Kabul Bank report finds officials missed signs of fraud and political meddling halted prosecutions
The founder and chairman was wanted by Interpol for financial crimes, shareholders were helping to smuggle cash out of the country hidden in food trays on an airline they owned, and the chief executive was handing out no-strings-attached envelopes of cash to powerful connections.
These were just some of the red flags missed or ignored by Afghan authorities, and now highlighted by a public inquiry into the $900m (£560m) Kabul Bank scandal. Published today, it lays bare for the first time the extent of fraud, cover-up and political collusion in a crisis that nearly crashed the national economy.
The report found Kabul Bank was in effect run as a vast and lucrative Ponzi scheme, where deposits were stolen instead of being invested. But it was ensconced in the heart of Kabul’s financial and political elite, with connections that helped delay investigations into the true state of its finances. Once the scale of the fraud became known, “political interference” also stalled efforts to prosecute those responsible and recover stolen cash.
“Many of the primary actors carry on their business in Afghanistan without fear of ever being held accountable, not to mention prosecuted,” the report of the public inquiry into the Kabul Bank crisis found. It warned there was “impunity for powerful Afghans” along with “scapegoating of the less powerful”.
Brothers of the president, Hamid Karzai, and vice-president, Mohammad Fahim, were among the bank’s shareholders and creditors. They are not facing prosecution for their involvement with the bank. Both have repaid money and deny any wrongdoing.
Relative to the size of Afghanistan’s puny economy, the Kabul Bank crisis is the biggest banking scandal the world has ever seen, equivalent to around 5% of national income, and staggering in its scale and audacity.
An array of forged documents and fake official stamps for nonexistent companies helped managers keep one set of books for auditors and another for themselves; more than $800m of the stolen money went to just 12 people and seven companies connected to them.
Hundreds of millions of dollars was sent abroad, some in the food trays of an airline owned by shareholders linked to the bank, with staff salaries of $320,000 booked as “pilots of cash delivery”. Other sums were sent more mundanely through international wire transfers.
At one point, the then-chief executive officer, Khalilullah Ferozi, drove around the Afghan capital handing out money in envelopes.
“It was almost worse than corruption,” said Drago Kos, chair of the joint Afghan and international anti-corruption committee behind the inquiry. “In corruption you give the money and ask for something in return. Here the money was given without asking for anything in return.”
Ferozi has declined to say how much he handed out, or to whom exactly. But among the bank’s creditors are a group who got $3.1m in loans but are so powerful that receivers for Kabul Bank have declined to even ask for the money back. Overall, they would be lucky to recover even half of what was stolen, Kos said.
So a government bailout of Kabul Bank in late 2010 means Afghanistan’s impoverished population, who earn on average less than $500 a year, indirectly pay for the extravagance of Kabul Bank’s looters.
“Every citizen in Afghanistan will bear the cost,” the report said. “This is real money from the annual budget of the government that could be much better spent on other priorities such as education, health care, infrastructure, or security.”
The inquiry suggested the crisis could have been staved off, or at least mitigated, with more robust institutions and better financial controls, including information about the bank’s managers.
Sherkhan Farnood, founder, chairman and former competitive poker player (in the World Series of Poker Europe), was wanted for financial crimes in Russia most of the time that he was helping himself to depositors’ money in Kabul.
Background checks when Farnood founded Kabul Bank in 2004 did not uncover his murky past. But there was subsequently plenty of opportunity to pick up on his misdeeds: in 2007, police in Afghanistan were told that Russia wanted to prosecute him on charges including purchasing property for illegal use.
The Interpol warrant arrived as Farnood was just starting to use bank money to build up a portfolio of luxury villas and other real estate in Dubai worth $151m, and help other shareholders, friends and political connections line their pockets.
He had only begun stealing money around 2006, although he probably never intended to run Kabul Bank as a conventional business, Kos said. “To have a Ponzi scheme you need a certain amount of money,” he told the Guardian after the release of the public inquiry’s findings. “They just didn’t have the money to do it from the beginning.”
If authorities had followed up the request, or simply taken it as a warning to look more closely into the finances of Farnood and his bank, they might have staved off the worst of the crisis. “Interpol sent out an arrest warrant for him for illegal banking activities, organising a criminal group, money laundering, which means basically he did the same thing there,” Kos said.
“Then he came over here, and what was funny was that since 2007, Interpol Afghanistan knew about it and did nothing. Even today they do nothing and he is still wanted by the Russians.”