A Victim of Legal Anarchy - Manulife in Indonesia (A) (B)

When Canadian insurance giant Manulife entered Indonesia in 1987, it followed the rulebook to the letter. It partnered with a local firm, as required by Indonesian law, and even had the cooperation of the International Finance Corporation (an agency of the World Bank), which held a 9% stake in the joint venture. To show its commitment to the region, Manulife in 1997 became the first financial company to buy government bank bonds. Yet the company’s apparent good standing in the community and its financial resources were not enough to insulate it from the powerful and tangled web of local corruption, explain Professor Douglas Webber and Ulla Fionna in this case study.

by Douglas Webber, Ulla Fionna
Last Updated: 23 Jul 2013

In a true story that seems stranger than fiction, Douglas Webber, Professor of Political Science, and Ulla Fionna, Research Associate, outline the bizarre case brought in 2000 against Canadian insurance giant, Manulife, by the Indonesian police who accused the company of fraud. In a lesson to all companies doing business in countries known for corruption, the case provides a detailed account of how local authorities built a “case” against Manulife, resulting in the apprehension and detention of several of its managers, and a legal fight that sapped time and resources from the company.

The case starts with Manulife’s expansion into Indonesia in 1987. Far from a newcomer to the region, Manulife already had a strong presence in Japan, Taiwan, Singapore, and the Philippines. By 2000, Manulife’s Indonesian operation had 72 branches in 33 cities and employed some 3,300 people. When its local partner, DSS (Dharmala Sakti Sejahtera) ran into troubles following the Asian economic crisis and was declared bankrupt, Manulife was in the position to buy out their share in the joint venture. Wanting to pre-empt any accusation that it was exploiting the crisis to acquire Indonesian assets ‘on the cheap’, Manulife offered to pay more for the stake than DSS itself had calculated it to be worth.

What was supposed to be a routine business transaction turned into a legal nightmare. The authors explore Manulife’s response to trumped up charges by local police that led to the arrest and detainment of several of its top-level executives. (For Manulife’s managers, it was clear that its former local partner had paid the police to harass it.) These strong-arm tactics, said Manulife’s president-director Philip Hampden-Smith, are aimed at pressuring foreign companies into out-of-court settlements. “Basically, it’s extortion and blackmail. . . They put pressure on companies, for example, by arresting their top executives without charging them. The whole aim is to frighten and cajole you.”

Though supported by numerous organizations, including the IBRA (Indonesian Bank Restructuring Agency) and Indonesia’s Attorney General’s Office, Manulife could get little help from the Indonesian government. The company’s only recourse was to bring the issue to international attention, protesting first to the Canadian government, which put pressure on the Indonesian government, and then to the World Bank, a major donor to Indonesia. The strategy worked, though more slowly than one might expect. The Indonesian economics minister and Attorney General openly admitted that the police’s behaviour toward Manulife was impossible to justify, but implied they were powerless to control the police.

Breaking down the layers of corruption required intense external pressure, including threats by the International Monetary Fund to withhold funding to the country. Finally, seven months after the ordeal began, Indonesia’s president Wahid announced that Manulife was innocent of fraud charges.

The case study reveals the extreme complexity of post-Suharto Indonesia, which in 2001 was ranked by Transparency International as the world’s third most corrupt country, up from sixth in 1998. An accompanying Background Note offers a historical overview of the political and legal systems in Indonesia, illustrating the endemic nature of corruption and the challenges facing reformers.

INSEAD 2002

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