Economy & Development

The Kabul Bank Tribunal: an exercise in containment


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’s Martine van Bijlert takes a closer look.

1. The Kabul Bank tribunal; uneven convictions

On Wednesday 6 March 2013 the Special Tribunal for the Kabul Bank crisis finally reached its verdict. (1) It convicted twenty one people, with punishments ranging from a nominal fine to short and medium term prison sentences. The verdict followed three lines of reasoning: the Kabul Bank leadership and the head of the New Kabul Bank were convicted for misuse of property that had been entrusted to them, other Kabul Bank staff members and affiliates were convicted for complicity, while Central Bank staff was convicted for abuse of authority and/or dereliction of duty, for having failed their regulatory role.

I. The conviction of the Kabul Bank leadership was based on articles 466 and 6 of the penal code, which provide a surreally mild interpretation of what the Kabul Bank scam entailed: article 466 deals with the misuse of (moveable) property by someone who has been entrusted with it and calls for medium sentences, while article 6 stipulates that a person who has acquired a good through crime will have to return either the good or its price to the owner. Based on these articles the bank’s leadership Sher Khan Farnod and Khalil Ferozi were sentenced to 5 years in prison. Massud Khan Musa Ghazi, who was appointed temporary head of the New Kabul Bank after the bank went into conservatorship, is accused of making a large, irregular money transfer to Dubai and was sentenced to 3 years in prison. The men were additionally asked to repay respectively 279 million, 531 million and 5 million USD.

II. The second group of convictions concerned a number of Kabul Bank staff members and affiliates who were considered complicit in the crime. Six people were given 4 years in prison (four of whom were tried in absentia), while four others received 2 year sentences.(2) The convictions were made based on article 130 of the constitution, which in practice is often used when judges don’t know how to deal with a case:

Article 130 of the Constitution: “In cases under consideration, the courts shall apply provisions of this constitution as well as other laws. If there is no provision in the constitution or other laws about a case, the courts shall, in pursuance of Hanafi jurisprudence and within the limits set by this constitution, rule in a way that attains justice in the best manner”.

The inclusion of such a provision in the constitution – the current one, as well as the two earlier ones in 1964 and 1980 – provides judges with an enormous amount of discretion. Articles 130 (referring to Hanafi jurisprudence) and 131 (referring to Shi’a jurisprudence) are often used in cases that fall in the gap between codified criminal and civil law and customary Islamic jurisprudence. Judges have for instance reverted to its use when dealing with the highly controversial ‘crimes’ of apostasy and blasphemy, but it is also used to criminalise girls and women who escape from abusive homes. The use of these articles means that the gaps in the current laws, as well as the potentially more fundamental disagreements over which laws are to be followed, are resolved in the courtroom by individual judges.

In this case the article appears to have been used because the Afghan penal code is not clear on how to deal with someone who is an accessory to a crime (rather than a partner in crime). The court has not yet released the text of the verdict, but one would hope that it details the crime in Hanafi jurisprudence and/or other legal argumentation on which the verdict rests. Article 130 is after all not a criminal provision in its own right.

III. The third group of convictions concerns eight staff members of the Central Bank. They include former Central Bank governor Abdul Qadir Fitrat who has been in the US since June 2011 (2 years in prison, in absentia); his former first deputy Mohibullah Safi, the former heads of the supervision department Zafarullah Faqiri and Shir Agha Halim, and member of the supervision department Besmellah (each 1 year), member of the supervision department Mohammad Aref Salek and head of the financial audit department Mohammad Qasim Rahimi (each 6 months) and the head of the analysis department Mustafa Massoudi (a fine of 24,000 Afs, or approximately USD 480).

All of them were convicted based on articles 285, 381 and 156 of the penal code. Articles 285 and 381 deal with officials who respectively impede the implementation of the law and who intentionally refrain from informing officials of a crime. Article 156 stipulates that in the case of several related crimes the court shall enforce only the heaviest punishment (most of the convicted received multiple prison sentences, of which only the heaviest will be enforced).

The Independent Joint Anti-Corruption Monitoring and Evaluation Committee (MEC), an independent body that released a stinging public inquiry into the Kabul Bank crisis in November 2012, was highly critical of the outcome of the trial. MEC chair Drago Kos let it be known through a press release that:

“Today was a disappointment for the resolution of issues resulting from the Kabul Bank fraud. International standards require sanctions that are proportionate, dissuasive, and effective. We feel that this is lacking in the judgment issued today. Even worse for the Afghan people, this judgment fails to take advantage of provisions in the Anti-Money Laundering Law that would facilitate recovery of the missing money.” 

The MEC in particular registered its concern over the lightness of the sentences for the Kabul Bank leadership, given the extent of the fraud and compared to the sentences that had been handed down to others who appeared to have had little or no involvement in the fraud. Although it welcomed the tribunal’s intention to look into the involvement of an additional 29 individuals, it noted – with a sense of understatement – that criminal proceedings were apparently “not proceeding as quickly as desired”. (3)

2. The Kabul Bank crisis; diverging investigations with different culprits 

The details of the Kabul Bank scam, including its astonishing size and scope, have by now been well-documented. At the heart of the crisis, as described in detail in the MEC public inquiry, was a massive and complex web of fraudulent insider loans, with over 90% of the bank’s entire loan portfolio benefitting 19 individuals and companies, most of whom were Kabul Bank shareholders. The fake loan accounts were created by staff in the bank’s credit department, on instruction from the senior management and supported by forged documents. The bank management, according to the MEC, additionally engaged in large scale “non-loan disbursements”: excessive expenses, investments, fake capital injections, advance payments, unjustifiable bonuses, salaries to non-existent employees, inflated costs or payments for fake assets and political contributions.(4)

But although the technical details of the scam have been revealed, there is no consensus on where to lay the blame. A brief overview of the main investigations, and their findings, illustrates this point:

• The report of a special investigation by the Central Bank, dated October 2010 (not publicly available), details what the Central Bank had been able to uncover at the time. The report focuses on the Kabul Bank management, the shareholders and the recipients of the irregular loans and gifts. It includes lists of expenses, properties and beneficiaries at a level of detail that is potentially quite embarrassing for a large number of people.

• A USAID review of its bank supervision assistance, dated 16 March 2011 (initially unclassified, later ‘reclassified’, but still available online), questioned the effectiveness of 7 years of technical assistance to the Central Bank by USAID-funded consulting firms. It found that there had been multiple clear indications that something was wrong at the Kabul Bank – including death threats in conjunction with onsite examinations – which had neither been followed up, nor reported. The report is an interesting read and aptly illustrates the limitations of technical assistance in an environment characterised by impunity, intimidation and implication. (5)

• The report by an Investigative Committee headed by the High Office of Oversight (HOO), dated 14 May 2011 (not publicly available, findings were presented in a press conference on 29 May 2011 and described in the MEC report) introduced a third group of culprits, in addition to the Kabul Bank management and the shareholders: the regulators – in particular the Central Bank and the international auditors. It recommended that the shareholders be let off the hook, provided that they repay their loans, but that the others two groups be investigated by the Attorney General’s Office. In doing so the committee largely followed the government’s cues: in April 2011 Karzai had already announced an amnesty for shareholders who paid back their loans and had asked for prosecution of the international advisers. The inclusion of the Central Bank, however, was new. This seems to have been a direct response to the appearance of Central Bank governor Fitrat in Parliament on 21 April 2011, where he disclosed the names of a large number of shareholders and borrowers – probably at the prompting of the internationals. (6)

• The report of a public inquiry by the Independent Joint Anti-Corruption Monitoring and Evaluation Committee (MEC) was released on 28 November 2012. The inquiry was one of the benchmarks that had been agreed on with the IMF (see here for background). Its report, that is the most comprehensive public document to date, was described by the Washington Post as a “damning portrait of foot-dragging, incompetence and blatant political manipulation involving virtually every agency that was supposed to either investigate why the Kabul Bank failed or take legal action against those responsible for looting it of more than $900 million.” The report leans heavily on the forensic audit by investigative firm Kroll Associates (not publicly released), the findings of the original Central Bank investigation and additional interviews. The HOO, which is embroiled in a turf war with the MEC declined to participate in the inquiry. (7)

The MEC report places the blame squarely on the shareholders, describing everything else that happened as “compounding factors that allowed the fraud to continue and for the perpetrators and participants to escape any form of accountability or justice.” It is however also critical of the “collective failure of banking oversight and enforcement” by the Central Bank and the international advisers, and lists the opportunities they missed to detect and prevent the fraud. The report also details the instances of high-level political interference, pointing to the absence of true independence that allows institutions to “operate outside of politics and protect the public interest.” Instead institutions are “beholden to politicians and vested interests; [they] delegate their authority upwards by unnecessarily deferring to high officials [or] are directly interfered with by political interests”.

• The indictment by the Attorney General’s office (AGO; not publicly released), on which the tribunal’s verdict is based, mentions two groups as responsible for the Kabul Bank crisis: those who signed and provided the illegal loans and those who received and used the loans against the law. But, it only indicts the Kabul Bank leadership, Kabul Bank staff and Central Bank staff, while sidestepping the question of shareholder and borrower culpability. The tribunal’s judge seemed to suggest that this may still be dealt with in the future.

The reluctance on the part of the Afghan government to go after the shareholders and the borrowers has thus been mirrored in the course that the HOO and the AGO have taken. This is no coincidence; as found in the MEC inquiry, there has been a consistent deferring to the President by what should be independent investigative bodies – even to the point of it being explicitly stated, that it is up to the President who should be prosecuted and which accounts are to be sent to court.

3. The response to the Kabul Bank crisis; a leaky exercise in containment

The Kabul Bank crisis was caused by a scam that was spiralling out of control, but it was sparked by an internal power struggle. Sher Khan Farnod, the bank’s founder, feared that he was being pushed out by Khalil Ferozi, the man he had brought in as CEO. The conflict led to revelations that were potentially embarrassing for a large number of people: the shareholders and borrowers who had accepted overly favourable arrangements; the wider circle of politicians, government officials and MPs who had been at the receiving end of generous gifts and donations; the Central Bank, that had failed its regulatory responsibilities; the direct donors, whose technical assistance to the banking sector had not prevented the scandal; but also the wider donor community that feared that the collapse of the bank and possibly the wider financial sector, as well as the implication of senior officials, could fatally undermine the efforts to get the Afghan state ready for transition – even if only optically. It didn’t help that several of the protagonists behaved like loose cannons (which was highlighted when Farnod and Ferozi appeared on a live talk show in May 2011, where they loudly swapped accusations and dropped tantalising hints of who else may be implicated in the scandal).

When the crisis broke with an article in the The York Times on 31 August 2010 titled ‘Troubles at Afghan Bank Jolt Financial System’ all parties went into damage control mode. The government downplayed the crisis, at times implying that it had been created by the international media and was part of a wider conspiracy (a line that was initially also taken by Central Bank governor Fitrat: “The New York Times report has political motives. They want to harm the newly founded banking and financial system of Afghanistan and harm the government of Afghanistan”). The shareholders and borrowers tried to wriggle out of their responsibilities, with Mahmoud Karzai as the most vocal defender of his own innocence appearing regularly on local television. Donors sought to portray a picture of a single rogue bank, hoping that the other shaky banks would hold together and were not hiding similar skeletons in the closet. At the same time, shocked by the potential size of the crisis and annoyed by the reluctance of the Afghan government to act, they used the opportunity to press the government to act, strengthened by the expiry of a crucial IMF loan.

The involvement of Mahmoud Karzai and Hassin Fahim – brothers of respectively the President and the First Vice President – as Kabul Bank shareholders and beneficiaries of large irregular loans has attracted a lot of media attention and has fuelled the suspicions of political interference and intentional protection from prosecution. But, as has already argued elsewhere, it would be a mistake to simply view this as a matter of the President and the Vice-President protecting their brothers (there is in particular not much love lost between Hamid and Mahmoud, who have often treated each other as liabilities rather than trusted partners). It is much deeper and more entrenched than simply relatives looking out for each other; this is a system that is protecting itself.

The reaction of the scam’s main beneficiaries, as well as key government officials, is quite instructive. When they speak, the shareholders and borrowers express a sense of being unfairly treated: all they did was follow the unwritten rules of the game of wealth and power. Because if one thing has become clear in this saga, it is that there is a group of people – spread throughout the business community, the political elites and all branches of government – who find it completely normal that their connections and wealth earn them all kinds of privileges, including gifts, donations, shares, campaign contributions, and loans that they did not expect to repay. And because the web of implication reaches so far, nobody knows who may be embarrassed or brought down, or against whom this may be used, if accountability is seriously pursued. So it is safer to stall.

In many ways, the trial should thus be seen as an exercise in containment, seeking to limit the number of people who go down with this and the severity of punishment for those who probably still have secrets to reveal. But does it stop here? Nobody really knows. Although the various institutions have not shown much independence, even fig leaf processes that have been set up under pressure sometimes acquire a life of their own. And although the lines of political influence and pressure are often quite crude, they are not necessarily reliable. So although the lightness of the sentence for Farnod and Ferozi (not to mention the hint that it may not be strictly enforced, like the pre-trial house arrest and detention) does not quite spread fear, the unpredictability of the system and the fact that the investigation is still ongoing is likely to keep all those involved on edge a little longer.

4. What the Kabul Bank saga tells us

The Kabul Bank saga illustrates many things. First of all, it put the spotlight on the modus operandi of the politically-connected business community: their intertwinements and competitions, their entanglement with political power (for some detail see here), their international branching out and their idea of a luxury life style. It provided an intriguing, if only fleeting, peek into the world of election campaign financing and political plying. And it highlighted the reluctance of the government – executive, judiciary and legislative – to deal with problems like this.

Secondly, it illustrated confusion that arises from having a multitude of, often competing or disagreeing, investigative, regulatory and judicial bodies – the Central Bank, the High Office of Oversight, the international forensic audit, the MEC, the AGO, the special tribunal, the financial dispute resolution committee – with no centre of gravity, other than the final say of the President (see for a similar problem and ‘resolution’ the wrangling surrounding the contested outcome of the Parliamentary elections).

Thirdly, it highlighted the fundamental limitations of capacity building as a means to strengthen the rule of law and of the limitations of regulation as a way of preventing of abuse. This is a system where knowledge of a crime usually does not lead to action, either because a party is implicated itself or because it simply doesn’t know where to start, and where rules are for those without power, wealth or connections.

Finally, despite the pressure to recover the money and to prosecute a widening circle of culprits, all indications are that those involved intend to return to as much ‘business as usual’ as they can get away with. They know they are vulnerable to the quirks of an unreliable system and will probably try to deal with it using the trusted tools of influence, pressure, bribery and threats. The unavoidable, but overly mild conviction for Farnod and Ferozi (and the slightly random and seemingly loosely argued convictions in the case of the others) does not change this conclusion.

 

(1) On 3 April 2012 Karzai ordered the establishment of a special prosecutor’s office and a special tribunal to investigate who took out illegal loans from the Kabul Bank and who was involved in the ensuing financial crisis (the Palace statement can be found in footnote 1 here).

(2) The 4 year prison sentences were given to: former member of the Board of Supervisors Engineer Afzal, former Head of Operations Abdul Basir Faruq, former chief of the audit department Raja Gupal Kreshan, former head of the loan committee Ram Chanran, former member of the Board of Supervisors and head of Pamir Airways Amanullah Hamid, and former deputy of the loan department Esmatullah Bek – the last four were tried in absentia. 2 year prison sentences were given to: former head of the IT department Mohammad Tariq Miran, former head of branches Kamal Nasir Korur, former staff member of the law compliance unit Mahbub Shah Forutan, and former head of government communications Aminullah Kheirandesh.

(3) According to the tribunal’s judge there were three categories of defendants: the 21 that stood trial on 6 March 2013, a group of 13 people whose cases are still under investigation and have not yet been sent to the prosecutor, and another 16 people – some of whom are no longer in the country – whose cases are with the prosecutor but according to the judge have not yet been pursued. There continues to be considerable confusion over the status of the group of 13 (the shareholders and/or beneficiaries of the irregular loans), with Tolo TV reporting on 6 March 2013 that the cases are being pushed back and forth between the Financial Disputes Resolution Committee (FDRC) and the Attorney General, who cannot agree on whether this should be treated as a civil or criminal case. The civil case is related to the untangling of the loans to determine who should repay what.

Markedly absent from the tribunal’s verdict were the shareholders and major borrowers, but also two Indian banking professionals and the former deputy CEO of the bank who, according to this detailed report, respectively designed and kept the records of the fraudulent loan scheme.

(4) The report of the MEC’s public inquiry, released in November 2012, provides the most comprehensive, publicly available overview of the rise and fall of the Kabul Bank. For additional insider detail on the lengths to which the Kabul Bank leadership went to circumvent the bank’s internal audit department, see ‘How They Robbed the Kabul Bank’, released in June 2012.

(5) In a telling anecdote, during a course on enforcement actions Central Bank examiners apparently looked incredulous when the adviser suggested that the Central Bank had the power to remove bank management. When the examiner probed their views by asking “You don’t think the Central Bank can remove the chief executive officer of the Kabul Bank?” the reply of the examiners was “He can remove us.” (USAID review, p 5)

(6) The impression that the inclusion of Central Bank staff in the criminal investigation was a direct response to Fitrat’s apparently unwelcome revelations in Parliament is strengthened by the fact that the investigation into Central Bank complicity or negligence has so far not included the earlier years when banking irregularities were found and not sufficiently followed-up (see the MEC report for details). For more detail on Fitrat’s “public break with President Karzai on the Kabul Bank crisis” see here. This report, incidentally, links to practically everything that has been written on the Kabul Bank crisis.

(7) The turf war between HOO and MEC is illustrated in this comment in the MEC’s second 6-monthly report (25 July 2012, p 10):

“In recognizing, HOO’s central importance, MEC has developed several benchmarks directed to HOO. Unfortunately, HOO has not been receptive to MEC’s recommendations and benchmarks and has never formally responded to MEC’s monitoring and evaluation efforts. The source of this consternation is HOO’s unwillingness to recognize MEC’s independence. HOO’s continued resistance jeopardizes many constructive anti-corruption initiatives and impedes Afghanistan’s overall progress in combating corruption.”

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Thematic Category: Economy & Development