Implementing Customer Due Diligence Principle on Financial

Services Corporation in Order to Prevent and Eliminate Money

Laundering

Sunarmi

, Detania Sukarja

, and T. M. Lubis

Faculty of Law,Universitas Sumatera Utara, Jalan Universitas Nomor 4, Kampus USU, Medan, Indonesia

Keywords: Customer Due Diligence Principle, Financial Services Corporation, Money Laundering.

Abstract: Money Laundering, a white collar crime causes negative effects such as the loss of the government’s control

over its economic policies, undermining the integrity of economic markets, undermining corporate sectors,

the emergence of an economic distortion and instability, and it reduces the country’s revenue. A financial

services corporation as the vessel where money laundering was conducted must perform a customer due

diligence principle, however unfortunately, it has yet to be implemented, and therefore it is difficult to

detect the activities of money laundering. The purpose of this research is to understand and analyze a

financial services corporation that implements the customer due diligence principle in order to prevent and

eliminate money laundering. This research is based on explanations or inventions on the anti-money

laundering law field. The results of this research shows that there are still lots of financial services

corporation Industry except for banking companies, insurance companies, and pawnshops that has yet to

implement the customer due diligence principle even though this has been clearly regulated on Elucidation

of Article 18 point (2) Law No. 8 of 2010 and Various Bank Indonesia Regulation (PBI).

1 INTRODUCTION

Money Laundering is considered as a white collar

crime which caught international attention and

concerns including Indonesia’s. This is due to the

remarkable effect that money laundering itself

causes. Money laundering may hamper a state’s

progress, from social, economics, even cultural

aspects (Amrullah, 2004). John Mc. Dowel and Gary

Novis stated that there are a few impacts that money

laundering causes which are: the loss of the

government’s control over its economic policies,

undermining the integrity of economic markets,

undermining corporate sectors, the emergence of an

economic distortion and instability, it reduces the

country’s revenue from tax payment sources and it

also causes the damage of a country’s reputation

(Syahdeini, 2004).

In an economic stand point, money laundering

may: undermine a legitimate corporate sector owing

to the fact that money laundering is usually done

using a front companies to conceal the illegitimate

cash with a legitimate cash so that a legitimate and

clean business will lose the competition to those

companies that conducted a money laundering; it

undermines the integrity of economic markets

because the financial institutions are relying on

funds that were made out of crime may face the

danger of liquidity; it causes the loss of

government’s control over its economic policies

owing to the fact that money launders invest their

funds in countries that are less likely to detect their

money laundering activities rather than investing in

countries that gives them a higher rates of return;

furthermore, it may cause an economic distortion

and instability owing to the fact that money launders

are not interested on making profits out of their

investments and instead they are more interested in

protecting their labor of crime and the funds that

they have been placed on doesn’t have to effect the

receiving country’s economy. For the government,

the follow-up impacts are the increased of financial

crimes and it also generates a high social cost

especially on the cost to increase its law

enforcement efforts.

In relation to the increased potential of financial

crimes, effective banking supervision principles

were introduced by the Basel Committee on Banking

1674

Sunarmi, ., Sukarja, D. and Lubis, T.

Implementing Customer Due Diligence Principle on Financial Services Corporation in Order to Prevent and Eliminate Money Laundering.

DOI: 10.5220/0010094416741677

In Proceedings of the International Conference of Science, Technology, Engineering, Environmental and Ramiﬁcation Researches (ICOSTEERR 2018) - Research in Industry 4.0, pages

1674-1677

ISBN: 978-989-758-449-7

Supervision on Core Principles for Effective

Banking Supervision stated that implementing

Customer Due Diligence is considered an important

factor on protecting the well-being of the bank, as

well as to prevent various risks. The purpose of this

principle is so that banks may be protected from

various risks such as operational, law, concentrated

transactions, and reputation risks, with those risks

being taken care of, banks will not be used as a

vessel or an object of the perpetrators to money

launder their labor of crime.

In order to prevent and eliminate money

laundering, it is important to conduct the customer

due diligence principle to every financial services

corporation possible so that data or identity of a

customer and their transactions would be recognized

by the financial services corporation, hence they

could categorize those transactions as a suspicious

financial transactions. However, in reality the

customer due diligence principle has yet to be

conducted by the financial services corporation. The

importance of implementing financial services

corporation’s customer due diligence principle

correctly and maximally to prevent money

laundering activities accompanied by an effective

regulation and supervising systems.

2 RESEARCH METHODOLOGY

This research uses the normative juridical approach

supported by the empirical juridical approach with

the purpose is to gather the secondary data in a form

of inventory of laws which are gathered by

document studies. Empirical data gathering is to

receive a primer data which was gathered directly

from the respondent by conducting questionnaires

and interviews.

This research is conducted using the normative

juridical approach and supported by the empirical

juridical approach. The data collecting is conducted

by document studies, questionnaire and interviews.

The Respondent Consists of Banks, Insurance

Company, Savings and Loans Cooperative, Foreign

Exchange Company, Securities Company,

Automotive Showroom Company, Real Estate

Company, Jewelry and Precious Metal Company as

informants on money laundering. The interviews

were conducted towards The Financial Services

Authority (OJK) and Indonesian Financial

Transaction Reports and Analysis Center (PPATK).

3 RESULT AND DISCUSSION

3.1 The Negative Impacts of Money

Laundering

Money laundering has a negative impact which is

disruption towards the economic stability. Moreover,

money laundering has a very high potential to

disrupt both national and international economy, this

is because money laundering will jeopardize an

economic effective operations and it will cause poor

economic policies. This means that money

laundering will cause a sharp fluctuation on

exchange rates and interests, therefore, it will slowly

destroys the financial market and it will decrease the

public trust on the financial system that may

increase the risks and instability of the system itself,

it may also decrease the world’s economic growth

(Nasution, 2007). With regard to those impacts, the

effort to prevent or eliminate money laundering is by

conducting “follow the money” approach. This

approach is conducted by involving numerous

parties (known as Anti-Money Maundering Regime)

which each of them has a specific role and a

significant functions, for instance the Informant, The

Supervising and Regulating Institution, Law

Enforcement Institution, and other concerning

parties. Preventing and eliminating money

laundering must involve the cooperation between all

law enforcement body and the financial services

corporation and it is mandatory to be conducted, this

is because in a legal structure that was mentioned by

Lawrence M. Friedman, it is impossible to conduct

if a legal structure, legal culture, and legal substance

is not in a single system that works well (Basuki,

2001).

3.2 Financial Services Provider

Corporation

The principle of customer due diligence must be

conducted by every single financial services

corporation as an informant as it was regulated on

Article 17 of Law No. 10 of 2008 as follows: a.

financial services providers are 1. Bank; 2. Finance

company; 3. Insurance and Insurance Broker

Company; 4. Financial Institution on Retirement

Funds; 5. Securities Company; 6. Asset Manager; 7.

Custodian; 8. Trustee; 9. Posts as a Giro Provider;

10. Foreign Exchange Trader; 11. Organizer of a

Card Payment Method; 12. Organizer of E-money

and/or E-wallet; 13. A Saving and Loan

Cooperation; 14. Pawnshop; 15. Company Engaging

Implementing Customer Due Diligence Principle on Financial Services Corporation in Order to Prevent and Eliminate Money Laundering

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in Commodity Futures Trading; or 16. A Remittance

Business Organizer. b. provider of goods and/or

other services: 1. Property Company/Agents; 2.

Motorized Vehicle Trader; 3. Pearls and

Jewelries/Precious Metal Trader; 4. Arts and

Antique Trader; or 5. Auction Room.

Preventing money laundering may be applied

through conducting customer due diligence

especially on banks to prevent savings that were

received through money laundering.

3.3 The Obligation to Conduct

Customer Due Diligence Principle

In Indonesia, customer due diligence principle was

introduced on Bank Indonesia Regulation (PBI), it

adopted the recommendation that was issued by

Financial Action Task Force (FATF) with regard to

the efforts of preventing money laundering and

preventing terrorism funding by using banking

facilities and products. Within this regulation, the

terminology of “know your customer” was

converted to “customer due diligence (CDD)”. CDD

is an “activity in a form of identification,

verification, and supervision that a Bank conducted

to ensure that a transaction is in accordance with the

profile of the future customer, WIC (Walk in

Customer), or customer. Besides the CDD there is

also a term called “enhanced due diligence” (EDD).

EDD is an in-depth CDD activity that a Bank

conducted when they are encountering their future

customer, WIC, or a high risked classified customer,

such as politically exposed person, and the

possibility of money laundering and terrorism

funding.” (Article 1 Point 7 & 8)

In order to prevent and eliminate money

laundering it is mandatory that all of finance

services corporation to conduct a customer due

diligence. With the following interests: 1.To

avoid/reduce the Business risk, Banks must conduct

a cautious principle, and one of the efforts of

conducting a cautious principle is to conduct the

CDD, 2. To avoid money laundering and terrorism

financing in banks, 3. To aid the efforts of law

enforcement, especially on money laundering.

Based on the results of researches that was

conducted on financial services corporations, one

can learn that the customer due diligence principle

has yet to be conducted by a considerable amount of

the financial services industry, with various reasons

such as the company claimed that they did not know

the principle, they knew about the principle but

chose to prioritize their business interest rather that

the rule of law. Even though through preventing

money laundering it will also prevent the negative

implications of money laundering itself which are:

Letting the society enjoy an illegitimate funds,

which means an organized crime is authorize to

build an illegal business foundation and letting them

enjoy their labors of crime. This practice will cause

a dishonest competition. With a permissive

treatment on money laundering, aren’t we taking

part on building the ethos of a dishonest competition

as well? The decrease of business moral, legal

authority will drop dramatically, materialistic

oriented world is strengthened and so forth. The

development of this practice will weaken the

financial strength of society in general. The numbers

that reflects the indicator of society’s macro

economy level of reliability will drop owing to the

fact that there is too much money flowing around

outside the economic system’s control in general

(Meliala, 1993).

4 CONCLUSION

The responsibility to conduct a customer due

diligence principle has a strong legal basis behind it,

it is regulated under Law No. 8 of 2010 on

Preventing and Eliminating Money Laundering and

also under Bank Indonesia Regulation (PBI) No.

3/10/PBI/2001 on Implementing Know Your

Customer Principles which was later converted to

Bank Indonesia Regulation (PBI) No.

5/21/PBI/2003. On 2009, Bank Indonesia Regulation

(PBI) No. 5/21/PBI/2003 on Implementing Know

Your Customer Principles was perfected on Bank

Indonesia Regulation (PBI) No. 11/28/PBI/2009 on

Implementing Anti-Money Laundering Program and

Preventing Terrorism Funding For Commercial

Banks, which was later updated to Bank Indonesia

Regulation (PBI) No. 14/27/PBI/2012. Only banks

and insurance companies that has formed a taskforce

specifically to eliminate money laundering, financial

services corporation industries however has yet to

conduct those responsibilities. This causes

difficulties to prevent and eliminate money

laundering. The regulatory and supervisory

institutions has yet to conduct itself optimally on

supervising the implementation of customer due

diligence principle on financial services corporation

industries. Viable solutions includes socializing,

constant and gradual supervision, and giving out

strict sanctions.

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