Karzai's brother financed Dubai property purchases through embattled Kabul Bank

Despite media reports of corruption at Kabul Bank, Afghan officials insist that it is not in danger of collapse.
By Andrew Higgins
Washington Post Foreign Service
Wednesday, September 8, 2010; 12:02 AM

DUBAI, UNITED ARAB EMIRATES - The brother of Afghan President Hamid Karzai made nearly $1 million on a Dubai property deal financed with money from Kabul Bank, according to a person familiar with the transaction and a property sales registry.

It was not previously known that the president's brother, Mahmoud Karzai, had benefited financially from Dubai real estate transactions involving Afghanistan's biggest but now deeply troubled bank. Kabul Bank is at the center of a financial and political crisis in Afghanistan following a rush by depositors to withdraw their money. The bank's disarray has cast a pall over President Karzai's administration and his American backers.

Mahmoud Karzai, Kabul Bank's third-biggest shareholder, described himself as a "passive partner" and said he had no role in Kabul Bank's management decisions, including those relating to Dubai real estate. He blamed the bank's sometimes questionable practices on its now-ejected executives. Kabul Bank, which has built a network of branches and ATMs across Afghanistan, has done "good things, but also did stupid things," Karzai said.

Karzai bought a villa on Dubai's Palm Jumeirah, a high-end property development, for 7 million dirhams in July 2007 and sold it to an Iranian buyer in April 2008 for 10.4 million dirhams, for a profit of 3.4 million dirhams, or about $930,000 at current exchange rates.

Karzai said in a telephone interview that he could not recall the details but that the initial purchase involved a loan handled by Kabul Bank's now-ousted chairman, Sherkhan Farnood. "What is wrong with this? I borrowed money from the bank and made an investment," he said. He said he made a profit because he "sold at the peak of the market" but added: "I'm not a rich man."

Karzai became a shareholder in Kabul Bank in March 2007, four months before purchasing the Dubai property with money from the bank. He acquired his 7 percent stake in Kabul Bank with a loan - still outstanding - from the same bank, according to Karzai and other shareholders.

Kabul Bank's unorthodox lending practices form part of a skein of transactions that are under investigation by Afghan authorities as they struggle to hold together a financial institution critical to the country's economy and security. Kabul Bank handles salary payments for soldiers, police and teachers.

Karzai said he purchased his since-sold Palm Jumeirah villa to obtain Dubai residency status so that his children could attend local schools. He said he bought it from Farnood, the then-Kabul Bank chairman, who gave him a loan. This money, said Karzai and a person familiar with the transaction, was later repaid in full.

Kabul Bank has struggled over the past week to stay afloat in the face of waves of depositors trying to pull out their savings. The rush, triggered by news that the Central Bank on Aug. 30 forced Farnood and the bank's chief executive, Khalilullah Fruzi, to resign, now appears to have slowed. Depositors withdrew about $67 million Monday, down from the level of last week, and the withdrawals slowed further Tuesday, the bank said.

Kabul Bank bet heavily on the Dubai real estate market, investing at least $140 million in property in the Persian Gulf sheikdom, which is part of the United Arab Emirates. Most of the purchases, including 16 villas and two apartments, were on Palm Jumeirah, a man-made island in the shape of a palm tree that juts into the gulf.

Nearly all the Dubai property purchased with Kabul Bank funds is registered in the name of Farnood, the former chairman, or that of his wife. Mahmoud Karzai, an American citizen who used to run an Afghan restaurant in Maryland and still has a house in Glenwood, maintains a residence at one of the properties registered in Farnood's name, a $5.5 million seafront villa on Palm Jumeirah. Karzai says he makes a monthly payment on the property.

Farnood, at the request of the Afghan Central Bank, has pledged to transfer the titles of the real estate to Kabul Bank.

Kabul Bank's liquid assets, which were about $500 million when the crisis broke, are running dangerously low, but a long holiday that begins Wednesday will give the bank and the Afghan government breathing space. Afghan banks are closed from Wednesday through Sunday, first for an Afghan national holiday and then for the end of Ramadan, the Islamic holy month of fasting and prayer.

Karzai said Kabul Bank suffered from a "concerted attack" by the American media, which he said is being given information by U.S. officials hostile to his brother, the president. The bank, he said, cut corners under the previous management but built up a successful business from scratch. Its misdeeds, he added, are nothing next to those of "thieves" in Afghanistan who are "always stealing."

The Afghan government has vowed that Kabul Bank will not collapse but has so far balked at providing state funds to help prop it up. Washington has ruled out any U.S.-funded bailout of the bank.

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