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Corruption Allegations Test Afghan Banking System

September 9, 2010 at 4:25 PM EDT
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Allegations of corruption in the Afghan banking system are causing fury and concern among citizens who fear their money isn't safe. Margaret Warner talks to Washington Post correspondent Rajiv Chandrasekaran for more.
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JUDY WOODRUFF: Now: a bank in trouble in a country riddled with accusations of high-level corruption. Margaret Warner has the Afghan story.

MARGARET WARNER: For more than a week now, nervous Afghans have lined up outside branches of one of the nation’s largest banks, trying to withdraw their deposits.

MOHAMMAD NAWAZ, Kabul Bank customer (through translator): After we heard the news, we have come to Kabul Bank to close my account, but it is very busy here. A lot of people are here to withdraw their money.

MARGARET WARNER: The customers acted after Kabul Bank posted losses of $300 million and saw its two top officers ousted.

U.S. and Afghan officials say the bank made unorthodox loans to well-connected elites and risky real estate investments in Dubai. The bank has close connections to President Hamid Karzai. The top shareholders, former chairman Sherkhan Farnood and former CEO Khalilullah Fruzi, helped finance and advise Karzai’s 2009 reelection campaign.

Two other top shareholders, and beneficiaries of bank loans, are the president’s brother, Mahmoud Karzai, and the vice president’s brother, Haseen Fahim. The government insists its central bank will do what’s needed to keep Kabul Bank from collapsing.

OMAR ZAKHILWAL, Afghan finance minister: My message to all the depositors is that their money is safe. The government of the Afghanistan bank is standing behind Kabul Bank. We know the money is there. They must not panic.

MARGARET WARNER: State Department spokesman P.J. Crowley said this week, the U.S. won’t be involved in any bailout.

P.J. CROWLEY, U.S. assistant secretary of state for Public Affairs: We are there to provide support as needed, but we do not contemplate employing any U.S. taxpayer funds to rescue the bank.

MARGARET WARNER: And for more, we go to Rajiv Chandrasekaran, a senior correspondent and associate editor of The Washington Post who has reported extensively from Afghanistan.

And, Rajiv, welcome back. First, just a little context here. How important is Kabul Bank to Afghanistan’s overall financial system and stability?

RAJIV CHANDRASEKARAN, national editor, The Washington Post: It’s vitally important. It is the largest bank in the country. It has a network of branches and ATMs.

But one thing that makes it centrally key in this whole international effort to stabilize the country is that Kabul Bank is — is the bank that is used to pay the salaries of thousands of police officers and soldiers across the country. And, if there’s a disruption to that, there could be broad-scale chaos in the country.

MARGARET WARNER: So, how did it get in such hot water financially? I mean, was this bad business judgment, or are we talking about malfeasance?

RAJIV CHANDRASEKARAN: Well, this is characteristic, I think, of the freewheeling financial climate in Afghanistan of mismanagement that led to a series of incredibly foolish real estate purchases in the United Arab Emirates at the height of the real estate market, huge amounts of the bank’s capital going to those sorts of purchases — and, of course, as that property market collapsed, the bank’s investments collapsed — but also just very shoddy management and oversight.

And — and that, of course, gets to the political connections here. Because of the — the connections to the president’s brother and the vice president’s brother, does that mean that the regulators, whatever they are in Afghanistan, weren’t really keeping tabs on what this bank was doing?

MARGARET WARNER: Now, the president’s brother Mahmoud Karzai, he directly benefited from bank funds, right? I mean, they — they were used to enrich him.

RAJIV CHANDRASEKARAN: Indeed, and with this sort of very curious shell game. He received a loan from the bank, so he could buy shares in the bank, a very unorthodox practice. And then he received an additional loan to buy a luxurious villa on the beach in Dubai that then he then sold for something like an $800,000 profit.

So, he’s clearly had a financial stake in all of this and has benefited. And then the question is, by — what connection is there to the president? We do know that the bank played a key role in helping to finance President Hamid Karzai’s reelection bid last year.

MARGARET WARNER: That’s right. The two top officials there were chief financial advisers to the campaign. Now, to what degree does this situation offer a window into the broader problem of Afghanistan corruption, which we read a lot about and we hear alleged a lot? But rarely are there actual particulars that are easy to understand.

RAJIV CHANDRASEKARAN: Well, I think what this shows us is that corruption is endemic in Afghanistan.

It not only affects the largest bank there, but a whole series of other institutions, public and private. And it’s sapping public confidence in the Afghan government, which leads directly to the security situation and the problems the country faces.

A big driver of the insurgency is simply public — the lack of public confidence in the Afghan government. And they — they look at these senior officials and say, they’re enriching themselves in these sorts of illegal ways. Why should I throw my support behind the government?

The Taliban, draconian as it is, is offering to the Afghan people or saying to the Afghan people, we promise you good, clean governance.

MARGARET WARNER: Now, you had a today reporting that the Afghan president, President Karzai, is just taking steps now that will make it harder to get at this broader problem of corruption.

RAJIV CHANDRASEKARAN: Indeed. What the president has said he intends to do is to restrict the activities of U.S. and British advisers to the principal anti-corruption agencies within the Ministry of Interior. And these are agencies that have actually investigated and arrested several officials in country, including most recently a top aide in Karzai’s presidential palace.

And what Karzai has said is, those foreign advisers now have to take a backseat role, just do training; they can’t be involved in actually shaping these investigations. He’s also going to prohibit the United States from helping to — what they say plus-up the salaries of some of these investigators, so that they can attract the best people. And he’s also saying that the United States can’t really have a role in helping to select Afghans to work on these investigative units.

MARGARET WARNER: And the Obama administration, how has it reacted to this? Is it trying to convince Karzai not to do this?

RAJIV CHANDRASEKARAN: It’s not saying a whole lot publicly. There’s a whole lot of behind-the-scenes action here trying to get Karzai to back away from some of these things. They recognize the issue of Afghan sovereignty and — what — Karzai’s argument that, when this aide was arrested, that they came in and barged in, in the middle of the night, and that has ruffled a lot of feathers there. But they say, look, to get the support of the U.S. Congress for funds and whatnot, you need to be more transparent and you need to support these bodies.

MARGARET WARNER: Rajiv Chandrasekaran, thank you.

RAJIV CHANDRASEKARAN: Good to talk to you.