U.S. and Afghans at odds over Kabul Bank reform

By Joshua Partlow and Andrew Higgins
Thursday, October 7, 2010; 12:07 AM

KABUL - The United States and Afghan President Hamid Karzai are at odds over a proposed investigation into Kabul Bank and how to clean up the tottering but politically connected financial institution, according to U.S. and Afghan officials.

The dispute, which flows in part from arguments over a forensic audit of Kabul Bank, has stalled funding for Afghanistan from the International Monetary Fund, which was due to a approve a new $120 million credit line last month. It has also revived tensions over corruption that the Obama administration has tried to calm.

Kabul Bank, Afghanistan's largest private financial institution, nearly collapsed in early September during a run by depositors. This followed moves by the Afghan Central Bank to rein in the freewheeling bank, which bet big on the property market in Dubai and issued off-the-book loans to insiders, including Mahmoud Karzai, the president's brother and a part owner. Kabul Bank helped fund President Karzai's fraud-tainted reelection campaign last year.

A confidential Afghan report on Kabul Bank obtained by The Washington Post shows that authorities were well aware of grave problems at the bank long before they agreed, under pressure from Washington, to take action. The report was prepared at the start of the year by the Central Bank's Financial Audit Department and lists a catalogue of problems at Kabul Bank.

"Ignoring the mentioned failures and shortcomings and failing to fix them will result in serious challenges and problems for the bank in the future," the report concluded.

Clearly mismanaged

The proposed forensic audit of Kabul Bank would be performed by Ernst & Young, the London-based accounting firm. Such an audit would help untangle a thicket of hidden loans given to the bank's shareholders and other well-connected insiders, including Mahmoud Karzai and brother of the vice president, Mohammad Qasim Fahim, for luxury villas in Dubai and other investments.

"It's very hard to determine who borrowed what because the bank was mismanaged, clearly. They didn't keep correct sets of accounts," said an international official familiar with Kabul Bank.

The proposed audit, requested by Central Bank governor Abdul Qadeer Fitrat and to be financed primarily by the United States, has run into political problems, according to U.S. and Afghan officials. A U.S. official said that Karzai wants to make sure that Ernst & Young reports to the Afghan government, not to foreigners. U.S. officials have long pushed for a forensic audit.

Ernst & Young declined to comment, as did the Treasury Department, which has played a major role in advising Afghanistan's Central Bank on how to handle Kabul Bank.

President Obama has in recent months attempted to step back from public confrontation with Karzai, calculating that public spats over corruption risked hurting the war effort against the Taliban. But arguments over what to do about Kabul Bank and what went wrong there have added new friction between the allies over how to fight graft among the Afghan elite.

"Karzai has got to restore international confidence in the government's ability to manage its money," said a senior U.S. military official in Kabul. "The IMF is putting pressure on Karzai . . . to look effectively at Kabul Bank and legitimately find out what happened."

Stricter supervision

Raphael Anspach, an IMF spokesman, said the IMF board in Washington had postponed discussion of new money for Afghanistan "to allow time to assess the implications of the events at Kabul Bank and discuss corrective actions." The stalled credit facility was to have replaced an IMF program that ended on Sept. 25.

The crisis at Kabul Bank has eased somewhat since angry depositors swarmed bank branches last month, prompting clashes with Afghan security forces and stirring fears that Afghanistan's financial system, a pillar of U.S efforts to bring security to the country, was on the brink of a meltdown. The stampede began after the Central Bank ousted Kabul Bank's two top executives and took effective control of the bank.

Since then, the United States and other foreign donors have pressed Karzai for more extensive housecleaning at Kabul Bank and throughout the financial sector.

In order to approve the new credit line, the IMF wants to see stricter bank supervision and reformed lending practices.

The stalled IMF program involves a relatively small sum of money, but it is symbolically important for others considering loans or grants to the Afghan government.

Answers wanted

Past audits of Kabul Bank have been handled by a Pakistan-based affiliate of PriceWaterhouseCoopers, the international accounting and consulting company. Kabul Bank reported a pretax profit of $17.6 million for 2009 and its accounts, declared clean by a PWC affiliate, make no mention of Dubai property investments, large loans to insiders or other potential improprieties. A spokesman for PWC said its affiliate is a separate entity and has sole responsibility for its audits.

The Kabul Bank fiasco has prompted widespread speculation among Afghan officials and businessmen that Fitrat, the Central Bank chief, might be ousted. The Central Bank supports the forensic audit, according to one Central Bank official, but "what the Afghan government thinks is a different story." Fitrat could not be reached for comment.

Al Haj-Mohammad Aqa, a director general at the Afghan finance ministry, said the government wants a rigorous audit of Kabul Bank, which handles 250,000 accounts for government employees, including for salaries of soldiers and police.

"Even the government wants to know what are the exact issues," said Aqa, who criticized the Central Bank for failing to identify problems earlier.

"Some people took money and didn't record it. This is very bad. And the Central Bank should have been aware of this," he said. "We need to continue with Kabul Bank. We have no other option."

partlowj@washpost.com higginsandrew@washpost.com

Higgins reported from New York and Dubai.

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