Jiwasraya Scandal Widens

Indonesian prosecutors detained five suspects, including a businessman who lost a case to Goldman Sachs in a share ownership dispute, as authorities widened a probe into investment irregularities at the nation's oldest insurer that's pushed it to the brink of collapse.

Benny Tjokrosaputro, president director of PT Hanson International, Heru Hidayat, president commissioner of PT Trada Alam Minera, and Hendrisman Rahim, former president director of PT Asuransi Jiwasraya were among those arrested on Tuesday, said Hari Setiyono, a spokesman for the Attorney General ST Burhanuddin. The suspects will remain in custody for 20 days for interrogation, he said.

Prosecutors are investigating financial irregularities at Jiwasraya that's facing a $2 billion hole on its books, stemming from what the state insurer has described as product mispricing, reckless investment activities, aggressive window dressing and liquidity pressure. The company is now betting on a government bailout as mounting leave it with a lack of cash to pay policyholders.

The scandal at Jiwasraya has been unfolding during the past three years, after a 2016 audit revealed violations of investment guidelines. Another audit last year showed the insurer had negative equity of 27.2 trillion rupiah ($2 billion), sparking calls for a lifeline. The probe also uncovered alleged irregularities and fraud in the management of its savings and investment plans, which offered guaranteed returns of as high as 13%.

State-Owned Enterprises Minister Erick Thohir lauded the auditor and the attorney general's office for the quick investigation and arrests. "Stern and indiscriminate actions are needed for justice and restoring the public trust in the corporation," he said in a statement.

Jiwasraya's stocks and mutual fund investments in violation of guidelines caused a potential state loss of 13.7 trillion rupiah until August, according to the attorney's office. The insurer also invested heavily in assets with high risks including medium term notes issued by Hanson International.

A spokeswoman for Hanson confirmed Tjokrosaputro's detention but deferred other questions to his legal team. Calls to Trada Alam's office were unanswered while lawyers for Rahim and Jiwasraya's former finance and investment director Harry Prasetyo, who was also arrested, could not immediately be reached.

Goldman Sachs last year won an appeal against a lower court ruling in favor of Hanson's Tjokrosaputro in a share dispute case. Hanson International shares slumped 58% last year and the company was probed by the market regulator for violating fund raising rules.

Insurer Facing $2 Billion Financial Hole Sparks Call for Rescue

The crisis at Jiwasraya affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia's audit board said last week. President Joko Widodo has ordered the finance and state-owned enterprise ministers to take steps to rescue customers' funds, his spokesman Fadjroel Rachman said Wednesday.

"The troubles at Jiwasraya have reduced confidence in Indonesia's overall financial system" though other rated insurers are unlikely to face similar issues, Jessica Pratiwi, an analyst at Fitch Ratings said in a statement. "Life insurers that underwrite a high proportion of products with high guaranteed interest rates" may have difficulties fulfilling their obligations.

The mess at Jiwasraya has spurred the government to consider setting up an agency to shield policyholders of troubled insurance companies. The government has also put on a watch list PT Asabri, which manages the pension and insurance of millions of police, military and defense personnel, after the value of its stock investments eroded.