This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2013/03/06/world/asia/afghanistan-convicts-21-in-kabul-bank-scandal.html

The article has changed 3 times. There is an RSS feed of changes available.

Version 1 Version 2
Afghan Court Convicts 21 in Kabul Bank Scandal Trail of Fraud and Vengeance Leads to Kabul Bank Convictions
(about 13 hours later)
KABUL, Afghanistan — An Afghan court on Tuesday delivered the first convictions in connection with the near collapse of Kabul Bank, a scandal that has become a byword for Afghanistan’s rampant corruption. The bank’s founder and its former chief executive were found guilty of charges similar to fraud, sentenced to five years in prison and fined hundreds of millions of dollars. KABUL, Afghanistan — If Kabul Bank’s founder, Sherkhan Farnood, had not decided on a summer day three years ago that revenge was worth self-incrimination, he might never have seen the inside of a courtroom.
In total, 21 defendants were found guilty on Tuesday of crimes for their roles in the failure of the bank, which investigators have described as little more than a Ponzi scheme. But the halting and often obstructed investigation he helped fuel that day culminated on Tuesday with the first convictions in the Kabul Bank fraud scandal, a spectacular implosion of corruption that has undermined the credibility of the Afghan government and its Western benefactors.
Its main function was to funnel depositors’ money to its own shareholders and their cronies, and its owners masked their theft for years by creating fictitious companies, phony books and even smuggling cash out of the country in the food trays of a commercial airliner they owned. Mr. Farnood was one of 21 people found guilty on Tuesday. But it was specifically his conviction and that of his chief executive and former bodyguard, Khalilullah Frozi, that American and European officials had warned would be necessary if billions of dollars of international aid was to continue to flow to Afghanistan. The two masterminds were convicted of a crime akin to fraud, sentenced to five years in prison and fined hundreds of millions of dollars, considerably lesser results than prosecutors had sought.
The convictions were once unthinkable for many in Afghanistan, where political connections often equal legal impunity. Sherkhan Farnood, the founder, and Khalilullah Frozi, the former chief executive, had financial and personal ties to President Hamid Karzai and other senior officials. The path to those verdicts had been laid out in dozens of interviews since Kabul Bank nearly collapsed in 2010, with the main players offering details of the fraud scheme and their decision-making, including Mr. Farnood, shareholders and Afghan, American and European officials.
The prosecution began only after Western countries made clear that billions in aid dollars hinged on legal action. American and European officials have in recent months lauded the government’s decision to prosecute. But Tuesday’s convictions did little to ease doubts about the Afghan government’s willingness to fight corruption that pervades the Karzai administration and is seen as fueling the Taliban insurgency. In the summer of 2010, Mr. Farnood stood atop a huge pyramid of fraudulent loans and kickbacks. But things were beginning to crumble, threatened by a perilously overstretched balance sheet and a power struggle for control of the bank among Mr. Farnood, Mr. Frozi and two other major shareholders.
The crime for which Mr. Farnood and Mr. Frozi were convicted — breach of trust for effectively defrauding someone — is far less serious than the charges of money laundering, embezzlement and forgery that prosecutors had originally brought and that carried sentences of up to 20 years. Mr. Farnood was losing.
Their fines were based on what the court decided they had stolen — $278 million for Mr. Farnood and $530 million for Mr. Frozi. The enmity had become so great that Mr. Farnood was telling friends that he would rather bring down the bank than let his rivals have it.
But the penalties did not include confiscation orders and there appeared to be no legal mechanism to require payment. Nor was it immediately clear if the men would spend any time in prison. Both have been living under a fairly loose form of house arrest, sometimes lunching in expensive restaurants and in Mr. Farnood’s case occasionally hosting high-stakes poker games. That arrangement is expected to continue and both men have already served nearly half their sentences if house arrest is counted, a matter the court left unclear. In July, he got his chance when two American law enforcement agents investigating the mysterious flight of billions of dollars in cash from Afghanistan walked through the doors of his office in Dubai. Kabul Bank appeared to play only a tangential role in the cash smuggling. But the investigators had heard about the power struggle at the bank. They had a hunch that Mr. Farnood might talk.
Aside from questions about the convictions and penalties, the choice of whom to try has also troubled American and European officials. Of particular concern is Mahmood Karzai, a brother of the president, who has yet to be charged with any crimes. He was given large loans, one of which he used to buy 7 percent of the bank, and none of which he was expected to pay back. Some Afghan and Western investigators say he still owes tens of millions of dollars, though he says he has repaid all his debts. He did more. Mr. Farnood, who had once won an event at the World Series of Poker Europe, went all in.
According to Afghan and Western investigators, the regulators were actively deceived by the bank’s owners, who kept double books and engaged in other ploys to cover up their deceit. The owners even created fictitious companies, including fake letterheads and rubber stamps to leave a paper trail that would appear legitimate. The Karzai administration also stymied the regulators’ work, the investigators said before Tuesday’s verdicts. They had characterized the prosecutions as an effort to seek retribution. Within days, he was telling the Americans how the bank was basically a Ponzi scheme. Depositors put in money, and its owners took it out through fraudulent loans, lining the pockets of a narrow clique tied to President Hamid Karzai and his first vice president, Muhammad Qasim Fahim.
The other defendants convicted on Tuesday were largely bank employees who had benefited little from the illegal activities. Their sentences ranged from six month to two and a half years in prison. He told them how Mahmood Karzai, the president’s brother, had bought a 7 percent stake in Kabul Bank with a loan from the bank. He told them how Haseen Fahim, the first vice president’s brother, had taken millions of dollars deposited by Afghans to finance his own businesses, at least one of which won business from the American-led coalition. He told them about how millions in deposits had been used to finance President Karzai’s re-election campaign the year before.
Once celebrated by American and Afghan officials as a cornerstone of the Western project to rebuild Afghanistan, Kabul Bank was taken over by regulators in August 2010 after becoming perilously insolvent. At the time, 92 percent of its loan portfolio — $861 million, or about 5 percent of Afghanistan’s annual economic output at the time — had gone to 19 people or companies, according to a forensic audit by Kroll Associates, an international investigative firm. He even told the investigators about the luxury villas he had bought in Dubai in his own name. How did he and his partners cover up a nearly $900 million fraud for so many years? Very simply, he explained: among their more creative ploys was to create fake letterheads and rubber stamps needed to make legitimate-looking paper trails for fictitious companies that were used to siphon money from the bank.
All were part of a clique that was tied to Mr. Karzai’s government. Bailing out the bank cost the financially struggling Afghan government roughly $825 million, a sum that at that time represented most of the government’s annual revenues. Estimates of how much has been recovered from those who received loans vary from $200 million to $400 million, Afghan and Western officials have said. “I knew that this could be potentially huge,” said one American official familiar with the investigation, “when we found out there had been almost no capital ever invested in the bank.” The capital infusions in the bank’s records were financed with its own loans.
Yet few of the people who received millions of dollars in loans have been charged with any crimes, although they took the money with no expectation of repaying it — an act that investigators have said could make them liable to conspiracy charges. By midsummer in 2010, the Americans had warned the Afghan central bank about fraud at Kabul Bank. Regulators seized it that August.
Among that group are Haseen Fahim, the brother of First Vice President Muhammad Qasim Fahim. Kroll had recommend that he and Mahmood Karzai, the president’s brother, be prosecuted. Its audit said they each still owe at least $5 million. Both men have previously denied any wrongdoing. But the biggest recipients of the bank’s largess were Mr. Farnood, the founder, and Mr. Frozi, the chief executive. By then, 92 percent of Kabul Bank’s loan portfolio — roughly $861 million, or about 5 percent of Afghanistan’s annual economic output at the time — had gone to 19 people or companies, according to an audit by Kroll Associates, an investigative firm.
Both were remanded to the custody of The National Directorate of Security, Afghanistan’s intelligence agency, which has supervised their house arrest. The ensuing government bailout cost about $825 million. While the United States and European countries have insisted that they did not directly finance the bailout, their aid money filled the holes the rescue had opened in the Afghan government budget.
They can appeal their convictions and Mr. Farnood’s lawyer said on Tuesday that his client would do so. “My client did not do anything illegal. This was not a fair trial, it was a political trial, and many high-ranking people abused their positions to the detriment of my client,” said SebGhutullah Tamil, the lawyer. Neither Mr. Frozi nor his lawyer could be immediately reached for comment. Yet even after the convictions on Tuesday, doubts lingered about the Afghan government’s commitment to fighting corruption.

Habib Zahori and Sangar Rahimi contributed reporting.

Exhibit A was the relatively light sentences for Mr. Farnood and Mr. Frozi. The fines did not come with confiscation orders, and it was unclear if there was any way to force payment.
Nor was it clear if the men would spend any time in prison. Both have been living under a loose form of house arrest, sometimes lunching at Kabul restaurants and, in Mr. Farnood’s case, occasionally hosting high-stakes poker games. There was no word whether that setup would change.
American and European officials, along with Afghan observers, have expressed concern that neither Mahmood Karzai nor Haseen Fahim have been charged with any crimes.
Equally worrying, they say, was that a handful of regulators who had tried to repair the damage at Kabul Bank were convicted on Tuesday of crimes similar to negligence. One was fined, and the others were sentenced to between 6 and 30 months in prison. Their inclusion on the docket was seen as punishment from President Karzai’s inner circle, which had completed the prosecution list, Afghan officials said.
The other defendants convicted on Tuesday were largely bank employees who benefited little from the theft. They all received prison sentences ranging from 6 to 30 months.
As for Mr. Farnood, who refused to comment after the verdicts, only he can say whether talking to the Americans turned out to be a good wager.
People familiar with his thinking have said he calculated the odds this way: connections often equal impunity in Afghanistan, and he figured he could keep his riches and his freedom while keeping the bank out of the hands of Mr. Frozi.
In the weeks after the bank was seized by regulators, it looked like a good bet. He and Mr. Frozi were called into Mr. Karzai’s office about two weeks after the collapse and were told that they would not be prosecuted if they returned the money they had stolen, Mr. Farnood said in an interview.
Mr. Farnood did try to help track down some of the stolen money, Afghan and American investigators have said. In fact, his information has led to most of the recoveries so far, which are estimated to total between $200 million and $400 million.
In the estimation of Afghan and American investigators, Mr. Farnood’s theft, like his ploy with the American investigators, was the act of a gambler.
“He was doing what he had always done — he was trying to make money into more money,” said the American official familiar with the investigation. Mr. Sherkhan, he added, “saw an angle — flipping villas in Dubai, or turning one thing into another — and everyone would be richer.”

Azam Ahmed, Habib Zahori and Sangar Rahimi contributed reporting.