Mr. Theodoor Bakker Philip Payne Luky I Walalangi August 12 2011 Currency Law uncertainty over foreign currency payments ABNR | Banking & Financial Services - Indonesia Mr. Theodoor Bakker , Philip Payne, Luky I Walalangi Banking & Financial Services IntroductionMandatory use of rupiah for domestic paymentsCommentIntroductionOn May 31 2011 Parliament passed the Currency Law, which was signed into law by the president on June 28 2011. This update summarises some of the law's main features, focusing on those which are likely to have a significant effect on the payment systems employed in Indonesia.The law will have a major impact in the fields of trade and finance due to its requirements regarding the use of rupiah for payments. Its principal purpose is to regulate the rupiah as Indonesia's official legal tender: most of its provisions deal with requirements for the issuance, printing and minting of rupiah banknotes and coins. The law authorises Bank Indonesia to determine the amount of currency in circulation, take responsibility for the printing of banknotes and determine the issuance, distribution and recall of banknotes and coins.Mandatory use of rupiah for domestic paymentsThe law contains significant provisions on the mandatory use of the rupiah as legal tender. Unfortunately, the provisions create considerable uncertainty, as they are worded very broadly.Article 21(1) of the law provides that rupiah must be used:"(a) in each transaction that is intended as a payment; (b) for the settlement of other obligations that must be fulfilled with the use of money, and/or; (c) in other financial transactions which are conducted within the territory of the Republic of Indonesia."Article 21(2) lists the following exceptions:"(a) specific transactions in the framework of implementing the governmental income and expense budget; (b) grants to be given to or received from offshore sources; (c) international trade transactions; (d) foreign exchange bank deposits; and (e) international financing transactions." Article 21 must be read in conjunction with Article 23(1), which prohibits the refusal of rupiah as tender where the transfer of rupiah is intended as payment in settlement of obligations that must be paid in rupiah, or other financial transactions within the Indonesian territory. The prohibition does not apply where there is doubt about the authenticity of the rupiah being tendered.Article 23(2) contains a further exemption to the mandatory use of rupiah for payments or settlements of obligations for which foreign currency has been agreed in writing.Breach of Articles 21 and 23 is punishable by up to one year's imprisonment and a fine of up to Rp200 million.CommentArticles 21 and 23 may cause uncertainty, as settlement in a currency other than rupiah appears to be prohibited, except for the limited transactions listed in Article 21(2) or under the exception in Article 23(2). One possible interpretation is that the law deals with physical tender only (ie, banknotes and coins) and does not cover payments that do not involve the exchange of such instruments. A strong argument in support of this interpretation is found in Article 2(1)'s definition of 'rupiah variants' as "paper rupiah and metal rupiah". However, the exceptions formulated in Article 21(2) clearly suggest that the use of non-physical rupiah (in the form of bank transfers and other giro, postal and electronic payment methods) falls within the scope of the law.In Indonesia, the interpretation of laws is often largely based on the interpretation adopted by the relevant regulator, rather than the view of the courts. The relevant regulator is Bank Indonesia, but it has not yet issued a statement on Articles 21 and 23.Assuming that the law is not limited to the use of tangible currency, a literal reading of the law suggests the following conclusions: Rupiah must be used for the act of payment. A member of Parliament has publicly suggested that the law does not prohibit the use of foreign currency as a base currency in which obligations are expressed or referenced, provided that payment itself is made in rupiah, referenced to an exchange rate. International payments are not affected by the law to the extent that they are made within the framework of trade and financing. It is likely that the term 'trade' includes trade in goods and services. Thus, cross-border investments, loans, forward transactions, structured finance transactions, derivatives, import and export payments, payments of technical assistance fees and similar payments may continue to be made in foreign currency. Deposits with domestic banks may still be made in foreign currency. Conversely, to the extent that payments are not international (ie, between two Indonesian parties), it appears that they must be made in rupiah, even if they relate to trade and finance. This could have serious effects on the domestic payment system. Payments that are traditionally made in US dollars - for example, in domestic trading in commodities such as coal or oil, or under commercial and residential leases - would have to be made in rupiah. The same restriction would apply to the full range of domestic financing transactions. Among other things, this would affect bank loans, overdraft facilities and other banking facilities, large-scale finance leases, domestic goods and services transactions, structured products and derivatives, and credit card and automatic teller machine payments, as well as certain investment products (eg, Reksadana investment funds). The foreign currency prohibition appears to affect all payments where the payor and payee are based in Indonesia. As such, it would catch private individuals who are resident in Indonesia and Indonesian subsidiaries and branches of foreign companies, including foreign-owned companies and bank branches. Uncertainty arises in respect of payments between two domestic banks where at least one of the account holders is an offshore person or entity. The prohibition against demanding payment in foreign currency (or such payment by cheque, money order or bank transfer) is widely formulated. It includes payments for other financial transactions within the Indonesian territory, even if they are not expressed as being payable in a particular currency. The prohibition can be avoided by written agreement; therefore, parties that wish to allow for payment in a foreign currency may consider it prudent expressly to agree to this in writing in each relevant contract. It is unclear whether the prohibition has retrospective effect, but where payments under an existing contract are to be made in future, it appears that the parties can amend the existing contract in writing to allow future payments to be made in a foreign currency. The law touches on many issues that cannot be addressed with certainty at this point, especially as it has been suggested that the law may be sent to the Constitutional Court for judicial review. Parties doing business in Indonesia will wish to follow such developments closely.For further information on this topic please contact Theodoor Bakker, Philip Payne, Luky I Walalangi or Vincent A Lie at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5122) or email ([email protected], [email protected], [email protected] or [email protected]).