The Kabulbank Scandal: Part III

Kabul Bank
Kabul Bank

The Kabulbank scam may be the largest theft of depositor money per capita the world has ever experienced. Kabulbank was Afghanistan’s largest bank when the central bank intervened on September 2010. It was put into receivership on April 20, 2011.

New Kabul Bank (NKB) was established the same day by transferring old Kabulbank’s remaining deposit liabilities covered by an equivalent amount of claims on the central bank, Da Afghanistan Bank (DAB). Kabulbank’s deposits had dropped from $1.3 billion eight months earlier to under $0.6 billion by the time of its good bank/bad bank split.

The establishment of NKB allowed the continuation of the newly developed direct deposits of a large share of government salary payments to employee bank accounts, a function other banks were not yet able to perform (see Part I).

The Afghan authorities (and the conditions of IMF loans) have focused on justice for those involved, the recovery of stolen assets, and the future of NKB and the banking sector more broadly (see Part II). This is the third of a three-part series chronicling the unfolding and ultimate resolution of that scandal.

The new Ghani/Abdullah coalition government of Afghanistan that took office on Sept. 29, 2014 had both campaigned on the promise that fighting corruption would be one of their highest priorities.

The very next day, President Mohammad Ashraf Ghani held a press conference in which he stated that the Kabulbank case would be retried and expanded to all potentially guilty parties.

The original trial had given the real crooks, Sherkhan Farnood, the founder of the bank, and Khalilullah Ferozi, its CEO, relatively light sentences. They were never imprisoned. Instead, nine DAB staff members were convicted of the bogus crime of failing in their supervisory duties to detect the real crime.

NKB Attack
NKB Attack

NKB attack

One of those watching the press conference on TV that day was the 33-year-old Comptroller General of DAB, Muhammad Qaseem Rahimi, who was one of the nine DAB staff convicted in the first trial. Qaseem had joined DAB’s staff in May 2004 as Portfolio & FX Manager in its Market Operation Department.

He was one of a group of young Afghan university graduates hired by BearingPoint, a USAID contractor, as part of a USAID mentoring program. Those hired in this program received special training and mentoring from BearingPoint experts and many went on to become middle management of the central bank and the Finance Ministry.

Qaseem is a natural leader. When I visited DAB’s Market Operations Department in 2005 and 2006, I would often find him standing in the center of a group of his colleagues.  At 5 feet, 11 inches, he was at least a half a foot taller than those who usually surrounded him so he was easy to spot.

Though he was earning a master’s degree in finance from the International Islamic University, Kuala Lumpur, Malaysia, when Kabulbank was established and licensed by DAB, he had risen to the head (director general) of the Financial Supervision Department by the time DAB intervened in 2010. His conviction and those of his DAB colleagues were bogus and were meant to convince the public that the government was acting to punish the Kabulbank bad guys, who had cost taxpayers (someone’s, somewhere) almost a billion dollars.

Qaseem’s first encounter with rough play by the Attorney General’s Office (AGO) came in 2011 when he and 25 other DAB staff were rounded up from their offices at DAB and detained in the basement of the AGO’s building for questioning and mug shots. They were held there for over 12 hours. Qaseem’s anger at such crude intimidation was palpable as he relayed his experience to Kat Woolford and me during one of our regular lunches with him in his office after the event.

Thus Qaseem greeted the President Ghani’s promise of a new trial with relief. But this is Afghanistan and when the president’s order, “On resolving Kabul Bank Crisis and reimbursement of embezzled properties,” was issued the next day on Oct. 1, 2014, it differed significantly from his press conference promise of a new trial.

Instead of a new trial, it called for a speedy conclusion of the appeals of the earlier convictions and stated that the “Attorney General Office shall oversee the implementation of preliminary court ruling and arrest suspected individuals within three days after issuance of this order and keep them in custody until the issuance of the courts final verdict.”

That was Wednesday, the last working day of the week before Eid holidays. On Thursday, Qaseem met with fellow DAB convictees, Mohibullah Safi, the former first deputy governor, and Mustafa Massoudi, former head of the Financial Intelligence Unit, and drafted a letter to the president requesting him not to cancel their bail as they were government employees and willing to appear in court whenever required. They attempted to send their letter to the president via Ateeq Nosher, Ghani’s deputy for Policy and Strategic Planning and former head of DAB’s Monetary Policy Department, but he had left, along with others in the president’s office, for Dubai for the Eid holidays.

Their letter never reached the president. On Tuesday Oct. 7, the first workday following Eid holidays, Bismillah, a DAB bank examiner who was also convicted in the Kabulbank trial, was arrested in his office. Knowing that he would be arrested, Qaseem left home for his office on Wednesday, kissing his 10-day-old daughter Yusra and his 4-year-old son Yusuf goodbye. Indeed, he was arrested that day along with DAB bank examiners M. Arif Salik, and Sher Aqa.

The convictions of the latter two young men were upheld but their sentences were reduced from six to three months imprisonment, which they have now served. Qaseem’s conviction was overturned but not until he had remained in jail for five weeks. Due to bureaucratic incompetence or vindictiveness (it is often difficult to tell which in Afghanistan), he was not actually released for another week.

At the same time, Nov. 11, 2014, the court increased the penalties for the real criminals. Shekhan Farnood, Kabulbank’s founder, was sentenced to 10 years in jail, increasing the previous sentence of five years, and required to repay the US$334,256,079 that had been taken from the bank, plus a fine of US$237,384,668.  Khalillullah Ferozi, the bank’s CEO, was also sentenced to 10 years in jail, increased from five years and required to repay the US$196,632,892 he had taken, plus a fine of US$137,174,981. And this time these two are actually in jail.

The convictions of three other Kabulbank staff were upheld — one year each in jail — but Raja Gopalakrishnan, Kabulbank’s internal auditor and the brains behind the accounting design of the fraud and his Indian sidekick Ram Chandaran (chief credit officer) remained safely in India to which they were allowed to flee under questionable arrangements with the AGO. My lawyer counsels me against stating the obvious.

For the rest of the DAB scapegoats, Mustafa Massoudi was fined AFS24,000 (about US$400), Mohibullah Safi still sits in jail waiting for a judgment on his appeal, Masood Khan Musa Ghazi, former chief accountant of DAB appointed as Conservator of Kabulbank, then CEO of New Kabul Bank, fled the country to places unknown, and former Governor Abdul Fitrat resigned and fled the country after revealing to the Afghan Parliament all that DAB knew about the Kabulbank swindle (including the participation of then President Karzai’s brother Mahmood) and is now living in Virginia. So far, the Attorney General’s Office has made no progress in the investigation and arrest of a list of other real participants in the crime called for by President Ghani.

What is the explanation for this bizarre mix of results? Most observers accept the sincerity of President Ghani’s and CEO Abdullah Abdullah’s desires to fight the entrenched corruption of Afghan political and administrative structures. Skeptics claim that Ghani allowed innocent people to go to jail just to demonstrate that he was doing something. Genuine change is a step-by-step process that will take a very long time. The president’s powers are limited.

He can’t even easily appoint his own government. His first choice for finance minister, Jailani Popal, withdrew because, according to the New York Times, “he did not have enough money and jobs to bribe Parliament into approving him.” Ghani’s nomination for governor of DAB, Khalil Sediq, a former governor of the central bank, was rejected by Parliament because of his dual citizenship (American and Afghan). According to former DAB governor Fitrat, the Attorney General, Muhammad Ishaq Aloko, is the most corrupt person in the country, which may explain some of what we are seeing.

People lined up to collect their salary
People lined up to collect their salary

People lined up to collect there salary

The new government put all existing ministers, including Attorney General Aloko, in acting status and Aloko resigned but has not yet been replaced. Long-established ways of doing business will take a long time to squeeze out of the system and the culture, but honest and determined leadership from the top is essential.

Asset recovery

By the end of the Karzai government, US$216.5 million had been recovered of total recoverable assets of US$896 million (taking account of allowed write-offs). Of that amount US$157 million was in cash and the rest in property. Since then, total recoveries increased to US$229 million, an increase of only US$12.5 million.

A large part of the problem of recovery of the stolen assets stems from the fact that so much Kabulbank money was transferred abroad to related parties of the bank, or entities controlled by them. The recovery of these assets depends critically on mutual legal assistance requests and the cooperation of the countries where those assets are located.

Considerable insight into this issue can be found in reports of the Independent Joint Monitoring and Evaluation Anti-Corruption Committee (MEC), which was established at the invitation of the Afghan government following the London and Kabul conferences of 2010.1 The MEC’s October 2014 report on KB provides the most thorough public accounting of where the money went and who absconded with it.

The report, which is available in its entirety on the committee’s website,2 notes that, according to the Kabulbank receivership, between March 2007 and April 2011 $873 million of licit and illicit funds were sent to 28 countries for the benefit of bank-related parties via SWIFT transactions. The largest of the 28 recipient countries were the United Arab Emirates, Latvia and China. In a number of cases, transfers were made for the purchase of products and services from trading companies, oil and gas-related companies, and for the purchase of products and services related to Pamir Airways, which was owned by Farnood.

Between 2011 to 2013, the AGO sent requests for mutual legal assistance to seven jurisdictions in 2011 (United Arab Emirates, France, United Kingdom, India, Switzerland, Germany and the United States). In some cases, such as the UAE, Afghanistan has mutual legal assistance treaties. In others, such as the U.K., there is no standing treaty governing such matters, thus any requests for assistance must be handled on an ad-hoc basis.

Unfortunately, these requests have proceeded slowly due to a variety of factors, including technical deficiencies with some requests and the lack of prioritization by receiving countries. Key points regarding these requests are illustrated for the UAE, the most important of the jurisdictions involved:

  • United Arab Emirates
  • Afghanistan and the UAE have had an agreement of mutual legal assistance in criminal matters since October 2008. The agreement provides for best efforts in providing documents and records, locating and identifying persons or items, executing requests for searches and seizures, and assisting in the proceedings related to the immobilization and forfeiture of assets.
  • The Afghan government submitted an urgent request for legal assistance to the UAE in May 2012 seeking records, documents, and other information related to Farnood and Ferozi. It also sought to freeze assets related to specifically mentioned bank accounts in anticipation of a confiscation order. The UAE Ministry of Justice initially returned the document on the grounds that it was sent without the signature and stamp of higher judicial authorities of the Afghan government. Afghan officials sent additional requests in July and September 2013, and a subsequent letter in October 2013. This request met with no response from the UAE.
  • In December 2013, MEC members brought the UAE’s lack of cooperation to the attention of the Organization for Economic Cooperation and Development (OECD). The MEC requested that the OECD add the UAE to a list of countries that do not enforce anti-money laundering laws.

The OECD’s secretary-general forwarded the request to the Financial Action Task Force (FATF), which focuses on high-risk and non-cooperative jurisdictions.

In April 2014, the FATF president committed to bring the MEC’s concerns to the attention of the Asia/Pacific Group and the Middle East and North Africa Financial Action Task Force for them to consider during the next compliance evaluations for Afghanistan and the UAE.

As the above brief MEC summary demonstrates, there is plenty of blame to go around for the lack of progress on international recovery of Kabulbank assets. Some of the requests from the Afghan authorities have lacked the information necessary for the recipient country to respond in a meaningful fashion. In particular, critical information regarding specific individuals, transactions and/or accounts often has not been included.

When requests have been sufficiently detailed and specific, they have typically only been submitted to the foreign authorities in Dari, despite assurances of translation into the receiving countries’ official languages. In addition, technical assistance has been available from the international community to support criminal asset recovery to assist with further international letters of request and analysis of data provided through mutual legal assistance, but this avenue has not been vigorously pursued by the AGO.

On the other hand, in some cases, requests have been delayed in the recipient countries for reasons that have not been readily apparent.

Clearly, renewed and vigorous efforts are needed, both on the Afghan side and from the international community. Afghan authorities need to frame requests in the language of the recipient country and with sufficient clarity and specificity, and adherence to any relevant procedural requirements, so that the recipient countries can actually understand the request and respond in a meaningful manner. It remains to be seen whether the new government can improve on the efforts of its predecessor.

Even if this can be accomplished, however, it is very much a two-way street: recipient countries also need to prioritize properly framed requests and respond to them in a timely fashion. Only then can there be any hope of recovering the millions of dollars of Kabulbank funds that were spirited out of the country.

It is noteworthy that Afghanistan is a party to the U.N. Convention Against Corruption and the U.N. Convention Against Transnational Organized Crime (the Palermo Convention), both of which contain mutual legal assistance provisions. Hopefully, the new Afghan government, as well as other parties to these and similar conventions, will take these obligations very seriously.

New Kabul Bank

The IMF’s position was that New Kabul Bank (NKB), which is temporarily owned by the Finance Ministry, should be privatized to reputable owners in a transparent auction or liquidated rather than remaining a state-owned bank and thus joining the other two overstaffed and inefficient state banks. Liquidation had been put off as a last resort because of the important role played by NKB in the electronic payment of government salaries.

Over 90 percent of such payments are made through NKB and until the completion of upgrades in payment infrastructure financed by the World Bank making it possible for employees to designate their own bank, there was no option to continuing the service except through NKB.

These upgrades and new, more integrated payment systems will not be completed until the end of 2016, though the growth of mobile banking is extending the possibility of electronic salary payments to remote areas as well. Though most of these salary deposits are withdrawn in cash immediately, the electronic salary payment program has significantly reduced payments to ghost workers and skimming by paymasters.

Sixty percent of government employees are now paid electronically, over 90 percent of which are through NKB.

In a tragic terrorist attack on NKB in Jalalabad on April 18, 34 bank customers waiting to withdraw their government salaries were killed and 125 were injured. It was the first suicide bombing by Daesh (also known as the Islamic State or ISIS) in Afghanistan.

The first effort to privatize NKB in early 2013 failed because the only bid received did not meet the technical requirements of the tender. The most important requirement was that the new owners must be fit and proper. A second tender was held in the autumn of 2013 and two bidders submitted bids that met the tender’s technical requirements.

The Evaluation Committee recommended that the Afghan Cabinet accept the better of the two bids, but the Cabinet rejected it as insufficient. The real reason was more likely that those wanting to keep the bank under government ownership prevailed. Government banks, like Afghanistan’s existing two (Bank Millie and Pashtany Bank), are invariably overstaffed, poorly run and, in general, sources of patronage and corruption.

The story of Kabulbank is a sad and tragic one. The struggle to build a strong and efficient banking sector in Afghanistan has been and will be long and hard. Hopefully, the headwinds of corruption that have produced this story are receding but we will only know many years in the future.

ENDNOTES

  1. The MEC is an independent agency consisting of six senior anti-corruption experts selected through a nomination process overseen by the international community and the Afghan government. It is not subject to direction from either the Afghan government or from the international community. The MEC focuses on developing anti-corruption recommendations, monitoring and evaluating the anti-corruption efforts of the Afghan government and the international community, and reporting on a regular basis to the president, Parliament, the people of Afghanistan, and the international community, about the state of the fight against corruption in Afghanistan.
  2. Independent Joint Anti-Corruption Monitoring and Evaluation Committee, Unfinished Business:  The Follow Up Report on Kabul Bank (October 2, 2014), available at www.mec.af/files/2014_10_02_Kabul_Bank_Follow-Up_Report.pdf
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Warren Coats

Warren Coats retired from the International Monetary Fund in 2003 as assistant director of the Monetary and Financial Systems Department, where he lead technical assistance missions to central banks in more than 20 countries. He was a director of the Cayman Islands Monetary Authority from 2003 - 2010 and is currently Senior Monetary Policy Advisor to the Central Bank of Afghanistan, Iraq and Kenya for the IMF and an advisor to the Bank of South Sudan for Deloitte. His most recent book, “One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina,” was published in November 2007.

He has a Bachelor of Arts degree from the University of California, Berkeley, and a PhD in economics from the University of Chicago. He lives in Bethesda, Maryland.

Warren Coats
T.  +1 (301) 365 0647
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Gary A. Gegenheimer
Mr Gegenheimer has advised numerous central banks and other financial regulatory authorities in emerging market countries since 1995 on projects sponsored by the US Agency for International Development, the World Bank, the Asian Development Bank, and the Canadian International Development Agency. He has previously worked for Deloitte Consulting, LLP, BearingPoint, Inc., KPMG Consulting, Inc., DevPar Financial Consulting, and Barents Group, LLC. Prior to beginning his international consulting career, he was with the US Treasury Department’s Office of Thrift Supervision during most of the time of the savings and loan crisis of the early 1980s and early 1990s. He holds an LL.M. degree in international banking and financial law from Boston University School of Law.Gary GegenheimerSenior financial regulatory advisor, emerging markets Independent Consultant United States T: +1 703-264-7920E: garygeg53@gmail.com LinkedIn