state common person, a corporation, or even other banks.

Bad economic condition of a state may bring significant impact to the ability of debtors to repay the loan bank provided previously. In other side, those who keep their fund in a bank may find difficulties should they try to make withdrawal. To deal with these difficulties, bank may borrow a sum of money from another bank and make it payable in a short period of time just to fulfil those who made withdrawal. Also, bank may request a term loan facility from central bank. The problem is that the fund, whether provided by the central bank or provided by other bank, may be spent abusively by the bank owner. As result, the banks were unable to refund the financial support. Also, the banks remained unable to repay their third party funds or other indebted obligations to the people or institutions or even other bank as creditors.

In humanities studies, this banker’s practice is allegedly a betrayal to the people as tax payer whose money used as financial support to banks. Besides, the support to banks will presumably allow banks to take more risks in the future (McGee, 2009). This paper will further discuss the responsibility to repay those fund enjoyed by respective bank and entities that are responsible to make that repayment. Bank as discussed in this paper is limited to commercial bank in the form of a limited liability company. This paper does not include bank as a regional government owned company or in the form of a cooperation or credit this is a qualitative research using comprehensive approach covering statute and conceptual approach.

Bank Governance

Indonesian system of corporate governance is different to well-known system as executed in English speaking countries. Companies especially incorporated or limited liability Company in Great Britain as well as United States of America is led by board of directors (De Andres & Vallelado, 2008). In Great Britain, The Board of Directors holds supreme authority upon a company and for day to day activity the Board of Directors may appoint a managing director if necessary. The same thing happens in the United States of America (Singh, 2016).

According to Indonesian Limited Liabillity Company Act (Act number 40 year 2007) or in Indonesia Undang-undang Perseroan Terbatas, herein after shortened to UUPT, Directors and commissioners are the organs that govern a company while the general meeting of shareholders is the proprietor of the company. These three are considered as organs of the company. According to verse (1) of article 98 UUPT, Director is the organ that holds the authority and responsibility to manage the company and to represent the company in or out of court of justice while commissioner holds the supervisory authority upon the company’s daily activity and in particular to supervise the director’s conduct. General meeting of the shareholders holds the proprietorship of the company and bear any rights and responsibilities that are not further mandated to directors or commissioners (Nachane et al., 2005).

As a special entity, well organized by certain bodies, and closely connected to state’s economic stability, banks must pay more attention to those who are going to lead them. Besides, the government must also provide certain measurement upon banks shareholders, directors and commissioners. The government issued certain principles of good corporate governance particularly within a bank. The Financial Services Authority or Otoritas Jasa Keuangan (OJK) as regulator of financial institution in Indonesia enacted OJK Regulation or Peraturan OJK, herein shortened to POJK.

POJK number 55/POJK.03/2016 concerning application of corporate governance in commercial bank regulates certain points on directors and commissioners. This POJK regulates first about the composition of the directors and commissioners. On article four, this POJK regulates that the board of directors must consist of at least three persons and one of them is stated as the president director while commissioners must consist of at least three persons and at most similar to the board of directors, said article 23 verses 1. There are some restrictions concerning the position of director in a bank according to this POJK. Directors may not be connected each other or to the commissioners in a family up to the second degree.

POJK 55/POJK.03/2016 also regulates an institution within a bank. This institution is independent commissioner. Independent commissioner is a member or are members of the board of commissioner but they come from outside of the company, without any whatsoever connection to the company, the shareholders, the other commissioners and directors in term of blood, marriage, financial, or anything else. Independent commissioners must fill not less than 50 percent of the number of the board of commissioners.

As a common practice worldwide, candidate for top executive of a bank must first undergo a fit and proper test. According to Indonesia law, besides those two institutions, the controlling shareholder must also undergo this fit and proper test. This fit and proper test is further regulated under POJK 27/POJK.03/2016. Article 1 of this POJK states that controlling shareholder is a corporation or individual or organization that hold a number of share of a financial institution and has the authority to control this specified financial institution.

Article 2 verse 1 of POJK 27/POJK.03/2006 regulates that principals of a financial institution must first obtain permission from OJK. This permission shall be obtained after first undergo a fit and proper test. For a bank, the principals are controlling shareholders, directors and commissioners, as stipulated in article 2 verses 2 of this POJK. The aim of this fit and proper test is to ensure that a bank is managed by qualified personnel (Sentosa, 2012).

Banking act (Act number 7 year 1992 as amended by Act number 10 at the year of 1998) groups entities that is closely connected to a bank, named affiliated party, to four groups. The first group consists of commissioners, sharia supervisors, directors and their proxies, bank officials and employee. Second group consists of managements and executives of a bank in the form of cooperation, third group consists of those who provide services to a bank such as accountant, appraiser, legal consultant, and other consultant. Fourth group consists of broader scope of people that, according to Bank Indonesia, may affect the operation of a bank such as the shareholders and their relatives also the relatives of the commissioners, sharia supervisors, directors, and managements.

There is some issue in relation to affiliated party. Those who are included in fourth group of affiliated party are not obliged to undergo fit and proper test although they may deeply affect the operation of the bank. The other problem is the difficulty to provide evidence on their intervention to bank’s operation for this intervention is mostly unwritten.

Liquidity Support

Sometimes banks come to a situation where its available fund does not suffice the request of withdrawal made by depositors. This happens as consequences of economic condition of a state that makes much debtors failed to pay off their loan on schedule while in the other side much depositors of this particular bank withdraw their fund from that bank (Mwenda, 2000). For this issue, at least there are two way out. First is by using the interbank market where bank may request for a short term loan from other banks (Iori et al., 2006), second by requesting loan to central bank as lender of the last resort (Allen et al., 2009).

In case a bank failed to repay that loan provided by Bank Indonesia, the Government must first support Bank Indonesia. This government’s support is executed under a mechanism named factoring or in Indonesia it is called cessie where the government purchases the account receivable from Bank Indonesia so the fund paid by Bank Indonesia to support the bank is repaid by the government. Further the government will demand the bank to repay the fund to the government. This type of support is named bail out (Klimek et al., 2015) for the support comes from outside of banking industry, in this case the government through Bank Indonesia as central bank or other banks through interbank market.

The other type of support is named bail in where a bank is supported within the bank (Joseph, 2014).). This bail in is executed by demanding shareholder to inject fresh fund to save the bank’s liquidity. Other way of bail in is by using any money saved and stored inside the bank to save the company such as cancelation of any account payable of the bank or to convert bank’s payable to share (Goodhart & Avgouleas, 2015).

If either way is unable to resolve the difficulties of any specified bank, this bank will be considered failing bank and be put under the authority of The Financial Stability System Committee or Komisi Stabilitas Sistem Keuangan and abbreviated to KSSK under Perpu 4 2008 concerning Financial Services Security Net. Prior to 2016, KSSK would decide whether this bank was systemic or non-systemic. If the bank was systemic then it will be handed over to LPS to rescue, otherwise the bank would be terminated. LPS is Lembaga Penjamin Simpanan or Deposit Insurance Corporation whose authority is regulated under LPS Act 2004 (Act number 24 years 2004) as amended under LPS Act 2009 (Act Number 7 year 2009). After the enactment of Law 9 year 2016 concerning Prevention and Treatment of Crisis on Financial System, there must be a well maintained list of systemic bank so the duty of KSSK should be lighter.

Should a bank in Indonesia is stated as systemic failing bank, this bank will be further taken care by LPS. LPS will take over the bank, restructure, and resale. For a non systemic failing bank, LPS will process the repayment of third party fund payable by this particular non systemic failing bank. After this phase, the bank will be terminated. This activity is closely related to core duty of the LPS as to support the stability of banking industry in Indonesia and to insure the third party fund within a failing bank, under certain limitation regarding maximum insured fund and other financial liability of any particular third party. LPS itself got starting capital from the government for IDR 4,000,000,000,000 (Four trillion Indonesian Rupiah). Beside that starting capital, LPS earns membership contribution fee and deposit insurance premium from banks to become member within LPS.

The existence of LPS and KSSK does not free Indonesia from cases concerning banks. On November 21 2008 KSSK stated that Bank Century as a failing bank, and decided to rescue the bank. At that time the world was at financial crisis (Bullard et al., 2009) and this decision was made to avoid systemic impact of a bank’s closure.

LPS then took over the bank operation, injected more than six trillion Rupiah, renamed it Bank Mutiara (Alfiyani & Ariningrum, 2012). Now the bank is sold and renamed J Trust Bank Indonesia. In between this process, Robert Tantular was prosecuted and sentenced for at least two crimes, banking crime and money laundering. Robert Tantular was proven guilty robbing his own bank prior to taken over by LPS and renamed to Bank Mutiara.

De Facto Authority within a Bank

It is an undisputed fact that sometimes in a bank, particularly in Indonesia; there is a particular person with authority to make unwritten executive decision while this person is not an executive of the bank (Elyasiani & Zhang, 2015). This particular person is neither the executive nor the shareholder of the bank, directly or indirectly. This particular person is not the family of directors, commissioners, officials or shareholders. Nevertheless, people within a bank always execute the decision made by this particular person although the risk of that decision will be on the executor’s. This executive decision may cover the approval of certain loan application or the use of fund obtained from Bank Indonesia. As result of this fact, the actual people who enjoy the benefit as bank’s owner may evade the court of justice and its punishment while those who just followed order was brought before the court of justice. Let us name this particular person as de facto authority within a bank.

In laws concerning tax, some states acknowledge the existence of beneficial owner. Internationally accepted definition of beneficial owner said that it refers to person or persons or entity, as the ultimate owner of a tax subject company, which ultimately enjoy the benefit of certain tax object (Collier, 2011). This concept of beneficial owner is recognized with regard to any tax treaty made by certain states to avoid double taxation (Baker, 2007).

In Indonesia, beneficial owner is explained based on circular letter issued by the Director General of Taxes, Ministry of Finance the Republic of Indonesia. Circular letter number SE- 04/PJ.34/2005 dated July 7 2005 defined beneficial owner as the actual owner of income dividend, interest, or royalty whether individual or non-individual taxpayer, who has full authority to directly enjoy the benefit of such income. Later based on circular letter number SE- 03/PJ.03/2008 dated August 22 2008, the tax to be paid by beneficial owner is limited to certain percent based on tax treaty agreed by Indonesia and other states.

If the term of beneficial owner refers to those who ultimately enjoy certain benefit, in Indonesian insurance industry we may see a term named controller as entity who ultimately control the company. Indonesian Insurance Act 2014 (Undang-undang Perasuransian 20/2014) at article 1 number 19 defines Controller as an entity, directly or indirectly has authority to place director, commissioner, or any equal position in a cooperation or mutual insurance company and/or to influence the conduct of director, commissioner, or any equal position in a cooperation or mutual insurance company.

This controlling entity of a company, named controller in insurance law, has similarity to affiliated party within a bank as meant by Banking Act. Article 1 number 22 letter d of Banking Act said that affiliated party includes parties, according to Bank Indonesia, may influence the bank’s management. This party includes the family shareholders, commissioners, directors, officials, and sharia supervisor. Anyway there is a slight but important difference that in insurance a controller must be clearly stated by the insurance company and undergo a fit and proper before being placed and acting as a controller while affiliated party of bank’s may be stated by Bank Indonesia and there will be no fit and proper for them.

That official placement in insurance and statement in banking may bring different legal impact. If the placement is official, as in insurance, the responsibility of certain conduct of directors and/or commissioners may be easily demanded to exact person, the controller, if it is said influenced by the controller. If the placement is by statement of Bank Indonesia then first this statement is disputable. The status of family is undisputable but not the influence for most of the influences is unwritten and the number of the family is enormous. Also, what if these influences do not come from any of the family of the positions aforementioned?

Considering positivistic legal tradition in Indonesia, the term of controlling entity as de facto authority within a bank, other than de jure authority as stipulated within Banking Act, must be clearly stated within a rule, preferably Banking Act or Financial Services Authority Act. There must be a clear definition of this controlling entity and the definition of controller in insurance mutatis mutandis may be considered. Criminal charge as well as private responsibility upon banks lose must also be clearly regulated (Achmad, 2011).

This controlling entity, or any name with similar definition, may be placed by the company under consent of Indonesian Financial Services Authority prior to fit and proper test. This consent is not meant to limit the authority of the company and its shareholders but to minimize the risk of the placement of nominee as controlling entity by the bank. Therefore, the Authority must conduct proper analysis to find out whether this particular person is the actual controlling entity or just a nominee).

Conclusion

Conclusion may be made that apparently beside common executive as stipulated by laws, banks are also under the authority of de facto executive with vast authority of decision making while the responsibility of what comes from this decision is put on the shoulder of the common executive. To be just, laws must also provide rules covering this aspect so the de facto executive will also have responsibility of decision they made.

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Received: 07-Apr-2022, Manuscript No. JLERI-22-11708; Editor assigned: 09-Apr-2022, PreQC No. JLERI-22-11708(PQ); Reviewed: 25-Apr-2022, QC No. JLERI-22-11708; Revised: 23-Aug-2022, Manuscript No. JLERI-22-11708(R); Published: 30-Aug-2022