AAN Thematic Dossiers

Thematic Dossier XIII: Still (not) dealing with the Kabul Bank scandal


President signs a document flanked by a number of officials.
On 1 October 2014 President Ghani signed a presidential decree to reopen the Kabul Bank fraud cause. Photo credit: PAJHWOK/Bais

One of the very first acts of the National Unity Government was to reopen the case of the massive Kabul Bank scandal. President Ghani later referred to this portfolio as one of his government’s “signaling priorities,” implying that progress on this issue would be indicative of the seriousness with which his government tackled corruption. Now, a day ahead of the Brussels conference, one of Afghanistan’s main anti-corruption bodies – the Independent Joint Anti-Corruption Monitoring and Evaluation Committee (MEC) – has released a stinging update on the government’s handling of the case. In this latest thematic dossier AAN has pulled together past research and commentary to provide necessary background on what was a near-billion dollar scam perpetrated by Afghanistan’s political and business elites.

Presidential decree number 3, that was issued days after the National Unity Government’s inauguration in September 2014, reopened the Kabul Bank case and instructed the various government institutions to speedily act in the fields of criminal proceedings, asset recovery and the privatisation of the New Kabul Bank. The text of the decree can be found in this special bulletin of the Supreme Court on the Kabul Bank.

Shortly after, the Appeals Court did indeed issue a verdict, in November 2014. The two main suspects – both former shareholders and managers of the Kabul Bank – were sentenced to prison terms of ten years for embezzlement and five years for money laundering (although only the most severe term is applied). Nine former employees of the Kabul Bank received modest fines or prison sentences. The court further ordered that the assets of twelve individuals and eight companies be frozen and blocked until they had repaid their debts. Shortly after, the Supreme Court confirmed the verdict, while adding that sixteen individuals who had been partners in the embezzlement scheme should also be “seriously prosecuted” (as quoted in the MEC’s seventh six-month report).

The verdicts largely followed the outcome of earlier judicial proceedings that had taken place under President Karzai and had let the bank’s powerful shareholders off the hook. And although both courts did call for further action in terms of asset recovery, investigations and prosecutions, very little happened.

The MEC update that was released today, describes the government’s follow-up in the fields of criminal proceedings, asset recovery and the bank’s privatisation. It has found very little progress, even less transparency and little indication that the remaining perpetrators will still be held accountable. MEC chairman Yama Torabi, summarised their findings like this:

The latest episode in the Kabul Bank scandal is evidence that the initial strong political will became diluted in the face of strong pressure. This case shows that Afghanistan is still not well equipped to recover stolen assets – both internally and working with foreign governments. Nor has it the will to sentence those who engaged in organized financial crimes.

The MEC ends its update with a strong call for transparency as the processes of prosecutions, asset recovery and the sale of the New Kabul Bank go forward. (Find the full update in English here and the press release here).

The question now is why the current (and previous) government has had such difficulty acting decisively in the case of the Kabul Bank. Is it unwilling or unable? To help answer this, AAN has gathered some of its key past reporting and commentary below.

 

Who are the shareholders implicated in the scandal?

The Kabul Bank Investigations; Central Bank Gives Names and Figures

Author: Martine van Bijlert                        Date: 2 May 2011

The court verdicts have let the main shareholders and partners in the embezzlement scheme off the hook – even though their names, as well as the size of their irregular loans, have been known from the very beginning. As AAN reported in 2011:

On Wednesday, 27 April 2011, the head of Afghanistan’s Central Bank, Abdul Qadir Fitrat, and the new (Central Bank appointed) chief of the Kabul Bank, Massud Ghazi, briefed the Parliament on what was going on with the Kabul Bank. They named names, gave detail of the close to one billion USD irregular loans that brought the bank on the brink of collapse, and called for the prosecution of those involved. The individuals that were singled out and the links they have, provide a glimpse into the world of Afghanistan’s big business.

The dispatch lists the shareholders that Fitrat named in Parliament and analyses how they are linked. And even though many more details have emerged over the years, it is remarkable that the main names were known from the very beginning – without there having been many consequences.

For more background see also this interview with Voice of America on 28 June 2011.

Afghanistan’s business elite has its own election

Author: Martine van Bijlert                        Date: 23 November 2011

A few months later, in November 2011, AAN reported on the tumultuous election of the board of Afghanistan’s Chamber of Commerce. The details on who competed illustrate the interconnectedness of Afghanistan’s business elites, while the competition also featured several of the main protagonists of the Kabul Bank story:

Last month Afghanistan’s Chamber of Commerce, the ACCI, elected its new leadership. The process was not without controversy. A lively pre-election trade in ACCI membership cards allowed large numbers of underage children and people who had nothing to do with running a business to participate in the vote at the provincial level. And at the national level there were allegations of dealmaking, money transfers and ethnic politicking. The fact that highly powerful individuals and networks find these positions worth competing over illustrates their importance. The controversies surrounding the vote also underscore how deeply problematic elections – of any kind – have become and how the involvement of the Independent Electoral Commission is no guarantee for a serious vote. This report takes a look at what happened and what this tells us about Afghanistan’s new business elites.

 

How the Kabul Bank scandal endangered donor funding 

The IMF, Kabul Bank, government salaries and transition 

Author: Martine van Bijlert                        Date: 20 June 2011

The shock of the Kabul Bank collapse, and the reluctance of the Afghan government to acknowledge the magnitude of the problem, weighed heavily on the relations with the donors. This came to a head in the summer of 2011 when progress on the Kabul Bank dossier became a condition for continued assistance and even led to the temporary freezing of donor funds. For a brief period, it was unclear whether the government would still be able to pay its salaries. Both sides – the Afghan government and the donors – blamed each other for not really wanting to solve the problem:

The IMF and the Afghan government failed to reach an agreement last week on how to deal with the Kabul Bank crisis. The long-simmering controversy, which began months ago, is starting to have far-reaching consequences both for the cash flow of the Afghan government and for the possible nature of the transition, as donors are making their aid conditional on the decisions of the IMF. AAN explains what exactly is the matter.

The Rise and Fall of the Kabul Bank – making the details public

Author: Martine van Bijlert                        Date: 27 November 2012

The crisis between the donors and the Afghan government was ultimately averted after the Afghan government reluctantly agreed to the donors’ conditions. One of these conditions had been the launch of an independent, in-depth public inquiry. This inquiry, which was conducted by MEC, was released in late November 2012:

After the Kabul Bank collapsed and the government stepped in to stem the hemorrhaging of both the money and the confidence in the country’s financial system, the Afghan government and the international donors started a protracted conversation on how to deal with the crisis. The hand of the donors was strengthened by the fact that a crucial IMF loan, the Extended Credit Facility, had expired, allowing them to insist on a set of detailed benchmarks, one of which was the launch of an independent, in-depth public inquiry. The job of implementing the inquiry was given to the Independent Anti-Corruption Monitoring and Evaluation Committee (MEC), a government-appointed independent body consisting of three international and three Afghan commissioners and a Secretariat.

The full report of the public inquiry can be found here.

 

Criminal proceedings: Letting the shareholders off the hook

The Kabul Bank Tribunal: an exercise in containment

Author: Martine van Bijlert                        Date: 9 March 2013

The original Kabul Bank verdict was finally issued by a Special Tribunal in March 2013, still under President Karzai, and was described in this AAN report as “an exercise in containment.”  The report tracks the different avenues of investigation that each laid the blame elsewhere, and explains how this resulted in a verdict which scapegoated the two main managers of the bank and let all other main players off the hook:

The Kabul Bank crisis is complicated and multi-layered. Its tentacles reached into almost all centres of power and threatened to embarrass not just the architects of the scam, but practically everybody involved: businessmen, politicians, senior government officials, the various Presidential campaign teams, Parliamentarians, Central Bank staff, international advisers, donors – the list is long. Since the story broke in August 2010, everyone has tried to do their own version of damage control, which has left us with a confusing mix of partial and competing investigations, alternating efforts to cover-up and to reveal, half-hearted pushes towards prosecution and greater regulation, and continued efforts to downplay the seriousness of the crisis and to limit the circle of those implicated. The long-awaited verdict by the Special Tribunal, last Wednesday, has done little to change that picture.

AAN Podcasts: Martine van Bijlert talks Kabul Bank 

Date: 22 December 2014

After the NUG came to power, as explained above, the case was reopened, but the new court verdict still let the main shareholders – who had been the beneficiaries of massive irregular loans – off the hook. At the time, the government could still count on some ‘benefit of the doubt’ – it was early days after all and there were still signs of determination – but there were already reasons for concern. In his commentary accompanying an AAN podcast on the Kabul Bank verdict, AAN’s Thomas Ruttig wrote that, although prison sentences had been handed out and assets frozen, there were indications that “this government may well decide to leave the shareholders alone, like the previous government did, as long as it looks like they have repaid their loans.”

He concluded that:

Ghani’s step to reopen the case was symbolically important – but does not yet go far enough … For now, all that has happened is that the existing court case has been finalised. And although it is refreshing to have a government that at least wants to be seen to act, it is still too early to be very optimistic. The so-called reopening of the case has not yet breached new ground.

The podcast itself can be found here.

 

Asset recovery and the embarrassment surrounding Smart City

As the criminal prosecutions of the shareholders and those who had left the country (including two Indian advisers) fell by the wayside, the NUG seemed to focus mainly on the bank’s asset recovery. As seen above, progress on the Kabul Bank dossier had been a condition for continued donor assistance in the past, and had even led to the temporary freezing of donor funds. President Ghani seemed determined not to let that happen again.

This determination, to make great strides and to employ creative ways to recover the losses, however, backfired late last year when an ambitious housing scheme was launched in partnership with one of the two Kabul Bank managers (Khalil Ferozi, who was not only allowed to make large investments, but was also let out of prison to do so). The partnership was cancelled, but the confusion surrounding the deal damaged to the government’s efforts to show itself as serious about corruption.

The Afghan Government and the Smart City Debacle: Who out-smarted whom? 

Author: Martine van Bijlert                        Date: 21 November 2015

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.

 

Economic Management in Afghanistan; Thoughts on what worked, what didn’t and why

Author: William Byrd                       Date: 26 August 2015

Finally, a paper by Bill Byrd, released ahead of a Senior Officials Meeting (SOM) in Kabul a meeting that was review to progress and discuss new reform programs  looked at the lessons from Afghanistan’s past experience with economic management. In this paper, Byrd identified the contributing factors that facilitated what he calls the “Kabul Bank disaster.” He concluded that:

Perhaps most fundamentally, the Kabul Bank fiasco illustrates how a confluence of greed, readily available resources for looting, and high-level political connections protecting those involved gave rise to a ‘perfect storm.’ Other Afghan private banks, though much smaller than Kabul Bank, also carry vulnerabilities and risks of failure, albeit more due to concentrated and potentially bad investments rather than the kind of outright fraud and theft seen in Kabul Bank.

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