Kabul Bank Scandal

KABUL BANK Kabul Bank, one of the biggest private financial institutions that sprang up after the fall of the Taliban, stands at the very center of Afghanistan’s political and economic elite. In late August 2010, depositors began pulling money out of the bank in a panic, and the country’s embryonic financial system appeared to be threatened. The panic began when government officials demanded the resignation of the bank’s president and chairman after learning of $300 million in losses — far more than the bank’s capital — much of it in investments in Dubai real estate. Afghan and American officials say the two men presided over the bank in a reckless and freewheeling manner, doling out millions to allies of President Hamid Karzai and pouring money into risky investments that crashed. In January 2011, estimates of the losses were raised to as much as $900 million. Banking specialists, businessmen and government officials said they feared that word of Kabul Bank’s troubles could prompt a run on solvent banks, destroying the country’s nascent banking system and shaking the confidence of Western donors already questioning the level of their commitment to Afghanistan. The scandal has severe political and security implications. A damning internal report by Afghanistan’s own Central Bank depicted the Afghan political elite as using Kabul Bank as its private piggy bank. The report both raised questions about why the authorities did not act sooner and suggested that the answers lay in the political connections of the bank’s officers and shareholders — the recipients of most of the loans. The report also suggested that Kabul Bank’s long-term finances were in much more dire shape than previously understood, a condition that explains why the Central Bank has been discussing putting the bank into receivership. The International Monetary Fund is pressing for receivership as a condition of renewing its program with Afghanistan. Without the I.M.F.’s blessing, some major donors are required by their own laws to withhold aid from the country. The Afghan government announced a plan in April 2011 in which the bank would be split in two as part of a drastic overhaul to save it from failure, stabilize the country’s financial system and reassure foreign lenders and donors. Under the overhaul plan, the government has divided Kabul Bank into a “good bank” with its deposits, good loans and other assets, and a second institution that will handle the hundreds of millions of dollars in bad loans. In April 2012, President Karzai ordered the appointment of a special prosecutor and the creation of a special tribunal to try those involved in the near collapse of the bank. He also ordered that hundreds of millions of dollars in outstanding loans by the bank be repaid within two months. Most of the loans were taken by politically connected insiders — including the president’s brother Mahmoud Karzai — and investigators have said that few of the loans were ever meant to be paid back. Fraud Trial Begins; Audit Likens Bank to ‘Ponzi Scheme’ In November 2012, a major step toward resolving the loss of hundreds of millions of dollars began with the trial of nearly two dozen people, including Kabul Bank’s former chairman and former chief executive, who are accused of being the main architects of a colossal fraud. International donors, including the United States, the European Union and others, had demanded that the Afghan government take a series of steps to combat corruption in the aftermath of the collapse of Kabul Bank. One of the most important was to prosecute those who had perpetrated the fraud. Now with the trial under way, donors privately say they are cautiously optimistic. And, as important, Afghans are watching as local television stations have begun to broadcast reports of the trial proceedings. In late November, a confidential forensic audit of Kabul Bank reported that “from its very beginning, the bank was a well-concealed Ponzi scheme.” The audit, prepared for Afghanistan’s central bank by the Kroll investigative firm, gave new details of how Kabul Bank was institutionalizing fraud that reached into the hundreds of millions of dollars and obliterated Afghans’ trust after regulators finally seized the bank in August 2010 and the theft was revealed. Read More... Going further than previous reports, the audit asserted that Kabul Bank had little reason to exist other than to allow a narrow clique tied to President Karzai’s government to siphon riches from depositors, who were the bank’s only substantial source of revenue. At one point, Kroll’s investigators found 114 rubber stamps for fake companies used to give forged documents a more legitimate look. And the auditing firms used by the bank never took issue with loan books that were “almost entirely fraudulent,” Kroll found. For many Afghans, the scandal surrounding Kabul Bank, a linchpin of the economic order established here by Americans and their allies, has cemented the opinion that the United States brought crony capitalism, not free markets, to Afghanistan. The audit is likely to reinforce that view while raising potentially troubling questions about who is being prosecuted here in connection with the scandal, and who is not. Posing a Challenge to a Fledgling Financial System The bank’s troubles — and the corruption associated with them — have posed a direct challenge to the country’s fledgling financial system, which was built under American guidance after the collapse of the Taliban government in 2001. Kabul Bank, which counts a brother of President Karzai among its shareholders, illustrates the intertwining of political and economic interests in Afghanistan. Afghan and American regulators said the bank’s political connections had shielded it from scrutiny until recently. An official of the bank said in September 2010 that it retained about $1.1 billion in deposits. That figure alone would equal about a quarter of Afghanistan’s foreign currency reserves, which Mr. Karzai said totaled $4.8 billion. Afghan officials said the bank had $2 billion in assets, and $120 million in capital. Most Afghans do not keep their money in the banking system. But creating a credible and stable banking system is an important goal of the American-led effort in the country, which is seeking to help Afghanistan develop a modern economy. One of Mr. Karzai’s brothers, Mahmoud, is a major shareholder, as is Haseen Fahim, the brother of the Afghan first vice president. The bank lent Mr. Fahim, a prominent businessman, as much as $100 million, officials say. While Afghan and American officials depict a crisis far worse than has been made public, State Department cables released by WikiLeaks show that Afghan and Western regulators were aware of many of the problems, but were most focused on the problem of terrorist financing, rather than the fraud scheme that was the main problem at Kabul Bank. In a cable from Sept. 26, 2009, posted by WikiLeaks, American diplomats said that competitor airlines complained that “Kabul Bank is using its deposit base to subsidize Pamir Air without its depositors’ knowledge in an attempt to drive competitors out of business.” According to businessmen in Kabul, loans were made to people who were fronts for the real beneficiaries. “Sometimes they would bring a loan document to someone who was a gardener or a cleaner and just ask them to sign it, and they would pay him 500 Afghanis and the person could not read or write more than his name,” said a prominent businessman here with ties to the banking community. New York Times