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Inside Job - How crooks set up the largest bank in Afghanistan & then robbed it for almost $1 billion

28th November 2012

Global Witness available for comment

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. The “Report of the Public Inquiry into the Kabul Bank Crisis”, 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.

“This is a story of a nascent financial sector in a conflict zone in which crooks were able to loot a major bank over the course of multiple years because of the apparent failure of the regulators, donors, auditors and the international anti-money laundering framework,” said Gavin Hayman, Director of Campaigns for Global Witness.

According to the report, Kabul Bank engaged in fraudulent lending and embezzlement that led to a loss of approximately $935 million. Electronic wire transfers and food carts stuffed with cash and loaded onto Pamir Airways flights were used to funnel millions of dollars out of the country.

“This is quite possibly the largest banking failure of all time” said Hayman. “For years to come, the Afghan people will be paying for this massive fraud rather than for much needed essential social services, security and infrastructure.”

The report findings are based on expert research and extensive discussions with anti-money laundering experts but they have yet to be proven in a court of law.

The report demonstrates:

  • Afghanistan was unable to implement and enforce its anti-money laundering laws due to widespread corruption and lack of capacity in its fledgling banking sector.
  • International donors, who have provided millions of dollars of aid, failed to build the capacity of the banking sector and protect the economy from this type of fraud.
  • International auditors appear to have done the bare minimum and gave Kabul Bank a clean audit opinion even though the central bank consistently noted issues with compliance.
  • The international anti-money laundering regime failed to stop millions of dollars from leaving Afghanistan and ending up in banks around the world.

The report shows how shareholders, individuals and companies related to the bank, and politically exposed persons1 appear to have been the main beneficiaries of the fraudulent schemes. The MEC report details 19 related parties, including companies with hidden ownership that appear to be connected to individuals at the bank, benefited from over 92 percent of the fraudulent lending.

“Donors, auditors and the international banks involved in this scandal all have questions to answer,” said Hayman. ”Which banks accepted corrupt money from Kabul Bank shareholders or politically exposed persons? What measures did they take to assure themselves that the funds were not the proceeds of corruption? The answers to these questions are necessary to understand why so much corrupt money was able to flood the international financial system, to facilitate the recovery of stolen assets, and to ensure that it doesn’t happen again.”

Global Witness added that countries with assets from Kabul Bank, including the United Arab Emirates, the United States and Switzerland must freeze and return the assets stashed in their private banks, and launch inquiries into how the money ended up within their borders.

/ Ends

For comment please contact:

In Washington, DC:

Stefanie Ostfeld at sostfeld@globalwitness.org, +1 202 621 6674 or +1 202 577 5858

In London:

Rosie Sharpe at rsharpe@globalwitness.org, +44 20 7492 5854 or +44 7850 733 681

Notes to editors:

  1. Senior officials, their family members and close associates are known in the banking industry as ‘politically exposed persons’ (PEPs).

 

Additional 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.”

It should be emphasised that this is an independent report and that these allegations have yet to be proven in a court of law.

What needs to happen?

  • The United Arab Emirates, the United States, Switzerland, and every other country that is a destination for corrupt funds from Kabul Bank should immediately call on private banks within their borders to freeze the assets of shareholders, related individuals or entities, and politically exposed persons involved in the Kabul Bank scandal. These countries should also launch a formal inquiry into how corrupt money from Afghanistan entered their formal and informal banking systems. If domestic laws were broken, criminal charges should be pursued.
  • Similarly, banks from around the world, that accepted funds from Kabul Bank shareholders, related individuals or entities, or politically exposed persons must immediately freeze the funds and work with authorities in Afghanistan and in the country where the bank is located to return the assets.
  • Afghanistan’s Attorney General’s Office must initiate criminal investigations into all of the shareholders at Kabul Bank, the accounting firms that were used to create fraudulent documents, and individuals involved in setting up fake companies or the cash smuggling scheme through Pamir Airways. The office must also request mutual legal assistance for all individuals and companies that took out loans from Kabul Bank, not just the ex-Chairman and ex-Chief Operating Officer.
  • Afghanistan must require the public disclosure of beneficial ownership information for all corporate vehicles incorporated in Afghanistan or allowed to do business there. But because anyone can open up a company anywhere else, it is critical that all countries require national level, public registries of beneficial ownership information for all companies incorporated there. All countries, including Afghanistan, must require banks to identify and verify the beneficial owners of all accounts before accepting the business. The Afghan Parliament should include these two recommendations in the banking amendments it will be considering in March 2013.
  • Afghanistan must require banks to perform enhanced due diligence on accounts for all Politically Exposed Persons, whether domestic or foreign.
  • Afghanistan should regulate its accounting and auditing sector.
  • International actors operating in corrupt environments need to have appropriate checks in place to identify these types of issues. If the international auditors were not able to pick up on this fraud, then the checks they had in place were not fit for purpose. The international community must be doing more to ensure that this type of fraud never happens again.