Jurisdiction - Indonesia
Reports and Analysis
Indonesia – Ministry Of Trade Regulation Will Require Payments For Export Of Commodities To Be Made By Indonesian Bank Letter Of Credit.

10 March, 2015

 

 

Background

 

1. On 5 January 2015, Indonesia’s Ministry of Trade issued Regulation No. 04/M-DAG/PER/I/2015 on the Use of Letter of Credit for the Export of Certain Goods (the “Regulation”). The Regulation will take effect on 1 April 2015.
2. The primary driver for the issuance of the Regulation appears to be the desire to encourage repatriation of export proceeds into Indonesia as well as improving reporting on export of certain commodities, in particular in order to control illegal mineral exports.
3. The Regulation is applicable to all exports of the minerals and other commodities specified in the attachment to the Regulation and there appear to be no exemptions from the requirements set out in the Regulation.

 

Requirements

 

4. The Regulation provides that payment for export of the specified goods (including gold, silver, copper, coal, crude oil, condensate, LNG and crude palm oil) must be in the form of a letter of credit.
5. The Regulation also provides that the letter of credit must state the price of the commodities exported and such price must at least be equal to the “global market price”. The Regulation is silent on how “global market price” is to be determined.
6. The letter of credit must be issued by a licensed Foreign Exchange Bank, being a bank licensed to deal in foreign exchange in Indonesia. This would include Indonesian banks, licensed branches of foreign banks as well as Indonesian incorporated subsidiaries of foreign banks.
7. Relevant mineral/commodities exporters will be required to specify “letter of credit” when describing the payment method in the Goods Export Notice. Under another recent Ministry of Trade regulation (Regulation No. 04/M-DAG/PER/1/2014 on Provisions for Export of Processed and Refined Mining Products), the export of specified refined or processed mining products must also be verified by a surveyor and supported by a surveyor’s report. The Regulation provides that the surveyor is required to examine the letter of credit documents and the surveyor must clearly state in its report that the payment mechanism for the exported goods is a letter of credit

 

Sanctions

 

8. Failure to comply with the requirements of the Regulation would result in the mineral/commodity exporter being unable to export the specified goods. The exporters may also be subject to sanctions for breach of the Regulation, although the extent of such sanctions is not expressly prescribed.

 

Observations

 

9. The letter of credit requirement introduced by the Regulation was in fact previously introduced by the Ministry of Trade in 2009 as a means to promote the use of local banks as well as a method to control illegal mineral exports. At the time in 2009, the letter of credit requirement was met with resistance from industry players and was eventually abandoned.
10. Since the Regulation is likely to have a significant impact on mineral/commodity exporters, in particular in situations of long-term sales contracts and commodity trading since the letter of credit mechanism does not fit well within the payment mechanisms usually used in such circumstances, we expect that the requirements of the Regulation will again meet with resistance from the industry players. It remains to be seen whether objections raised by commodity exporters will sway the Ministry of Trade; however, as things stand, the Regulation is stated to take effect on 1 April and all exporters of the commodities listed in the Regulation will be required to comply with the requirements of the Regulation.

 

herbert smith Freehills

 

For further information, please contact:

 

David Dawborn, Partner, Herbert Smith Freehills

david.dawborn@hbtlaw.com

 

Tjahjadi Bunjamin, Partner, Hiswara Bunjamin & Tandjung

tjahjadi.bunjamin@hbtlaw.com

 

Irina Akentjeva, Herbert Smith Freehills

irina.akentjeva@hsf.com


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