How lawyers and big banks help one of Asia’s largest paper companies expand despite poor environmental record and social conflicts.
On the island of Padang, in the heart of Indonesia’s industrial logging country, a group of teenagers pointed to the charred remains of sago palm trees – the remnants of the fires that have scorched the archipelago nation’s lush forests for two decades.
“There’s a sense of anger,” said Alvin, 15, who grew up in the village of Bagan Melibur. “The effects of forest burning and deforestation are enormous” for both humans and animals, he said.
In 2015, the fires were so intense across the island chain that a bitter haze blanketed much of Indonesia and drifted as far as Thailand. Airline flights were grounded. Children wore protective masks to school. Studies linked smog levels to at least 19 deaths and respiratory problems in as many as half a million people. Indonesia’s meteorology agency called the unbreathable murk “a crime against humanity.”
The fires that produced the smog were a result of a prolonged dry season and slash-and-burn practices used to clear Indonesia’s lush peatland forests to make way for palm oil and pulpwood plantations. In the fires’ wake, environmental groups lashed out at the industrial players involved in clearing Indonesia’s forests, including Asia Pacific Resources International Holdings Ltd., also known as April, one of the world’s largest pulp and paper producers.
A leak of offshore records now reveals that April, like some other natural resources companies, owed its ability to thrive and log huge sections of Indonesia’s tropical forests, in part, to a global network of elite bankers, lawyers and accountants that helped it navigate corporate and tax challenges.
The documents come from the offshore law firm Appleby and corporate services provider Estera, two businesses that operated together under the Appleby name until Estera became independent in 2016. They show how the Bermuda-based law firm Appleby and brand-name banks such as Credit Suisse and the Netherlands’ ABN Amro have continued to help April structure its operations despite questions about the company’s environmental record.
Internal records from Appleby underline concerns of scholars, advocacy groups and government officials that the offshore financial system contributes to the expansion of companies involved in leveling forests and other practices that contribute to global climate change. Compounding the problem is the fact that Indonesia, home to the world’s third-largest expanse of tropical forests, has the highest rate of deforestation.
The leaked documents, now known as the Paradise Papers, were obtained by German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ) and 94 other media partners.
An ICIJ analysis of the documents found that April is one of a dozen Asia-based forest products companies that have used the services of Appleby, which calls itself “one of the world’s largest providers of offshore legal services.” April has shuffled billions of dollars through a web of offshore companies stretching from the Cook Islands in the South Pacific to the British Virgin Islands in the Caribbean, ICIJ’s review found.
“April does not comment publicly on the details of its financing arrangements,” a company spokesperson wrote in an email.
April is a member of the Royal Golden Eagle Group, one of Asia’s largest resource conglomerates. Based in Singapore, RGE employs more than 60,000 people around the world, producing paper, palm oil and other products. The conglomerate is closely held, and financial information about it is scarce.
RGE says that it provides “strategic advice and comprehensive business process outsourcing” to April and other companies in the group and that each is “independently run, owns its assets, and manages its finances autonomously.”
No one doubts who controls all of it: Indonesian billionaire Sukanto Tanoto, who rose from modest circumstances to become one of the country’s most-powerful and best-connected figures.
Tanoto took over the family business of supplying spare parts to the oil and construction industries in 1967, according to the company’s website, and he soon won contracts from a state-owned oil and gas company. He founded RGE in 1973 and then moved into the forestry business as a plywood manufacturer.
The late Indonesian President Suharto, the dictator who took power in 1967, spurred development by encouraging massive exploitation of the country’s natural resources. He declared that the nation’s forests – covering roughly three-quarters of all Indonesian land – were state-owned, brushing aside indigenous communities’ claims to ownership. Forest concessions were split among family members, business partners and loyalists. By the end of the Suharto era, which lasted into the 1990s, about 100 million acres of Indonesia’s tropical forest – an area the size of Germany and the Netherlands combined – had been stripped of trees by clear-cutting.
Tanoto opened his first pulp and paper mill with a ceremony attended by Suharto and his Cabinet. Over the years, his companies benefited from generous government subsidies provided to the forestry sector, including royalties paid to the government that have been kept artificially low since the 1990s, according to Indonesia’s Corruption Eradication Commission and forestry researchers.
Tanoto moved into palm oil, energy and a fiber used to make rayon and cellophane as the country rode the mid-1990s economic boom to become an “Asian tiger.”
Around the same time, RGE began moving its financial dealings to tax havens, according to records reviewed by ICIJ, setting up corporate entities in zero- or low-tax jurisdictions and moving capital offshore.
In September 1994, the first pieces of what would become the April group emerged with the formation of two companies in Bermuda, a key outpost in the offshore financial system. Those firms retained Appleby for administration and legal services Within a year, one of those Bermuda entities, also known as April, was listed on the New York Stock Exchange. According to secret documents used in ICIJ’s 2013 “Offshore Leaks” investigation, a Singapore-based offshore services provider called Portcullis TrustNet helped RGE set up a company in the British Virgin Islands and two firms in the Cook Islands. One of the Cook Islands companies was PEC-Tech Ltd., an engineering firm that became an active player in Tanoto’s pulp and paper operation.
For some of the corporations created through Portcullis, Tanoto signed contracts that authorized a third-party company to execute transactions on his behalf. Tanoto, an ethnic Chinese citizen of Indonesia, signed the authorizations with his Chinese name, Tan Kang Hoo.
The 1997 Asian financial crisis sent the Indonesian economy into a tailspin and forced Suharto from power. The economic shock forced the delisting of April, staggering under $1.3 billion in debt, from the New York Stock Exchange in 2001.
The government of President Megawati Sukarnoputri stepped in to rescue the country’s resource industry. The Indonesian Bank Restructuring Agency and national and international creditors restructured April’s and its competitors’ debt. According to reports by Indonesian forestry experts, April agreed to expand its pulp operations on the major Indonesian island of Sumatra in exchange for the restructuring.
April also expanded to China, Brazil and elsewhere, according to the company website. Appleby documents show that April has or had subsidiaries in Dubai, the Seychelles and other tax havens. These companies are not listed on April’s public website.
RGE, in the meantime, moved its headquarters to Singapore, a low-tax financial center, where it remains.
The conglomerate’s growing complexity came back to bite it in 2007, when Indonesian tax authorities began investigating RGE’s giant palm oil affiliate, known as Asian Agri. The government charged that between 2002 and 2005, Asian Agri managers devised a sophisticated tax-avoidance scheme involving 14 subsidiaries.
Authorities claimed that Asian Agri used shell corporations in the British Virgin Islands, Macao and Hong Kong to manipulate the price of transferred goods and artificially reduce the profits of the Indonesian companies while increasing those of the low-tax offshore subsidiaries. In 2012, Indonesia’s Supreme Court sentenced Asian Agri’s Indonesian tax manager to two years in prison and ordered the palm oil company to pay more than $440 million in taxes and penalties.
As RGE’s palm oil unit battled tax problems, April, the conglomerate’s forest products company, was mired in controversy as its expansion continued.
In 2008, a government official in central Sumatra was convicted and sentenced to 11 years in prison for taking $100,000 in bribes in exchange for issuing forest plantation licenses to companies illegally logging in protected forests. Seven of those companies were April wood suppliers, according to several news reports. Neither April nor any of its subsidiaries was charged, but environmentalists said the company bears responsibility because its subsidiary purchased wood from companies operating illegally. Eyes on the Forest, an environmental coalition, claimed that April was responsible for the destruction of about 350,000 acres of forestland in Sumatra and that the company “knowingly pulped natural forest wood from concessions whose licenses were issued through corrupt practices.”
April disputed the allegation. “We undertake land conversion responsibly,” April wrote in response to the Eyes on the Forest report. “Accusations that April or those the company sources wood fibre from are operating illegally, or that concessions awarded have been the subject of corrupt practices, are untrue.”
In 2016, Indonesia’s Supreme Court fined one of April’s suppliers $1.2 billion after finding that the supplier had engaged in illegal logging and destroyed more than 18,000 acres of forest.
In 2009, a year after the bribery case in central Sumatra, an April subsidiary won a license to operate on Padang Island, a much smaller island just east of Sumatra. Residents of Bagan Melibur, in the southern part of the island, later said they became aware of April’s logging activities when farmers who live in the forest noticed the heavy machinery.
Loggers began clear-cutting the forest and planting acacia trees for paper production, and excavators dug canals through the peat to transport logs to the mill and drain the wetland.
Villagers organized marches, hunger strikes and other protests. Some stitched their lips shut to protest the government’s support of the company.
One protester, Budimaridi (some Indonesians go by a single name), said villagers use the forest to cultivate rubber trees, oil palms and sago palm trees, used to produce starch for biscuits and crackers.
“We are one family, one village” and have “one problem,” said Budimaridi. “They continued exploiting” the forest and “we continued fighting.”
Sometimes we feel like we are not Indonesian citizens anymore. Our government is not strong enough to control the company.
In 2013, the central government removed about 17,000 acres of land claimed by the islanders, including those living in Bagan Melibur, from April’s concession. Yet, according to local environmental organizations, the company has continued operations there with the government’s silent approval. April declined to comment on these allegations.
“Sometimes we feel like we are not Indonesian citizens anymore,” said Budimaridi, who works for a local energy company. “Our government is not strong enough to control the company.”
Even as complaints mounted, the big-bank loans flowed, often funneled through complex corporate webs to companies operating in Indonesia’s forests.
In December 2010, for instance, a group of banks led by Credit Suisse, using Appleby as counsel, arranged to lend more than $180 million to the April group, according to a flow chart in Appleby’s internal files. The money was destined for PEC-Tech, the Cook Islands engineering company. But it wouldn’t go directly there, according to the chart.
Instead, the borrower was a British Virgin Islands holding company, Gold Crest Capital, which, in turn, would lend the sum to another British Virgin Islands company, which would send the loan to a Singapore holding company, which was “to act as a treasury and finance centre for the April group,” according to Appleby emails.
The Singapore holding company, Heliosity Consulting, would lend money to April’s Indonesian pulp-supplying unit, which would then pay PEC-Tech for a new pulp production line.
The circuitous arrangement was part of a tax-driven structure designed to decrease the group’s overall tax burden, a lawyer for the banks wrote in an email to Appleby.
Appleby did not set up this structure but provided legal services to banks lending to some of April’s subsidiaries.
The effects of this arrangement on taxes are not known. But the leaked files show that in 2013 an April subsidiary in the British Virgin Islands obtained a similar loan that was described as tax-free.
An April spokeswoman said the company “meets all tax obligations in the jurisdictions where it operates” and “complies with all relevant domestic and international laws and regulations in its financial dealings as part of an overall commitment to good corporate governance and to sustainable business practices.”
Experts interviewed by ICIJ said firms can lower the cost of borrowing by moving loans through shell companies in the British Virgin Islands and other tax havens to financial centers such as Singapore. Routing the money that way can reduce or avoid withholding taxes on interest payments to lenders. The loan proceeds can then be distributed to an operating company in a high-tax country such as Indonesia.
This kind of arrangement is legal, and indeed common. The Appleby files reveal that between 2006 and 2013, April alone moved as much as $3 billion to subsidiaries through its entities in the British Virgin Islands and other secrecy jurisdictions.
Experts told ICIJ that such arrangements often shift taxable profits away from jurisdictions that bear the social costs of resource exploitation to others that simply charge lower taxes.
They also said that the use of shell companies in loan transactions enables banks to claim only limited involvement with natural resources companies that flout environmental laws. When loans are provided to offshore subsidiaries, identifying responsible parties and holding them to account becomes much harder, they said.
Numerous reports by human rights groups and development agencies have documented how land-grabbing and forced displacement of indigenous peoples are often consequences of natural resources companies’ business practices. Big foreign conglomerates, they say, are profiting at the expense of struggling communities whose livelihoods depend on the stewardship of the forest and the land.
To protect the interests of developing countries and prevent the abuse of tax treaties to aggressively minimize corporate taxes, the Group of 20 world economic powers and the Organization for Economic Cooperation and Development recently endorsed a series of measures to reform international tax rules.
Forested areas of Indonesia are vitally important not only to local populations “but also to the country’s overall economy and future as well as globally, in terms of climate change,” said Stephanie Fried, executive director of the Ulu Foundation, a U.S.-based environmental group.
When companies use money saved by tax avoidance to invest in deforestation and other destructive activities, “the environmental damage and the social devastation are much broader,” said Fried, who is also an expert in the Indonesian forestry sector.
Since the mid-2000s, major banks have been adopting voluntary standards to assess the environmental risks associated with lending to natural resource companies, progress made under pressure from environmentalists and the World Bank Group.
April has continued to get hefty loans, even as complaints about its environmental record have mounted. In 2011, for instance, one of April’s holding companies in the British Virgin Islands negotiated a $600 million loan from ABN Amro, Spain’s Banco Santander and others.
Appleby’s files show that April sought to weaken an environmental clause in loan documents. A draft version would have committed the company to “take all reasonable steps in anticipation of known or expected future changes to or obligations under Environmental Law or any Environmental Licences.” In a footnote in the draft, an agent for the lenders wrote that April asked that the environmental clause be deleted because it would be “burdensome for them to monitor and anticipate future changes to environmental law.” The company’s effort was successful.
April declined to comment on these efforts. An ABN Amro spokeswoman said the bank “does not take part in any transactions or activities that are in conflict with nature conservation” and does not “facilitate tax avoidance.” She declined to comment on the bank’s business with April.
Two months after the loan closed in June 2011, corporate customers such as Fuji Xerox Australia and Officeworks announced that they would stop doing business with April, citing environmentalists’ concerns about deforestation and claims that the company’s suppliers were engaged in illegal logging.
In 2011, April lost a key endorsement when the Forest Stewardship Council, an environmental standards watchdog based in Bonn, Germany, withdrew certificates of approval from two of April’s Sumatran pulp and paper producers. In 2013, the council cut ties to April altogether after Greenpeace and other environmental groups denounced what they described as the company’s role in large-scale deforestation.
In 2015, April did obtain certification from another body, one that some environmentalists dismissed as weaker and more responsive to industry interests.
In its response to the Forest Stewardship Council’s 2011 decision, April said: “While we understand there are those who are philosophically opposed to the establishment, or even the existence, of forestry industries in Indonesia, our firm view is that forestry industries are an integral element in progressing the Indonesian Government’s plan for achieving the country’s national development and environmental objectives.”
In April 2015, Credit Suisse’s chief risk officer met with Greenpeace and other environmental organizations and told them that the bank would “review” its lending to April, according to minutes of the meeting published on the BankTrack website. About the same time, Santander and ABN Amro announced that they would provide no new loans to April.
Our firm view is that forestry industries are an integral element in progressing the Indonesian Government’s plan for achieving the country’s national development and environmental objectives.
By early June 2015, April announced that it had stopped logging naturally grown forests the previous month – four years ahead of schedule. The company said it shifted to obtaining all of its wood from pulpwood plantations.
The move encouraged Greenpeace to join the company’s Stakeholder Advisory Committee. ABN Amro reversed its stand on financing, citing environmental groups’ endorsement of April’s revised practices, said BankTrack’s Karen Vermeer, recounting an explanation the Dutch bank gave in 2016.
For its part, Credit Suisse never stopped lending to April. Without commenting on the bank’s decision, a spokesperson said Credit Suisse encourages its clients to “address any sustainability or social concerns.”
In September 2015, as wildfire-generated haze covered the region, April’s Singapore holding company was negotiating another giant loan – for $1.1 billion – from a consortium including Credit Suisse and ABN Amro. Appleby provided legal services to the banks to facilitate the loan, according to the leaked documents.
At one point, emails indicate, the smog – which environmentalists blamed on April and other forestry companies – got so thick that flights were canceled and April’s Indonesian executives couldn’t leave Sumatra to attend talks in Jakarta. They were forced to grant power of attorney to their representatives in Jakarta to act on their behalf.
The loan closed in late October 2015. The next year, a government agency found that April’s operation on Padang Island had violated a moratorium on peatland clearing imposed in the aftermath of the fires and sickening haze. Peat drainage canals dry out the land and make it more prone to fire.
As a result, the agency halted the company’s operations on the island and Greenpeace and the World Wildlife Fund withdrew from April’s Stakeholder Advisory Committee.
April issued an apology and renewed its commitment to restore and conserve forest areas.
In October 2017, the Indonesian environment ministry rejected the company’s long-term work plan because it allegedly did not comply with the nation’s rules on peatland protection. “I invite [the company] to obey the rules of this country,” the minister, Siti Nurbaya, said in a statement.
Since April stopped logging the forest claimed by Began Melibur villagers, weedy vegetation, some of it five feet high, has taken over an expanse where meranti trees and other trees once stood tall. What residents say is an abandoned company control tower looms near a farmer’s wooden hut and his pineapple crop.
On a day in early May 2017, Suhairi, a 31-year-old farmer, walked in rubber boots across a patch of land he said had once belonged to him. He said he grew and harvested oil palm fruits there until the land was taken as part of April’s concession. Excavation tracks mar the peat. A dead python floats on the still, muddy water of a canal nearby.
Suhairi dug up a handful of soil to show the fossilizing bits of organic matter that make up peat. He remembered hunting mouse-deer and bees for honey in the forest as a child. Once, he thought he’d work the land he inherited from his father and pass it on to his son, now 5, one day. Now that’s in doubt.
“If we have our farm, we have hopes that we can still earn a living,” he said. “If they take our land, how can we imagine a future?”