The Afghan government, much to its chagrin, has found itself embroiled in a controversy that has direct links to the 2010 Kabul Bank scandal. On 4 November 2015, a small group of high-level government officials presided over the stone-laying ceremony of a new and ambitious township called Smart City. What was meant as a good news story spectacularly blew up in the government’s face, when it turned out that Khalil Ferozi – one of the main perpetrators of the plundering of the Kabul Bank, convicted for embezzlement and money laundering – was both shareholder and guest of honour. Since then it has become clear that the agreement with Ferozi was linked to a loan recovery policy that was both authorised by the Cabinet and backed by the president. The question now is how much the president was aware of the details of the deal and the extent to which corners were being cut, and whether he intends to continue along the same lines. AAN’s Martine van Bijlert takes a forensic look at the affair so far.Caption: Convicted Kabul Bank shareholder Khalil Ferozi is treated as a guest of honor during the 4 November 2014 stone-laying ceremony for Kabul's Smart City, where he signs an MoU with the ministry of urban development. Source: ministry of urban development.
I. The Smart City signing ceremony; an unpleasant surprise
Smart City (in Dari alternatingly called Shahrak-e Hoshmand and a phonetic rendition that reads like “Esmart Siti”) was to be built along the Kabul Airport road, next to Shahrak-e Aria – a collection of eye-catching white apartment blocks with red roofs. It is one of several shahraks or townships – literally small cities – that are being built around Kabul to provide housing for a growing middleclass. (An average three-room apartment in Shahrak-e Aria, according to this article, costs 140,000 USD).
The stone-laying ceremony on 4 November 2015 was attended by the Minister of Urban Development Sayed Saadat Mansur Naderi; the president’s Special Adviser on Good Governance (recently elevated to vice-presidential level) Ahmad Zia Massud; and the president’s Legal Adviser Abdul Ali Muhammadi. All three spoke, praising the initiative as an important step forward. Zia Massud described the project as “very valuable,” as it would bring the government a lot of profit, and introduced Khalil Ferozi as one of the shareholders. Legal Adviser Muhammadi explained how the Kabul Bank clearance committee was pursuing different ways to recover the bank’s loans and that this project was the best way to do it. The presence of Khalil Ferozi was treated, not just as a normal occurrence, but as a highly positive sign.
Urban Development Minister Naderi gave details of the project, proudly referring to Smart City as the first shahrak in both the country and the region that would be built according to modern and international standards. It would, according to a post on the ministry’s Facebook page, house 8000 families in three, four, or five-room apartments built according to 15 different “international designs.” The township was to have its own facilities, such as shopping centres, mosques, kindergartens, offices, parks and clinics.
Naderi then presided over the signing of a Memorandum of Understanding (MoU) between Khalil Ferozi, who was providing the land for the project, and a representative of the Nabizada Wardak construction company, that would be in charge of the actual building. (1) The officials and other dignitaries who were present at the ceremony (see pictures here) did not seem to think they were involved in anything untoward.
The initial investment in the project, it was announced, would start at 95 million USD, while the total amount of money involved was expected to reach an estimated 900 million USD. It is not clear, though, where the initial sum was going to come from and whether this figure also included the value of Ferozi’s land. Although reporting so far has focused on the two main shareholders – Khalil Ferozi and the Nabizada Wardak construction company – there has been some buzz within Afghanistan’s wider business community, in particular among businessmen with prior links to the Kabul Bank shareholders, about the possibility of joining the project and making some money. The current going rate for real estate, according to one source, is around 1000 USD per square metre, while the cost of building is estimated at 400 USD per square metre. Even if these figures are optimistic, the prospects for profit seem huge – provided that the apartments sell. The government was slated to receive 50 USD for every square metre, in tax.
Although some of the national coverage was initially very bland, and probably based solely on the provided press releases, (2) the story soon broke with scathing headlines. The New York Times and The Guardian opened with respectively “Afghan Businessman Convicted in Kabul Bank Fraud is Still Free to Make Money” and “Afghan government signs huge property deal with shamed ex-banker.”
The rest of the government seemed to have been caught off guard, both by the ceremony and its fall-out. Insiders in the Palace described scenes of stunned disbelief and exasperation when the news broke. The question on everybody’s mind, of course, was whether the president had known about the deal and, and – whether he had or had not – how it could possibly have happened.
II. The problems with the Smart City arrangement
Criticism against the deal was swift and stinging. The collapse of Kabul Bank had been the biggest financial crisis to hit Afghanistan and a major embarrassment for the government, starkly illustrating the entanglement of money, power and impunity. As details of the Kabul Bank scandal emerged, in 2010 and the years that followed, it became clear that the bank’s leadership had over the years plundered the bank through a system of double-bookkeeping that allowed them to give huge illegal loans to the bank’s shareholders, as well as gifts and payments to a large number of politicians. (The lists of shareholders and debtors have been made public; those of the recipients of gifts and other largesse have not).
The total amount of debts owed to Kabul Bank was a whopping 982.6 million USD. Over 92 percent of these loans were handed out to nineteen individuals and businesses, ultimately benefiting twelve individuals. Ex-Chairman Sher Khan Farnod and ex-deputy chairman Khalil Ferozi were among the largest debtors and were both sentenced to five years imprisonment for money laundering and ten years for embezzlement in November 2014 (however, according to Afghan law only the longest prison sentence will be enforced.) The other shareholders and recipients of illegal loans were not prosecuted, although they were instructed to repay their loans. (For an earlier AAN analysis of this “exercise of containment” see here). The shareholders included Mahmud Karzai, brother of former president Hamid Karzai, and Hassin Fahim, brother of former vice-president Qasim Fahim.
Businesses that owe the Kabul Bank money, according to the MEC public inquiry, include Gas Group (121.2 million USD), Pamir Air (88.9 million USD), Zakhira (22.9 million USD), Kabul Neft (21.5 million USD), Hewadwal corporation (15.5 million USD), Gulbahar Towers (16.8 million USD), and Ariana Steel (1.5 million USD).
The Kabul Bank saga cost the Afghan state a lot of money. To prevent the collapse of the country’s financial system and to restore consumer trust, the government provided the bank with an 825 million USD lender-of-last-resort instrument, funded from its central reserve. This money is now slowly being repaid from Afghanistan’s annual budget; for instance in 2014 the government paid approximately $67 million, or 1.35 per cent of the year’s operating budget. Moreover, the New Kabul Bank is still operating at a loss (7.4 million USD in 2013, with an accumulated loss of 46.8 USD million at the end of December 2013 and possibly up to 65 million USD by August 2015). This is being paid for by the Afghan government, as part of its commitment to sell the bank with a clean balance sheet.
Tackling the Kabul Bank case had been one of President Ghani’s campaign promises and has long been upheld as one of the early (and few) tangible of achievements of this government in the much needed fight against corruption. The government in its own September 2015 ‘self-assessment’ document for the Senior Officials Meeting described how “[i]mmediate action on the Kabul Bank case broke the aura of impunity that had surrounded high level malfeasance.”
So to then find senior government officials organising and celebrating the inclusion of one of the architects of the scandal in what was probably going to be a highly profitable partnership, while condoning the obvious flaunting of a prison sentence, was embarrassing to say the least. Moreover, Farnod, Ferozi and their business partners, had squandered large chunks of the bank’s money through big and imprudent investment schemes, including in real estate. So it was also awkward that Ferozi would be allowed to earn back his debts in ways that resembled how he had made them in the first place. And all of this while presumably making a handsome profit, in a shareholder arrangement that seemed to carry no personal financial risk whatsoever.
Apart from the optics, there were obvious legal problems with the Smart City arrangement, as many commentators have pointed out. There is of course the issue that the executive should not interfere with a court’s verdict, by overturning or modifying a prison sentence. Although the president under certain circumstances can pardon a criminal, prison convictions for administrative corruption are exempted (article 350 of the criminal code). Legal adviser Muhammadi – who has since been suspended from his job – argued that Ferozi had not been released, but that he was simply being given a kind of leave that every prisoner is entitled to when needing to take care of private business. However, it is clear from other reporting that Ferozi had already been allowed out of prison for quite a while, at least during the day. (3)
Moreover, according to the procurement law, contractors with the government need to be of clean background and not have been convicted for a crime. There is also some debate whether article 113 of the criminal code applies, which says that a person who is sentenced to “long imprisonment” of more than ten years is not allowed to make contracts with or receive privileges from government institutions, nor are they allowed to manage assets and properties. Ferozi, depending on how one counts, was sentenced to exactly ten years. (4)
The move, of course, left people wondering whether bribes were paid and to whom. Several MPs claimed to have information, although they have not provided details. On 11 November 2015 members of the Wolesi Jirga complaints commission claimed a seven million USD bribe had been paid to allow the project happen and to release Ferozi from jail (the recipients were not specified). Similarly, on 15 November 2015 the Adalat wa Towsea daily quoted an unnamed MP who said minister Naderi had told them in a private chat that Zia Massud and Muhammadi had received bribes from Ferozi of respectively 2.5 million and 1.8 million USD. None of the allegations have so far been substantiated with evidence.
This is, incidentally, not the first time Ferozi has been subjected to a very lenient interpretation of ‘detention’. Under Karzai, both Ferozi and Farnod could often be found in the capital’s upscale restaurants, meeting friends and business partners under the guise of trying to recover their money so they could pay back their debts, even though they had been arrested and were supposed to be detained.
III. How the government reacted
The government’s reaction to the Smart City outcry came in instalments and suggests the president has been uncomfortably caught between the wish to still be seen to be firm and decisive, and the need to tread carefully. The question, of course, is why the caution?
The first formal reaction came from deputy presidential spokesman Sayed Zafar Hashemi on the day after the ceremony. He reiterated the president’s commitment to recovering the Kabul Bank debts and referred specific questions on the ceremony to the three officials involved, thus leaving it to them to defend the arrangement. Minister Naderi sought to reassure critics, by stressing that Ferozi’s activities would be closely monitored and that no untoward deal had taken place: “We are monitoring the project and there is no reason to be worried about it,” he said. Legal Adviser Muhammadi, in an interview on Tolo TV on the evening of the ceremony, argued that Ferozi had been neither forgiven, nor freed, but that this was the best way to recover the Kabul Bank’s money. He then proceeded to explain the mechanism, based on a government directive, through which the debtors were allowed to repay their loans in instalments over a period of one to seven years.
Muhammadi further defended the fact that the government had not simply taken the land from Ferozi, saying there had been no Cabinet instruction to do so and that whoever was ready to hand over their assets would be allowed to invest them. “What would the government do with 68 jerib of land,” he asked. “Why take it, if Ferozi can change it into money?” He added that Farnod, the former Kabul Bank chairman, would also be allowed to do so if found ready. Ali Akbar Zhwanday, president Ghani’s private-sector adviser, when asked by the New York Times, sided with Muhammadi saying that given the country’s economic hardships, allowing Ferozi to work and pay his debts and his hefty tax bill was a good idea. “What is better: for him to die in prison, or to pay back the money?” Zhwanday asked. (5) Ferozi himself also defended the deal, while speaking to Reuters by phone from prison. He said the project had already raised 14 million USD in debt repayments and, if it went ahead, would raise $75 million for the government. “The land belongs to me but if the government wants to sell it, they have the authority. But if they let the company build the township, from the money I earn, I will pay Kabul Bank’s loan back,” he said.
On 7 November 2015, the Palace released a statement containing several presidential decisions. It was framed in legal language and started by staking out those parts of the policy that the government presumably wishes to salvage: it reiterated the government’s commitment to recover the loans by all possible and legal means, and noted that the MoU was signed based on legal advice from the Kabul Bank clearance committee and the good will to expedite the loan collection process. It then described four decisions, based on what it said had been an urgent and thorough review of the project: (a) the court’s verdict on Ferozi is “unalterable and binding;” (b) the MoU is considered null and void; (c) the Kabul Bank clearance committee should review whether Ferozi’s land can be handed over to the Kabul Bank; and (d) the Attorney General’s office should report on the full enforcement of the court’s verdict.
It then took the Palace another ten days to decide whom it wished to hold responsible, at least for the moment. On 18 November 2015, it issued another statement (full Dari text here, English version not yet posted) in which it suspended legal adviser and head of the Kabul Bank clearance committee Muhammadi until further notice and relieved him of all responsibilities relating to the Kabul Bank loan recovery.
The president, in the same statement, tasked a delegation to review the evidence with regard to the “unlawful way” the Kabul Bank loan recovery had been managed; two members are mentioned: Seyed Ghulam Hussein Fakheri, head of the High Office of Oversight and Anti-Corruption (HOO) and Muhammad Yassin Osmani, member of the Independent Joint Anti-Corruption Monitoring and Evaluation Committee (MEC). (For details on the different ways in which these two organisations, that have had a troubled relationship in the past, have viewed the Kabul Bank case, see here). The statement again reiterated that although the MoU was no longer valid, the process of loan recovery would continue.
IV. The clearance committee and its encouragement mechanism
The inquiry team will probably need to tread carefully, given that both Urban Development Minister Naderi and Legal Adviser Muhammadi have consistently argued that they were implementing a Cabinet-approved government policy – while blaming each other for what went wrong (Zia Massud, incidentally, has remained very quiet). Palace communications further suggest that the Smart City arrangement – and presumably other arrangements that are now slowly coming to light – was directly inspired by a preoccupation with loan recovery which seems to prioritise debt collection over punishment. What is less clear is whether the details of the deal itself were authorised and at what level.
Originally the Kabul Bank receivership together with the Attorney General’s Office were responsible for recovering the squandered loans, but when progress remained slow President Ghani apparently decided to take firmer control and established the Kabul Bank clearance committee (komite-ye tasfiah in Dari). Its establishment in March 2015 was not formally announced, nor does its composition seem to be public knowledge, but a report of the first three-monthly meeting, chaired by the president himself, appeared on the Palace website in June 2015. The report explains that the committee had been tasked with “expedit[ing] inquiry into the case of Kabul Bank based on a specific procedure” and mentions a one-week deadline for those who had not paid their debts in the preceding three months. Those who failed to clear their accounts within that deadline would be banned from leaving the country and referred to the Attorney General for prosecution.
The specific procedure referred to is the so-called ‘encouragement mechanism’. It has been alluded to and explained by legal adviser Muhammadi on various occasions in the media and on his Facebook page. (6) Under this mechanism Kabul Bank debtors were given the opportunity to either repay their loans in full in exchange for a significantly decreased interest rate (around 0.5%), or to negotiate a phased timetable for the repayment (against an interest rate of around 3.5%). Senior economic adviser and former finance minister (now slated to become Afghan ambassador to Pakistan) Omar Zakhilwal appears to have been at the origins of the scheme, but over time Muhammadi became the main person responsible.
One of the main points of contention now appears to be whether the scheme as described could have extended to Ferozi and Farnod, as, unlike other debtors, their obligation to repay their loans with interest and an added-on fine had already been established by the court in their conviction.
Muhammadi, in the meantime, continues to maintain he has done nothing wrong, stating that he simply implemented a Cabinet-sanctioned policy. He has also maintained he knew nothing about the deal with Ferozi, but that, at least, has been proven untrue. After Muhammadi again blamed the minister of urban development Naderi for the deal, the minister hit back on 10 November 2015 revealing that Muhammadi had sent three letters to his ministry, urging him to grant the license for the township. (For more detail, see here). At least two of these letters have since been leaked to the press and at least one of them includes an explicit reference to a contract signed between Ferozi and Nabizada Wardak. (7)
So far Muhammadi has been the only one who has been publicly singled out as being responsible for what the Palace has referred to as mismanagement of the clearance initiative and/or a misinterpretation of the law.
V. Where to go from here
Tackling the continued fall-out from the Kabul Bank scandal is obviously not just a financial matter, it was also symbolically very important. In the run-up to the joint Senior Officials Meeting in September 2015, the Afghan government described decisive action on the Kabul Bank scandal as a “top signalling priority.” During the meeting itself the president said the actions he had taken had made the Kabul Bank “no longer a symbol of impotence, but a symbol of resolve.” This makes it extra painful that the government has now been caught in cahoots with the Kabul Bank defaulters by facilitating the repayment of their loans and fines, and providing opportunities for them to play with new investments and, presumably, amass new wealth practically risk-free.
This has come into even more stark relief with the recent reports that Smart City was not the only possibility being explored to help Ferozi repay his loans. On 18 November 2015, Khaama Press disclosed yet another leaked letter from Muhammadi. In this one he was said to have asked the Ministry of Finance to instruct all government institutions to purchase their gas from Gas Group during the winter season. Gas Group, as mentioned before, was one of the largest recipients of illegal Kabul Bank loans. The company was established in 2006 by Hassin Fahim, brother of the late former vice-president Qasim Fahim, and later taken over by Farnod and Ferozi. (For details see here, p 39-44). According to Muhammadi’s letter, Gas Group had recently resumed operations based on an agreement with the Kabul Bank clearance committee; the revenue from the company’s operations would flow into the account of the Kabul Bank loan department to cover Ferozi’s loans. (An illegible picture of the letter can be found here). A handwritten instruction at the bottom of the letter apparently states that copies of the document(s) should be sent to the Kabul Bank clearance committee and the Office of Administrative Affairs, which – if this is an original addition – strongly suggests that the revival of Gas Group was a move authorised at the highest level.
The government, or parts of the government, seems to have decided that if it is spending money on fuel anyway, it might as well do so in a way that makes the money flow back into its coffers. It is, however, a roundabout way of dealing with the problem. More importantly, it lets Ferozi – and other defaulters – off the hook and gives them privileged treatment. Such a directive to buy only from Gas Group, is, in fact, reminiscent of the monopoly that the Kabul Bank used to have with regard to the payment of government salaries – thus making this government look a lot more like the previous one than it would like to admit.
In terms of which details were known when, it seems highly unlikely that the president was not aware of the Smart City project and the Gas Group plans at all – given the amount of attention he has paid to the Kabul Bank case and his propensity to micro-manage portfolios he considers crucial. It is of course possible that details were held from the president or were misrepresented, or that those involved had misinterpreted the limits of the authorised policy (or misjudged the damaging effect of a festive ceremony). But it is also possible that the president knew and is now trying to separate himself from the most damaging fallout. All in all, the attempts to help revive Ferozi’s businesses seem to illustrate a broader willingness on the part of the government – possibly all the way up to the president – to consider partnerships with tainted businessmen and to welcome their ‘black money’ if they are willing to invest.
(1) Nabizada Wardak does not seem to be a well-known company. It has a Facebook page, but the website listed there is inactive. The company is headed by one Abdul Bari Wardak and has been awarded government contracts before, including, in 2012, a contract for the construction of the Doshi to Pol-e Khumri part of the northern ring road.
(2) On the bland side, Khaama opened with “Foundation stone of a modern city laid in Kabul.” Wadsam had “A modern city called ‘Smart City’ to be built in Kabul.” Both articles focused purely on the inauguration, while ignoring the presence of Ferozi. Tolo News, on the other hand, had “Kabul Bank Defaulters Now Partner to Government Projects,” and the next day “Criticisms Spark After Kabul Bank Criminals Allowed To Enjoy Business.” Pajhwok, opened with “Bank fraud convict Ferozi invests a fortune in housing scheme” and explained that Ferozi’s release “had become possible in line with the court decision and his signing of the agreement to pay back the bank loan.”
(3) See for instance this New York Times article, and also the reporting by US anti-corruption watchdog SIGAR (Special Inspector General for Afghanistan Reconstruction) in October 2015, noting that:
Despite a presidential order, a special oversight committee, and President Ghani’s claims of taking “decisive action” in holding accountable those responsible for the Kabul Bank theft, Kabul Bank’s ex-CEO Khalil Ferozi was reportedly released from prison this quarter at behest of high-ranking Afghan government officials after serving only a fraction of his 10-year sentence. This was ostensibly done to enable him to more easily liquidate and transfer assets and properties to the government to help satisfy his debts. (p 169-70).
(4) Khalil Ferozi and Sher Khan Farnod were both sentenced to five years imprisonment for money laundering and ten years for embezzlement. However, according to Afghan law such prison sentences run concurrently, so both should serve ten years.
Muhammadi has tried to argue that the real problem had to do with the interpretation of article 113 (and that that, the cabinet’s decision to find creative ways to expedite the return of the embezzled money was still sound and unchanged). He blamed Naderi, saying: “What the Ministry of Urban Planning did was a mistake, not what Ferozi did,” claiming that the ministry should have been aware of the legal prohibitions.
(5) Zhwanday is co-founder, shareholder and ex-vice-chairman of Afghanistan’s Azizi Bank and is another banker with roots in the hawala system. Zhwanday was part of the consortium, MTZ, that in February 2013 made the only remaining bid for the New Kabul Bank. The bid was rejected, according to a finance ministry official, because it was “not consistent with the current banking system.”
When the New Kabul Bank was re-advertised in September 2013, two firms bid on the bank, but neither ended up buying. A new bidding process was announced on 28 October 2015.
(6) See for instance in this article, dated 1 July 2015: “Abdul Ali Muhammadi, legal advisor to the President, said on Sunday that $437 million of the total $987million stolen from Kabul Bank had been recovered, but $578 million remained unpaid. According to Muhammadi, 24 individuals involved with the scandal have cleared their debts with the bank while 21 others have pledged to pay their debts to the bank. He added that the government has developed a persuasive procedure for collecting the money, saying that properties of those who have failed to commit for clearing their debts will be sold for clearing their debts with Kabul Bank.”
(7) A copy of one of the letters can be found here; and an illegible photo of a second letter can be found here. The first letter references a contract between Khalil Ferozi and Nabizada Wardak that was signed on 1 September 2015 (and thus preceded the annulled MoU of 4 November 2015). This is potentially interesting, given that, according to the president’s statement of 7 November 2015, the MoU was null and void because it was “not binding,” failed to “carry the legal weight of a contract” and had an inherently weak legal basis. This leaves one wondering whether this means that behind the annulled MoU, there might still be a contract that the government may want to revive in the future.
(8) Advisers close to the president who have been accused of involvement in the Kabul Bank scandal include, among others, former finance minister and current Economic Adviser to the president Omar Zakhilwal (see here, here and here) and current Senior Good Governance Adviser Ahmad Zia Massoud (see here and here).
This article was last updated on 19 Nov 2021