BUSINESSWEEK ONLINE : JULY 26, 1999 ISSUE
INTERNATIONAL -- ASIAN COVER STORY

Suharto Billions May Be Sneaking Back (int'l edition)
Is family money being used to buy back property seized for nonpayment of debts?

Eko S. Budianto, deputy chairman of the Indonesian Bank Restructuring Agency (IBRA), thought there was something fishy about the small group of Western and Indonesian visitors from a foreign hedge fund who walked into his Jakarta office recently. He had never heard of the fund, which had an acronym for a name and was registered in a Caribbean tax haven.

Without even looking at the list of IBRA holdings, the visitors immediately offered to buy a hotel owned by one of the children of former President Suharto. IBRA--the government agency charged with clearing dud loans off bank balance sheets--had seized that hotel and was holding it as collateral against a bad loan from a Suharto family-run bank it had nationalized. The hedge fund representatives offered only 10% of the hotel's market value and said they planned to take it public. Budianto, suspicions raised by the way his visitors zoomed in on an asset they knew of already, declined to sell.

''I tell them: 'This is not the right time to sell anything,''' says Budianto, referring to these and other would-be buyers with obscure connections. He adds, ''You have to be very careful, you know. They're not going to say, 'Hey, by the by, I'm representing the Suharto family.'''

But Budianto thinks they are. Though he can't prove it, Budianto and a number of bankers in Jakarta who have dealt with them suspect such funds are acting as proxies. Wealthy Indonesians, including Suharto's six children, are believed to have spirited more than $100 billion out of the country following the ouster of Suharto in May, 1998. Through the attempted hotel purchase and others like it, they've been trying to bring that money back in, according to officials, banking executives, and investment bankers in Singapore and Jakarta.

These Indonesian notables are trying to buy back on the cheap many of the assets they once owned but which were seized after the tycoons' companies could not make good on their debts. If these schemes work, then the original owners will get their properties back and avoid paying off the bad loans that caused their assets to be seized in the first place. Explains Budianto: ''Rather than settling the debt, [the debtor] says, 'O.K., take my assets.' And then circling back, he uses a [front] company and says, 'I'm thinking of paying 10 cents on the dollar.'''

This is all perfectly legal under Indonesian law. Like just about anywhere in the world, limited liability laws protect people whose companies go bust from having to lose their personal assets. If Suharto family members buy back their companies with personal funds, no laws are violated. Since IBRA is required to get the highest price possible for the $33 billion total assets it seized from the Suhartos and other wealthy Indonesians, it may end up selling them back to the original owners after all. IBRA plans to hold public auctions for the seized assets some time in the future, and it will sell them to ''whomever is willing to pay the highest price,'' says Budianto, regardless of the bidders' history or affiliation.

Suharto and his six children have been questioned by investigators probing corruption, but so far none has been charged with any crime related to assets seized by IBRA. That leaves the legal path clear for them to buy back at auction at bargain-basement prices what was seized. BUSINESS WEEK sent letters to Suharto and five of his six children asking them to respond to their alleged connections to foreign investment vehicles. None responded.

At their economic apex, the six children are believed to have amassed a business empire valued at $4 billion--even more, say other estimates. Their holdings included vast amounts of property and estates overseas and equity stakes in large Indonesian corporations. But since Suharto's ouster, the kids have lost the advantages that gave them lucrative licenses and franchises and made them joint-venture partners of choice for multinational corporations seeking entree into Indonesia. Now, many of their oil-and-gas, mining, shipping, logging, and other operations are technically bankrupt. Their earnings in devalued local currency cannot pay down huge debts denominated in dollars. ''The family has virtually no performing assets left in Indonesia,'' says Wilson Nababan, director of CISI Raya Utama, an Indonesian credit agency.

The Suhartos have resigned from all their posts in the cabinet and legislature. Suharto's second son, Bambang Trihatmodjo, was forced to resign from his directorship of holding company Bimantara Citra. Finance industry sources say Bambang has proposed swapping his Grand Hyatt Jakarta in exchange for having his Bimantara debt forgiven. Suharto's third son Hutomo Mandala Putra, or Tommy, is on trial for allegedly defrauding the State Logistics Agency in a land-swap scandal.

Yet some Suharto business interests remain. Suharto's eldest daughter, Siti Hardiyanti Rukmana, known as Tutut, remains chairman of toll road management company Citra Marga Nusaphala Persada. The company collects $100,000 in tolls daily--or $37 million a year--but suffered a loss of $68 million last year on top of more than $200 million in debt.

Suharto children also earn millions every year from various taxes and duties that the World Bank has repeatedly criticized as extravagant. Remnants of the Finance Ministry's attempt to ''privatize'' tax collection, companies owned by Suharto children collect a stamp tax on beer cans and bottles, a toll on logs removed from forestry concession areas, and a commission from a multinational corporation on the distribution of concentrated kalamansi fruit juice. ''Businesspeople are afraid that not enough has changed [in the government] to put your foot down, so they pay up,'' says the CEO of a foreign consumer-goods maker in Jakarta.

The Suharto children have used proxy companies before. For starters, it allows more anonymous investment, deterring questions on the original source of the funds. It also affords an extra degree of legal protection: the right to repatriate funds. ''There's nothing like that for local investors,'' says a foreign attorney in Jakarta. Long before the crisis, Bambang and three nominee investors set up proxy companies in Hong Kong and used them to invest in Bambang's Chandra Asri petrochemical plant. As a result, the company was able to qualify as ''100% foreign owned'' and thereby circumvent restrictions against heavy borrowing by domestic investors in 1992. ''Hong Kong is one of the biggest foreign investors in Indonesia, but not much of the money actually comes from Hong Kong,'' says the attorney.

The alleged front companies are small, no-name operators, registered primarily in tax havens such as the Cayman Islands, where laws make it easier for companies to hide their ownership. People claiming to represent the companies ''don't have a record of doing business with the family,'' says a Jakarta investment banker. ''They're people who owe Suharto a favor, like the lady who had a free kidney operation at one of his charity hospitals or the guy whose business was saved by a soft loan from one of the family banks.''

LOCKED HOTELS. Among the total of $13 billion in assets seized by IBRA are an estimated $200 million worth of Suharto-connected hotels and millions of dollars worth of equity stakes in various companies. They include a 60% stake in the Chandra Asri plant, as well as a 40% equity stake in Toyota Motor Corp. assembler Astra International, formerly owned by Nusamba Group, the investment company of several charities of which Suharto was chairman. The assets also include a 30% stake in Bank Central Asia, formerly held by Tutut and her younger brother Sigit Harjoyudanto. And there's the Jakarta office tower and West Java assembly plant of Timor Putra Nasional, Tommy's national car program.

Some of the estimated $100 billion of flight capital has been returning via less exotic routes than nominee companies in tax havens. In the past five months, the Singapore offices of Chase Manhattan Bank, American Express Bank, and J.P. Morgan have all been approached by wealthy Indonesians seeking advice on how legally to acquire assets in their native country, according to finance industry sources. Officials at those banks flatly refuse to confirm or deny whether any of them have represented the Suhartos. But one Singapore-based banker says: ''You couldn't be dealing in Indonesia without in some way finding yourself in that situation.''

Lately, the Suharto family has been showing a renewed sense of business confidence. This is most apparent at Bimantara Group, which used to be run by Bambang. It is now run by Chairman Rosano Barak, who in an interview with BUSINESS WEEK admitted he has been a close friend of Bambang's since boyhood and that he acts according to Bambang's wishes. According to investment bankers with inside knowledge of Bimantara's debt-restructuring talks, several deals have fallen apart because Bambang didn't like the pricing. In one example, Deutsche Telekom offered to bail out Bimantara's Satelindo cell-phone network, which has undisclosed debts, but was turned down.

Sources close to the family say the Suhartos are simply waiting for the Indonesian rupiah and stock market--already up this year 20% and 75%, respectively--to strengthen further before cutting some of these deals. Politically, the family also has reason to hope for a comeback. The year-long government corruption investigation is still continuing. But Armed Forces Commander-in-Chief General Wiranto and opposition leader Megawati Sukarnoputri--both front-running candidates for the presidency--have said they will go easy on Suharto and his family for the sake of national unity. Wiranto, once an aide-de-camp to Suharto, has vowed to guarantee the family's ''security and dignity.'' Locally, the phrase is taken to mean that Suharto family members will not have to serve time in prison, even if they are eventually found guilty of corruption.

The irony is that a return of the Suharto millions, as well as those of other wealthy Indonesians, would be a boon for the economy. Foreign investors see the return of local capital as the sign of confidence they're looking for. ''This is investment that the country needs,'' says a Hong Kong-based economist who tracks Indonesia. Even if it is tainted.

By Michael Shari in Jakarta

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