Microsoft case highlights unusual risks of 'corruption' prosecutions in Indonesia

12 February 2018 5:57pm

9 February 2018. By Jet Damazo-Santos.

A Microsoft executive avoided jail in Indonesia yesterday after being cleared of corruption charges stemming from a contract with a state-owned bank, but the case is another illustration of the unusual risks corporates face in Southeast Asia’s largest economy.

Eril Isdan Pasaribu, a Microsoft executive in charge of business development in provincial governments and state-owned enterprises, was one of five individuals acquitted by a court in Kupang, East Nusa Tenggara, a province located in the relatively underdeveloped eastern region of the country.

Over the past four months, he was tried alongside three officials of the state-owned Bank NTT Kupang and a director of third-party software distributor Comparex on charges that they caused the state 2.2 billion rupiah ($154,000) in losses when they signed an allegedly overpriced 4.3 billion rupiah contract in 2015 for original Windows licenses.

While the case involved no accusations of actual bribery or collusion among the defendants, Indonesian law has a wider definition for corruption — an act taken for private gain that results in financial “losses to the state.”

This means that deals or contracts involving state agencies or state-owned enterprises that the government deems unfair to it can potentially be prosecuted under corruption laws, which has happened in the past to companies such as US energy giant Chevron and Ooredoo-linked Internet company IM2.

In Microsoft’s case, prosecutors alleged that Bank NTT was forced to sign a contract for more expensive goods than it needed following a discovery by the software giant that the bank had been using unlicensed versions of the Windows operating program.

The case was built around misunderstandings of how Windows licensing for large organizations works as well as the technicalities involved in how those licenses are delivered, a source familiar with the case told MLex.

For instance, one key point of confusion was why Bank NTT only received 500 activation keys for 830 licenses, when in fact activation keys can be used several times.

Prosecutors also questioned why Pasaribu was involved in pricing discussions alongside Comparex when Microsoft isn’t allowed to sell directly to companies in Indonesia.

Unusual risk

While the judges in the regional corruption court eventually concluded that no crime was committed, and Microsoft told MLex that it “greatly appreciates” how “the highest ethical and legal standards have been followed,” the time and resources expended on the case nevertheless remind companies of this unusual risk of corruption charges in Indonesia.

Had yesterday’s verdict gone the other way, moreover, Pasaribu could have been sentenced to up to three years in jail — a fate suffered by executives from other companies for causing losses to the state. That could yet remain a possibility in the current case, as prosecutors have said they would appeal.

In 2013, an employee of Chevron Indonesia, Bachtiar Abdul Fatah, was sentenced to two years in jail for his role in a joint environmental project with the country’s oil and gas regulator that involved cleaning up a contaminated site in Riau Province.

Prosecutors questioned the necessity of the project and whether the contractors hired were qualified, and alleged it cost the state around 100 billion rupiah in financial losses because Chevron was being reimbursed for its costs.

The following year, the Indonesian Supreme Court not only upheld the ruling, but added two more years to Bachtiar’s sentence, despite government officials stating no regulations were violated, and Chevron insisting it wasn't actually reimbursed for anything.

The American Chamber of Commerce in Indonesia at the time said the decision was “deeply disappointing and perpetuates a series of unsettling court decisions on the case from a ‘rule of law’ perspective.”

Also in 2013, the Jakarta Anti-Corruption Court sentenced the president director of Internet service provider IM2 to four years in jail for having caused state losses by using a spectrum awarded to its listed parent company, PT Indosat Tbk.

Being partly owned by the government, Indosat was entitled to a discounted rate for a frequency radio band, which it allowed IM2 to use. Prosecutors argued that this cost the state 1.36 trillion rupiah in spectrum fees that IM2 should have paid the government.

The court found the parties involved guilty of corruption, even after the communications minister at the time stated that Indosat did not violate any laws.

'Dodgy grounds'

While the risk of having to engage in bribery to get things done in Indonesia remains a real problem, these cases illustrate that even during the rare instances where no corruption is involved, companies can still be prosecuted under the country’s anti-corruption laws, said one Indonesian corporate lawyer.

“If you look at the string of cases prosecuted by the Attorney General's Office, you can see that some of the grounds for prosecution are extremely dodgy,” the lawyer told MLex.

The weaknesses of Indonesia’s legal system continue to be a major source of risk for foreign companies operating in the country.

"We watch these kind of cases very closely," said A. Lin Neumann, the managing director of the American Chamber of Commerce in Indonesia. "We remain concerned that legitimate actions by companies can often be criminalized in ways that undermine investor confidence and harm the business climate.”

	Eliot Gao