Documents provide fresh detail on Kabul Bank scandal

Documents obtained by The Sunday Times cast new light on how one of London’s most respected accountancy firms was hoodwinked

The Sunday Times

The largest private bank in Afghanistan, hailed as a success story by the West, was deliberately designed to help its politically well connected shareholders and executives plunder about £622m.

Documents obtained by The Sunday Times cast new light on how a complex fraud set up by Afghan executives allegedly hoodwinked one of London’s most respected accountancy firms, Price Waterhouse Coopers (PWC), which in February last year found no wrongdoing at Kabul Bank.

Months later it emerged that executives and shareholders had spent years looting the bank’s coffers. The scandal forced the Afghan government to raid its reserves for £528m to bail out the stricken bank.

As a result, Britain and other countries suspended millions of dollars in aid to Afghanistan, one of the poorest countries in the world. President Hamid Karzai blamed western advisers for failing to spot the looming disaster.

Referring to PWC’s February audit, the American government said at the time: “This ‘clean audit’ opinion from a professional accounting and auditing firm with worldwide operations demonstrates the difficulty of identifying fraud at Kabul Bank.”

However, the documents show that the bank’s structure was created for the prime purpose of committing fraud on a massive scale. Investigators have identified 114 fictitious companies set up by the bank, according to the minutes of a recent meeting between Afghan officials, leading donor countries and employees of Kroll, an investigations agency that began a £6.2m audit of the bank earlier this year.

Loans were then made to these fake businesses with the cash dished out among the main shareholders and the bank’s senior executives. The bank also paid off 10 accounting firms (but not PWC) to create a mass of documents that supported the existence of these fake companies.

Between them the bank’s executives and shareholders spent about £93m on luxury villas in Kabul and Dubai and a doomed property venture in the United Arab Emirates.

Among those under investigation in the scandal are Mahmoud Karzai, the president’s brother, and Mohammed Qasim Fahim, a warlord and brother of the country’s first vice-president.

Relatives of Fahim also bought shares and obtained loans worth millions from the bank. Mahmoud Karzai, who had a 7% shareholding in the bank, and the Fahim family deny any wrongdoing.

The shareholders and executives spent a further £37m of the bank’s money on travel and luxurious hotel rooms as they jetted around the world spending depositors’ money.

“Shareholders and management were motivated by loans they could receive rather than by the performance of the bank,” the minutes quote a Kroll official as saying. “Layers of governance in regard to compliance, internal audits and the audit committee were non-existent.”

There are also allegations that bank officials bribed Afghan cabinet ministers to ignore the bank’s fraudulent dealings and gave millions of dollars to President Karzai’s 2009 election campaign, which was itself tainted by accusations of widespread voter fraud.

Questions remain over how PWC failed to spot the massive fraud. The company declined to comment.

“The independent audit that was carried out on Kabul Bank by PWC will be scrutinised, as their audit cleared the bank of all illicit dealing when actually this was not the case at all,” the minutes state.

A Kroll official present at the meeting said the agency would be “looking into this very closely”.

So far just £46m — 8% of the missing funds — has been recovered. Shareholders have apparently signed agreements to repay a total of £203m. A further £249m is still in dispute, raising the possibility that the Afghan government will never get the bulk of its money back.

“There are people who are supposed to have received some of the loans who claim not to have received any money,” said one Kroll official. “It’s possible that some of these people could have had no clue about the loans or they could have had their identities stolen.”

Afghan officials will decide whether to push forward with prosecutions or to let those responsible for the fraud walk free in return for help in securing the rest of the cash, according to western officials.

The attorney-general’s office in Kabul says it has so far completed investigations into 19 individuals, but only nine have been charged.

In private, western officials are sceptical about the willingness of the Afghan government to prosecute shareholders and executives because of their political connections.

Officials say the bank’s former chairman, Sherkhan Farnood, a word-class poker player, could dish the dirt on senior government officials if he were ever taken to court. Farnood and his deputy, Khalilullah Frozi, were arrested in July. Both men were released on the condition that they help the government recover the missing funds.

At the meeting of Afghan officials and donor countries, a Kroll official said the men were “being very co-operative in assisting with the collection of the bad loans”.

The International Monetary Fund last month renewed its credit programme to Afghanistan, which it had suspended 13 months earlier because of the Kabul Bank crisis and the lack of oversight of Afghanistan’s banking system. Britain and other donors had also withheld aid, which is used to pay the salaries of teachers, health workers and government employees.

Kroll believes it could take up to seven years to recover the cash because of the nature of the fraud.

“The challenges are in the complexity of the loan portfolio and in the extent of the fraud. There were more than 2,000 loan accounts that the bank used,” said a Kroll official.

Dubai spending spree

Properties bought by executives and shareholders of Kabul Bank included multi-million dollar villas built on Dubai’s Palm Jumeirah – an artificial sand island in the shape of a palm tree off the coast of
the Emirate.

Dubai’s sheikhs labelled the island that is four times the size of Hyde Park “the eighth wonder of the world”. Old aircraft were sunk off the coast to create artificial reefs and dolphins were flown in from the
Solomon Islands to populate the lagoon.

The bank also invested $40 million in one of Dubai’s most disastrous property developments known as Business Bay. The construction site is a wasteland: two large holes in the ground are the only signs of the
proposed pair of 20-storey towers.

All these properties have been significantly devalued by the collapse of the Dubai economy, which will make it almost impossible for the Afghan government to recover the looted cash.

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