INSIDE JOB - HOW CROOKS SET UP THE LARGEST BANK IN AFGHANISTAN & THEN ROBBED IT FOR ALMOST $1 BILLION (FIRST PUBLISHED 28TH NOVEMBER 2012 (PART 2)

INSIDE JOB – HOW CROOKS SET UP THE LARGEST BANK IN AFGHANISTAN & THEN ROBBED IT FOR ALMOST $1 BILLION (FIRST PUBLISHED 28TH NOVEMBER 2012 (PART 2)

The first official analysis of the “Kabul Bank Crisis” of 2010 reveals an urgent need for reform in the international banking system, said Global Witness today [28th November 2012]. The “Report of the Public Inquiry into the Kabul Bank Crisis”, [ http://bit.ly/1rShJIY ] published today by Afghanistan’s Independent Joint Anti-Corruption Monitoring and Evaluation Committee (MEC) shows how the perpetrators behind the fraud were able to repeatedly bypass the checks and balances of regulators, donors, auditors and international banks, and steal enough money to incur a bailout costing approximately 6 percent of Afghanistan’s GDP.

background

To prevent a run on the bank and the collapse of the financial sector, the Government of Afghanistan guaranteed deposits at the bank through the country’s reserves, and placed the bank in conservatorship, which suspended the rights of shareholders. It took the President of Afghanistan seven months to announce that Kabul Bank would be placed under receivership, which is responsible for recovering the stolen assets, and that bank management would be prosecuted.

The money that is not recovered will be repaid out of Afghanistan’s budget over the next eight years, meaning the Afghan people will foot the bill for this fraud out of much needed resources for the country’s development and security. As of the end of August 2012, $128.3 million has been recovered. The Kabul Bank receivership has also taken control of assets worth $190.6 million, although it is expected that they will be sold for closer to $100 million. Nearly 40 percent of what has been recovered has come from regular bank customers that were not connected to Kabul Bank despite only having been responsible for eight percent of the loan balance when the bank was put into receivership.

The effort to recover assets looted from Kabul Bank is being hindered by the opacity surrounding the ownership of corporations that received loans. Many of these companies, including companies related to individuals who worked at Kabul Bank, have not been making payments on their loans. Gas Group is one example, with loans amounting to $121 million, in which disputes among shareholders over the beneficial ownership, and therefore liability, of the company have slowed down the asset recovery process.

Political clout is also hindering the asset recovery process. The report references the forensic audit of Kabul Bank which found that politically exposed persons had loans totaling $9.6 million and that seven people owe $3.1 million to Kabul Bank, but that due to their political standing there have not been any attempts to recover the funds.

The report’s findings include:

The ex-Chairman and founder of Kabul Bank is a fugitive from the Russian Federation wanted on a variety of charges including “illegal banking, money laundering, purchasing property for illegal use and organizing a crime syndicate.” In 2007, Interpol provided Afghan authorities with this information as well as an arrest warrant and evidence. To date, the ex-Chairman has not been arrested on these charges. He allegedly benefited by approximately $270.3 million from the scheme.
Supervision of the bank was completely ineffective because of a conflict of interest in the Supervisory Board of Kabul Bank.
Anonymous individuals and people with false identities had accounts at the bank and loans were given to individuals who were not identified and did not provide adequate identification.
Kabul Bank was essentially insolvent since shortly after it was formed in 2004.
Food trays on Pamir Airways flights were used to smuggle money out of the country; 10 Pamir Airways pilots were paid for cash shipments out of a Kabul Bank account.
In addition to the cash smuggled out of the country through Pamir Airways, most of the money left the country through electronic transfers to the Shaheen Exchange (a hawala in which the ex-Chairman has a 49% stake) and to other international bank accounts.
Funds from the scheme are reportedly in multiple countries, including “the United Arab Emirates, the United States, Switzerland, and other places unknown.”
An October 2009 United States Embassy cable “references money flowing from Kabul Airport through Pamir Airways, and several properties owned by prominent Afghans [including the ex-Chairman] suggesting that they were extracting as much wealth as possible while conditions permitted, but the Embassy does not appear to have informed any Afghan authorities.”
Deloitte advisors, contracted by the United States Agency for International Development (USAID), heard in December 2009, that “Kabul Bank owned Pamir Airways and that the shareholders had purchased properties in Dubai with bank funds.” Yet the report reveals that a Deloitte “lead adviser indicated that his professional judgment and risk tolerance were probably clouded by the Afghanistan context of incessant rumour of fraud and corruption and that consequently he did not take the fraud indications seriously.”
A separate assessment of USAID’s work with the bank regulator and central bank, Da Afghanistan Bank, “concluded that embedded Bearing Point and Deloitte advisers had several opportunities to learn about fraudulent activities at Kabul Bank and should have been more aggressive in following up on indications of serious problems.”
AF Ferguson and Company, a Pakistan based member of PricewaterhouseCoopers, became the auditor of Kabul Bank at the end of 2008 after Da Afghanistan Bank issued a directive that all Afghan banks use one of five major firms approved by the central bank. According to the report, “The auditors concluded that the internal policies and procedures of Kabul Bank were consistently applied, which seems unlikely given the fact that the Da Afghanistan Bank examiners consistently noted that the Bank was not complying with their own policies and procedures.”
Rampant impunity enabled the fraud to continue and is hindering the asset recovery process. The report notes, “The lack of action from the Attorney General’s Office also because of political influence has resulted in a lack of investigation, procedural delays that have allowed perpetrators to escape and surely for money derived from Kabul Bank to be lost forever.” And points out, “If the systemic issues raised by Kabul Bank are not resolved, the viability of Afghanistan as a fully functioning democracy is lost.”