New Kabul Bank

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New Kabul Bank
Type Private
Founded Kabul Bank (2004)
Headquarters Kabul, Afghanistan
Key people Sherkhan Farnood
Chairman of the Board

Khalilullah Frozi
Chief Executive Officer
Website New Kabul Bank

Kabul Bank is a commercial bank in Afghanistan that has its main branch in the capital of Kabul. Established in 2004, it is the main bank used to pay the salaries of the army and security forces. The bank provides facilities to maintain accounts in Current, Savings Bank and Fixed Deposits; and offers its consumers branch and automated teller machine services. The bank is under the supervision of Da Afghanistan Bank (DAB), the central bank of Afghanistan.

Kabul Bank was badly shaken and almost collapsed in one of "the worst banking scandals in history," according to The Guardian newspaper.[1] In late 2012, according to the Los Angeles Times, independent investigators and journalists uncovered widespread corruption in Kabul Bank.[2] The New York Times, in 2012, headlines indicate "Audit Says Kabul Bank Began as ‘Ponzi Scheme’" following investigation and judicial action in the aftermath of the Bank's crisis and scandal.[3]

In 2010, it was disclosed that its Chairman Sherkhan Farnood and other insiders were spending the bank's US$1 billion for their own personal lavish style living and lending money under the table to family, relatives and friends. The bank scandal also involved members of Afghan President Karzai's family, including one of his brother, Mahmood Karzai. In September 2010, one of the principal owners of the bank, said that depositors had withdrawn $180 million in two days and predicted a "revolution" in the country's financial system unless the Afghan government and the United States moved quickly to help stabilize the bank.[4][5] In November 2010, reports appeared that Farnood and chief executive Khalilullah Frozi both had been sacked from duties;[6] as of early 2011 both were effectively under house arrest and could not leave the country,[7] and in July 2011 both were formally arrested and detained in Kabul.[8] DAB stated in February 2011, it would seek to sell Kabul Bank within three years once it was rehabilitated,[9] but both the International Monetary Fund and US officials subsequently pressed for a rapid wind down of the institution.[10] A USAID inspector general report estimated that fraudulent loans diverted $850 million to bank insiders.[8] By October 2011, more than a year after the government seized control, officials had recovered less than 10 percent of the nearly $1 billion that went missing.[11]

History[edit]

An advertisement for the Bakht Account (Lucky Account).

In 2010, there was a run on the Kabul Bank; Despite nearly $1 billion in U.S. taxpayers' funded assistance in the form of Afghan government salaries deposited into Kabul Bank. Kabul Bank was on the brink of collapse and mobs of customers massed outside of Bank locations trying to get their deposits out of the bank with limited luck.[12]

Kabul Bank claims that accounts can be opened and maintained in afghani, U.S. dollars and euro. Kabul Bank claims that it is connected throughout the globe with SWIFT facility, which enables fund transfer for its customers. The bank has correspondent relationship with seven international banks situated in Germany, China, Iran, Tajikistan, Saudi Arabia and India.

Despite Kabul Bank's near collapse in 2010 during the corruption allegations, Kabul Bank claims it is significant to Afghanistan's internal security and stability because it is the vehicle used to pay, largely with money supplied by the United States government, as many as 300,000 Afghan government employees, mostly military and police, who are key to plans to rebuild Afghanistan's capacity to deal with its ongoing Taliban-led insurgency.[6] President Karzai's brother, Mahmood Karzai, is reported to have played a significant role in the back scandal, and is alleged to have received millions of dollars in loans from Kabul Bank. He was later alleged to be under investigation by a U.S. Federal Grand Jury and U.S. tax authorities, including the U.S. Internal Revenue Service for tax evasion allegations. Canada's Maclean's magazine reported that Mahmoud Karzai was being investigated for racketeering. extortion and tax evasion as a result of connections to the Bank and Hamid Karzai.[2][13][14][15][16][17][18][19]

  • During the bank scandal and panic in September 2010, hundreds of Afghans, including many civil servants and their families, gathered outside Kabul Bank offices in the capital and elsewhere in Afghanistan. Long lines formed of depositors hoping to withdrawal some or all of their money. Afghan police beat back mobs at the Kabul Bank worried their money would be lost according to the Washington Post. Panic set in among many depositors according to reports by the New York Times.[20]
  • On December 27, 2010, a suicide car bomber killed at least three Afghans, including one policeman, as he targeted police officers who lined up to withdraw their salaries in front of Kabul Bank in central Kandahar; the midday explosion also wounded 16 policemen and five civilians, officials said.[21]
  • On February 19, 2011, at least 38 people (including 13 policemen) were killed during an insurgent raid on a branch of Kabul Bank in Jalalabad, the provincial capital of Nangarhar, and at least three militants were killed, officials said. Three suicide bombers reportedly entered the bank and detonated themselves, and fighting between insurgents and security forces continued for over four hours; President Hamid Karzai and a NATO International Security Assistance Force spokesman condemned the attack, which was the deadliest in the country since June 2010.[22]

In its review of the Kabul Bank scandal and its aftermath, international non-governmental organization (NGO) Transparency International has raised repeated concerns about problems of corruption in Afghanistan and its impact on the economy, business investment, security and civil society.[23][24]

2010 depositor panic and aftermath[edit]

In early 2010, the Washington Post reported that the Kabul Bank played a part in "a crony capitalism that enriches politically connected insiders and dismays the Afghan populace."[25]

At the beginning of September, Frozi, one of the two largest shareholders of Kabul Bank, said reports indicating that the institution had lost as much as $300 million were overstated. But he predicted that if Afghan depositors continued to withdraw their money at the current rate, Kabul Bank would almost certainly collapse, undermining confidence in the nascent financial system the Afghans have been trying to build with American help.

"If this goes on, we won’t survive", Mr. Frozi said in an interview. "If people lose trust in the banks, there will be a revolution in the financial system."

Mahmood Karzai is one of the brothers of the Afghan President Hamid Karzai and a seven percent shareholder in the bank. In a telephone interview with the Boston Globe he said: "America should do something." [26] In October, the Washington Post reported that Mahmood Karzai could soon be indicted for tax evasion in the U.S., though he denied the charges, telling the newspaper: "I'm very clean", and insisting his only interest was "rebuilding Afghanistan."[5][17]

Afghan leaders promised to guarantee deposits in an attempt to arrest the panic, which began at the end of August when the country's top banking officials demanded the resignations of both Frozi and Farnood.[4] "The government has decided that there will be an audit firm that will be coming to audit not only Kabul Bank accounts but also other private banks in Afghanistan", an Afghan presidential spokesman announced in late October. Earlier in the month, the government also froze assets held by some of Kabul Bank's owners even as the central bank governor said it was solvent and had the backing of Karzai's administration.[5] U.S.-educated economist Hamidullah Farooqi, a former Karzai minister and Chairman of the Afghanistan International Chamber of Commerce, said Afghanistan received a "massive wake-up call" from the crisis, further stating: "It's not just a lack of capacity in our institutions, there is a lack of laws and a lack of accountability, which is much more serious. It's a case of the blind leading the blind. They are too young, they are babies."[6]

In mid-January 2011, acting chief financial officer Rana Tayyab Tahir and other Pakistani employees of Kabul Bank fled to Pakistan, apparently out of fear for their lives and possible arrest, though some said they were being made scapegoats for powerful shareholders. Afghan authorities also called in several bank managers, including foreigners, for questioning and detained some in southern Afghanistan's Helmand Province in connection with illicit transfers of bank funds.[7]

In early February 2011, DAB Governor Abdul Qadir Fitrat said the central bank would impose stricter rules on banks wanting to handle about US$1.5 billion worth of salaries for government and security officials, which until now has been done by Kabul Bank. Fitrat also told Reuters the total amount of money at risk over suspected irregularities at Kabul Bank amounted to $579 million, almost twice the figure estimated when the bank's troubles first surfaced. Fitrat dismissed concerns that it faced liquidation, saying it would be privately owned again within three years. "Kabulbank is stabilised, it has enough cash at its disposal and the central bank is trying to rehabilitate the bank and then at some point sell it to potential buyers in two or three years," Fitrat told Reuters.[9] In early July 2011, Fitrat resigned as head of the central bank after fleeing to the United States, claiming his life had been threatened and that he was being made a scapegoat for politically connected individuals.[8]

After a mid-February 2011 visit by Neal Wolin, the U.S. deputy Treasury secretary, the Afghan finance ministry said that weak international support had exacerbated the crisis. “Afghan and US officials agreed that (the crisis)... was compounded by the erroneous audit by PricewaterhouseCoopers, and ineffective international technical assistance and supervision,” the ministry said. However, Wolin pressed the government to rapidly place the lender into receivership, echoing calls made by a previous International Monetary Fund (IMF) delegation. “The deputy secretary... stressed the need for the Afghan government to take swift and decisive action to ensure a credible, effective resolution of issues related to Kabul Bank," the U.S. embassy said in statement.[10] Kabul Bank was put into receivership following the scandal and a new bank set up, but only $70 million of fraudulent loans it granted have so far been recovered, with criminal investigations ongoing. In October 2011, Afghanistan's parliament approved a $51 million payment to DAB as part of a planned compensation package over its multi-million-dollar bailout; the payment is part of a package of government measures agreed with the IMF to secure a new loan. Afghanistan has been without an IMF program since the Kabul Bank failure, but the IMF announced that it is moving ahead on a new $129 million loan in the wake of the government's reform promises, with a new program expected to be submitted to the IMF executive board for approval in November 2011.[27]

At the end of June 2011, the Washington Post reported that Farnood and Frozi used fake names, forged documents, fictitious companies and secret records as part of an elaborate ruse to funnel hundreds of millions of dollars to shareholders and top Afghan officials, including President Karzai's brother Mahmood and Mohammed Fahim, the country's first vice president. Both Farnood and Frozi were arrested in Kabul and held without charge, even though Afghanistan's attorney general said the evidence against them was "quite clear." Without a successful resolution of Kabul Bank’s problems, one senior U.S. official said Afghanistan could face "the collapse of the banking sector."[28] As of October 2011, neither man had yet been charged with a crime, but Deputy Attorney General Enayatullah Nazari said the government intends to bring them to court.

“A crime has happened,” Nazari said. “They will go to the court whether they manage to secure the money or not.” Authorities loosened the terms of their detention and provided them with a security detail to go to a bank office on workdays and on occasion to fancy restaurants and hotels for what Nazari described as work meetings.[11]

Depositor and U.S. taxpayer losses[edit]

With regard to public sector corruption in Afghanistan and the loss of nearly U.S. $1 billion in U.S. taxpayers' funded foreign assistance to Afghanistan in the form of U.S.-supplied Afghan government and Afghan military and police salaries deposited into Kabul Bank, The New Yorker Magazine, the Wall Street Journal, the New York Times, National Public Radio (NPR) and others, have reported that widespread corruption, ponzi schemes, fraudulent loans, mass looting, insider loans to fake and bogus companies run by family and friends, and other corrupted practices, were undertaken by a small group of Afghan insiders (less than 12 people), apparently linked to Mahmoud Karzai, President Hamid Karzai and Ahmed Wali Karzai.[29][30] This resulted in nearly $1 billion ($900 million) in Kabul Bank's deposits seemingly vanishing into Dubai and other off-shore locations and unknown offshore bank accounts and tax havens. Hundreds of millions of U.S. dollars were often smuggled and flown out of Afghanistan secretly stashed in bags and airline food trays [31][32][33]

Anti-corruption report[edit]

On November 28, 2012, the Independent Joint Anti-Corruption Monitoring and Evaluation Committee published its report and declared in a news conference that US$5 billion, including $400 million the Kabul Bank’s shareholders, were illegally transferred abroad. About 22 people are accused of embezzlement in the case, and their trial started. At three hearings, 18 people, including Sher Khan Farnood and Khalil Ferozi, appeared before the court to defend themselves. Some $935 million of the bank assets was transferred abroad through various systems and $825 million are needed to bail out the bank. The Afghan government will have to pay 5-6% of its GDP to save the bank, which would be a huge blow to the country’s economy.[34]

Oversight and reform efforts[edit]

Since 2011, the Karzai Government has rejected banking oversight and reform efforts by the United States in the wake of the Kabul Bank scandal and collapse according to reports by the U.S. Special Inspector General for Afghanistan Reconstruction (SIGAR) in 2013-14. [35] [36] [37]

Banking experts, economists and humanitarian aid officials have expressed serious concern about this development given Kabul Bank's large and historic dependence on U.S. taxpayers' funding of bank deposits via payments of the Afghan National Army soldiers, police and Afghanistan's civil service employees who are largely paid with billions of dollars in U.S. aid to the Karzai government and to Afghanistan from the U.S. Congress, U.S. Treasury and ultimately U.S. taxpayer.

The U.S. government has found anti-corruption efforts in Afghanistan in the wake of the Kabul Bank crisis as deeply troubling, including the banking sector, according to reports by the Washington Post in 2012 and SIGAR. [38]

Murder of IMF official[edit]

In January 2014, the International Monetary Fund's (IMF) representative Wabel Abdallah, who assisted in the Kabul Bank crisis aftermath, was murdered by suicide bombers and gunmen in Kabul along with some 21 others in a high profile attack that the Taliban said they undertook. [39]

Abdallah headed the IMF's office in Afghanistan since 2008.

See also[edit]

References[edit]

  1. ^ Boone, Jon, The Guardian (15 November 2011), (United Kingdom), "Afghan finance minister admits doubts over Kabul Bank's missing $1billion: Omar Zakhiwal pledges to prove sceptics wrong as IMF backs asset recovery scheme after 18-month dispute" http://www.theguardian.com/world/2011/nov/15/afghan-bank-missing-billion
  2. ^ a b Zucchino, David, Los Angeles Times, (28 November 2012) "Report cites extensive corruption involving Afghan bank"http://articles.latimes.com/2012/nov/28/world/la-fg-wn-kabul-bank-corruption-report-20121128
  3. ^ Rosenberg, Matthem, New York Times, (26 November 2012) "Audit Says Kabul Bank Began as ‘Ponzi Scheme’" https://www.nytimes.com/2012/11/27/world/asia/kabul-bank-audit-details-extent-of-fraud.html?pagewanted=all
  4. ^ a b Filkins, Dexter (2010-09-02). "Depositors Panic Over Bank Crisis in Afghanistan". New York Times. Retrieved 2010-09-03.  Huffman, Michael (2012-06-12). "How They Robbed Kabul Bank". 
  5. ^ a b c Ahmad, Sardar (2010-10-19). "Afghan government orders all private banks to be audited". AFP. Retrieved 2010-11-05. 
  6. ^ a b c Ellis, Eric (2010-11-07). "Why Farnood was flushed out of Kabulbank". Euromoney. Retrieved 2010-11-11. 
  7. ^ a b Partlow, Joshua (2011-02-01). "Kabul Bank employees flee to Pakistan amid investigation into lending, officials say". Washington Post. Retrieved 2011-02-13. 
  8. ^ a b c Shah, Amir (2011-07-06). "Afghan official: 2 Kabul Bank officials arrested". Associated Press. Retrieved 2011-07-13. 
  9. ^ a b Burch, Jonathon (2011-02-02). "Afghan cbank says will sell troubled Kabulbank". Reuters. Retrieved 2011-02-13. 
  10. ^ a b Green, Matthew (2011-02-18). "Kabul rebukes outsiders over bank crisis role". Financial Times. Retrieved 2011-02-19. 
  11. ^ a b Londono, Ernesto (2011-10-02). "In Kabul Bank scandal, little money recovered". Washington Post. Retrieved 2011-10-20. 
  12. ^ Riechmann, Deb and Faiez, Rahim, Associated Press ( September 2010 "Kabul Bank braces for run on deposits after doubts" http://www.highbeam.com/doc/1A1-D9HVIO4G2.html
  13. ^ Belluz, Julia, MaClean's (Canada), (7 March 2011), "Mahmoud Karzai being investigated for racketeering, extortion and tax evasion: Prime Minister Hamid Karzai’s older sibling may face charges in the U.S."http://www2.macleans.ca/2011/03/07/band-of-brothers/
  14. ^ Spencer, Richard, The Telegraph, (8 September 2010) (United Kingdom) "Hamid Karzai's brother made £500,000 on Kabul Bank property deal: The brother of the Afghan President Hamid Karzai made a half-million pound profit in eight months on a luxury villa in Dubai bought with a loan from the bank at the centre of a financial and political crisis in Kabul." http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7989594/Hamid-Karzais-brother-made-500000-on-Kabul-Bank-property-deal.html
  15. ^ Higgins, Andrew, Financial Times (22 February 2010) "Banker feeds crony capitalism in Afghanistan" www.ft.com/cms/s/0/c73eeaf2-1f85-11df-8975-00144feab49a.html
  16. ^ Imbert, Louise,(11 November 2011), Le Monde Diplomatique (France - English Edition), "Hushed up scandal of the Kabul Bank The Afghan banking crisis" http://mondediplo.com/2011/11/11kabulbank
  17. ^ a b Risen, James, New York Times, (3 June 2012), "Intrigue in Karzai Family as an Afghan Era Closes" https://www.nytimes.com/2012/06/04/world/asia/karzai-family-moves-to-protect-its-privilege.html?pagewanted=all
  18. ^ Wall Street Journal,(16 February 2011), "Grand Jury Investigates Karzai Brother U.S. Federal Probe Risks Worsening Relations With the Afghan President; Mahmood Karzai Hires a Washington Lawyer"
  19. ^ Higgins, Andrew & Markon, Jerry, (14 October 2010) Washington Post, "Karzai's brother might be indicted for evading U.S. taxes" http://www.washingtonpost.com/wp-dyn/content/article/2010/10/14/AR2010101407927.html
  20. ^ Filkins, Dexter, New York Times (2 September 2010) "Depositors Panic Over Bank Crisis in Afghanistan"http://www.nytimes.com/2010/09/03/world/asia/03kabul.html?_r=0
  21. ^ Abi-Habib, Maria (2010-12-28). "Afghan Bomber Targets Officers, Kills at Least Three". Wall Street Journal. Retrieved 2010-12-30. 
  22. ^ "Insurgents raid Afghan bank; 38 killed". CNN. 2011-02-20. Retrieved 2011-02-20. 
  23. ^ Gutcher, Lianne, The Guardian (UK) (19 July 2011) "Afghanistan's anti-corruption efforts thwarted at every turn: Afghans now pay double the bribes of two years ago and Hamid Karzai has gone out of his way to curb anti-corruption initiatives; Transparency International has raised concerns about the impact of corruption on the banking and financial sector in Afghanistan and its controversial links to the public sector and public officials." http://www.theguardian.com/world/2011/jul/19/afghanistan-anti-corruption-efforts-thwarted
  24. ^ Bast, Andrew, Newsweek (2 August 2010)"Afghanistan Wants to See the Money" http://www.highbeam.com/doc/1G1-232721485.html
  25. ^ Washington Post, February 22, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/02/21/AR2010022104317.html, Huffman, Michael (2011-12-03). "The Kabul Bank Scandal and the Crisis that Followed". 
  26. ^ Higgins, Andrew; Londono, Ernesto (3 September 2010). "Karzai's brother calls on US to help avert Afghan bank run". The Boston Globe. 
  27. ^ "Afghan parliament approves $51m payout over Kabul Bank". AFP. 2011-10-16. Retrieved 2011-10-20. 
  28. ^ Partlow, Joshua (2011-06-30). "Elaborate ruse behind vast Kabul Bank fraud". Washington Post. Retrieved 2011-07-13. 
  29. ^ The Independent, (February 2011) (UK) "Afghan Elite 'Plundered $900M' from Leading Bank" http://www.highbeam.com/doc/1P2-27826545.html
  30. ^ International Wire, CNN (28 November 2012) "Widespread Corruption at Kabul Bank in Afghanistan" http://www.highbeam.com/doc/1P3-2826806991.html
  31. ^ Davidson, Amy, New Yorker Magazine, (1 September 2010) "Too Corrupt to Fail?" http://www.newyorker.com/online/blogs/closeread/2010/09/too-corrupt-to-fail.html
  32. ^ Sutherland, J.J., National Public Radio (NPR), (27 September 2010) "Karzai Brother Being Investigated For Corruption" http://www.npr.org/blogs/thetwo-way/2010/09/27/130152430/karzai-brother-being-investigated-for-corruption
  33. ^ Davidson, Amy, The New Yorker (7 June 2012), "The Karzai Rule : Who Pays for Corruption in Afghanistan"
  34. ^ "Billions of Dollars Sent Illegally Abroad from Kabul Bank". The Gazette of Central Asia (Satrapia). 28 November 2012. 
  35. ^ U.S. Special Inspector General for Afghanistan Reconstruction (SIGAR) Audit Report, January 2014, "Afghanistan's Banking Sector: Central Banks Ability to Regulate Commercial Banks Remains Weak" http://www.sigar.mil/pdf/audits/SIGAR%2014-16-AR.pdf
  36. ^ PBS, Washington, D.C., 8 January 2014, "Afghan central bank’s ‘fragile state’ increases risk of new banking crisis, audit finds" http://www.pbs.org/newshour/rundown/afghan-central-banks-fragile-state-increases-risk-of-new-banking-crisis-audit-finds/
  37. ^ Standifer, Cid, Washington, D.C., 9 January 2014, Stars and Stripes, "Report: Afghan banking authority rejects U.S. help" http://www.stripes.com/news/report-afghan-banking-authority-rejects-u-s-help-1.261194
  38. ^ DeYoung, Karen, Washington Post, 11 December 2012, "U.S. finds Afghan anti-corruption efforts ‘deeply troubling" http://www.washingtonpost.com/world/national-security/us-finds-afghan-anti-corruption-efforts-deeply-troubling/2012/12/11/e0c57b80-43b3-11e2-8061-253bccfc7532_story.html
  39. ^ Donati,Jessica, Reuters,18 January 2014, "IMF, U.N. officials among 21 killed in Kabul suicide attack" http://in.reuters.com/article/2014/01/18/afghanistan-explosion-idINDEEA0G0D020140118

External links[edit]