The Convergence of Tax Rules and Money Laundering Crime in

Indonesia

Benny Gunawan Ardiansyah and Annisa Salsabila

Politeknik Keuangan Negara STAN, Kementerian Keuangan

Keywords: Convergence, Tax Rules, Money Laundering.

Abstract: Indonesia, with its increasing size of the economy, cannot be separated from illegal activities in the form of

money laundering. This phenomenon could be predicted from the size of the underground economy, which is

quite large and more difficult to disclose because of its level of secrecy. This study tries to reveal the

convergence of tax rules and money laundering crime in Indonesia. Convergence is carried out based on

recommendations that have been applied in OECD countries. The objectives of this study addressed the

treatment should be taken if any choices between tax revenue or combating money laundering. Although there

is a provision in tax amnesty program that the authority could conduct the investigations separately, but

basically there is still no convergence between Indonesia's tax rule and OECD recommendations. Tax revenue

is the priorities for the tax examiner and tax auditor than combating the money laundering from proceeds of

crime or possible acts of terrorism

1 INTRODUCTION

The underground economy is an integral part of the

economic activities of most countries. The

underground economy, ie, economic activities both

legally and illegally missed from the calculation of

Gross Domestic Product (GDP), also known as other

unofficially economy or black economy, has now

become a global issue (Scheineider & Enste, 2000).

Drug transactions, gambling, prostitution,

smuggling, piracy, are activities that are classified as

amoral and illegal in the eyes of the law. Legal

activities are included in the underground economy

because they are not recorded or not reported, so they

are not included in the GDP calculation. The

underground economy takes up a relatively high share

in the GDP of every country in the world. They are

thus giving rise to a tax gap that affects the collection

performance and tax ratio. The value of the

underground economy activity, which is quite large

causes the loss of potential tax revenue, which should

be collected by the government (Afdi and Purnomo,

2015). Illegal activities in the underground economy

are more difficult to disclose because the level of

secrecy is higher. At present Indonesia is a target

market for underground activities in the circulation of

illegal drugs. Advances in technology and

information in the era of globalization and progress in

other fields facilitate the circulation of drugs across

countries with Indonesia as the largest market for the

distribution of illegal drugs in Southeast Asia.

Approximately 70% of narcotics and similar illegal

drugs circulating in Indonesia come from outside,

such as Thailand, Laos, Cambodia and other

exporting countries such as Latin America, Middle

East and Africa (Iriawan, 2013).

The drug business is one business that is difficult

to detect by law enforcement agencies. The large

population and high economic development in

Indonesia are the main attraction for the illegal drugs

market to be open in Indonesia. The high number of

demand and good market prices, the ease with which

laws can be purchased also accelerates the

development of this type of business. Within a year,

no less than Rp52 trillion in money was successfully

generated from the illegal drug business in Indonesia

(Berisatu.com). In 2017, there were 325 drug cases

with a total of 2,312 kilograms of methamphetamine

drugs seized. The amount is higher than in the

previous year (Tempo.co).

According to Welling (1993), money laundering

starts from the existence of dirty money originating

from the tax evasion and by breaking the law. The

business of illegal drugs such as other underground

economies is inseparable from money laundering.

Ardiansyah, B. and Salsabila, A.

The Convergence of Tax Rules and Money Laundering Crime in Indonesia.

DOI: 10.5220/0009399600560061

In Proceedings of the 1st International Conference on Anti-Corruption and Integrity (ICOACI 2019), pages 56-61

ISBN: 978-989-758-461-9

Money laundering is carried out in an effort to

disguise the original source of wealth obtained from

the drug trade by hiding it into a legitimate business.

In practice, money laundering from drug trafficking

not only establishes relationships with other actors or

government officials and law enforcement officials

but also participates in the establishment of banking

institutions that are classified as high-risk foreign

banks in offshore financial centers (Savona, 2001). If

the wealth of illegal activities can enter into a bank or

other financial institution, the distribution will be

easier, can be converted to other currencies, and used

to invest in his business and pay for shopping.

According to the Financial Action Task Force

(FATF), estimates of the amount of money washed

each year worldwide from illicit drug trafficking

ranges from the US $ 300 billion and the US $ 500

billion.

Drug business activities are structured neatly and

disguised by legal businesses by money laundering.

Money laundering causes the main source of income

for illegal drug businesses, and it is difficult to know

the tax status mixed with money from legal

businesses that can be taxed.

This study will reveal the convergence between

money laundering and taxation provisions in

Indonesia. Convergence is carried out based on

recommendations that have been applied in various

countries (especially OECD member countries) in

addressing the treatment taken if there is a choice

between purely remaining on tax goals in collecting

state revenues or jointly combating money

laundering.

2 LITERATURES

Drugs trade are one of the transnational crimes that

have a wide scope of operations that is difficult; this

causes the prevention of narcotics crimes to be

difficult, both with persuasive and repressive efforts.

Circulation of illegal narcotics has gone through

various ages, genders, and the social and economic

level of the community. The regulation of criminal

sanctions in Law Number 35 the Year 2009 is quite

adequate, applying criminal objectives on a twin-

track system, by considering the retributive and

rehabilitative effects (social improvement) of

convicts.

Crimes given to narcotics offenders vary

according to the level of crime committed, the

heaviest sanctions are the death penalty. Narcotics

crime is an extraordinary crime against humanity

(extraordinary crime) so that enforcement requires

special, effective, and maximum treatment. One of

the special treatments is by applying severe penalties,

namely capital punishment. However, the use of

criminal sanctions proved to be ineffective in

overcoming narcotics crimes, marked by the increase

in criminal acts of narcotics, residual perpetrators, the

increasing variety of ways of smuggling narcotics

both from within and outside the country.

Criminal cases in 2018 showed an increase in

narcotics crime activities; drug offenses increased by

6.43% or 778 cases in the 3rd week of November

2018 compared to the 2nd week of November 2018

in only 731 cases in Indonesia. The number of

suspected narcotics crimes also increased by around

5.35% from the previous 972 people to 1,024

suspects. (bisnis.com). Global and national policies

regarding regulations that suppress drug trafficking

and circulation have produced a side that is related to

the increasing illegal trade and circulation of drugs

(Cain, 2008).

Drug trafficking crimes are closely related to the

money laundering process. The results of a UN

survey (United Nations, 1992) suggest that drug

trafficking is part of organized crime and money

laundering is a way to manipulate the results. Stessen

(2003) and Lilley (2006) reveal that a series of money

laundering activities includes a series of activities

carried out in an organized manner including the

activities of placing a number of proceeds of crime

into the financial system through financial service

providers (PJK), coating the money through various

financial transactions to obscure origin his proposal

and reuniting it in the form of investment in a

legitimate business in a certain period of time.

The pattern of Money Laundering from Drug

Trafficking, by doing four phases, namely

1) The phase of placement of money from drug

trafficking is included in the financial system

by placement through banking institutions

(Finckenauer, 2007; Lilley, 2006; Block &

Weaver, 2004; Reuter & Truman, 2004). The

money is the result of drug trafficking in cash.

This money is then put into the financial system

through banking institutions. Banking

institutions that are a place to store money from

drug trafficking are overseas banks that are

classified as high risk (high-risk foreign banks).

High-risk foreign banks are a means of placing

money from drug trafficking due to having

financial mechanisms and instruments.

According to Lilley (2006), the placement is in

the form of an anonymous bank account;

internet banking and phone banking services;

ATM cards and credit cards; availability of

The Convergence of Tax Rules and Money Laundering Crime in Indonesia

banking services; unlimited cash withdrawal;

and financial transfers without the need to

include anonymity.

2) Layering phase in laundering money from drug

trafficking is done to coat, break, or obscure

money from drug trafficking contained in the

financial system so that it is difficult to detect.

Layering activities in money laundering from

drug trafficking include smurfing, money

changers, and buying stock portfolios on the

stock market.

3) The Smurfing phase is an activity of

transferring a sum of money to various other

accounts in domestic and foreign banks (Reuter

and Truman, 2004). Some of the proceeds from

drug trafficking from traders (retail dealers or

street dealers) are deposited with the main drug

traffickers through the cartel of financial

managers (Grosse, 2001). The money is

deposited in cash and placed into the financial

system through a banking institution. Then, the

money from the drug trafficking that has been

collected is broken down into various other

cash fragments directed at the smurf.

Furthermore, it is these smurf who coat the

fractions of the drug trade by crediting them to

various accounts in several banks. The money

is credited with a number that is not much

different.

4) Phase integration as a final activity in the

money laundering process resulting from drug

trafficking no longer has a direct relationship

with the origin of the drug. There are three

reasons for conducting business integration in

money laundering from drug trafficking,

namely (Lilley, 2006): trying not to involve

many people in the business; have business

staff who have work skills, and creating a

business that is engaged in trade and has low

production value. Integration in money

laundering as a result of drug trafficking in the

form of investments in the restaurant business,

entertainment, sports, and property (real

estate).

Meanwhile, the business forms used in the money

laundering pattern are

a) Money changer

In laundering money from drug trafficking, there

are activities to exchange some money from drug

trafficking with foreign currencies. This money

changer mode includes activities, namely a large

amount of money from drug trafficking in the

financial system in banking institutions exchanged

for foreign currencies. Purchasing foreign currency

through electronic financial transaction services and

instruments provided by banking institutions. Then,

there was a transaction between money from drug

trafficking using the local currency, which was

exchanged for a number of money with foreign

currency. As a result, there are differences in the

value of the currency that has been exchanged. The

case of money changers in money laundering

activities resulting from drug trafficking is rampant

in Colombia, Panama, and Indonesia (Grosse,

2001).

b) Purchase of stock portfolio

The stock market is an effective means of money

laundering (Lilley, 2006). Various investors, both

domestic and foreign, can carry out various

financial transactions on the stock exchange

(Yuhassarie, 2004). The money from drug

trafficking is transferred to brokers and then

managed in the stock exchange. The money is used

to buy a number of stock portfolios from companies

labeled infamous companies. In addition, these

companies are classified as red flags or dotcom

companies.

c) Invest in the restaurant business

The restaurant business is a business that has long

been run by the Italian mafia in the United States

(Finckenauer, 2007). The restaurant business is a

pizza restaurant or other Italian specialty. In

addition, according to Savona and De Foe (Savona,

2005), drug traffickers in China and Japan also have

similar businesses.

d) Invest in the entertainment business

The entertainment business includes a casino, horse

racing, and lotteries (Reuter & Truman, 2004). The

casino business is a business that is rampant by drug

traffickers (Savona, 2005). The velocity of money

is fast becoming the reason. However, this

gambling business can only be done in the country

that legalizes it.

e) Invest in the sports business

The investment carried out by drug traffickers from

Colombia is aimed at the sports business, namely

the ownership of America soccer team (Lilley,

2006). Not only that, but the business of selling

sports equipment is also a place for reuniting money

from drug trafficking.

f) Investing in the property business (real estate)

Business in the property sector is done by buying

real-estate through affiliated companies. Then, drug

traffickers buy real-estate at a low price and resell it

at market prices (Savona, 2005).

ICOACI 2019 - International Conference on Anti-Corruption and Integrity

3 DISCUSSION

3.1 Money Laundering Crime

Awareness

The OECD (2019) stated the importance of awareness

of the crime of money laundering and funding of

terrorism. Money laundering is a "white-collar" crime

that threatens the economy and must be eradicated. It

is important for each country to take firm action

against the perpetrators of money laundering. For this

reason, cooperation between authorized institutions is

needed.

Fighting money laundering has several objectives.

The first goal, for social purposes. Evil causes both

tangible and intangible losses to third parties,

individuals, and society as a whole. Money

laundering can result in reduced public confidence in

the credibility of certain professions such as lawyers,

accountants, and notaries as well as trust in economic

sectors such as real estate, hotels and banks, and other

financial institutions. From the results of money

laundering, actors can invest in large amounts so that

it will have an impact on business competition and

entrepreneurship. Actors have the opportunity to

start, continue, and expand activities in the legitimate

economic sector. This can create a perception that

crime is beneficial and may inspire others to initiate

criminal acts.

The second objective is to identify tax crimes and

other financial crimes. Unreasonable transactions can

identify tax crimes and all parties involved. At

present, the Indonesian tax regulations are only

focused on revenue. However, with these rules, it will

not disclose the crimes that occur or the benefits they

generate. Information exchange is needed with law

enforcement agencies to be able to disclose criminal

acts with the start of an investigation.

The third objective is to find and confiscate the

assets of criminal offenders. By identifying unnatural

transactions, money flows, and the conversion of

proceeds of money laundering into assets such as real

estate, vehicles, cruise ships, bank accounts, and

virtual assets. This identification will help law

enforcement agencies seize these assets during the

investigation process.

The fourth objective is the legal context. The

majority of world countries have a legal framework

to eradicate money laundering and put it in separate

criminal violations. The Criminal Code states a list of

criminal acts originating from money laundering. The

Financial Action Tax Force recommends setting tax

crimes as a criminal offense from money laundering.

Not all tax crimes constitute criminal origin from

money laundering; for example, sales not reported are

not money laundering. If a country's tax authority

identifies an indicator of money laundering when

conducting a tax audit, this indicator can show the

results of a serious crime, and it is very important for

the tax authority to report it to authorized law

enforcement in accordance with the existing legal

framework.

3.2 Tax Amnesty and Money

Laundering Crimes

The definition of income according to the Income Tax

Law is any additional economic capability that is

received or obtained by taxpayers, both from

Indonesia and from outside Indonesia, which can be

used for consumption or to increase the taxpayer's

wealth in name and in any form. From the definition,

it can be concluded that the income scope obtained by

the taxpayer is almost unlimited, both the method of

obtaining, the place of acquisition, the form of

income, and the origin of where the income

originates. The absence of regulations that limit the

origin of income obtained by taxpayers results in

legal loopholes. This was proven during the issuance

of Law Number 11 of 2016 concerning Tax Amnesty.

The tax amnesty policy gives taxpayers space to

report their assets and get forgiveness from tax

sanctions. When tax amnesty is filed by money

laundering agents, the tax amnesty policy seems to

legalize money laundering and provide money

laundering benefits. The advantage in question is that

there is an opportunity for money laundering actors to

repatriate the income they get from abroad while at

the same time erasing the trace from where the

income originates.

In fact, despite obtaining credit for unreported tax

and property debts, the regulation does not eliminate

the legal incidents of money laundering, so the case

can still be investigated. One of the articles in the

regulation raises a criminal dispute, namely in Article

20, which reads: "Data and information originating

from a Statement and attachments administered by

the Ministry of Finance or other parties relating to the

implementation of this Law cannot be used as a basis

for investigation, investigation, and/or criminal

prosecution of Taxpayers ". In the article, it is

explained that regulated crime includes criminal acts

in the field of taxation and other criminal acts. Even

so, the tax amnesty law only pays forgiveness to the

two, namely administrative sanctions and tax crimes.

However, this provision cannot be used for other legal

violations. The data and information obtained cannot

be used as evidence for investigations, investigations,

The Convergence of Tax Rules and Money Laundering Crime in Indonesia

and / or criminal prosecutions of taxpayers. If there

are indications of a crime found from existing data,

law enforcement has the authority to conduct

investigations separately. If there is a possibility of

another criminal offense, such as a crime of money

laundering, terrorism funding, or corruption which is

not carried out on the basis of these regulations, the

public has the right to file a judicial review.

Provisions concerning non-criminal law have

been regulated in Article 44 of Law Number 6 of 1983

concerning General Provisions and Procedures for

Taxation as amended by Law Number 16 of 2009.

The purpose of the investigation in taxation is

contained in article 44B, namely "for the interests of

state revenues, at the request of the Minister of

Finance "The Attorney General can stop investigating

tax crimes as long as the criminal case has not been

transferred to the court." Literally, it can be seen that

the purpose of the tax provisions in the case of an

investigation is purely for state revenues.

Meanwhile, the OECD (2019) since 2009 has

recommended that tax auditors and the tax audit

process actually help the process of disclosing money

laundering. The technical provisions in the Minister

of Finance Regulation (PMK) regarding procedures

for inspection and procedures for examining the

initial evidence of criminal acts in the taxation sector

still do not accommodate OECD recommendations.

Even in the Substitute Government Regulation

number 1 the year 2017 concerning access to

financial information for tax purposes, it only aims to

secure state revenues.

4 CONCLUSION

Awareness of the existence of money laundering for

tax auditors is needed. If a country's tax authority

identifies an indicator of money laundering when

conducting a tax audit, this indicator can show the

results of a serious crime, and it is very important for

the tax authority to report it to authorized law

enforcement in accordance with the existing legal

framework.

Indonesia applies a tax amnesty policy that raises

disputes or differences of opinion in its application.

In article 20, the data and information obtained cannot

be used as evidence for investigation, investigation,

and/or criminal prosecution of taxpayers. Then if

there are indications of a crime found from existing

data, law enforcement has the authority to conduct

investigations separately.

Nevertheless, basically, there is still no

convergence between Indonesia's tax provisions and

OECD recommendations which prioritize war on

money laundering from proceeds of crime or from

possible acts of terrorism.

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The Convergence of Tax Rules and Money Laundering Crime in Indonesia