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Kabul Bank crisis followed U.S. push for cleanup

By Andrew Higgins
Washington Post Staff Writer
Friday, September 17, 2010; 7:42 PM

WASHINGTON - Late last month, a small team of U.S. Treasury Department experts rushed to Kabul ahead of a debacle Washington hoped wouldn't happen, but inadvertently helped create.

The three-man "quick response team" arrived in the Afghan capital on Aug. 31 - a day before Afghan depositors began clamoring for their money back from Afghanistan's largest, most politically potent and also dangerously freewheeling private bank.

The unraveling of Kabul Bank, which last week led to violent clashes between security forces and civil servants trying to withdraw their salaries, has hammered the credibility of President Hamid Karzai - whose brother is a major shareholder in the bank - and battered a central pillar of the U.S. strategy for bringing economic and political stability to Afghanistan.

The Treasury Department and the U.S. Agency for International Development, or USAID, which have both worked closely with the Afghan Central Bank, say it was never their job to scrutinize the misdeeds of individual Afghan banks but to focus on training Afghans to do that work.

But interviews with Afghan and American officials as well as Kabul Bank's principal shareholders make clear that the United States played a key role in persuading Afghan authorities to finally rein in Kabul Bank at the end of August, a move that many Afghan businessmen viewed as long overdue but which also triggered a run on the bank.

The current mess and months of earlier indecision about how to deal with Kabul Bank illustrate the perils created by a deeply distrustful but mutually dependent relationship between Washington and Kabul. U.S. officials are wary of pushing the Afghan government too hard for change but also have an excuse for inaction on discomfiting, politically sensitive questions seen as best answered by the Afghans. At the same time, Afghan officials are heavily reliant on American aid and expertise, but often feel shielded from the need to make tough decisions on their own.

When depositors first started thronging Kabul Bank to pull their savings on Sept. 1, Mahmoud Karzai, the president's brother, demanded that the United States "do something" to bail out the bank. At the same time, he fumed that American officials had engineered the crisis at Kabul Bank so as to hurt his brother.

In the end, Kabul Bank may have been saved, or at least given a temporary reprieve, by divine intervention: a long holiday to mark the end of Ramadan, the Islamic holy month, prevented depositors from yanking their funds. When the bank reopened for business this week, much of the previous panic had subsided.

But the bank's future is far from certain as Afghan authorities work to disentangle a web of illicit loans, and big questions remain: What pushed Kabul Bank to the brink of collapse, and why did it take so long for both Afghan and American officials to try to get a grip on a critical financial institution whose unorthodox practices had been an open secret in Afghanistan for years? These included big, risky bets on Dubai real estate and large concealed loans to Kabul Bank's own shareholders well beyond the legal limit.

"Everyone knew this mess would happen one day, but no one did anything," said an Afghan businessman, who recalled warning President George W. Bush's ambassador to Kabul, Zalmay Khalilzad, to watch out for Kabul Bank. "This thing is going to make you cry someday," the businessman said he told Khalilzad. Khalilzad did not respond to a request for comment.

A U.S. official who asked not to be named because of the sensitivity of the matter said that the Treasury Department - which has about 20 staffers stationed full time in Afghanistan - collected detailed information about possible improprieties by Kabul Bank and earlier this year urged the governor of the Afghan Central Bank, Abdul Qadir Fitrat, to take corrective action.

This information flowed in part from Kabul Bank's own senior executives following a bitter rift over the summer between the bank's chairman, Sherkhan Farnood, and its chief executive, Khalilullah Fruzi. Both Farnood and Fruzi have since been forced to step down but remain the bank's biggest shareholders.

According to Mahmoud Karzai, the president's brother, Farnood approached the American embassy in Kabul in July and "told them everything," including details of off-the-book loans to the brother of Afghanistan's vice president, Marshal Mohammed Fahim. Farnood, said Karzai, "is a rat" who thought the United States would side with him in his feud with Fruzi, the chief executive.

Fruzi, in an interview in Kabul, said he, too, believes Farnood went to the Americans with inside information and said he had been told this by Farnood himself.

Asked if that was true, Farnood, in an interview at his luxury waterfront villa in Dubai, grinned and said: "No comment. I'm a poker player. A good poker player." Farnood, who founded Kabul Bank in 2004, is the only Afghan to ever win an international poker event.

Increasingly concerned about the bank's stability this summer, U.S. officials worked closely with Fitrat, the central bank governor, and stepped up pressure for action. Gen. David H. Petraeus, the new top American commander in Afghanistan, for example, attended a meeting in Kabul about Kabul Bank with President Karzai and Fitrat, a former World Bank consultant in Washington, according to people familiar with the matter.

In close consultation with the Treasury attache's office at the U.S. embassy in Kabul, Fitrat worked out a plan to get control of Kabul Bank. Around Aug. 20, he requested that Washington send a team of bank experts to Kabul to help.

But what was conceived as a swift and discreet strike by the Central Bank to stabilize Kabul Bank became a muddled and highly public disaster.

On Aug. 29, Fitrat summoned Farnood, Fruzi and Mahmoud Karzai - Kabul Bank's three biggest shareholders - to a meeting at the Central Bank. But there was little sense of urgency. Farnood and Fruzi agreed to step down as chairman and chief executive - not immediately but at some unspecified time in the near future, according to people familiar with the discussions

The following day, the tone hardened sharply. In the early afternoon on Aug. 30, President Karzai called his brother Mahmoud to the Presidential Palace and berated him over the state of affairs at Kabul Bank. Mahmoud then rushed to the Central Bank, where Fitrat demanded that Farnood and Fruzi resign on the spot. Farnood initially balked but was told he would be thrown in jail if he resisted. "It was an easy choice. I resigned," recalled Farnood. Fitrat, reached by telephone in Kabul, declined to discuss Kabul Bank.

When Treasury's quick response team arrived in Kabul on Aug. 31, news of the purge had already leaked. That set in motion a stampede by depositors the following day. It took another three days for the Afghan Central Bank to freeze the assets of Kabul Bank's major borrowers, something that should have been done at the start. "It was a fiasco," said one U.S. official.

As depositors mobbed Kabul Bank branches across the country, Fitrat and other Afghan officials blamed the U.S. media for stirring panic. Government critics pointed to another culprit: years of inaction on Kabul Bank by Karzai's government.

Bringing such a big, well-connected and vitally important bank to heel, however, had always presented a conundrum.

Unlike many institutions in Afghanistan, Kabul Bank actually worked. Though long swamped by allegations of wrongdoing, it set up a nationwide network of branches, introduced Internet banking, installed sophisticated computer systems from Oracle and serviced 1.4 million customers.

In many ways, Kabul Bank seemed a rare Afghan success story and a vindication of American efforts to help President Karzai build a stable financial system on the ruins left by the Taliban, who had banned private banks.

Eager for a more efficient and, they hoped, more transparent way to pay government salaries, USAID, the World Bank and others encouraged Afghan authorities to route payrolls through private banks. Responsibility for paying the police, soldiers and teachers went to Kabul Bank.

At the same time, the United States poured in millions to fortify Afghanistan's Central Bank. Six consultants hired by Deloitte, the international accounting and consultancy firm, moved to Kabul to advise the Central Bank as part of a $92 million contract awarded last year. Treasury stationed two staffers full time in the Central Bank.

USAID says it was never involved in the "operational aspects" of supervising Afghan private banks and that reporting on problems at Kabul Bank or elsewhere was not part of its consultants' mission. Treasury officials tracked reports of questionable activities by Kabul Bank but had no mandate to tackle problems viewed as the responsibility of the Afghan Central Bank.

"I met with Treasury people many times, and they never voiced any concerns, absolutely none," said Raja Gopalakrishnan, Kabul Bank's chief audit officer.

The Afghan Central Bank did occasionally attempt to calm Kabul Bank excesses, but got nowhere. For example, it issued an order before last year's presidential election that banks not get involved in politics. Kabul Bank did the opposite. It helped to fund President Karzai and his running mate, each of whom had a brother who was a Kabul Bank shareholder and a borrower.

With little political clout of its own, the Central Bank leaned on the crutch offered by the United States. Asked early this year why nothing had been done about Kabul Bank's property speculation in Dubai, Fitrat, the governor, said he had heard such "rumors," checked them out and found nothing untoward.

The Central Bank, noted Fitrat, had both Treasury advisers and USAID consultants, and had regularly inspected Kabul Bank's accounts. If something were seriously wrong, he said, "they would have found it."

higginsandrew@washpost.com Correspondent Joshua Partlow contributed to this report from Kabul.

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