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Troubles at an Afghan bank jolt a fragile financial system

By Dexter Filkins

Sangar Rahmi contributed reporting

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KABUL, Afghanistan — The Afghan government intervened to shore up a deeply troubled bank Tuesday, sending shock waves through the capital and prompting fears that Afghanistan's pervasive corruption had now put the country's entire financial system at risk.

Sherkhan Farnood and Khalilullah Frozi, the top executives of Kabul Bank, abruptly left their jobs this week at the demand of officials at the Central Bank of Afghanistan, after the discovery that Kabul Bank's losses may exceed $300 million. That number far exceeds the bank's assets.

The Central Bank installed its own chief financial officer, Masood Khan Musa Ghazi, as the chief executive of the bank. Afghan and U.S. officials expressed alarm not only at Kabul Bank's financial condition but also at the prospect of a collapse of confidence in Afghanistan's fragile financial system, which was built from scratch after the ouster of the Taliban in 2001.

The immediate concern was that news of the bank's financial irregularities, already spreading through the capital, would prompt a run on the bank itself and that the panic would spread to other financial institutions. Bank deposits in Afghanistan are not guaranteed by the central government, officials here said.

"This could be catastrophic for the country," a senior Afghan banking official said. "The next few days are critical. I am worried."

Kabul Bank and its chairman, Farnood, lie at the heart of the political and economic nexus that sustains — and is sustained by — the government of President Hamid Karzai. Frozi was an adviser to Karzai's presidential re-election campaign last year, and Kabul Bank provided millions to Karzai's campaign.

U.S. investigators say that Farnood's unorthodox financial dealings, which included lending tens of millions of dollars to himself and other politically connected Afghans, have long been shielded from scrutiny by his close ties to Karzai. U.S. officials said the intervention by the Central Bank was personally approved by Karzai himself, after he was briefed about the details of Kabul Bank's financial condition and its irregularities.

Investigators and bank regulators say Kabul Bank is also tied to the inquiry into New Ansari, the money-transfer firm, or hawala, that is suspected of moving billions of dollars out of the country for Afghan politicians, drug traffickers and insurgents. Kabul Bank used the firm, whose dealings are nearly impossible to track, to transfer at least $60 million out of the country, a bank shareholder said.

For a bank to use a hawala to move money is inherently suspect, investigators say, because a financial institution like Kabul Bank already has the means to transfer the money electronically. Electronic transfers are easier for regulators to follow.

Neither Farnood nor Frozi could be reached for comment Tuesday.

Bank regulators emphasized that the Afghan government had not taken over Kabul Bank.

The regulators said they were worried that the bank would not be able to cover a run of withdrawals from nervous creditors. Afghan officials and businessmen said other financial institutions here might be affected by similar troubles; the shareholders of other banks also indulge in the practice of lending large sums of money to themselves.

In interviews, Afghan officials and businessmen described Kabul Bank as Farnood's personal fief, which he used to reward himself, shareholders and political allies who could advance his financial interests. First among the beneficiaries was Farnood himself, the officials said.

He invested about $140 million of the bank's money in the real estate market in Dubai in the United Arab Emirates, said Mahmoud Karzai, the president's brother and a Kabul Bank shareholder. Among those properties were more than a dozen multimillion-dollar villas in Farnood's name, some of them on Palm Jumeria, an island off Dubai's coast, Karzai said.

The Dubai real estate market collapsed in 2008, wiping out much of Farnood's investment and leaving Kabul Bank with the losses. A senior Afghan banking official said that the bank's estimated losses were believed to be about $300 million, with assets of about $120 million.

It is not clear what Farnood did with all the properties he purchased, but he made at least some of them available to his friends and allies. One of them was Mahmoud Karzai, who owns about 7 percent of the bank.

Speaking in an interview from Dubai, Karzai said he has rented one of Farnood's villas for the past year and a half. Mahmoud Karzai said the bank's troubles — and Farnood's opaque dealings — had made him decide to vacate soon. "I want to move to a different house," Mahmoud Karzai said. "I want to cut this out."

Kabul Bank also lent some $100 million to Haseen Fahim, a shareholder. Fahim is the brother of Muhammad Fahim, Afghanistan's first vice president and a close political ally of Karzai. Haseen Fahim is the owner of Gas Group, a large distributor of natural gas, and an the developer of several large construction projects. "I am not completely aware of what he has done," Karzai said of Farnood.

Farnood was a banker before Afghanistan had a modern financial system, opening a hawala in the 1970s. A hawala allows a person in Afghanistan, say, to hand someone a bundle of cash and have it instantly credited to an account in another country — say, in the United Arab Emirates. Hawalas typically operate outside any government regulation. Farnood closed his hawala and started Kabul Bank in 2004.

From the beginning, the Afghan banking official said, Farnood ran Kabul Bank outside the law, daring regulators to rein him in. Kabul Bank often exceeded the limit of what it was allowed to lend on any particular project, and it sometimes skirted collateral and deposit requirements.

"Sherkhan Farnood is a very clever individual," the Afghan banking official said. "Keeping the bank in line with the law was a constant challenge for us." New Ansari is known to be intimately connected to another financial institution, Afghan United Bank, officials say.

Asked why Farnood would use a hawala to transfer money abroad, Mahmoud Karzai, a shareholder, said he did not know.

"This a very legitimate question," Mahmoud Karzai said. "You should ask Sherkhan." The New Ansari case has drawn close attention, and not only because U.S. investigators say the money trails lead to Afghan political elites, insurgents and suspected criminals.

One of the men arrested in connection with the inquiry is a senior aide to Karzai. The aide, Mohammed Zia Salehi, was released in early August after investigators were pressured by Karzai himself.

Afghan officials say they hope they can avoid a meltdown of Kabul Bank — and of the country's financial system. Farnood has promised to transfer the title of all of his properties to the bank, Karzai said, which would provide the bank with at least some assets to cover the loses.

But it is not clear, after the collapse of the Dubai property market, how much Farnood's properties are worth. Farnood and Frozi together owned more than half of the bank, meaning that the other shareholders had little leverage with them, officials said. It was only recently, as the bank's losses mounted, that the two men began to disagree. Karzai and other Afghan officials said the departure of Farnood and Frozi will allow the bank to finally be run properly.

Without federal depositors' insurance, the senior Afghan banking official said, that might be the only chance depositors have of getting their money back. "The only government guarantee is the effective supervision of this bank," he said.






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