Image Source: Joe Burger
December 2016
REGION: South Asia

In “Responding to Corruption and the Kabul Bank Collapse,” Grant McLeod draws lessons from Afghanistan’s struggle to bring justice to the political elite responsible for the money laundering and embezzlement scheme which brought about the 2010 collapse of the Kabul Bank. He discerns lessons from Afghanistan’s efforts to prosecute those responsible, recover the illicit funds from beneficiaries, and reform the banking sector. McLeod offers several proposals aimed at improving regulation and oversight but concludes successful criminal prosecutions of all the perpetrators are untenable, given the current political challenges and capacity deficiencies of the judicial system.

Investigations revealed the bank had dispersed nearly $900 million in fraudulent loans, most of which went to a network of political elite who remain unprosecuted. Primary architects of the scheme include the bank’s chairman Sherkhan Farnood and chief executive Khalil Ferozi, who remain the only major beneficiaries to receive sentences for money laundering and embezzlement. These sentences came as a result of President Ashraf Ghani’s campaign promises to make the bank a focal point of his administration. Despite this, the rest of the politically powerful beneficiaries remain immune to criminal prosecution. McLeod believes they will likely remain so given the current political climate and thinly stretched judicial system.

The administration has focused primarily on collection of the fraudulent loans, yielding some progress, but the politically powerful debtors remain a challenge. Collection of the illicit loans has been delegated to the receivership while the remaining good assets are wrapped up in the New Kabul Bank, which the government is attempting to privatize for the third time. The bank’s balance sheet indicates it has been successful in reducing operating costs and in 2016 posted what is likely its first profit since its inception. However, the banking sector as a whole remains fragile despite continued initiatives aimed at strengthening its health. Collection efforts internationally hold more promise, but efforts have been stymied by Afghanistan’s inadequate attempts at coordination with foreign agencies, as formal requests to freeze assets have been fraught with technical errors, rendering them inoperable by cooperating countries.

McLeod recommends Afghanistan strengthen its financial oversight capacity, which currently lacks the resources crucial to preventing future financial disasters. Specifically, McLeod cautions against the country’s current lack of an anti-money laundering regime or adequate monitoring of suspicious money transfers. Afghanistan’s numerous money service providers, who conduct 90% of the country’s transactions, require increased oversight and improved training for employees who often do not comply with, or are unaware of, reporting requirements. McLeod concludes that successful prosecution and collection of funds from the scheme’s beneficiaries is improbable, given the lack of political will to further expose the scandal’s connection to the political elite. Moreover, Afghanistan’s judicial and law enforcement institutions are not equipped to fully address the intricacies of an international criminal conspiracy of this caliber.

NOTE: This summary is produced by the Rule of Law Collaborative, not by the original author(s).

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