U.S. advisers didn't report early signs of trouble at Kabul Bank, probe finds

By Ernesto Londono and Rajiv Chandrasekaran
Thursday, March 17, 2011; 10:57 AM

KABUL - U.S. officials have suspended the contract of an auditing team advising the Afghan Central Bank because the team did not disclose early signs of widespread corruption at the country's largest private bank before its revelation last fall triggered a destabilizing crisis.

An inspector general's probe commissioned by the Kabul chief of the U.S. Agency for International Development, which paid the advisers, suggests that consultants employed by accounting firm Deloitte could have alerted U.S. officials about a pattern of fraudulent loans and cronyism at Kabul Bank before the scandal broke.

The crisis prompted a run on the bank last September and exposed the underworld of a sector that had been hailed as one of the few U.S. success stories in Afghanistan. It also has jeopardized billions of dollars in aid earmarked for Afghanistan from nations that want to be assured that corrupt officials won't steal their money. The investigation provides the first indication that American officials could have taken steps to mitigate the fallout of the banking crisis.

A senior U.S. official familiar with the preliminary findings of the investigation, which has not been made public, called it "damning" for the team of Deloitte accountants assigned to advise executives at Afghanistan's Central Bank. The government-run bank regulates all private banks and sets monetary policy.

The case highlights a dilemma faced by hundreds of U.S.-paid advisers working for the Afghan government: There are no clear rules dictating what type of information they need to report to the U.S. government.

"Some of the Deloitte guys saw signals of corruption and fraud but didn't tell" USAID, said the senior U.S. official, who spoke on the condition of anonymity to discuss a politically sensitive issue. The official said the report concluded that the Deloitte accountants should have known about the problems at Kabul Bank.

Jonathan Gandal, a spokesman for Deloitte, did not say whether the firm's experts saw early signs of the crisis, and if so, whom they reported them to.

"We were not Kabul Bank's independent auditor," he said in a statement. "Our services did not include supervising or conducting bank examinations at Kabul Bank prior to Kabul Bank being put in conservatorship in September 2010."

Michele Schimpp, USAID's deputy director for Afghanistan and Pakistan affairs, said the agency cancelled Deloitte's Central Bank contract on Monday.

"We've terminated this part of the Deloitte contract, and we intend to make sure all of our technical assistance is as effective as possible," she said.

New audit commissioned

Facing increasing reluctance from international donors, the Afghan government has agreed to commission a sweeping forensic audit for Kabul Bank and Azizi Bank, the country's second largest.

Afghan and U.S. officials fear that the examination, if thorough, could reveal that a far larger number of politically connected Afghans have received loans that they have used for risky investments.

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