Afghan Bank Scandal Triggers Run on Deposits

President Karzai's brother urges U.S. to help prevent financial panic

By Michael Isikoff
|  Thursday, Sep 2, 2010  |  Updated 3:15 PM PDT
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Afghan Bank Scandal Triggers Run on Deposits

AP

Afghan president Hamid Karzai's brother is urging the U.S. to help prevent financial panic.

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WASHINGTON - About $155 million in deposits have been withdrawn from Afghanistan’s largest bank in just the last two days, spurring fresh concerns among U.S. and Afghan officials that a financial panic could spread through the country and derail the U.S. war effort, according to bank insiders and U.S. officials.

Mahmood Karzai, the brother of Afghanistan’s president and one of the principal shareholders in the troubled Kabul Bank, told NBC News in a telephone interview that panicky depositors withdrew $70 million from the bank on Thursday. This is on top of an estimated $85 million taken out on Wednesday, he said.

Amid reports that Afghan government employees, including teachers, soldiers and policemen, were lining up outside Kabul Banch’s branches throughout the country to demand their money, Afghanistan’s Finance Ministry issued a statement Thursday declaring the bank was “reliable” and that deposits would be guaranteed.

But Karzai urged the U.S. government to take steps to calm the situation as well, saying continuing withdrawals could create a panic that might cause the bank to collapse and destroy Afghanistan’s fragile financial system. 

“If this collapses, there will be a meltdown,” Karzai said.

According to him, the Kabul Bank had more than $1.3 billion in assets and about $500 million in cash on hand before the crisis began.

The prospect of a spreading financial crisis was triggered by new disclosures by Afghan officials and media reports this week that the Kabul Bank had allegedly violated the country’s banking laws by providing hundreds of millions of dollars in loans to influential insiders, including Karzai and others with close ties to President Hamid Karzai’s government.

In addition, the bank’s chairman, Sherkhan Farnood, a world-class poker player who is known for flying around the world to play in card tournaments, acknowledged in an interview with NBC that the bank had invested more than $160 million of the bank’s assets to purchase luxury villas and two residential towers in Dubai. Most of the multimillion-dollar villas with swimming pools were acquired at Palm Jumeirah, a fabulously opulent man-made island that juts out into the Persian Gulf in the shape of a giant palm tree and has been dubbed by its developers “the eighth wonder of the world.” 

Farnood and Mahmood Karzai both confirmed that the homes were acquired in Farnood’s name using bank funds and then turned over for the use of major bank shareholders, such as Karzai, who owns about 9 percent of the bank, and Haseen Fahim, the brother of Muhammed Fahim, Afghanistan’s first vice president. Asked why he put the bank-acquired homes in his own name, Farnood said: "It was easier" to do it that way.

U.S. officials have described the Palm Jumeirah properties as a galling symbol of the massive movement of capital out of Afghanistan by the country’s wealthy elite as well as the cronyism and corruption that plagues Karzai’s government.

A senior U.S. official in Kabul told NBC that in recent weeks, Gen. David Petraeus, commander of international forces in the country, and other U.S. officials had “forcefully” urged President Karzai to crack down on the bank.

After reviewing the bank’s activities, “we didn’t like what we saw,” said the official. In particular, the official said, U.S. officials — “and many Afghans” — were upset that the country’s assets, much of which has been derived from billions of dollars in western aid, were being taken out of the country and invested elsewhere.

The U.S. prodding apparently prompted President Karzai to direct Afghanistan’s Central Bank to move in and oust Farnood, the bank’s chairman, and Khalilullah Frozi, the bank’s chief executive officer, from their positions. The reports of the move, first reported by the Washington Post, triggered the run on deposits that has now threatened the bank.

U.S. officials, under the direction of David Cohen, assistant secretary of the treasury for counterterrorism, are closely monitoring the situation and have dispatched a team to assist officials of the Afghan Finance Ministry as they grapple with how to deal with fallout from the bank withdrawals,a Treasury Department official said Thursday. 

"U.S. officials in Kabul are in close contact with the Central Bank Governor and are monitoring the situation. The Treasury Department recently sent a Quick Response Team to offer advice to the Central Bank and we will continue to work with Afghan authorities in support of their efforts to ensure a prompt and effective response," the official said in an email.

Mahmoud Karzai said he still has hopes the situation can be stabilized. So do U.S. officials: The Kabul bank is heavily used by the U.S. Embassy and by the Afghan government to pay the salaries of Afghan police officers and soldiers who are critical to the war effort.

Karzai, who lives in one of the Palm Jumeirah properties that he leases from the bank, defended his own activities, saying his business profits — which include investments in a cement company, restaurants and a major housing complex in Kandahar that had been financed with U.S.-backed loans — were being reinvested in Afghanistan. But he acknowleged that his luxurious Palm Jumeirah home had created public relations problems. “I’m going to move,” he said.

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