By Maria Yudhitama Eka Dewi
Bank Indonesia has issued a regulation to improve the competitiveness of local banks in providing trust services, basically the management of assets. In particular, the new regulation is addressed to oil and gas companies operating in Indonesia, which keep much of their foreign exchange proceeds outside of the country, utilizing trust services provided by foreign banks.
Regulation No. 14/17/PBI/2012 on Banks' Trust Management Business ("PBI") can generally be seen as complementing another Bank Indonesia regulation, No. 14/25/PBI/2012, regarding the Receipt of Foreign Exchange from Export Proceeds and the Withdrawal of Foreign Exchange from Foreign Debt. That regulation requires that foreign exchange from export proceeds be received through a foreign exchange bank in Indonesia.
The regulation on Banks' Trust Management Business governs limited trust activities in Indonesia. Only banks may offer such trust services and only legal entities that have no affiliation with the offering bank may take advantage of these trust services. Unlike trust activities in most common law jurisdictions, which allow a trustee to manage almost any type of asset, trust services under this PBI are limited to cash, receivables and/or commercial papers. However, the PBI does not define the currencies of the trust activities, implying that the trust services are open for financial assets denominated in Indonesian rupiah or foreign currencies.
Before an Indonesian bank or an Indonesian branch office of a foreign bank can be the receiver and administrator of assets ("Trustee"), it must fulfill a series of requirements to ensure its financial soundness and capacity to provide trust services. These requirements are: (i) a minimum Capital Adequacy Ratio (CAR) of 13% for the last 18 consecutive months; (ii) a minimum composite Bank Soundness Level (Tingkat Kesehatan Bank) of 2 for the last 12 consecutive months and a minimum composite rank of 3 for the six months preceding that; (iii) trust services must be included in the Bank Business Plan; (iv) Bank Indonesia administrative, risk management, and compliance assessment of trust services capacity; (v) the bank must be an Indonesian legal entity stipulated as a foreign exchange bank (bank devisa) with a minimum core capital of Rp 5 trillion; and (vi) foreign bank branch offices must be Indonesian legal entities with a minimum Capital Equivalency Maintained Assets ("CEMA") of Rp 5 trillion.
If domestic banks or branch offices of foreign banks meet these requirements, they can obtain the principal license and letter of affirmation from Bank Indonesia allowing them to provide trust services. The letter of affirmation is valid for only one office/branch, meaning a separate letter of affirmation must be obtained for each office/branch that wishes to provide trust services.
Trustees are required to maintain the above CAR percentage, CEMA, core capital level and Bank Soundness Level as long as they provide trust services. Trustees are required to submit monthly reports to Bank Indonesia, and Bank Indonesia may audit a Trustee at any time.
Trust services are based on a written agreement between the owner of the assets ("Settlor") and the Trustee for the benefit of the beneficiary. This Trust Agreement shall include a clear definition of the activities that the Trustee may undertake. The Trustee can play different roles, as a paying agent, investment agent and borrowing agent.
Under the PBI, the Trust Agreement must specify, inter alia, the appointment of the Trustee and beneficiary the rights and obligations of the parties a statement that the custody assets are not included in the bank's assets and a termination clause, assignment clause, choice of governing law in the event of a dispute, and dispute resolution mechanisms.
The Trust Agreement shall be made in Bahasa Indonesia and if it is translated into another language and a conflict of interpretation arises, the Indonesian version shall prevail. Note that the PBI does not stipulate the governing law or dispute resolution forum if a conflict arises, implying that the parties to the Trust Agreement are free to choose their preferred governing law and dispute resolution forum.
Trustees are required to implement risk management practices set out by Bank Indonesia. These include identifying, measuring, monitoring, and controlling risk, and implementing comprehensive and effective policies and procedures as they relate to, among other things, human resources and dispute settlement.
In addition, Trustees must use only accounts in Indonesian banks in carrying out trust activities, and are prohibited from using custody assets for their own benefit or for activities that go beyond the scope of the Trust Agreement, be it on the Trustee's initiative or on the instruction of the Settlor. The Trustee shall submit a monthly report on its trust services to Bank Indonesia, as further stipulated in Bank Indonesia Circular Letter No. 15/10/DPNP, dated March 28, 2013, regarding Reports on Trust Provided by Commercial Banks.
The PBI stipulates that custody assets must be reported separately from a bank's assets. In the event of bankruptcy, the trust assets are not included in the bankruptcy assets (boedel pailit) of the Trustee, and the trust assets will be returned to the Settlor or assigned to another Trustee nominated by the Settlor.
This PBI was designed to give the owners of export proceeds the confidence to place those proceeds with banks in Indonesia. While a worthy cause from the point of view of Indonesia, it remains to be seen if the regulation will have the desired effect and entice exporters to stop parking their funds offshore.
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