Conflict & Justice

Kabul Bank: tragedy or farce?


Afghan pedestrians walk past the main branch of The Kabul Bank in Kabul on Sept. 4, 2010.


Massoud Hossaini

KABUL, Afghanistan — The fleshy face and puffy eyes of Mahmoud Karzai, the older brother of the Afghan president, stared earnestly at his interviewer, Mujahid Kakar, of Tolo TV.

“It is all lies,” he said, speaking of accusations by Central Bank chief Abdul Qadir Fitrat that Mahmoud Karzai, along with other Kabul Bank shareholders, was responsible for the collapse of the bank. “Fitrat lied about me to Parliament, which is a crime in itself. I am suing him.”

Then the elder Karzai lowered the boom on his own brother, saying he regretted having supported him in his bid for a second term as Afghanistan’s president.

“Unfortunately the president has gathered weak people around him whom I cannot refer to as professional advisers,” he said. “It is his fault … not being on track with the world especially in terms of the economy is challenging the country.”

Mahmoud Karzai, a successful businessman who has made ample use of his contacts to secure lucrative deals for himself, and who is now implicated in what has been called “the biggest per capita fraud in history,” was scathing in his critique of the Afghan government.

"Almost all ministries misuse and sell their properties and lands,” he said. “They buy … villas for themselves. Unfortunately nobody thinks of building Afghanistan."

It was an impressive performance from a man who is under criminal investigation in two countries. In the United States, Mahmoud Karzai is the target of a grand jury investigation for tax evasion, extortion and racketeering.

With more than $900 million in losses, Kabul Bank threatens to torpedo Afghanistan’s financial standing. But it has been the public airing of the comedy of errors leading up to the scandal that is doing the real damage.

Almost no one is going to escape unscathed — neither the shareholders of Kabul Bank, who allegedly engaged in an orgy of property speculation, political patronage and risky venture capitalism with unsecured loans from the bank; nor the Central Bank, which buckled under political pressure and declined to push an investigation into what it knew to be a nest of corruption; nor the Western advisers to the Central Bank, who pocketed their swollen salaries and looked the other way when red flags were flying all around them.

This is the import of a report by the Office of the Inspector General (OIG), quietly released in March but soon taken offline and classified. According to the report, there were clear warning signs that trouble was brewing as early as 2008.

A banking expert from BearingPoint, who was conducting on-site inspections in Kabul Bank, began to receive death threats. The response from the world-renowned management and consulting firm, upon consultation with its overseers in the U.S. Agency for International Development (USAID), was to send the adviser out of the country and discontinue the inspections. They switched to less risky technical advice — trainings on good banking practices, offsite examinations of documents, and other hands-off activities.

In hindsight, says the report, perhaps USAID and its contractors should have been a bit more alarmed.

“The death threats should have been recognized as a red flag, signaling a high risk of fraud at Kabul Bank,” reads a USAID memo dated March 2011.

But BearingPoint, and its successor, Deloitte, had a contract with USAID worth $92 million to improve Afghanistan’s banking sector. So persevere they did.

Other troubling signs were similarly disregarded — from the Central Bank’s complaints of political interference and pressure, to persistent rumors, later demonstrated to be true, that Kabul Bank shareholders had used the bank’s money to speculate in Dubai’s volatile property market.

In February 2010, The Washington Post published a story by the indefatigable Andrew Higgins, titled “In Afghanistan, Signs of Crony Capitalism.” The piece set out in stark terms the sweetheart deals and questionable practices that were then reigning inside the bank.

The article caused a stir at USAID, according to the OIG report. The contractor — by then Deloitte, which had bought out BearingPoint’s public services business — was also motivated to confer with its client, the Central Bank, to see whether the allegations contained in the newspaper report were true.

The Central Bank conducted an examination of Kabul Bank and, according to the OIG, saw cause for concern.

“The Kabul Bank examination report was presented to the (Central Bank) governor. The report listed many violations of banking regulations and practices, including concerns over controls to prevent money laundering and terrorist financing, loan approval, and collateral requirements for loans. It … warned that if the bank did not pay serious attention to the problems and faults of the loans, then the bank would probably incur huge losses on the loans and would pose a serious risk. The report stopped short of mentioning fraud, however.”

As if the risks of huge losses and terrorist financing were not enough?

An audit carried out by Pricewaterhouse Coopers in January-February 2010, gave Kabul Bank a clean bill of health. The report was issued before The Washington Post piece, and was later used to bolster arguments that Kabul Bank was not as rotten as it seemed.

So no direct action was taken to address the problem until the scandal broke in September 2010, prompting a run on the bank and some tough-love intervention by the International Monetary Fund, which threatened to blackball Afghanistan if Kabul Bank was not put into receivership.

It seems that for years, Kabul Bank was allowed to run amok and intimidate anyone who tried to rein it in, all because of its close ties to the central government.

Some economic analysts trace the real cause of Kabul Bank’s financial woes to the millions it poured into the 2009 presidential campaign. But in the labyrinthine world of Afghan politics, it is doubtful that it will ever be known exactly how much money was given, and to whom.

Much of the funding went to President Karzai, who was expected to win, and whose now-regretful brother was one of the bank’s shareholders. Another shareholder and former chief executive officer, Khalilullah Ferozi, actually served as financial adviser to Karzai’s campaign.

According to numerous sources, the shareholders spread the money around to other candidates as well. No one will come out into the open on the use of Kabul Bank funds to finance the 2009 elections, however.

“If you can get someone else to say it, I will confirm,” said one politician who was close to the campaign of Karzai’s main rival, Dr. Abdullah. “But I am not going to be the first to speak.”

Ferozi, in the halcyon days before the scandal broke, had no such qualms about admitting that Kabul Bank had played a pivotal role in the campaign. As he told The Washington Post in early 2010, "If there is no Kabul Bank, there will be no Karzai, no government."

Well, Kabul Bank has now fallen. It remains to be seen whether the rest of Ferozi’s untimely prediction comes true.