The Guardian, May 11, 2011

Kabul Bank fraud: consultants ignored warning signs, report says

US government watchdog says action by consultants could have reduced losses

By Jon Boone

Hundreds of millions of dollars lost to fraud at Afghanistan's biggest bank could have been saved if foreign consultants hired by the US government had not ignored obvious signs of trouble, a damning report says.

A US government watchdog finds highly-paid western contractors working in the Afghan Central Bank failed to raise the alarm even after they received death threats when they tried to audit Kabul Bank.

Sher Khan Farnood (left), Mahmood Karzai (center) and Mohammad Hussain Fahim, brother of the current vice president Qaseem Fahim (right), misused customers' deposits
Sher Khan Farnood (left), Mahmood Karzai (center) and Mohammad Hussain Fahim, brother of the current vice president Qaseem Fahim (right), misused customers' deposits. Last year, reports appeared in the media about the bank losing $300 million (13.656 billion afghanis) due to mismanagement, cronyism and dubious lending.

The bank nearly collapsed last year after revelations that most of its money had been loaned to its politically powerful managers and shareholders and their associates to fund reckless investments and beachfront mansions in Dubai.

With losses estimated at up to $850m in an economy with GDP of $12bn it has been likened to a pyramid scheme and described by western officials as "the biggest per capita fraud in history".

A report by the Office of Inspector General at the US Agency for International Development (USaid) reveals that the private consultants employed by the US government body repeatedly stumbled across "red flags" which they ignored.

They include an incident in November 2008 when an expatriate adviser employed by BearingPoint, a company later bought by Deloitte, received two death threats after participating in a regular Central Bank inspection of the offices of Kabul Bank.

The company responded by banning its consultants from taking part in any more inspections and "limited its technical assistance to classroom training".

The report said that, had inspections not been halted, "the fraud could have been detected earlier, and the magnitude of losses would have been smaller".

The following year, the consultants failed to report the "incredulous" response of Central Bank officials when the foreign advisers told them they, as regulators of Afghanistan's banking system, had the legal powers to remove the chief executive of Kabul Bank. On the contrary, "he can remove us", the officials are reported to have said.

In other incidents, the Central Bank governor raised "serious concerns" to Deloitte's lead adviser and consultants picked up rumours about the Dubai property investments, which were ignored.

"Because Deloitte staff did not follow up aggressively on indications of fraud at Kabul Bank, Deloitte and the mission lost opportunities to contain the problems at Kabul Bank," the report said.

It said BearingPoint and Deloitte, which had staff working on the Central Bank project for seven years, felt unable to share information with the US government, which was paying them as part of a $92m contract for their work, in order to preserve their relationship with Central Bank staff.

USaid, responding to the Inspector General's report, said: "Deloitte could not have stopped the massive fraud that occurred in Kabul Bank."

It said the criminal fraud was "deliberately concealed" by channelling illegal loans to individuals through fictitious companies. Even an audit by an affiliate of PriceWaterhouseCoopers, the respected accounting firm, failed to find any signs of trouble.

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