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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.

Such a finding could further roil the cash-strapped nation's banking system at a time when the international community is trying to demonstrate that Afghanistan is ready to take more responsibility for its security and governance.

President Hamid Karzai ordered the Central Bank to assume control of Kabul Bank last August after he learned that some of the bank's shareholders, including one of his brothers, had taken out loans that were not backed by collateral. The loans were used to invest in luxury real estate projects in Dubai and other dubious ventures.

Kabul Bank officials and Western diplomats have said that as much as $900 million in loans - nearly the equivalent of the Afghan government's yearly revenue - remains unaccounted for. Afghan and Western officials fear that only a fraction of that money may be recovered.

The crisis prompted the International Monetary Fund to suspend its program in Afghanistan. Many donor countries are leery of, if not forbidden from, providing aid to a country where the IMF does not provide at least a modicum of oversight.

"The Kabul Bank issue is a very serious one," Staffan de Mistura, the United Nations envoy in Kabul, said in a recent interview. "It touches on the concept of accountability that is crucial for the future of investment in Afghanistan. There is a need for the U.S. Congress and parliaments in Europe and other donor countries to be able to feel reassured that when they contribute to Afghanistan, their money is not going to be used in a wrong way."

U.S. not focused on oversight

Mark Dillen, a spokesman for USAID in Kabul, would not discuss details of the investigation because it is not finished. He said, however, that the United States never sought an oversight role over Afghanistan's banking sector.

"The U.S. does not, and indeed should not, have an operational role in supervising Afghan banks," Dillen said. "U.S. efforts are appropriately focused on capacity-building, particularly with regard to strengthening the integrity of the financial system."

In one instance, said the U.S. official familiar with the investigation, a Deloitte team member who accompanied a Central Bank official to Kabul Bank was threatened. The adviser did not report that incident to U.S. officials at the time.

Deloitte, which had the Central Bank project since August 2009, billed the government more than $657,000 a month for the five experts at the bank. The contract was renewable for up to four years. Consulting firm Bearing Point, which Deloitte acquired, previously held the contract.

There do not appear to be clear rules dictating the types of behavior and circumstances that U.S. advisers should report to American officials. It is possible that the Deloitte advisers chose to be circumspect because most U.S.-paid advisers sign confidentiality agreements meant to assure Afghan officials that they are not being spied on.

Chandrasekaran reported from Washington.

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