WaPo : Elaborate ruse behind vast Kabul Bank fraud

Elaborate ruse behind vast Kabul Bank fraud

By Joshua Partlow | June 30, 2011

KABUL — The top two officials of Kabul Bank used fake names, forged documents, fictitious companies and secret records as part of an elaborate ruse to funnel hundreds of millions of dollars to shareholders and top Afghan officials, according to newly obtained documents and interviews.

The scheme overseen by Sherkhan Farnood, the bank’s former chairman, and Khaililullah Frouzi, the chief executive, helped to cover up a vast disbursal of funds to Afghanistan’s ruling elite, the documents and interviews with bank insiders as well as U.S. and Afghan officials show. Among the major recipients was Mahmoud Karzai, the president’s brother, who allegedly received $22 million in loans; some parliament members, warlords and cabinet ministers, including Mohammed Fahim, Afghanistan’s first vice president, are alleged to have received smaller sums.

Farnood and Frouzi were detained Wednesday night in the first high-level arrests since the scandal began. Both deny responsibility, and neither has been charged with a crime, but Afghanistan’s attorney general, Mohammed Ishaq Aloko, said in a brief interview that the evidence against them is “quite clear.’’

The documents, from the Afghan government and from the bank, provide the most detailed account yet of how the fraud was carried out in the years before it was discovered in 2010, forcing the Afghan government to take over the bank, split it in two, dissolve the shareholders’ assets and spend more than $800 million to bail it out.

The crisis at Kabul Bank has shaken confidence in Afghanistan’s financial system and caused the lapse of the International Monetary Fund’s line of credit, which has stymied tens of millions of dollars of foreign aid to the country. Now the job of recovering as much as possible of the $912 million in loans amounts to perhaps the most serious task for President Hamid Karzai’s government outside of fighting the Taliban.

Without a successful resolution of Kabul Bank’s problems, said one senior U.S. official, Afghanistan could face “the collapse of the banking sector.”

Senior prosecutors in Afghanistan announced the arrests of Farnood and Frouzi several days after a special commission, established by President Karzai last year to investigate charges of improper loans and financial mismanagement at the bank, completed its work and forwarded its findings privately to the government. The chairman of Afghanistan’s Central Bank, Abdul Qadir Fitrat, fled to Virginia this week and declared that his life was in danger because he had revealed the names of prominent loan recipients.

Frouzi could not be reached for comment for this article. But in an interview in May in Kabul Bank headquarters, Farnood called himself a “scapegoat” for a broader conspiracy of government and business leaders in which, he said, Frouzi had played a big part. Farnood, a world-class poker player, acknowledged that the bank had gone to extraordinary lengths to prevent Afghanistan’s Central Bank from discovering the extent of the unsecured insider lending.

To ensure that Central Bank regulators remained compliant and incurious, Farnood and another former executive said, Frouzi had paid monthly bribes to central bank officials.

But Farnood, who asserts that the illegal loans and bribes took place without his knowledge when he was out of Afghanistan, said others also bore significant responsibility. “People need to know who were the real criminals here,” he said. “At the end of the day, people need to know where the money has gone.”

Following the money

After the crisis broke out last August, Kabul Bank’s employees combed through bank records in an effort to document who received Kabul Bank’s money.

After reviewing these records, the Afghan government alleged that Farnood illegally received loans totaling $497.1 million in the name of 163 companies, while Frouzi took $79.6 million associated with 37 companies, according to government documents obtained by The Washington Post. (Farnood said that he did not end up with the vast majority of the money but that bank loans in his name were given to other people.)

To facilitate these transactions, Kabul Bank relied on Shaheen Exchange, a Dubai-based money transfer business that Farnood owned before starting Kabul Bank and that had representatives inside the bank’s headquarters. To skirt regulations about loans to insiders such as shareholders that exceeded legal limits, the bank issued loans in various names and transferred money to Shaheen Exchange, which would then reroute the money back to Afghanistan and keep records of the actual recipients, according to several former bank executives and shareholders.

Among the recipients, the documents show, was Mahmoud Karzai. The documents show that the $22.2 million he borrowed was recorded as 10 separate loans under names such as Abdul Rahim, Dawood and Sultan Mohammad Hafizullah LTD.

Mahmoud Karzai has acknowledged receiving loans, but said that he was unaware of the misleading practices and that he has now paid back all he owes, about one-third of the $22 million. He said he is not responsible for about $14 million because the sum includes a villa in Dubai, United Arab Emirates, owned by Farnood and shares of Kabul Bank that the government has stripped from him.

“They were probably thinking I was not supposed to get a loan so they put in these different names. They did this illegal stuff for all the loans,” Mahmoud Karzai said in an interview.

These lending practices raised red flags within the bank at least two years before the Central Bank takeover last August. Employees in the credit department regularly encountered loan files with missing documents, including absent business licenses and audited financial reports and sent warnings to the leadership about the problems.

Managers ignored the procedures for determining borrowers’ risks. “Whenever I sent any file with a high-risk rating,” one former bank employee recalled, “they’d send it back and say I had to change it to medium or low. So I did that.”

Internal warnings

To create a veneer of legitimacy to fictional loans, financial documents were fabricated for front companies, according to two former bank employees.

In February 2010, six months before the Central Bank would take action, an internal memo addressed to Farnood called the loan portfolio “less than satisfactory.” The memo described the loans as sanctioned “without any proper scrutiny” and said that they were serving “vested, influential, and [concocted] interested parties which needs to be scrutinized at the highest level possible.”

The depth of the bank’s problems, first reported in The Post in February 2010, spooked the bank’s leadership and shareholders. The day after the article, Frouzi’s own Kabul Bank account reached its apex, $19 million. By July 4, it had been largely emptied, never again exceeding $3,000.

Despite the internal turmoil, the loans kept flowing. On July 20, 2010, an employee in the credit department wrote to Farnood about his concerns over being pressured to issue 71 loans that had no documentation. Farnood was warned that such loans were illegal and put “the bank at great risk and in particular me.”

The employee asked Farnood to instruct management to block the loans. “Please treat this mail in good spirit and take necessary action as these practices will lead to collapse of Kabul Bank, Officials and the Banking Industry,” he wrote.

Farnood did not write back. In his defense, Farnood said he was rarely in Kabul and left all authority for day-to-day operations to Frouzi.

Several people involved with the bank disagreed, saying the two men made all key decisions together. The shareholders did not hold meetings. One former executive said: “Sherkhan’s attitude was very simple, it’s like the mafia. ‘I’m the boss. I call you and tell you and you execute.’ You become an integral part of his activities.”

“He is the main perpetrator,” Mahmoud Karzai said of Farnood. “He is the architect of the entire episode.”

The daunting challenge

Among other prominent Afghan officials listed in bank documents as having received loans is Fahim, who is the first vice president and is identified as “Marshal Fahim,” and is said to have received $373,928. Others listed include Zalmai Rasoul, the foreign minister, $105,190; and Younis Qanooni, the former parliament speaker, $1.27 million.

Farnood did not dispute the figures but said they painted an incomplete picture, as bribes and other payments to officials were often recorded as expenses and the recipients not identified in the books by name.

The officials all denied they benefited illegally from Kabul Bank; those who acknowledged receiving loans said they paid them back. A person close to Fahim said that the Kabul Bank money was used to finance his vice presidential campaign in 2009 but that he has not received any money since. An aide to Fahim who uses only a first name, Gulbuddin, said “by no means has he borrowed any money from Kabul Bank or any other bank.’’

Rasoul said through a spokesman that he borrowed money from the bank but paid it back on time. He did not disclose the amount. An aide denied that Qanooni took the $1.27 million from Kabul Bank and said Qanooni would not be available for comment. Qanooni has said in the past that he did not receive gifts but received some donations from Kaubl Bank executives for his parliamentary campaign.

The challenge of fixing Kabul Bank has posed a daunting task for the Afghan government. It has responded, under international pressure, by stripping the shareholders of their ownership, putting the bank into receivership and breaking it into two parts: the “New Kabul Bank” for depositors and functioning loans, and another part functioning as a collection agency for the bad loans.

Under a warrant from the attorney general’s office, Interpol last month put Shokrullah Shokran, a cousin of Farnood’s who was the former deputy chief executive and has left Afghanistan, on a wanted list. In an attempt to follow the money amid competing versions by bank executives, an outside firm has also begun a forensic audit of the bank.

Some borrowers have refused repayment, and the government has collected less than $100 million. The arrests of Farnood and Frouzi on Wednesday were the most significant sign yet that the government was serious about prosecution.

“It’s a ridiculous situation,” said Mohammad Qasim Hashimzai, the deputy justice minister who is on a committee to look into Kabul Bank’s problems. “You can’t trust anybody.”

Correspondent Pamela Constable and special correspondents Javed Hamdard and Sayed Salahuddin contributed to this report.