By Joshua Partlow and Andrew Higgins
Washington Post Staff Writers
Tuesday, August 31, 2010

KABUL - Afghanistan's Central Bank has taken control of Kabul Bank, a politically potent financial institution partly owned by President Hamid Karzai's brother, and ordered its chairman to hand over $160 million worth of luxury villas and other property purchased in Dubai for well-connected insiders, according to Afghan bankers and officials.

The Central Bank's intervention aims to shore up Afghanistan's largest private bank, whose faltering finances threatened to wreak both economic and political havoc. Kabul Bank handles salary payments for Afghan soldiers, police and teachers, and has taken in more than $1 billion in deposits from ordinary Afghans.

U.S. officials have long worried that trouble at Kabul Bank could trigger financial mayhem, a prospect that would leave Afghan security forces without pay, threaten unrest by angry - and often armed - depositors, and gravely undermine President Obama's entire Afghan strategy.

The decision to move on Kabul Bank was made by Karzai after evidence was presented to him about the bank's illicit dealings by the Central Bank governor, Abdul Qadir Fitrat, at a meeting about a month ago. Top U.S. commander Gen. David Petraeus was present for the meeting, according to Kabul Bank insiders, who spoke on condition of anonymity and said that Petraeus urged Karzai to take action.

Some Afghan businessmen said they considered Karzai's decision to confront Kabul Bank as his first significant move in the fight against corruption in Afghanistan.

(Read about the millions of dollars leaving Afghanistan by plane for Dubai)

In an effort to head off a possibly catastrophic financial meltdown, the Central Bank summoned Kabul Bank's top management, including chairman Sherkhan Farnood and chief executive Khalilullah Fruzi, to its Kabul offices on Monday and ordered them to resign. In place of Fruzi, a former gem trader, authorities installed a Central Bank official, Masood Ghazi, to take charge of Kabul Bank's day-to-day operations and to untangle a large portfolio of hidden, off-the-books loans, said people familiar with the discussions.

(Read about how Farnood once said, "What I'm doing is not proper... but this is Afghanistan.")

The bank had previously been shielded by the political clout of its shareholders, who include Mahmoud Karzai, the president's brother, and Haseen Fahim, the brother of Vice President Mohammad Qasim Fahim, who is hospitalized for heart surgery in Germany, according to sources close to the situation. Kabul Bank also contributed to President Karzai's fraud-tainted reelection campaign last year.

The Central Bank has not taken ownership of Kabul Bank, which has scores of branches across the country, only taken over its management. The new acting chief executive is expected to be in place for three months until the Central Bank can recruit independent management.

Murky transactions by Kabul Bank, first detailed by The Washington Post this year, include large property purchases in Dubai with bank money. The properties include 16 multimillion-dollar villas on Palm Jumeirah, a luxury development in the Persian Gulf, and two towers still under construction. All were registered in the name of the bank's chairman, Farnood, a world-class poker player, and that of his wife.

Farnood stepped down as chairman Monday at the Central Bank's request and agreed to transfer the titles to the Dubai properties to Kabul Bank. Several of the Palm Jumeirah waterfront villas, each with a swimming pool, are occupied by prominent Afghans including Mahmood Karzai, and the family of former vice president Ahmad Zia Massoud.

Mahmood Karzai, who used to run an Afghan restaurant in Maryland and holds around 7 percent of Kabul Bank's shares, said he will vacate the Dubai villa purchased with bank money. It is unclear what others plan to do.

Of the takeover, Karzai said: "This is a very good thing. We can now work according to regulations of the Central Bank."

The Central Bank has sought to keep secret its plans for Kabul Bank, fearing that public speculation about the bank's solvency could spark a run on the bank, which has branches across the country. "We don't want to make a panic in the market so we are handling it very carefully," said one Central Bank official who spoke on condition of anonymity.

The precise state of Kabul Bank's finances will not be clear until authorities complete a full review of its books, and the bank's future will depend in part on the Dubai property market, where the price of real estate purchased with cash from the bank has slumped and created big losses, at least on paper.

Another major source of concern, said bankers and officials, is a hidden web of large loans, mostly to Kabul Bank's own shareholders. Afghan regulators failed to uncover the insider loans, which likely exceeded legal limits, despite assistance from the U.S. Treasury Department, which has advisers in the Central Bank.

Kabul Bank's biggest creditor, said bank insiders, is Haseen Fahim, a minority shareholder, who borrowed at least $92 million to fund various business ventures, which in turn won contracts at U.S. bases and sites in Afghanistan operated by the Central Intelligence Agency. One bank insider said Fahim took out $178 million in loans.

Fahim, who has a huge house on Dubai's Palm Jumeirah, recently paid back $26.5 million. His loans were handled by Fruzi, the ousted chief executive, who got his start in business buying Afghan precious stones while living in Poland in the 1990s.

Fahim, who is currently in Germany with his ailing brother, the vice president, said in a telephone interview that he took loans totaling $92 million from Kabul Bank to finance an oil venture, Afghan Gas Group, as well as logistics and transport companies, and a cement plant. He said he owes Kabul Bank, with interest, $22 million, and that he has assets including land and a gold market in Kabul worth about twice that.

"If the Central Bank says I want these [Kabul Bank loans] to be returned then I will comply with that," he said.

Fahim described the government takeover of Kabul Bank as hasty and said the government should have allowed shareholders time to return the overseas money. His home in Dubai, he said, is registered in his name and was bought with personal funds.

"Naturally, this will affect the market," Fahim said. "The bank should have had an opportunity to address the concerns of the Central Bank."

Kabul Bank was once hailed as a banking pioneer in Afghanistan, where it introduced ATMs, produced glossy brochures and drummed up business by holding prize-drawings for depositors. But it then expanded into the airline business, took in politically connected figures as shareholders and became a symbol of the cowboy crony capitalism that has helped disfigure the country after the U.S.-led rout of the Taliban in late 2001.

Kabul Bank's two biggest shareholders are Farnood, the ex-chairman, and Fruzi, the former chief executive. The two men, both Russian speakers who spent years in Russia and the former Soviet bloc, have in recent weeks been locked in a tumultuous struggle for control of the bank.

One bank shareholder said they fell out after Farnood uncovered loans far in excess of what the official balance sheet showed. Usually based in Dubai, he flew to Kabul to confront Fruzi, whose brother controls the bank's heavily armed security force. But a second shareholder said that the dispute began when Farnood returned to Kabul claiming that the losses in the Dubai property market were the bank's responsibility, not his own.

This second shareholder alleged that Farnood handed over his information about the bank, detailing the involvement of Mahmood Karzai and others, to American investigators in Kabul, information that helped build the case that was later presented to Karzai. Others said Farnood just threatened to give evidence to the Americans, but didn't. Farnood, said a person familiar with the clash at Kabul Bank, threatened other shareholders that "America is behind me" and would provide him bodyguards.

"As both sides were going at each other, and then going to external entities, that made the president nervous, that made American investigators nervous, and that made the Central Bank nervous," this person said. "And that led to this decision."

Afghan bankers said the Central Bank's intervention is a risky move that should help recover assets but could also unsettle the country's already fragile financial sector. "It would be very difficult to manage a Kabul Bank collapse," said one prominent banker in Kabul. "It will be a disaster for the country."

A senior Afghan official, however, said that the Central Bank's intervention lanced the growing boil at Kabul Bank.

"We are fully assured that it will run smoothly and we'll recover some of the damages," the official said. "There is nothing to worry about."

Higgins reported from Dubai.

partlowj@washpost.com higginsandrew@washpost.com

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