$2 Billion Annual Revenue Loss and Damage to Rule of Law, Human Rights
December 1, 2009
Widespread corruption in the forest industry is the dirty secret no one wants to talk about. But until the lack of oversight and conflicts of interest are taken seriously, pouring more money into the leaky system from carbon trading is likely to make the problem worse, not better.
Joe Saunders, deputy program director

(Jakarta) - Corruption in Indonesia's lucrative forestry industry costs the government US$2 billion annually, detracting from the resources available to meet its obligations on economic and social rights, Human Rights Watch said in a report released today. Inadequate oversight and conflicts of interest also raise a red flag over whether Indonesia can be a reliable carbon-trading partner. Carbon trading schemes are likely to be an important topic at the United Nation's Climate Change Conference, which  begins December 7, 2009, in Copenhagen.

The 75-page report, "Wild Money: The Human Rights Consequences of Illegal Logging and Corruption in Indonesia's Forestry Sector," found that more than half of all Indonesian timber from 2003 through 2006 was logged illegally, with no taxes paid. Unreported subsidies to the forestry industry, including government use of artificially low timber market prices and currency exchange rates, and tax evasion by exporters using a scam known as "transfer pricing," exacerbated the losses. Using industry methods, including detailed comparisons between Indonesia's timber consumption and legal wood supply, the report concluded that in 2006 the total loss to Indonesia's national purse  was $2 billion.

Recent challenges to the country's Anti-Corruption Commission (Komisi Pemberantasan Korupsi, KPK), including an alleged conspiracy by police and prosecutors to discredit the commission as it began looking into possible police corruption, exemplify the harmful effects of corruption on the country's governance, Human Rights Watch said.

"Widespread corruption in the forest industry is the dirty secret no one wants to talk about," said Joe Saunders, deputy program director at Human Rights Watch. "But until the lack of oversight and conflicts of interest are taken seriously, pouring more money into the leaky system from carbon trading is likely to make the problem worse, not better." 

Some reduction in revenue loss has been reported since 2006, attributed to a dramatic increase in plantation timber production, doubling in a single year. But the area of established plantation required to produce the high volumes of timber reported call these new numbers into question, the report says.

The domestic impacts of corruption and revenue loss, especially on the nation's rural poor, are significant, Human Rights Watch said.  Indonesia is a party to the International Covenant on Economic, Social and Cultural Rights, the key international treaty under which it has agreed to use maximum available resources to ensure its citizens enjoy their rights to such services as health, education, and housing. Yet, the scale of lost revenue to corruption demonstrates Indonesia is in violation of these obligations.

The roughly $2 billion in annual lost revenue is equal to the country's entire spending on health at national,provincial, and district levels combined. The annual loss is also equal to the amount that the World Bank estimates would be sufficient to provide a package of basic health care benefits to 100 million of the nation's poorest citizens for almost two years. Indonesia has among the lowest per capita health spending in the region, even compared with countries of much lower per capita GDP.

"It's a particularly cruel irony that in many of the rural areas that generate the country's forestry income, basic health care services are among the worst in the country,"Saunders said. "People who live next door to the very forests being ravaged to line officials' pockets must travel huge distances to reach the nearest doctor."

Indonesia has one of the largest areas of forest in the world, but also one of the highest deforestation rates. Reported exports from its lucrative timber industry were worth $6.6 billion in 2007, second only to Brazil and more than all African and Central American nations combined.

The individuals who profit the most from illegal logging and the associated corruption are rarely held accountable, the report found, in part because of corruption in law enforcement and the judiciary. Bribes go to the police to manipulate evidence or even to sell seized illicit timber back to illegal loggers; to prosecutors to manipulate  indictments (sometimes deliberately using a charge for which the evidence is weak); and to judges for favorable rulings.

Forestry Ministry officials have taken steps to improve timber reporting and tracking systems, the report says, but they have to contend not only with shady dealings in the private sector but with entrenched interests within their own ministry. Reporting of timber production and revenue collection is compromised by conflicts of interest within the forest agencies and unclear jurisdictions between central and local forest authorities. Bribes to officials in exchange for allowing logging without, or in violation of, proper permits create a powerful incentive to neglect accurate data keeping or to fail to make regular reports to the central ministry.

While the government of President President Susilo Bambang Yudhoyono has taken steps to combat corruption, there is strong resistance from some high-level officials. Increasing tensions between the Anti-Corruption Commission (KPK) and police and prosecutors led to the arrest and removal of two of the commissioners after the police accused them of extortion and abuse of authority.

In November, a presidential fact-finding team found insufficient evidence for the charges against the commissioners and recommended they be dropped, although it is not clear if the commissioners will be returned to their posts. The team further recommended a full investigation into corruption in the judiciary to eradicate "case brokers" inside the judiciary and police who act as go-betweens to deliver bribes, and a full inquiry into abuse of authority by the police, with sanctions for officers responsible for wrongdoing in the arrests of the anti-corruption commissioners.

"This is a critical juncture," Saunders said."If Indonesia can curb the corruption, it can be a global forestry leader. As it is, a lot of trees and a lot of money are going missing and the country's poor are bearing the brunt of the losses."

Human Rights Watch called on prosecutors to use the strong sanctions available in anti-corruption and anti-money laundering laws to reduce forestry corruption. The Forestry Ministry should create a mandatory revenue tracking and auditing system for all Indonesian timber from harvest to point of export to ensure legality, and allow for independent oversight.

Indonesia's trading partners should also ensure that they are not complicit in logging corruption. Consumer countries should enact laws to prohibit trafficking in these illicit products, as the US did recently by amending its Lacey Act. The EU should immediately pass pending legislation that would require a certification of legality for wood products to enter European markets, Human Rights Watch said.

"It will take strong action at the top levels of Indonesia's government and international trading partners to halt the corruption in the timber industry,"Saunders said. "The stakes are huge for the country's ability to improve living standards for its citizens and its standing in the world."