Karzai Orders Inquiry in Kabul Bank’s Losses
April 5, 2012 By Leave a Comment
Mr. Karzai also ordered that hundreds of millions of dollars in outstanding loans by the bank be repaid within two months, his office said in a statement. 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.
Cleaning up the financial and legal mess created by the government’s nearly $900 million bailout of Kabul Bank — a sum almost equal to the government’s annual revenue — has been seen inside and outside Afghanistan as a test of President Karzai’s willingness to tackle Afghanistan’s widespread corruption.
The bank, once Afghanistan’s largest, was seized by regulators in August 2010 after being left dangerously overexposed by shareholders who used it as virtual piggy bank, doling our loans to themselves, friends, relatives and business associates. Western officials have described it as little more than a Ponzi scheme.
Afghan regulators have since imposed tighter controls of the country’s nascent financial industry. But the authorities had made only incremental moves to deal with the Kabul Bank fallout until this week’s unexpected action by Mr. Karzai.
For instance, only $77.5 million in loans from the bank had been repaid as of Jan. 1, according to bank documents obtained by The New York Times. And almost half that amount came from the servicing of legitimate loans, which investigators estimate made up less than a tenth of the bank’s loan portfolio.
The lingering scandal has proved to be a source of persistent embarrassment for the Afghan government, and led Western officials to warn that it could eventually result in cuts to the billions of dollars in annual aid on which the government depends.
An Afghan central bank official said Thursday that along with the moves announced by the president’s office, the authorities were also quietly tightening the terms under which the bank’s two largest shareholders are being detained. The men — Sherkhan Farnood, the bank’s founder, and Khalilullah Frozi, its former chief executive — were arrested last summer and jailed for a few months pending trial, and then released in the fall, ostensibly to help investigators find missing assets.
Instead, they quickly became lunchtime fixtures at some of Kabul’s most expensive restaurants. And Mr. Farnood, a world-class poker player, has been hosting high-stakes card games at his home in Kabul’s fanciest neighborhood.
The central bank official said that the men’s behavior was “an affront to decency,” and that they would now be required to spend their nights in prison in accordance with the original terms of their release. The official asked not to be identified to avoid upsetting what he called the two men’s “allies” — the powerful businessmen and government officials who are also tied into the Kabul Bank scandal.
Aware of those connections, Western officials in Kabul said they were taking a wait-and-see approach to Mr. Karzai’s decisions to appoint a special prosecutor, create a tribunal and order the loans repaid.
The statement from the presidential palace, released on Wednesday, said the decisions were made at a meeting of senior Afghan officials a day earlier. It was not clear if a special prosecutor had been selected, and it did not say what would happen to those who did not repay their loans.
The American Embassy, in a statement, said it “noted with interest” the moves by Mr. Karzai. “We look forward to seeing the results of these decisions, especially the return of assets stolen from Kabul Bank and prosecution of those responsible for the crisis,” it said.
Financial support for the Afghan government after NATO’s combat mission here ends in 2014 is going to be a major topic when alliance leaders gather for a summit next month in Chicago, and it would help Afghanistan’s case if the government was seen to be getting serious about dealing with the Kabul Bank scandal, another Western official said. “If you’re judging the Afghans on what they’ve done up to today, they’re not getting high marks for this,” said the official, who spoke on condition of anonymity because he wanted to preserve his relationship with Afghan officials.
The International Monetary Fund is also preparing to review its program for Afghanistan. Many donors look to the fund for guidance on their own direct aid programs, and the fund’s approval is needed to continue disbursements from the Afghanistan Reconstruction Trust Fund, a collective donor effort through which aid money is funneled directly to the Afghan government.
Afghanistan lost about $70 million in payments from the trust fund last year after the International Monetary Fund refused to renew its program because of poor banking oversight.
Among the conditions the I.M.F. imposed when it finally agreed to renew the program in October was a forensic audit of Kabul Bank. Kroll, a corporate security and consulting firm based in New York, was hired to do the audit, which is now complete.
Although the results of the audit remain private — only the I.M.F. and the Afghan government have officially seen them — they give the authorities a clear accounting of who owes what.
The Afghan central bank official said that should allow for more aggressive efforts to collect from the bank’s shareholders, many of whom have disputed the amount they owe.
Graham Bowley contributed reporting.