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

The rapid turnabout in Kabul Bank's fortunes has led Afghans to question Western-style free-market capitalism.

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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.

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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.

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