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Built to Fail: The Kabul Bank Scandal and Systemic Corruption in Afghanistan
Noah Zoroya : October 19, 2022
Special Edition with Guest Student Authors from the Schar School of Policy and Government at George Mason University (https://traccc.gmu.edu/)
I have been honored to be an Adjunct Professor at GMU’s TraCCC ( The Terrorism, Transnational Crime and Corruption Center)for several years. Many AML/Sanctions experts have joined me as guest lecturers as we work with graduate students either in or contemplating a career in our community. This past summer, in my International Money Laundering, Corruption and Terrorism class the challenge was to educate and stay current with the plethora of changes occurring in the US and internationally.
The students were required to submit a final paper on a topic related to the vast areas covered in class and I have selected three papers that I know will be of interest to many.
Chair, AML RightSource Advisory Board
The Taliban seized control of Afghanistan on August 15, 2021. The United States’ 20-year nation building campaign came to an ignominious end as the last remnants of the US-supported Afghan government dissipated. Over the course of its longest-running war, the United States lost 2,448 troops and spent over $1 trillion to develop the Afghan state. Despite its significant commitment, US strategy under four presidents – two Republicans and two Democrats – failed to address endemic government corruption that undermined the US nation building strategy. Afghan politicians, officers, and businessmen funneled billions out of the country. Corruption stunted Afghanistan’s economic development, undermined public trust – a critical consideration in a counterinsurgency war over ‘hearts and minds’ – and empowered the Taliban insurgency.
This paper examines one of the most egregious instances of corruption: the Kabul Bank scandal, in which Afghan banker Sherkhan Farnood, and his money laundering empire embezzled nearly $1 billion from the Afghan people. Although the US war in Afghanistan is over, policymakers can utilize lessons learned from Kabul Bank to hone US anti-money laundering controls and improve US strategy when the next nation-building project invariably emerges. This paper’s analysis of the Kabul Bank scandal consists of three parts: First, a review of the West’s policy missteps that laid the groundwork for the Afghan kleptocracy; second, a brief look at the Kabul Bank’s collapse, which demonstrates the depth of corruption in Afghanistan; and third, an evaluation of policymakers’ failure to hold bad actors accountable and restore public trust after the damage was done.
The Beginning: Creating a Culture of Corruption
The lightning-fast US invasion of Afghanistan toppled the Taliban regime in a matter of months. The West was eager to construct a stable, Western-facing democracy to deny Al-Qaeda and other transnational terrorist groups safe haven from which to plan attacks. At the Bonn Conference in December 2001, Western powers agreed to a multilateral nation-building approach. The United States and its allies committed three crucial errors that opened the door to corruption in the fledgling Afghan state: Empowering nefarious actors to populate the Afghan government, surging resources that saturated the Afghan state with little oversight, and prioritizing counterterrorism at the expense of quality nation building. These policy pitfalls often mixed to produce dysfunctional strategy. This paper considers each in turn.
Despite its promises at Bonn, the Bush administration’s main objective in Afghanistan was to destroy al-Qaeda. The US military strategy aimed to maintain a light military footprint. To augment its forces in the opening weeks of the invasion, the United States aligned with strongmen across Afghanistan to support its campaign against the Taliban.  This “warlord strategy” was a critical policy mistake common among intervening powers; officials tend to misread a complex socio-political situation. In their effort to achieve a lofty, abstract end – like winning a war on terror – policymakers sort the target population’s citizens into two categories: the ‘bad guys’ and the ‘good guys.’
In “Corruption, Protest, and Militancy,“ Sarah Chayes, Alex De Waal, and Mary Kaldoor, capture the consequences of the ill-fated good guy-bad guy dynamic so common during counterinsurgency and antiterror operations: “we (the West) tend to demonize certain individuals and place them beyond the pale, and – whatever the justification for condemning these people – we overlook the reality that our friends who are fighting against these demons are no less responsible for grievous abuses.” The United States empowered its Afghan ‘good guys.’ These warlords – most of whom had a well-documented history of human rights violations and criminal activity – received substantive government appointments in the newly minted Afghan state for their service against the Taliban.
Once in government, they leveraged their positions to achieve greater influence and buy more power. The problem grew worse in the years following the 2001 Bonn Conference. The 2005 Afghan parliament included: “40 commanders still associated with armed groups, 24 members who belong to criminal gangs, 17 drug traffickers, and 19 members who face serious allegations of war crimes and human rights violations.” A US Department of State (DOS) cable from the same year noted that “there is a general consensus that Afghan corruption has swelled to unprecedented levels since Zahir Shah’s overthrow in 1973 – and especially after the Taliban regime’s rollback in 2001.” US policymakers’ decision to align with Afghanistan’s warlords cemented a culture of corruption in the Afghan system.
The Obama administration shifted the US strategy in Afghanistan, bringing more resources to bear. It surged troops and invested billions hoping to facilitate the transfer of security from Western forces to the Afghan military and hasten the US exit. Obama wanted to accelerate the process. Rather, one major consequence arose: the incentive among Afghan officials to engage in corrupt behavior exploded as Western financial aid poured in.
According to the Special Inspector General for Afghanistan Reconstruction (SIGAR) – a Department of Defense (DOD) oversight committee charged with investigating waste, fraud, and abuse during the war in Afghanistan – until roughly 2011, the basic US strategy assumed that corruption was mostly isolated; however, US officials failed to understand that Afghan corruption was not a series of one-off incidents. The torrent of US aid was changing the framework for rational decision making in Afghanistan. In its effort to speed Afghanistan’s development, US officials exercised limited oversight of international funds. Furthermore, given the political pressure from Congress and the President to get the job done fast, practitioners had little interest in tracking waste and fraud.
According to one US official interviewed by SIGAR: “when you push large amounts of money through and there’s no way to pull it back, it creates an incentive for corruption.” Many Afghans understood that the United States would eventually lose interest and depart with its seemingly unlimited resources. Aid would turn from a flood to a trickle and then stop altogether. Some Afghans succumbed to a “short-term maximization of gains mentality.” Stealing became commonplace. The West poured more money than Afghanistan had the capacity to absorb. According to Ryan Crocker, former US ambassador to Afghanistan, “You just cannot put those amounts of money into a very fragile state and society, and not have it fuel corruption . . . You just can’t.” For so many Afghans who lived in a country that ranks 177th in GDP per capita, the choice was clear.
The United States and its allies could have invested greater political capital to force reform. US agencies occasionally offered “conditional” aid, which Afghan officials could only receive if they met certain criteria to improve governance. However, the United States only achieved superficial gains, such as improved record keeping and clearer procedures. US officials lacked the resolve to hold corrupt Afghan officials accountable – and these bad actors knew it. Corrupt Afghans understood to call the US’ bluff. The short-term survival of the regime always took precedence over anticorruption policy. One anonymous US official noted: “The US government ultimately would not withhold critical assistance that Kabul desperately needed to ensure its survival. Conditions were announced, but not enforced.” The Warlord Strategy ignited the kindling, but the torrent of US aid fanned the flames.
The US strategic focus on counterterrorism further exacerbated the problem. US officials showed little interest in conducting the slow, iterative work of building good governance. US agencies were wholly focused on capturing or killing high-level al-Qaeda. The Central Intelligence Agency, US military intelligence, and even DOS relied on cash and lucrative contracts to retain the allegiance of warlords, drug traffickers, and defense contractors. One anonymous DOS official noted that the US government was “so desperate to have the alcoholics to the table, we kept pouring drinks, not knowing or considering we were killing them.” In “Corruption and Self-Dealing in Afghanistan and Other US-Backed Security Sectors,” Jodi Vittori argues that the West’s willingness to promote antiterrorism at the expense of good governance and sustainable state building should be “consigned to the dustbin of history.” Vittori continues to say: “building strong, accountable security institutions cannot be an afterthought; it must be part of the main effort (for all humanitarian or military intervention).” Divergent US strategies in Afghanistan – one counterinsurgency, one antiterrorism – confused good policy implementation. This issue is unfortunately all too common across the developing world.
France committed the very same policy misstep in West Africa. After supporting the Malian government – a former colony – in its fight against Islamic extremism since 2014, the Malian dictator Colonel Assimi Goïta demanded the French military withdraw in February 2022. France invested in military development without incentivizing good governance; its influence is now greatly reduced. To be sure, patron powers face limits. They cannot force local officials to root out corruption, nor fully anticipate volatile leadership and changing military situations. However, conditioning aid – and demonstrating the political will to follow through – will contribute to a stronger political foundation. The key is demonstrating the will to invest the time necessary to build good governance. Before launching an incursion that seriously disrupts the local political ecosystem, Western policymakers should ask themselves if they foresee their nation remaining in country one, two, or three decades in the future. If not, perhaps it is best to reconsider intervention.
Kabul Bank Scandal
Afghanistan was destroyed after the US invasion. Only six Afghan banks existed, all located in Kabul. The country had virtually no history of legitimate banking. Afghans relied heavily on hawalas – off-record money transfer services – to conduct financial transactions. In 2001, 5,000 hawalas existed in Kabul alone. Western donors were eager to develop Afghanistan’s banking sector to create infrastructure that might yield more foreign direct investment. Da Afghanistan Bank (DAB), which was little more than a converted Taliban currency printing press, became Afghanistan’s central bank in 2004. By 2005, DAB was offering licenses to legitimize banks, which came with full access to the global financial system including the Society for Worldwide Interbank Financial Communication (SWIFT) system.
Afghan entrepreneur Sherkhan Farnood saw his chance and licensed Kabul Bank – the first Commercial bank started in the post-Taliban era. Farnood, however, had a history of criminal activity. He started his first hawala out of his college dorm room in 1985. After launching Kabul Bank, Farnood leveraged his earnings to purchase Pamir Airlines and founded the Shaheen money exchange in Dubai. Farnood’s scheme worked like clockwork: he embezzled money from regular Afghan citizens with accounts at Kabul Bank, transferred cash via wire or couriers – often traveling on Pamir airlines to Dubai – and laundered funds through the Shaheen exchange or Dubai real estate. Additionally, Farnood lent hundreds of millions to fictitious companies; not one loan was repaid. Farnood kicked back millions to his politically connected shareholders and Afghan elites to provide legal cover. Remarkably, Farnood brought his own Ponzi Scheme to the attention of authorities in 2010 to exact revenge against Khalilullah Ferozi – Farnood’s second in command – who conspired to oust Farnood. The news provoked panic among Afghan civilians who made a run on the bank, withdrawing $180 million in just a few days. One million Afghans had accounts at Kabul Bank, including thousands of civil servants, soldiers, and police.
The web of Afghans connected to the conflict ran deep. Culpable parties included vice presidents, ministers, provincial governors, senior bank regulators, and numerous other Afghan elites. Even Mahmoud Karzai, Afghan President Hamid Karzai’s brother, was a shareholder who lent significant support to Ferozi in his quest to oust Farnood. The Afghan government offered an $825 million lender-of-last-resort bank loan to stop the bleeding. The Kabul Bank scandal was a product of its environment. It arose from a political landscape conducive to corruption. The Afghanistan kleptocracy abetted bad actors, lacked government regulatory oversight, and suffered under a flood of unregulated US aid. Mistakes, unfortunately, continued to mount as the government failed to hold guilty actors accountable.
The Aftermath and Lessons Learned
The policymakers were either unwilling or unable to exact justice. President Hamid Karzai was suspiciously close to the scandal. In addition to his brother’s involvement, Karzai’s 2010 reelection campaign received hundreds of thousands from Kabul Bank. The scandal touched so many elites that prosecuting all involved would mean dismantling major pillars of support for the government itself. When the Financial Transactions and Report Analysis Center of Afghanistan (FINTRACA) – a financial enforcement group – wanted to pursue Farnood’s Dubai assets, but Karzai intervened. US policymakers failed to act decisively. Obama officials wanted to push Karzai to act against corruption, but they feared alienating him during an important point in US negotiations with the Taliban. Under Karzai, Farnood and Ferozi were sentenced to just five years in prison while lower-level bank employees received disproportionately long sentences.
Certainly, policymakers committed the gravest errors at the start of Afghanistan’s nation building project. As the war progressed the United States made important strategic changes. It took steps to improve civil society, establish a free and open media, exercise financial oversight, and establish guidelines to more thoroughly vet contractors. Tragically, however, the damage was already done. Today, as the United States promotes anticorruption foreign policy across the developing world, US policymakers can move to curtail illicit activity in Free Trade Zones like Dubai, which suffer from limited regulation and rampant opportunity for money laundering. Of course, such development takes years and is never full proof – the United States is consistently the number one money laundering financial system on this planet.
US efforts to improve governance in Afghanistan were too little, too late. The consequences of corruption were clearest in the final few years of the war. Afghan army promotions went to the most politically connected officers, military contracts were filled only if kickbacks were given, wounded soldiers sometimes needed to bribe medical personnel to receive treatment, and officials skimmed from pension funds for widows who had lost loved ones in battle. Integrity-driven forces were isolated, unsupplied, and demoralized. The writing was on the wall.
Rushing to support emerging governments without developing government capacity is a recipe for disaster. US policymakers must understand the effort, patience, resources, troops, and diligence required to improve governance – then put forth the effort over the long term.
 For more information about the 2001 Bonn conference, please see the Stockholm International Peace Research Institute, DOA: July 25, 2022, https://www.sipri.org/commentary/topical-backgrounder/2021/multilateral-peace-operations-afghanistan-between-2001-and-2002.
 “Corruption in Conflict,” Special Inspector General for Afghanistan Reconstruction (SIGAR), September 2016, 16. https://www.sigar.mil/pdf/lessonslearned/sigar-16-58-ll.pdf.
 Sarah Chayes, Alex De Waal and Mary Kaldor, “Corruption, Protest, and Militancy,” Carnegie Endowment for International Peace, June 25, 2015, https://carnegieendowment.org/2015/06/25/corruption-protest-and-militancy/”dddddddif6y.
 SIGAR, “Corruption,” 18.
 Ibid, 6.
 “What We Need to Learn: Lessons from 20 Years of Afghanistan Reconstruction,” SIGAR, August 2021, 27. https://www.sigar.mil/pdf/lessonslearned/SIGAR-21-46-LL.pdf.
 Ibid, 29.
 Ibid, 36.
 SIGAR, “Corruption,” 52.
 Christina Wilkie, “9/11 Millionaires,” CNBC News, November 5, 2021, https://www.cnbc.com/2021/09/10/9/11-millionaires-and-corruption-how-us-money-helped-break-afghanistan.html.
 The World Staff, “US Spending in Afghanistan Fueled Rampant Corruption, Report Says,” The World, December 11, 2019, https://theworld.org/stories/2019-12-11/us-spending-afghanistan-fueled-rampant-corruption-reports-says.
 SIGAR, “What We Need to Learn,” 41.
 The World, “US Spending in Afghanistan.”
 Craig Whitlock, “Consumed by Corruption,” The Washington Post, December 9, 2019, https://www.washingtonpost.com/graphics/2019/investigations/afghanistan-papers/afghanistan-war-corruption-government/?tid=bottom_nav.
 Jodi Vittori, “Corruption and Self-Dealing in Afghanistan and other US-Backed Security Forces.” The Carnegie Endowment, September 9, 2021, https://carnegieendowment.org/2021/09/09/corruption-and-self-dealing-in-afghanistan-and-other-u.s.-backed-security-sectors-pub-85303.
 France 24 Staff, Mali’s Ruling Junta Asks France to Withdraw Troops ‘Without Delay,’” France 24, February 18, 2022, https://www.france24.com/en/africa/20220218-mali-asks-france-to-withdraw-troops-without-delay.
 Jelena Pavolic and Joshua Charap, “Development of the Commercial Banking System in Afghanistan,” International Monetary Fund, July 2009, 8, https://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdf.
 Brian George, “Lessons Learned from the Kabul Bank Scandal,” Carnegie Endowment for International Peace, 2020, 86, https://carnegieendowment.org/files/PageVittori_DubaiCorruption_final.pdf.
 Grant McLeod, “Responding to Corruption and the Kabul Bank Collapse,” US Institute for International Peace, December 27, 2016, 3, https://www.usip.org/publications/2016/12/responding-corruption-and-kabul-bank-collapse.
 George, “Lessons Learned from Kabul Bank,” 89.
 McLeod, “Kabul Bank Collapse,” 90.
 SIGAR, “Corruption,” 43.
 George, “Lessons Learned,” 90.
 SIGAR, “Corruption,” 11.
 McLeod, “Kabul Bank Collapse,” 6.
 Ibid, 5.
 Mcleod, “Kabul Bank Collapse,” 8.
 SIGAR, “Lessons Learned,” 10.
 Mcleod, Kabul Bank Collapse,” 5.
 SIGAR, “Lessons Learned,” 49.
 Vittori, “Corruption and Self-Dealing in Afghanistan.”