Will Going Cashless Help Indonesia Combat Corruption?

In Indonesia, cash rules. But the sheer amount of officials getting caught with stacks of dirty money has led the government to consider limiting cash transactions nationwide in a new bill to be debated on the floor of the House. If the bill passes through the House of Representatives (DPR), it means that cash transactions between people or companies will be limited to Rp 100 million ($7,205 USD) a day. And anybody who violates the regulation will risk facing a fine or in the worst case scenario—imprisonment.

The draft bill will be finalized soon, according to Indonesia's Law and Human Rights Minister Yasonna Laoly, and officials are hoping that if the bill becomes law, it will minimize the possibility of cash-related corruption like bribery, money laundering, and counterfeit money. For a country that ranks 96th out of 180 countries in this year’s corruption index by Amnesty International, becoming a cashless society seems like a step in the right direction. But is it?

“People tend to commit corruption, especially bribery, by using cash,” said Lalola Easter, a researcher from the Indonesia Corruption Watch (ICW). “That’s why so many people get caught red-handed—their method is old-fashioned.”

In August of last year, the Corruption Eradication Commission (KPK) carried out one of their biggest operations so far. Antonius Tonny Budiono, a top official in the Ministry of Transportation, was arrested for accepting a bribe for the dredging project in Semarang that totaled Rp 18.9 billion ($1.3 million USD) in cash. Only Rp 1.174 billion ($84,000 USD) came in the form of a wire transfer. The rest was cash.

A similar thing happened in disgraced Constutional Court Chief Justice Akil Mochtar’s case back in 2013. The KPK found Rp 2.7 billion ($122,500 USD) in cash hidden in the walls of a karaoke room at his official residence in South Jakarta. Corrupt officials have to get pretty creative with storing their boatloads of cash these days, and the bill, if passed, will make it even harder for them to get away with it.

“Once they receive the money, they only have two choices,” Lalola told VICE. “To either hide it in their homes, and risk getting caught red-handed, or turn it into an asset like property or gold. But if we go cashless, even if the money is converted, it’s still being tracked. So they can no longer use the graft money for a house or a car downpayment, which is the most common way to launder money.”

So what will happen if Indonesia becomes a cashless society? Let’s look at our not-so-distant neighbor India for some clues. In 2016, Prime Minister Narendra Modi said that banishing physical money was the only way to combat corruption in the country. Since then, the government has demonetized 86 percent of cash in the country, most of them in 500 rupee and 1,000 rupee bills. They have been replaced with Pay Through Mobile (Paytm), the biggest digital wallet in the world that the company claimed is routinely used by 220 million people in India.

As expected, the system wasn’t welcomed by a lot of people at first, and the plan created chaos and long queues at banks. But, over time the law became popular, especially among lower-income populations who believe that it’s a way to prevent tax evasion by the rich. Still, there’s no clear evidence so far that it’s actually reduced corruption—and it’s possible that there won’t be one.

The World Bank and Transparency International released a comparative analysis in 2016 that shows there is little correlation between the amount of cash distributed in society and corruption. India, which ranks 76th in the world corruption index, is an 11.8 percent cash economy. Meanwhile Germany, which ranks 9th, is an 8.7 percent cash economy. The two countries’ dependence on cash really isn't all that different.

Harvard Business Review has pointed out that between 2015 and 2016, only 6 percent of corruption cases in India involved cash, while the rest were in the forms of business investments, stocks, real estate, and jewelry. This means that cash isn’t the biggest threat when it comes to corruption in India.

Let’s put corrupt officials aside for a second. What will this bill mean to the everyday Indonesians? Are warteg owners going to have card readers now? What about parking attendants? In a report released by KPMG, only 8 percent Indonesians older than 15 years old own debit cards, which is way below the average of 15 percent in other countries in the region. The same goes with credit cards—only 4 percent of Indonesians have them.

“We want our society to be a cashless one,” said Kiagus Badarudin, the head of the Financial Transaction Reports and Analysis Center. “If we succeed, our economy will become more efficient, and we won't spend as much on expenses like printing money and storing money. And another goal is to prevent crime, such as counterfeit money, money laundering, corruption, bribery, and gratification.”

Non-cash transactions can also reduce social inequality, according to Harvard economist Kenneth Rogoff. In his book The Curse of Cash, he writes that poor people benefit the most from a cashless system. There would be less money that misappropriated by corruption and tax evasion, and these crimes tend to impact those who are financially vulnerable the most.

But a cash threshold won’t necessarily eliminate all crimes related to cash, according to research conducted by Deutsche Bundesbank. This system is considered most effective to fight tax evasion and bribe, but it may not help with other problems such as terrorism funding.

Kiagus told me that making sure banks have the same facilities to support the bill will be a challenge. And exceptions need to be made for cash-intensive small business such as street vendors, small retailers, and gas stations, as well as areas with no providers of financial services for cashless transactions.

“The learning process during the implementation of any policy is inevitable,” Kiagus told me. “Everything would still be rigid and we need to educate the masses. It will be uncomfortable at the beginning.

The system won’t be perfect, but it’s going to make it easier to spot suspicious banking activities, Kiagus said.

“Money politics usually always involve cash transactions,” Kiagus said. “So, those who don’t like this policy are the ones whose cash operation would be shut down.”