Afghan president: West shares in Kabul Bank fiasco

[April 11, 2011]  KABUL, Afghanistan (AP) -- Foreign advisers share a large part of the blame for the country's banking crisis and will face criminal investigation along with the bank managers and shareholders, Afghanistan's president said Monday.

President Hamid Karzai's comments and an equally combative statement about the need to shrink U.S. power over the Afghan government were his latest attempts to castigate his foreign partners, as the country tries to take on more responsibility for security and providing services.

The nation's largest private lender, Kabul Bank, nearly collapsed last year under allegations of mismanagement, cronyism and questionable lending that implicated many members of the Afghan elite with ties to the government.

The fiasco has led many international donors to question the stability of Afghanistan's financial system. Some Western allies are holding back aid until it is clear the banking system is solid.

Afghanistan's central bank has taken over Kabul Bank but has not yet said if it plans to sell it. Kabul Bank plays a key role in the Afghan economy by handling payrolls for government workers and security forces.

A U.S. government report said this month that at Kabul Bank, "fraudulent loans were used to divert $850 million to insiders. This amount reportedly represented 94 percent of the bank's outstanding loans."

Karzai told reporters that all bank shareholders have been removed and those who do not return lent funds will face criminal investigation.

However, he also blamed the crisis on international advisers who issued reports saying the bank was functioning normally. He said the government is investigating these outside advisers and auditors and will follow up any indications of misconduct with a criminal trial.

"Hundreds of millions of dollars have been paid to these individuals and organizations to help the banking system of the country and they failed in their task," Karzai said. He named PriceWaterhouseCoopers -- whose Pakistani subsidiary conducted audits of the bank, along with consulting firms Deloitte LLP and BearingPoint Inc.

"Whoever was involved in leading the bank into crisis, all those people will be brought to justice," Karzai said. The Pakistani auditor has previously said there were no basis for allegations that they operated wrongly.

USAID, the U.S. international aid agency, terminated its $92 million contract with Deloitte in March after the USAID inspector general issued a report saying that Deloitte employees acting as advisers to the central bank had failed to report signs of irregularities at Kabul Bank.

The report said, however, that Deloitte could not be held responsible for problems that brought down the bank.

Deloitte has claimed that the report did not provide any evidence of fraud by Deloitte employees and that the company had never audited Kabul Bank.

In May 2009, BearingPoint Inc. sold its public services business to Deloitte. The same advisers who worked for BearingPoint continued to advise the central bank's under USAID's contract with Deloitte.

Karzai's comments about the bank come just days before Afghanistan's top finance officials travel to Washington to attend the spring meeting of the World Bank and the International Monetary Fund, which has said it won't extend its program for Afghanistan until it clears up problems with the bank.

The United Nations has said that the impasse over the bank was weakening confidence in the entire country's financial system. The U.N. says that without an IMF program, it would be difficult for Karzai's international partners to meet commitments they have made to help Afghanistan -- and direct funds through the government's budget as Karzai has pleaded with them to do.

In absence of an IMF program, some $70 million in spending for government activities could be withheld, the U.N. has said.

The IMF has strongly suggested that Kabul Bank be placed into receivership and then quickly sold off as part of a broader effort to stabilize the country's shaky financial system. U.S. Treasury Department officials agreed with the recommendation. Karzai did not address this point.

Karzai also said that the Afghan government is moving forward with a process to formalize the country's relationship with the United States as international military forces turn more control over security to Afghan troops.

He said the Afghan government has been studying the U.S.-proposed strategic partnership agreement and will present a counter-proposal that includes rules for the conduct of soldiers, minimum funding levels and development priorities.

Karzai said the Afghan government is in the final stages of this proposal and stressed that it will put the Afghan government in control of funding and national priorities.

"We have tied up their hands and feet," Karzai said of the proposed rules for the United States operating in Afghanistan.

The U.S. Embassy in Kabul did not immediately respond to requests for comment.

[Associated Press; By RAHIM FAIEZ and HEIDI VOGT]

Amir Shah and Deb Riechmann contributed to this report from Kabul.

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