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C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 002392 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/IFD/OMA AND EAP/MTS 
TREASURY FOR IA - ANNA JEWELL, SUSAN BAKER 
MANILA FOR USED ADB 
COMMERCE FOR 4430/GOLICKE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO 
DEPARTMENT PASS FEDERAL RESERVE AND EXIM BANK 
PACOM FOR J5 YAMAMOTO 
 
E.O. 12958: DECL: 02/22/2016 
TAGS: ECON EFIN KCOR PGOV EINV ID
SUBJECT: SBY'S ANTI-CORRUPTION PROGRAM DEALT A SETBACK 
 
REF: 05 JAKARTA 7424 - BANK MANDIRI SCANDAL 
 
Classified By: Finance and Development Officer Ruth Mary Hall, Reasons 
1.4 b,d. 
 
¶1. (C) Summary.  In a verdict that took many observers by 
surprise, Indonesia's Anti-Corruption Court acquitted three 
former Bank Mandiri officials of corruption charges on 
February 20.  The Attorney General reportedly stated that he 
wants to appeal the case to the Supreme Court, and President 
Susilo Bambang Yudhoyono (SBY) also reportedly expressed 
disappointment with the decision.  The Attorney General told 
the Ambassador privately that he felt Neloe and his 
co-defendants had run a privately-funded, highly questionable 
propaganda campaign in the media and at universities while 
the case was ongoing.  Mandiri is widely acknowledged as one 
of Indonesia's most corrupt institutions, and the failure to 
convict Neloe and his colleagues is a clear setback for 
Indonesia's anti-corruption campaign.  End Summary. 
 
Former Bank Mandiri Officials Acquitted 
--------------------------------------- 
 
¶2. (SBU) On February 20, Indonesia's Anti-Corruption Court 
acquitted former President Director E.C.W. "Eddie" Neloe and 
two other former Bank Mandiri officials of corruption 
charges.  Neloe is a prominent political supporter of former 
President Megawati Sukarnoputri, and during his almost five 
years as President Director of Indonesia's largest 
state-owned bank, was in the top ranks of Indonesia,s 
business elite.  The court's decision came as a surprise 
since prosecutors had sought a tough sentence of twenty 
years.  The police arrested Neloe, former former director for 
risk management I Wayan Pugeg, and former director of 
corporate banking M. Sholeh Tasripan in May 2005 on 
corruption charges for alleged "lending irregularities" 
related to USD 1.3 billion in loans (reftel). 
 
¶3. (SBU) Despite the very large amount of non-performing 
loans (NPLs) at Mandiri, prosecutors based their case on only 
one questionable transaction: a Rp 160 billion (USD 17 
million) loan to the Medan construction firm PT Cipta Graha 
Nusantara/Tahta Medan.  The court determined that prosecutors 
had not proven that the loan had caused "losses to the state" 
because NPLs are part of business risk and do not count as 
corruption.  Under Section two of Law 31/1999 on Corruption 
Eradication, an individual is guilty of corruption if he 
enriches him/herself or others or a corporate entity in a 
manner that causes "losses to the state."  Noting that the 
loan in question was restructured and should be repaid by 
September 2007, Judge Gatot Suhartono reportedly said "the 
defendants were not proven legally and convincingly to have 
committed graft." 
 
Saleh Says the AGO Will Appeal; SBY Disappointed 
--------------------------------------------- --- 
 
¶4. (C) Attorney General Abdul Rahman Saleh said publicly on 
February 21 that he would ask prosecutors to appeal the 
decision to the Supreme Court.  He told the Ambassador the 
same day that he was "concerned and disappointed" with the 
acquittals.  Saleh said he felt that Neloe and his fellow 
defendents had run a "propaganda campaign" funding seminars 
at universities and television interviews presenting their 
position on "state assets."  Saleh related that the day 
before he had endured a marathon grilling by the House of 
Representatives, whose members had peppered him with detailed 
questions on the Neloe case. 
 
¶5. (U) According to media reports, President Susilo Bambamg 
Yudhoyono was also disappointed, stating that, "I want 
transparency upheld concerning why, what and other things 
about Neloe and the two other defendants being acquitted of 
graft charges.  The public has the right to know what went 
on." 
 
 
JAKARTA 00002392  002 OF 002 
 
 
Blow to Anti-Corruption Campaign 
-------------------------------- 
 
¶6. (SBU) The media quoted several corruption watchers 
including Indonesian Corruption Watch and the Partnership for 
Governance reform in Indonesia who noted that the decision 
would be a setback in the GOI's anti-corruption drive.  The 
GOI's willingness to go after Neloe was considered a bold 
move and a sign that President Yudhoyono was serious about 
anti-corruption, even when it involved well-connected members 
of the Jakarta elite. 
 
¶7. (C) A U.S. bank analyst who has worked with Mandiri for 
several years told us the present Mandiri management is 
"disillusioned" with the acquittals.  The analyst noted that 
Neloe is smart, would have covered his tracks well, hidden 
kickbacks effectively, and would have placed several layers 
between himself and the "brown envelope."  He also noted that 
when analyzing questionable bank loans, absent direct 
evidence of kickbacks, it is hard to draw the line between 
bad judgment and willful misconduct.  He said instead of 
going after the Cipta Graha case, prosecutors should have 
focused on transactions between Mandiri and other debtors 
such as pulp producer Raja Garuda Mas (RGM).  RGM has 
excellent cash flow but has not repaid Mandiri and other 
banks before it, a fact that might have made it easier to 
prove that an experienced banker would not have lent to such 
a firm absent substantial kickbacks. 
 
Comment 
------- 
 
¶8. (C) The GOI has not had good luck in its efforts to 
prosecute prominent former bankers on corruption charges 
since the 1997-98 financial crisis, and the Neloe case is no 
exception.  The lack of a written court decision makes it 
difficult to assess the degree of damage to SBY,s 
anti-corruption efforts, but press statements by the judges 
and prosecutors indicate an extremely low level of 
understanding by both judges and prosecutors about banking 
operations.  The case had a bit of unreality about it as 
prosecutors focused on whether there had been a "loss to the 
state" rather than on the kickbacks that, according to 
numerous sources, have long been a standard part of 
Mandiri,s corporate loan approval process.  Unless the GOI 
gets lucky and wins on appeal, the verdict leaves the GOI in 
a very difficult position with respect to moving forward on 
other corruption cases in the banking sector. 
 
PASCOE