Tuesday, 23 October 2018

How to Tackle Corruptions in the Directorate General of Taxes


On October 4th, 2018, the Indonesia's Corruption Eradication Commission (Komisi Pemberantasan Korupsi /KPK) announced that they have arrested six people, including a senior tax official and investigators of the Directorate General of Taxes (DGT), for alleged bribery in Ambon, Maluku. Although, this issue is soon disappear due to overwhelmed by other news, such as Ratna Sarumpaet’s hoax case and all related ‘political’ commotions, the weakness of rupiah against US dollar, and others, I think that corruption cases always need high attention.
Before the Ambon case, in April 2018, KPK also arrested a tax official in Pangkalpinang, Bangka Belitung due to an allegation of extorting Rp50 million from a taxpayer.
The two cases have added a long list of corruption offences at DGT since the case of, arguably, the most Indonesia's most notorious corrupt tax official, Gayus Tambunan was in 2010. Although Gayus has been punished in prison, he described himself as a ‘small fish’ compared to other much larger wrongdoers in the DGT. Corroborating his assertion, related analysis indicated that a significant “tax mafia” operates within the organization.
Following the Gayus case, several other corruption cases emerged in the mass media in the last decades. Some of them attracted high media coverage, such as cases committed by Bahasyim Assifie, Dhana Widyatmika, Tommy Hindratno, Anggrah Suryo, Pargono Riyadi, Eko Darmayanto and Mohammad Dian Nuqisra, and Handang Soekarno.
Those cases above involved DGT employees from various positions indicating that regardless of the level, each tax employee is an inherent risk to commit bribery or corruption.
I believe that the revealed cases are just iceberg phenomena. It seems that a larger percentage of a problem is subclinical, unreported, or otherwise hidden from our view. As can be seen from the table below, it indicates that public still consider corruptions occurred in DGT.  
Public’s* Perception of Corruption in DGT from 2011 to 2013
Items
2013
2012
2011
1.       Number of Tax Payers Giving Additional Payment or Favour
13
12
19
2.       Initiator of giving additional payment:



·      DGT Employees
33%
41.7%
36.84%
·      Tax Payers
17%
16.7%
15.79%
·      Both
50%
41.7%
47.37%
3.       Service Quality After Additional payment



·      Increase
75%
66.7%
73.68%
·      No Increase
25%
33.3%
26.32%
4.       Frequency



·      Always
15%
16.7%
36.84%
·      Often
8%
41.7%
26.32%
·      Rare
77%
41.7%
36.84%
5.       Type of payments or favours



·      Money/cheque
N/A
91.7%
89.5%
·      Entertainment
N/A
50%
10.5%
·      Souvenir
N/A
30%
5.3%
·      Other Facilities
N/A
27.3%
5.3%
6.       Level of DGT employees accepted the bribe



·      Direct contact (DGT immediate employee)
15%
54.5%
47.37%
·      All levels
8%
30%
36.84%
·      Decision Making Level
77%
27.3%
26.32%
7.       One determines the amount of surcharge



·      Bargaining
N/A
72.7%
42.11%
·      Common Standard
8%
45.5%
10.53%
·      DGT Employee
23%
50%
21.05%
·      Tax Payers
69%
27.3%
26.32%
8.       Level of Corruption



·      Do Not Know
48.9%
50.9%
N/A
·      Serious
14.2%
23.1%
45.03%
·      Not Serious
16%
16.8%
39.18%
·      No Corruption
21%
9.2%
N/A
·      Not Answer
N/A
N/A
15.79%
 *Public: tax payers received services from DGT
Source: Data obtained from Secretariat General, the Ministry of Finance

In addition, based on my research in 2016, during the last five years (2011-2015), respondents believed that 30 bribery cases occurred in DGT involving Rp100 millions or more committed by various positions from staff to echelon II and above as well as tax investigators. Based on information from respondents in my 2016 study, in 2015 there were 50 bribery and tax extortion cases reported through WISE. Of the number, 86% was valid according to the Internal Compliance and Transformation of Human Resources’ (Kepatuhan Internal dan Sumber Daya Aparatur/KITSDA) analysis. Until April 2016, there were 13 cases reported, which was 85% valid.
Such behaviours may destroy public trust in tax employees. It could trigger a movement in public to boycott pay tax, which potentially decreases tax revenues. From the inside organization, the cases may significantly let the faith and confidence of the DGT’s employees down in bureaucratic reform. Moreover, the shame and embarrassment those caused could make several DGT employees become somewhat secretive about their jobs. So, we need to take extra ordinary strategies to tackle corruptions in DGT. However, I believe that there is none strategy fits for all situations.
Thus, all suggestions are connected to each other, indicating that in the real world, things are much more complex than symmetrical explanation for tackling corruptions; different causal pathways could lead to either reporting or keeping silent. No single causal strategy is either sufficient or necessary to explain the real world of eliminating corruption. For instance, if respondents believe that retaliation is the most important factor deterring them from disclosing bribery, then, simply implementing more protections and guaranteeing of anonymity would not automatically improve the reporting rate.
Among other strategies, below, I would like to highlight three most effective strategies to tackle corruptions at DGT, which are “Know Your Employee”, “Whistle-Blowing System”, and “Reverse Burden of Proof” as the additional strategies that could be implemented by DGT.

Know Your Employee (KYE)

As we know that enemy within is as dangerous as criminals outside. We have learned that one or some employees can cause the same or an even greater threat of damaging institution’s reputation. Thus, Know Your Employee (KYE) Program is seen as crucial to an institution's protection against any possible frauds within an organization.
Furthermore, many institutions have expensed a lot of money to put firmly in place KYE program comprising policies, procedures, internal controls, background screening of potential employees, conflict of interests assessments, job descriptions, code of conduct/ethics, levels of authority, compliance with personnel laws and regulations, accountability, dual control, segregation of duties and other deterrents. They also put red flags of suspicious activities of their employees in order to detect and prevent any possible frauds assisted by employees as early as possible.
Theoretically, there are some common red flags of suspicious employee activities that are commonly used as examples, such as:
Ø  Employee exaggerates the credentials, background or financial ability and resources of a customer in written reports the bank requires;
Ø  Employee frequently is involved in unresolved exceptions or recurring exceptions on exceptions reports;
Ø  Employee lives a lavish lifestyle that could not be supported by his or her salary;
Ø  Employee frequently overrides internal controls or established approval authority or circumvents policy;
Ø  Employee uses company resources to further private interests;
Ø  Employee assists transactions where the identity of the ultimate beneficiary or counter party is undisclosed;
Ø  Employee avoids taking vacations.
However, considering recent conditions, I think that those KYE approaches including red flags are just not sufficient enough to identify suspicious activities. It is easy for a bad employee to avoid them. Many employees may easily not show off their wealthy in order to avoid others suspicious. Red flags are just indicators of possible fraud that can be easily evaded by wrongdoers since they know precisely what actions can be categorizes as suspicious activities.
Moreover, there are no unique characteristic of a fraud perpetrator. Many employees and employers seemingly having excellent reputation are also possible to commit in frauds, corruptions, embezzlements, extortions, and other white-collar crimes. The characteristics and behaviors of perpetrators do not necessarily “anomalies”. They can be married, have well education, good long employment tenure, various range of ages, none criminal record, are socially conforming, and are likely to belong to a religious institution. The person likely to commit next fraud could be anybody in the office because, under the right set of circumstances, anyone could become a fraud perpetrator. Indonesian’s Supreme Court (Mahkamah Agung/MA) indicated that corruptions committed by high rank officials from bureaucrats and politicians to law enforcers. Moreover, KPK’s data in 2016 informed that 361 District Heads committed corruptions. The data from MA and KPK, arguably confirms the above statement.
Thus, I, personally, believe that strong KYE program could not merely rely on the approach including red flags. Indeed, it needs additional components such as whistle-blowing system and reverses burdens in order to prevent “enemy within”.  

Whistle-Blowing System

In 1985, Janet P. Near and Marcia P. Miceli, professors from universities in USA, which are arguably known as the most prominent researchers in a whistle-blowing context, defined whistle-blowing as “the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action”.
ACFE's report in 2006 indicated that 64.1% occupational frauds were detected and reported by employees (whistle-blowers). Other reports came from outside information such as from vendors, customers, and anonymous with totally of 35.9%.
Other studies also consistently indicate the same conclusion. For instance, PricewaterhouseCooper’s (PWC) study in 2008 also revealed that whistleblowing by employees is the most effective tool for identifying misconduct because the individuals who are the closest to the business operations are best able to discern odd behaviour and accidents, and detect finance-related crimes. As we know, corruption and bribery are considered to be clandestine activities.
Moreover, the DGT’s spokesperson confirmed also the above finding that the most corruption cases at DGT can be detected due to the information received through their whistle-blowing system (WBS).
The reports above show that whistle-blowers in a good faith can be an effective tool to detect and reveal the internal frauds, even much more effective compare to traditional KYE program. I believe that peer group supervision is much more effective and efficient rather than top down supervision since the later has a lot of limitations to scrutinize employees’ daily activities. In early stage of its implementation, whistle-blowing system may increase a feeling of uncomfortable and insecure among employees, but in the future, it may increase the awareness of employees about the dangerous of committing crime by someone or a group of people for the whole company safety. If somebody commits crimes, his or her action will threat the entire company safety including most of good employees’ interests. The illicit actions conducted by one or some wrongdoers often become the heavy burdens carried on all employees’ shoulders.
This awareness is a very important key to implement whistle blowing system successfully. Furthermore, encouraging and protecting all employees to involve in company’s protection program by providing strong supports and commitments from management, and opening secret, sterile and secure hot line services become crucial ones. Another issue is that keeping intensive contacts to complainant and paying attentions to his or her reports can detect the illicit actions. Moreover, it can prevent the whistle-blower to report his or her complaints through mass media that can damage company’s good reputation.  
However, although a whistle-blowing system has a lot of benefits; it is not a panacea that can solve all problems related to white-collar crimes. Moreover, it also has some negative impacts if not used properly, such as the system may be abused by someone or group of employees to defame innocent rivals. If there is no secure and secret line for whistle-blowing system, bad news of accused one will easily become black campaign to destruct his or her reputation. Remember that a bad news and rumors are usually easier to be generally trusted by most of people. Another potential bad massive impact is if a whistle-blower does not feel that his or her report is handled properly by company internal authority or management, they may speak out through mass media that can damage institution’s reputation severely.  Among other things, I believe that we need more progressive approaches, such as reverse burdens of proof.
    
Reverses Burdens of Proof Program

Actually reverses burdens practices have been known and implemented since a long time ago. The problem is in the hands of whom the obligation to provide evidence must be carried out. Traditionally, many people believe that if you assert someone doing wrong things, you should be able to prove his or her mistake. Thus, the obligations to prove all elements of offence are in hand of prosecutor(s). It based on the opinion that one of the fundamental principles of criminal justice is the presumption of innocence.
However, in the last decades, many people consider in the name of fair justice and protect bigger society’s needs of safety; it seems that a lot of people need new methods to prove the wrongdoers’ illicit actions. If we link it to company, many honest employees who do rely on continual company’s long live may agree that internal wrongdoers are not easily to be catch merely based on whistle-blowing reports. Whistle-blowing is merely a trigger for further investigation to the accused persons.
Previous research conducted by US Merit Systems Protection Board (MSPB) in 2011 showed that a high rate of reporting, particularly for serious types of wrongdoing, is highly related to the quality of evidence held by whistle-blowers. It indicates that whistle-blowers need accurate information about the misconduct before making a decision to report or not report. Findings in my 2016 study confirmed the finding. The majority (86%) of respondents claimed that they would disclose bribery if they had sufficient evidence. The five most important types of evidence are: (1) documents (written order, letter, memo) that can be used as an evident that someone (usually the high rank official or supervisor) has against the regulations, rules, and policies; (2) knowing information in detail (what, who, when, where, why, and how) although without supporting document, such as a verbal instruction from supervisors to alter tax analysis results; and (3) witnessing the bribery; (4) being directly involved in the bribery; and (5) emails or other electronic evidence, such as recorded meeting, instructions.
The DGT should require that all officials and supervisors to document their actions. If officials and supervisors do not implement a proper documentation protocol, employees should have the right to refuse participation in the business process. The employees are legally protected from any form of retribution or discrimination if they exercise this right.
However, to prove whether somebody has commit crime or not, accused person not only should prove the neat documents of his or her duty jobs, but also if needed, they may have to prove that his or her “variance” belongings are not derived from ill-gotten money compared with his or her standard known incomes.

To ensure and review the document as well as to monitor business process, the DGT should make use of information technology to detect tax review irregularities. The success of the Indonesian Tax Amnesty Program in 2016 can be used to widen the tax base. In terms of audit purposes, the new tax base is more effectively based on risk assessment. Then, information technology should be used as an early detection tool of tax avoidance red flags, in particular among the wealthy. More parties (i.e. operational managers, internal control, risk management, compliance, and the internal and external auditors) should be involved in the process of tax assessment and reviews to make the technology more useful to detect possible unlawful assessment conducted by the DGT’s internal employees.
In addition, attention should be paid to the taxpayers because bribery usually involves two parties, both of whom benefit from the misconduct.  An internal control system to identify and determine suspected taxpayers is needed because it provides a more comprehensive means of addressing bribery than does a compliance program. Several approaches, such as:  1) due diligence of taxpayers, extended ‘to all third parties involved in tax controversy and discretionary tax issues, including lawyers, accountants, and tax advisers; 2) monitoring taxpayers in high risk areas; 3) monitoring taxpayers payments; and 4) accessing taxpayers’ bank accounts, could be included in an internal control program. The Automatic Exchange of Information (AEOI) is a good starting point to support transparency and accountability on this issue.
Although I do not try to simplify the situations, it is quite easy to prove whether the money or belongings come from legal sources or not. The simple formula is employee’s wealthy and belongings should be able to be supported by his or her incomes. Then, if there is an excess wealthy that cannot be supported by his or her incomes, the accused person should demonstrate that the excess is derived from legal sources, for instance from inheritance or other side job income. Furthermore, their belongings should be also supported by legal documents. Full access to employees’ private account and belongings is a compulsory. Thus, the company authority, without deposing or reducing or substituting legal actions that may be taken by government authorities, should have full access to their employees’ wealthy and have rights to fully investigate and track the sources of money.                

Conclusion

Although there are some impediments that may hamper the implementation of whistle-blowing and reverses burdens of proof system, such as potential abusing of the systems for defaming innocents and black campaign, I do believe that considering the necessity of effective KYE Program, organizations, including DGT should consider whistle-blowing and reverses burdens of proof systems as additional complementary tools. In addition, in order to protect the reputation of both complaint and accused persons, whistle-blowing and reverses burdens of proof systems should be firmly in place of secure, secret, and safety line with only limited authorized persons who can access it, like a company hot line. Moreover, due to limited authorities of DGT and Inspectorate General to investigate ‘corruption’ cases, they need to improve and relationship and collaboration with KPK and other law enforcement institutions.   
Topics: Know your employee, whistle-blowing, reverse burden of proof, bribery, Directorate General of Taxes 


The author is a public official in a ministry in Indonesia. The views expressed are his own and do not reflect the official stance of the institution he is working. His writing is not intended to vilify particular persons or institutions. He blogs at http://whistleblowing-indonesia.blogspot.com/

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