Hotasi Nababan and Merpati Airlines

I first wrote this article in late 2012. There were positive developments in 2013, terrible developments in 2014. If you do business with any of Indonesia's State-Owned Enterprises (SOE), pay attention.

From an article the FBI website WebArticles/FBI — District Man Sentenced to 18-Month Prison Term for Tax Fraud Related to Embezzlement from Indonesian Airline,

On 22 July 2014 in Jakarta—maybe coincidentally election day so there was little press attention to the event—ex-Merpati director Hotasi Nabanan was arrested in front of his wife and children to begin serving a four year sentence at Sukamiskin Penitentiary for korupsi. No one in the U.S. or in Indonesia has ever claimed that Hotasi was involved in actual corruption (but note the difference between “corruption” and korupsi in this case). Hotasi was the target and victim of the “false and fraudulent pretenses”. So how is that the victim does more prison time than the convicted perpetrators of the fraud?

December 2013 - An interesting case brought to the Corruption Court by the Kejaksaan Agung, or the Attorney General’s Office (AGO), is going on in Jakarta at the moment.

Two men are accused of criminal corruption and causing a loss to the Indonesian government of USD 1 million in a botched airplane leasing deal.

The lead suspect is the ex-director of the state-owned Merpati Nusantara Airlines, and he is now facing a four-year prison sentence.

Hotasi Nababan has two master’s degrees from Massachusetts Institute of Technology. He started his professional career with GE and led one of Indonesia’s State-Owned-Enterprises, Merpati Nusantara Airlines and is now Advisor to CAS (Cardig Aero Services) Airport Management in Jakarta. He has been active in public-service and anti-graft organizations.

In an article from The Jakarta Post:

In a later chapter Korupsi is not “Corruption,” be careful we explain the sometimes peculiar definition of Korupsi under Indonesian law. It is the most peculiar meaning of Korupsi which seems to have ensnared Hotasi.

From The Jakarta Post one year later:

If you assume that korupsi in Indonesian is the same as corruption in English, you are probably confused. Hotasi’s action appears possibly to have been a poor business decision, although even that is arguable, but it is certainly not corruption.

Repeating just to be clear, the alleged crime here is this: Hotasi as president of Merpati authorized payment of a deposit for leases of two airliners from a U.S. leasing company, TALG. The payment was to be held by a third party, Hume & Associates PC, a law firm also in Washington, D.C.

He apparently followed the normal and long-standing operating procedures at Merpati and discussed the deposit and leasing plans at the regular board of directors’ meetings.

TALG failed to make the scheduled delivery, but they still acquired the Merpati payment from Hume & Associates.

Merpati asked for a return of the deposit, and TALG declared bankruptcy. In a subsequent civil case in the U.S., the TALG officers, Messner and Cooper, admitted to misusing the money. The court ordered the TALG officers to repay the deposit (they had no personal protection through bankruptcy because they had apparently embezzled corporate funds), but so far they have failed to pay.

As the Jakarta Post article points out: “Hotasi is charged with enriching himself, or others, or a corporation, through an action that brought financial losses to the state,” and this is the definition of korupsi under Indonesian law.

But Hotasi did not intentionally enrich anyone, least of all himself. Whatever enrichment occurred was due to wrong-doing by the American officers of TALG, as a U.S. civil court decision has made clear.

This definition of korupsi entirely misses the point. Hotasi’s order to pay the deposit may have enriched the owners of TALG because they embezzled the Merpati deposit, but this is certainly NOT corruption under the normal meaning of the word.

So what is going on here? Is this a case of formalism run amok?

Why is the AGO prosecuting this?...

With all the problems of corruption in the country, why would the Attorney General’s Office spend so much time and energy prosecuting a case which doesn’t appear to be corruption at all, and can only be classified as korupsi through the most tortuous reading of an apparently inadequately-written law?

When the rest of the world talks about “corruption” in Indonesia, and Transparency International ranks Indonesia 118 out of 174 in the world corruption index, this definition of korupsi is certainly NOT what they have in mind.

In fact, the action of the Attorney General’s Office in prosecuting this case may itself be closer to the real complaints by international business organizations about disarray in the Indonesian legal system.

A really good really bad Hollywood movie...

All kinds of scandals have attached themselves to Merpati over the last few years.

Reading through the maze of articles above, there are enough loose ends to keep a really bad Hollywood movie busy for hours: a dubious airplane purchase contract for 15 new, overly-expensive, and nearly untested Chinese airliners with fingerprints of numerous government ministers and legislators all over the deal; renegotiation of the contract under threats of a break in Chinese-Indonesian trade relations...and cancellation of an important financing loan; fatal crash of one of these Chinese airliners—attributed to poor pilot training and non-standard instruction manuals; a bewildering array of announcements for plans to expand, contract, cancel, revise other airliner purchases and routes; rescheduling and refinancings of massive debts; allegations of blackmail.

All interconnected, but none connected to Hotasi’s deposit for the leasing of two airplanes in Washington D.C.

But what is clear is that no one normally involved in investigating criminal corruption—including the Anti-Corruption Commission (KPK) and the Director of Criminal Investigations of Indonesia has ever claimed that Hotasi’s leasing of two airliners had any aspects of criminality.

Even the AGO has not asserted that Hotasi intended wrong-doing or graft, or that he in some way colluded with Messner and Cooper to allow them to embezzle the deposit, only that they can apply a formalist and literal interpretation of the statue to convict him.

In the grand scheme of things, USD one million is so small that it is apparently not worth Merpati’s effort to attempt to recover the money from the judgement already granted by the U.S. court.

Further, Hotasi argues, with the U.S. court order the deposit is a bad debt—a civil, not a criminal matter—and any loss is caused by failure of the current management of Merpati to pursue repayment.

Possible outcomes...

We can make all kinds of wild speculations about the rational behind this. But consider some possible outcomes.

The technical violation here, apparently, is that Hotasi authorized payment of the deposit in May 2006, with the knowledge of the Board of Directors and in accord with normal Merpati management procedure, although the final budget plan was not formally signed until October 2006.

In the most narrow outcome, victory for the AGO would cause management paralysis in the State-Owned Enterprises, and there are many of them. No manager could make a decision for fear it might lead to a loss for the business which could then bring a criminal charge of korupsi for any small infraction of procedure.

It could have a broader effect. The phrase “for the purpose of enriching himself, or another person or a corporation” (dengan tujuan menguntungkan diri sendiri atau orang lain atau suatu korporasi) is the business definition of “profit.” So this section actually turns on the definition of “misuse” or menyalahgunakan.

With the often arcane regulations of Indonesian bureaucracy—including Immigration—it is almost impossible to conduct business without running afoul of the AGO’s technical definition of “misuse” as in the Hotasi case.

Any enterprise which does business with the state or a State-Owned Enterprise, from mining companies to telecom suppliers, could find Indonesian or expatriate managers subject to prosecution for korupsi if they are deemed to have caused a loss to the state, with the meaning of “loss” and “misuse” to be determined by the AGO.

Nothing in the law restricts it to Indonesian citizens. Applying the law literally in contract disputes, as in the Hotasi case, could hold Indonesian managers OR foreign executives liable for criminal korupsi. What a great bargaining tool in price negotiations.

This could be disastrous. In fact, President Yudhoyono has already made a call to go easy on prosecutions of korupsi which appear to be merely the result of poor business decisions, not intentional fraud.

This means that the President has already urged the AGO to use their discretion about which cases to prosecute. But as long as the law is on the books the AGO can use it in prosecutions, and the law institutions do not always demonstrate much cooperation with the President. They may not always use the same criteria as President Yudhoyono.

It might actually be necessary to cancel the law. There is a history of “revisions” of anti-corruption regulations by the legislature (the DPR or Dewan Perwakilan Rakyat), ostensibly to correct errors, but which turn out to weaken the legislation.

But the law IS on the books...

Yes it is. And the AGO is still prosecuting.

Actually it is not even clear to many observers how the korupsi law is being interpreted by the AGO, because a literal reading of the law would seem to rule out its application in the Hotasi case. But as we discussed in the early chapters of Indonesian Law Advisory, Formal Law—the law as written—and Applied Law—the law as enforced—may be entirely different: Your Law is what counts, and in this case the law is whatever the AGO says it is.

In earlier chapters we also discussed the Indonesian Civil Law system and the weak role of the Mahkamah Agung in defining law in appeal. There is no need for a successful prosecution of Hotasi before the AGO can use this law to prosecute other business executives.

Even dismissal of the case against Hotasi does not change the law, because law in Indonesia can be based upon textual analysis of statutes, not upon judicial precident.

Any Indonesian or foreign management executive doing business with the government of Indonesia or a State-Owned Enterprise could become a target for a charge of criminal korupsi unless this law is repealed.

It's a shame that it just happens to be a law intended to combat corruption—in the international sense.

UPDATE December 2013 - In February 2013 the Jakarta Corruption Court ruled Hotasi Nababan not guilty of the charges brought againto him by the AGO.

Hotasi released a statement:

It is not always that simple in Indonesia, however. Hotasi and his family were still fearful, because under Indonesian law the AGO has the same right of appeal as does the defendent. The case was heard in the Corruption Court, but the AGO was not ready to let it go so easily, and they appealed to the Supreme Court—in a move similar to that of the Prita Mulyadi case.

UPDATE July 2014 - In March 2014 the FBI proudly annouced the conviction for fraud, embezzlement, and tax evasion of the two American leasing agents Jon C. Cooper and Alan Messner.

In May 2014 the Supreme Court of Indonesia delivered a verdict in the appeal by the AGO convicting Hotasi of korupsi and sentencing him to four years imprisonment.

In July 2014 Hotasi was taken into custody to begin serving his sentence.

If, in reading this story, you feel there are some strange twists of logic here, some missing facts, maybe some mysterious motivations, you are probably right. Court watchers say that this case is not really unusual.

Hotasi's experience offers a strange parallel to the Prita Mulyadi story, except that in Hotasi’s case there is no public outcry to examine the events behind his conviction to overturn an unfair verdict. As commentators to the Prita case point out, relying on public outcry is a poor way to deliver justice.

If the case is not unusual, and failure to attract media attention allows outrageous convictions to stand, the careful reader might want to remember that there is nothing in the korupsi law exempting foreigners, and that actual “corruption” in the international sense is not a requirement for conviction of korupsi.

Loss to the state—including State Owned Enterprises—might include securing a contract price which an auditor later deems more expensive than a competitor might have offered, or delivering a product which does not meet all expectations.

Misusing one’s position might include any action—possibly including failure to register a change of address or overstaying a visa—which is contrary to law.

Is the AGO appeal legal?

The answer is “no” if you believe in written law. But on the other hand, Hotasi is now in prison.

Go back to the page Law as Enforced where we pointed out that “In the real world, laws don’t depend on statutes but on how they are enforced by police, prosecutors, and especially by the courts. Law as applied is whatever the police, the prosecutor, or the judge says it is.”

From an article in HukumOnLine:

Article 67 and Article 244 of KUHAP states: Regarding a judgment of a criminal charge delivered in the last level by a court other than the Supreme Court, the accused or the AGO can request an appeal at the Supreme Court level except in the case of a judgment freeing the accused of all charges.

Hotasi is right. The AGO’s appeal to the Supreme Court was illegal. But they did it anyway, it was granted by the court, and Hotasi is in prison.

DO NOT put your entire faith in written law.