The Bank Bust That Nearly Took Down Afghanistan

A new report details the ponzi scheme that clobbered the impoverished country’s financial system—a grievous assault bigger than anything the Taliban could have devised

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SHAH MARAI / AFP / Getty Images

Pedestrians walk past the Kabul Bank in Kabul, Sept. 1, 2010.

The lights blinked on and off in the newly remodeled basement of the Shah Bobo Jan Palace on the grounds of the Afghan Academy of Science, and then they finally died out. At the podium, the translator joked that if Kabul Bank, Afghanistan‘s largest private bank, had not needed to be bailed out by the government, the money could have been used to rebuild andrestore the city’s power grid.

Drawing a similar conclusion, a report on the Kabul Bank crisis released Wednesday by the Independent Joint Anti-Corruption Monitoring & Evaluation Committee, also revealed new details about how a small group of men profited from fraudulent loans. It called out local authorities for succumbing to political pressure and the international community for not doing enough to stave off the catastrophe which led to a near-complete meltdown of Afghanistan’s banking system in 2010.

(PHOTOS: Afghanistan Now)

The report, partly compiled from the results of a nine-month-long audit conducted by Kroll, a global investigations firm, said that the crisis was brought on by a well-hidden Ponzi scheme. More than 92% of the bank’s loan book, or $861 million, was extended to 19 related individuals and businesses, which ultimately benefitted 12 people. The remaining $74 million was extended to legitimate customers in loans, the report said. The report noted that the failure of Kabul Bank and the subsequent government bailout represented around 5% to 6% of Afghanistan’s gross domestic product, making”Kabul Bank one of the largest banking failures in the world,” Drago Kos, the committee’s chair told TIME.

Kos’ committee went on to detail how the fraud was committed. According to its report, “The Financial Transactions and Reports Analysis Centre of Afghanistan was advised in late 2009 that Kabul Bank was moving money through food trays on Pamir Airway flights,” claiming that 10 Pamir Airways pilots were paid for the service. It also noted that the bank’s credit department “opened loan accounts for proxy borrowers on instruction from senior management, and forged supporting documents including applications, financial statements and registrations, and employed fake business stamps to lend authenticity to the documents.”

Beyond the $861 million, the committee’s report also said that there was an estimated $66.2 million in non-loan disbursements for lavish cars, shopping, travel and houses, as well as paying the salaries of non-existent employees. Ordinary Afghans had entrusted their deposits to Kabul Bank, convinced by a sweeping advertising campaign and good publicity surrounding the bank  — which was touted by foreign donors and the Afghan government as proof that the country was modernizing and stable.

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Kos says he and his colleagues found the political pressure and interference the most outrageous. “For example, we found out that the prosecution service prepared indictments in June 2011 and they sat on them and they sent them to the court in June 2012 – after one year. And what’s even worse is that the decision over who would and would not be indicted was taken at the political level,” Kos says.

The report outlined the political pressure that government officials faced in investigating the case. “Although there are legitimate capacity issues at the Attorney General’s Office that certainly contributed to the delay in investigation, the major factor impeding the criminal investigation process is political interference resulting in reluctance to pursue charges against some of the participants of the Kabul Bank fraud,” the report said.

Kos says there were institutional problems as well. “The problem is having institutions in place that do not know what their mandate is, which do not understand the meaning of the word ‘independence’ and which are coping with political interference all the time, that of course makes the situation unique for Afghanistan, but it is also a signal to other countries that if they do not fight each of those elements themselves, […] the system will fail, and it has failed.”

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Although Kos acknowledges that “the threat is getting smaller and smaller everyday” of similar institutions collapsing in Afghanistan, he still has deep-founded concerns about future stability in the country. “This case was a big blow to the trust of the people of Afghanistan in the government. You know, the level of trust here is already not the best. In cases like that, not only was there serious moral damage, but thousands of people felt, directly, because they were depositors in the bank, they felt the monetary consequences of it,” says Kos, adding that, “people are telling us that corruption has now reached such an extent that [life] was even better under the Taliban – its not security, it’s the corruption. So, this was really a big blow to all of the national and international efforts to build up the state.”

The report made 48 recommendations to improve all the sectors involved in the crisis, but even committee members are dubious thatthey will be implemented. “There is one simple reason for this,” says Yama Torabi, Ph. D., the head of Integrity Watch Afghanistan and a committee member, “the environment of impunity that we have in this country, for committing corruption and not being pursued by the courts, by the Attorney General’s office. That is something we need to address. If law enforcement does not work in this country, this is what we get. And it’s still continuing. We need tohave the law enforcement agencies take their responsibilities more seriously.”

When asked if he thinks these changes will take place after the report, Torabi says, “I have no hope that this will happen in the near future, but we’re working on it. We will try to see practical ways of doing it. Part of it is linked with the political will. The issue with the political will in Afghanistan is that we are extremely fragmented politically. […] I don’t think we will get big changes before [2014], but who knows, I mean, these things can happen. Maybe some people will realize that you have to change things fundamentally in order to get there.”

MORE: The New Silk Road: Can a U.S.-Backed Initiative Bring Peace and Prosperity to Afghanistan?

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