Does More Aid Mean More Corruption in Afghanistan? 

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Does More Aid Mean More Corruption in Afghanistan? 

Looking ahead to the Brussels conference, and back to the Kabul Bank scandal.

Does More Aid Mean More Corruption in Afghanistan? 

Kabul Bank Chairman Sherkhan Farnood (L) and Kabul Bank CEO Khalilullah Ferozi listen during a news conference in Kabul (September 1, 2010).

Credit: REUTERS/Ahmad Masood

This week, Brussels will host a conference dedicated to Afghanistan, at which donor countries are expected to pledge more than $3 billion to Afghanistan. United Nations Secretary General Ban Ki-moon said that he would try to attract more aid for Afghanistan.

Will more money and aid address the problems in Afghanistan? Or it will pave the way for more corruption?

A report from the U.S. special inspector general for Afghanistan reconstruction (SIGAR) on September 14 strongly criticized Washington for pouring billions of dollars into Afghanistan with so little oversight that it fueled a culture of “rampant corruption” and undermined the U.S. mission.

Plagued by protracted wars for three decades, Afghanistan falls at the bottom of Transparency International’s Corruption Perception index. Afghanistan ranked 166th out of 168 countries, topping only North Korea and Somalia, in the 2015 index. Corruption is one of the most consistent themes found in Afghanistan. From the elite class to the grassroots level, corruption permeates almost all aspects of Afghan society. Endemic corruption in Afghanistan, a donor aid dependent country, has the capacity to derail the country’s future growth prospects.

Over the past decade Afghanistan has evolved into a kleptocracy, in which the government is self-organized for officials’ enrichment. Powerful elites and the mafia have blocked efforts to dismantle this kleptocracy. Meanwhile, the United States and international community have widely failed to enforce mutual accountability that will help deal with the problem of corruption.

Perhaps the most egregious example is the Kabul Bank scandal, which broke in 2011. Hundreds of millions of dollars were stolen. The scandal, “the biggest per capita fraud in history,” had severe political and economic consequences that triggered the freezing of a significant portion of international aid to Afghanistan.

The Kabul Bank Scandal

Kabul Bank was Afghanistan’s largest private bank, with member deposits totaling $1.3 billion in the summer of 2010. The bank conducted a massive fraud by creating fictitious companies and providing them with loans; hundreds of millions of dollars were loaned to about 200 fake companies. This money was then doled out to Kabul Bank’s shareholders, Afghan elites including cabinet ministers, businessmen, members of parliament, warlords, and former government officials and politicians. An investigation by an independent anti-corruption committee commissioned by the Afghan government found that the executives had stolen an amount equivalent to about one-twelfth of the country’s GDP.

The most notorious Kabul Bank investments are in Dubai, where according to the then-chief executive officer of Kabul Bank, Khalilullah Ferozi, $160 million was spent on 35 luxury villas on the Palm Jumerah. These villas were used to entertain Afghan MPs and government officials during their visits to Dubai.

After immense pressure from the international community and ten months after the Kabul Bank scandal began, the bank’s two top executives, Chairman Sherkhan Farnood and CEO Ferozi, were arrested. The scandal, though it broke before he took power, still poses a major test for President Ashraf Ghani. Ghni wants to show the international community and donors – a major source of Afghanistan’s budget – that he is committed to fighting corruption. In an interview with SIGAR, Ghani predicted that his government would “make history” by recovering the public money lost in the scandal. Ghani issued a decree setting out a 45-day deadline for the recovery of the stolen money from the Kabul Bank, which was warmly welcomed by the Afghans and international community.

But to the surprise of many, despite a presidential order and the current administration’s claims to have taken decisive action in holding the Kabul Bank perpetrators accountable, Ferozi – who was sentenced to 15 years in prison – appeared with high level governmental officials at the inauguration ceremony of a smart city township worth $900 million in November 2015.

Expectations were high that the new government would fight against corruption but after one year little has been done. The Kabul Bank clearance committee was established by a March 2015 presidential decree to look into and help resolve the case. However, in June the director and deputy director of the Kabul Bank Clearance Committee were arrested for taking a $100,000 bribe from an unnamed Kabul Bank debtor to process a settlement payment. The Afghan government has been unable to compel full repayment from Farnood and Ferozi. Integrity Watch Afghanistan, a donor-supported independent civil society organization, blamed the Afghan government for lacking the political will to support the Kabul Bank Receivership and the Attorney General’s Office in their efforts to collect the debts.

The 2012 Tokyo Mutual Accountability Framework (TMAF) outlined the basis for donor support to Afghanistan until September 2015, and specifically emphasized taking all possible steps to recover the assets stolen from Kabul Bank. However, the Afghan government has been unable to recover all of the stolen money. The United States continually stresses that it will hold the Afghan government accountable to its promises to address the ongoing corruption including taking action against those responsible in stealing $925 million from Kabul Bank. However, while some of the U.S. funding through the $800 million New Development Partnership with the Afghan government is tied to anti-corruption initiatives, none is explicitly conditioned on resolving the Kabul Bank case.

International donors have never showed much interest in pushing for genuine reforms in Afghanistan. However, initially, some actions were taken in order to put pressure on the Afghan government to resolve the Kabul Bank crisis. For instance, the United Kingdom’s Department for International Development opted to freeze $137.6 million in contributions to the Afghanistan Reconstruction Trust Fund, the main conduit for international assistance to Afghanistan. The British aid agency said that it was loathe to continue assistance to the fund as long as it remained unclear whether the International Monetary Fund (IMF) would withdraw its support for aid to Afghanistan.

The IMF concluded in its latest assessment that while progress has been made in Afghanistan on implementing macroeconomic policies and a structural-reform agenda, Afghanistan’s economy is dependent on government commitment to these reforms, improved security conditions, and continued donor support. According to IMF, earlier bank reforms are not progressing as quickly as anticipated.

Lukewarm Anti-Corruption Reforms 

Several types of anti-corruption organizations have been created within the Afghan government in order to bring reform and pursue corruption cases. These organizations, such as the High Office of Oversight (HOO), received international assistance but in many cases failed to live up to their promise. For example, USAID has reported that the HOO was dysfunctional, ineffective, and highly politicized.

The international community has established a host of accountability measures, but most have so far been weakly defined and weakly enforced. For instance, though TMAF listed fighting corruption as one of its governance indicators, the United States withheld only $15 million in 2014 when the Afghan government failed to meet the TMAF requirement to collect asset-declaration forms for senior Afghan government officials.

Likewise, the IMF was too flexible and did not put enough pressure on Afghanistan for its poor performance under the fund’s most recent Extended Credit Facility (ECF) arrangement, which provides assistance to countries with protracted balance of payment problems. The existence of an approved ECF is important to the international community because it demonstrates the Afghan government’s political will to enact necessary anti-corruption reforms. Afghanistan’s ability to adhere to the IMF benchmarks and fulfill macroeconomic requirements was supposed to have a direct effect on levels of foreign aid from the international community to the Afghanistan Reconstruction Trust Fund.

And yet, while ECF reviews were postponed and previously agreed-to benchmarks and reforms were modified, the international community did not threaten to or actually withhold significant amounts of funding. The ECF just ended quietly, without the world showing any major concerns about the Afghan government’s lukewarm approach to reforms. A nine-month IMF informal Staff Monitoring Program (with no direct funding incentives) concluded in December 2015, with mixed results. It is unclear what the IMF, World Bank, or the international community intends to do next.

The Kabul Bank crisis has highlighted a critical need to strengthen governance, rule of law, and robust reforms in Afghanistan. Enforcing rule of law and governance are necessary preconditions for economic stability and donor engagement. Inadequate supervision by the Financial Supervision Department of the Central Bank and huge-scale corruption, coupled with the lack of adequate accounting expertise, a failure to follow international principles, and regulatory violations were the major reasons for Kabul Bank’s collapse. The current administration should establish oversight mechanisms in light of the existing banking laws in order to have tight control.

There may be renewed hope for a resolution to the case, however. Recently, Ghani requested SIGAR’s help with his government’s efforts to repatriate the funds stolen from Kabul Bank by way of fraudulent loans, especially funds that have been moved to the United States. He has asked SIGAR to become part of a new task force, which will be made up of the Ministry of Finance, the Attorney General’s office, and the Kabul Bank Asset Recovery Commission. According to SIGAR, under the planned arrangement the U.S. watchdog will have full access to the relevant banking and financial records.

Afghanistan still lacks many effective tools used in other countries in order to combat corruption, including monitoring and supervision of adherence to the law and regulations, protection of whistle-blowers and anti-bribery rules. The government of Afghanistan needs to identify missing policies and take steps to establish them. For instance, whistle-blowers can be strong tool to identify corruption, but Afghanistan still doesn’t have a law to protect them. Similarly, the anti-money laundering law and anti-terrorism law need to be properly implemented to prevent illegal financial activities, including those that fund militant groups.

Donors can help by laying down smart conditions for assistance. Donor conditions can enable Afghan reformers to push through changes they might not otherwise have been able to implement due to resistance by corrupt political elites. For instance, the United States, through a bilaterally negotiated agreement with the current Afghan administration, conditioned $20 million of aid on a requirement that government officials declare their assets. This condition was satisfied in time for the December 2015 deadline. Similarly, international donors made increased revenue collection a key target for the Afghan government. This condition was fulfilled through increasing revenue collection in 2015. If the international community continues to set high standards for Afghanistan, the fight against corruption will receive a welcome boost.

Ahmad Shah Katawazai is a Political Officer at the Embassy of Afghanistan in Washington D.C. Prior to that, he held positions in the Ministry of Foreign Affairs of Afghanistan, the United Nations Security Council Resolution (UNSCR) 1325 Technical Committee, and the OSCE Secretariat. The views expressed in this piece are his own.