�Zeke Faux and Eltaf Na­jafizada

Bloomberg Businessweek (North America) - - Markets/ Finance -

by the In­ter­na­tional Mon­e­tary Fund in 2010 to ad­vise the Afghan cen­tral bank about Kabul Bank. He adds: “While it was to­tally a crim­i­nal op­er­a­tion as far as the own­ers were con­cerned, it none­the­less had the best bank­ing in­fra­struc­ture of any bank in Afghanistan.”

That may not be say­ing much. On a re­cent morn­ing, a branch in Kabul’s Ba­haris­tan neigh­bor­hood is guarded by five men in mil­i­tary uni­forms armed with AK-47 as­sault ri­fles. Some of the dust- cov­ered com­put­ers aren’t work­ing. A cus­tomer try­ing to make a with­drawal waits for an hour be­fore be­ing turned away. “I keep hear­ing about their sys­tem fail­ures,” says the cus­tomer, Atiqul­lah Wali. “It’s bet­ter to keep our cash in­side our pil­lows like be­fore.”

When the Tal­iban were driven out of Kabul in 2001, they left the fi­nan­cial sys­tem in dis­ar­ray, flee­ing with all but $30,000 of the cen­tral bank’s cash. Into the void stepped Sherkhan Farnood, who was wanted by Rus­sian au­thor­i­ties for al­legedly run­ning an il­le­gal mon­ey­trans­fer busi­ness. He founded Kabul Bank in 2004 and hired Khalil Ferozi as chief ex­ec­u­tive of­fi­cer. The bank­ing in­dus­try boomed as for­eign aid poured into Afghanistan, $632 with as­sets ex­pand­ing more than 50 per­cent a year. Kabul Bank’s de­posits soared to $1 bil­lion by 2009 af­ter the bank in­tro­duced a new kind of ac­count that gave cus­tomers a chance to win a weekly lot­tery, a way to at­tract money with­out pay­ing in­ter­est. Farnood amassed prop­erty in Dubai and com­peted in high-stakes poker tour­na­ments in Europe.

It all un­rav­eled in 2010, when the cen­tral bank learned of the fraud, or­dered Farnood and Ferozi to re­sign, and guar­an­teed the bank’s de­posits to stop a run. An in­ves­ti­ga­tion by an in­de­pen­dent an­ticor­rup­tion com­mit­tee com­mis­sioned by the Afghan govern­ment found that ex­ec­u­tives had stolen an amount equiv­a­lent to about one-twelfth of the coun­try’s gross do­mes­tic prod­uct, mainly by giv­ing loans to them­selves and their friends that didn’t have to be re­paid. One of the al­leged ben­e­fi­cia­ries was Mah­mood Karzai, brother of then-pres­i­dent Hamid Karzai; he wasn’t charged and has said he did noth­ing wrong.

Ul­ti­mately, Farnood and Ferozi were sen­tenced to 15 years in prison, but they were later spot­ted at restau­rants around Kabul. Drago Kos, a mem­ber of the an­ticor­rup­tion com­mit­tee, says he re­signed in protest in Novem­ber af­ter Ferozi was in­tro­duced as an in­vestor at the of­fi­cial un­veil­ing of a $900 mil­lion hous­ing pro­ject. Kos says many ex­pected the new Ghani govern­ment would do some­thing about cor­rup­tion. So far, “al­most noth­ing has hap­pened,” he says.

Basir Az­izi, a spokesman for Afghanistan’s at­tor­ney gen­eral, says the cul­prits are in jail and the govern­ment has col­lected 50 per­cent of the miss­ing money. Ferozi didn’t re­spond to a mes­sage seek­ing com­ment, and lawyers for the two men couldn’t be reached for com­ment.

The Karzai ad­min­is­tra­tion said it wanted to sell the bank but never did. In 2013 the Min­istry of Fi­nance an­nounced it was ac­cept­ing a $28.5 mil­lion bid from Dubai-based Kru Cap­i­tal Part­ners, ac­cord­ing to a U.S. re­port on Afghan re­con­struc­tion. Karzai’s cab­i­net re­jected it over the ob­jec­tions of IMF ad­vis­ers. Kru didn’t re­spond to mes­sages seek­ing com­ment.

“There are a num­ber of peo­ple in the govern­ment who are very much against pri­va­tiz­ing the bank,” says Coats, the for­mer IMF econ­o­mist. “Our as­sump­tion is they re­jected the sale at that time be­cause they wanted to keep that plum in their hands to play with.”

Ghani has said the govern­ment is com­mit­ted to pri­va­tiz­ing the bank. If the cab­i­net doesn’t ap­prove the cur­rent bid­ders, the bank will go back up for sale. Bid­ders had to have at least $20 mil­lion in cash and no con­nec­tion to the pre­vi­ous own­ers.

Yama Torabi, an­other mem­ber of the an­ticor­rup­tion com­mit­tee, says the ideal buyer would al­ready have op­er­a­tions in a war zone. “It’s a risky in­vest­ment in a coun­try like Afghanistan, but it can be prof­itable,” he says. “There’s a huge po­ten­tial in Afghanistan’s bank­ing sec­tor.”

mil­lion

The amount of out­stand­ing loans at Afghanistan’s

15 banks “There are a num­ber of peo­ple in the govern­ment who are very much against pri­va­tiz­ing the bank. … They wanted to keep that plum in their hands to play with.” ——War­ren Coats, for­mer IMF ad­viser A com­mod­ity trader’s wildly lu­cra­tive run stalls

Bid/ask: Canon is keen on Toshiba’s med­i­cal equip­ment The bot­tom line Kabul Bank was Afghanistan’s most ad­vanced, but it was un­done by fraud. The govern­ment wants to put it back in pri­vate hands.

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