The Hidden Costs of Flag Borrowing in Public Procurement

 By Kusnandar & Co., Attorneys At Law – Jakarta, Indonesia

 

The ongoing investigation by the Komisi Pemberantasan Korupsi (KPK) into alleged corruption in the advertising procurement process at Bank Pembangunan Daerah Jawa Barat dan Banten (Bank BJB) has once again brought public attention to a recurring corporate malpractice commonly referred to as “flag borrowing.” While this scheme has long existed in certain business practices, its presence within a regionally owned bank raises profound legal and governance concerns.

From the perspective of Kusnandar & Co., a law firm specializing in corporate governance and regulatory compliance, “flag borrowing” is far more than a procedural irregularity. It is potentially a structured mechanism designed to circumvent procurement requirements, conceal the actual controlling parties behind a contract, and distort fair competition. When such practices occur within a state-owned or regionally owned enterprise, the legal implications extend beyond corporate misconduct into the realm of public accountability and anti-corruption enforcement.

Legally, the “flag borrowing” scheme may trigger multiple layers of liability. First, it undermines the principle of fair competition by creating the illusion of legitimate participation in a tender process. A procurement process that appears competitive on paper may in fact be pre-arranged, thereby defeating the transparency and equal opportunity principles that govern public contracting. Second, if a corporate identity is used without proper authorization or to mask the fact that the true executing party does not meet regulatory qualifications, such conduct could constitute document misuse, misrepresentation, or fraud. Third, within a public financial institution, any facilitation or tolerance of such a scheme may amount to abuse of authority, particularly if decision-makers knowingly allowed irregularities to proceed.

As a regional development bank, Bank BJB is not merely a commercial entity; it is also an institution entrusted with public resources. Its board of directors and commissioners owe fiduciary duties to ensure that every allocation of funds aligns with legal standards and the best interests of the institution. If the investigation establishes that senior officials were aware of, or negligently ignored, irregular procurement practices, liability may extend beyond operational staff to those responsible for oversight and governance.

This case also highlights the inherent vulnerabilities in procuring intangible services such as advertising. Unlike infrastructure projects with measurable physical outputs, advertising services often involve performance metrics that are less tangible—media exposure, branding value, or campaign impact. Such ambiguity can create room for inflated pricing, manipulated deliverables, or preferential arrangements. When combined with a “flag borrowing” arrangement, the risk of financial loss and regulatory evasion significantly increases.

In our view, enforcement alone will not be sufficient. While criminal prosecution and asset recovery are essential components of accountability, systemic reform is equally critical. Strengthening internal control mechanisms within regionally owned enterprises, mandating disclosure of beneficial ownership for all vendors, and implementing transparent conflict-of-interest declarations for executives should become standard safeguards. Independent audits must also go beyond formal documentation reviews to assess substantive compliance and value for money.

The broader lesson from this case is that corporate integrity cannot rely solely on written procedures. Effective governance requires an institutional culture that prioritizes compliance and transparency over short-term gains. Without structural improvements, similar schemes will continue to evolve and exploit regulatory loopholes.

Ultimately, the alleged corruption in Bank BJB’s advertising procurement serves as a stark reminder that public trust is built on accountable management of public funds. “Flag borrowing” is not a harmless administrative shortcut; it is a distortion of the legal framework designed to ensure fairness and responsibility. As a nation committed to the rule of law, Indonesia must treat such practices not as technicalities, but as serious breaches that undermine both economic integrity and institutional credibility.

By : K&Co - February 25, 2026