This statement updates Directors on the status of the two remaining prior actions: (1) a strategy to enforce Afghan laws in relation to crimes committed at Kabul Bank; and (2) finalizing legally binding agreements with Kabul Bank shareholders. The first prior action has been completed, but the second is partially completed. Staff believes that the partial completion of the second prior action is regrettable, but considers that progress is sufficient to allow the Fund to move forward with a program. Staff will continue to monitor closely the status of asset recovery, and this would be a focus of the first review under the proposed program. These developments do affect the staff assessment.
Strategy to enforce Afghan laws in relation to any financial crimes committed at Kabul Bank—completed on November 3, 2011.
1. The Attorney General made a statement “On Progress in Prosecution of Economic Crimes in Afghanistan and Development of [an] Economic Crimes Strategy” on October 19, 2011. It was published on the internet at http://ago.gov.af/en/page/4811 on November 3, 2011.
2. The statement elaborates the government’s two overarching objectives of punishing any violation of Afghan laws and maximizing asset recovery, and explains how these two considerations are being balanced. For example, the two main shareholders have been taken into custody, but are being periodically released under close supervision to facilitate asset recovery. The authorities have stated their intent to enforce Afghan laws regarding any criminal wrongdoing, and are in the process of completing their investigations and preparing the legal cases. In the coming year, the government also intends to review the systemic failures that led to the Kabul Bank collapse, develop a comprehensive strategy to improve institutional structures, and build capacity to prevent and promptly respond to economic crimes.
Finalize legally binding agreements with cooperating Kabul Bank shareholders for the repayment of the full amounts attributed to them as of date, and identifying collateral and cash repayments to be made—partially completed as of November 9, 2011.
3. Since the staff report was finalized, staff has reviewed individual agreements which the authorities have made available to document the progress they have made on asset recovery under this prior action. This review has revealed some weaknesses in the agreements, which led staff to conclude that the prior action was met only partially.
4. To date, the authorities have signed 21 agreements with eight former Kabul Bank shareholders and related parties over repayment of US$270 million out of US$935 million in total assets sought for recovery.1 In addition, they have US$153 million in ceded assets available for sale outside such agreements.2 The remainder is largely still disputed between the receiver and the ultimate beneficiaries.
- Legally binding nature: The authorities have assured staff that these agreements are legally binding in Afghanistan, noting that US$36 million in payments under these agreements have been received through end-October.3 Staff confirms that the agreements reviewed thus far include the key elements one would generally expect to see in a legally binding document: the parties involved, the date of agreement, an acknowledgement of amounts owed, the interest rate, and a reference to a repayment schedule. However, in terms of specificity, the overall quality of the agreements appears to fall short of what one might see in other jurisdictions. The enforceability of the agreements through the courts has yet to be tested, and there is a risk that individuals may default on their payments in the future.
- Cooperating shareholders: Staff notes that one of the main shareholders allegedly responsible for a majority of the alleged fraud has thus far shown only limited cooperation and has not yet agreed to sign any agreements himself until amounts attributable to him are established. Two other former shareholders are also not cooperating and have not signed agreements.
- Amounts attributed: The agreements cover the full amounts attributed to the cooperating shareholders and related parties with one exception.4 The authorities acknowledge that the amounts in some of the agreements may need to be revised once the final report of the forensic audit is available; the report is expected to provide substantiated information on the amounts attributed to the individuals. In this regard, it is understood that these repayment agreements do not preclude attribution of additional amounts owed.
- Collateral and repayment schedule: While the level of specificity varies across the agreements, the agreements purport to pledge collateral and establish cash installment repayment schedules. In this regard, most of the agreements refer to collateral in general terms, and only some identify specific assets. The receiver is working with the individuals to identify specific assets that can serve as collateral and estimate their market value. Moreover, the agreements also include a provision that the receiver can take recourse to all of the signing parties’ assets if those already identified cannot cover the amounts owed.
5. It should also be noted that the authorities have not precluded asset recovery through the criminal justice system and mutual legal assistance from other countries. They have specifically asked a reputable international audit firm help them with this, as well as with a global asset trace. They have also sought dedicated training in this regard from the World Bank, and have discussed asset recovery via the criminal justice system with Fund staff since September 2010.
Staff views the prior action on legally binding agreements as being partially met, mainly because the collateral is not always fully specified, and at least in one instance a lower amount than what is believed to be the case has been attributed. While this is regrettable, staff notes that the authorities have made significant progress to date, while disentangling the fraudulent loan book has turned out to be more challenging than initially anticipated. The authorities’ next steps will have to be informed by the outcome of the ongoing forensic audit which should be finalized by March 2012. It is expected that the audit results could lead to upward revisions of some agreements, though downward revisions cannot be ruled out. Staff will continue to monitor closely the status of asset recovery from Kabul Bank shareholders and related parties, including finalizing legally binding agreements and cash recoveries. Progress on these two areas would be a focus of the first review under the proposed program.
Kabul Bank had 16 shareholders of which 11 have allegedly benefited from the fraud.
These assets include real estate in Afghanistan and Dubai.
In addition, debt service payments on regular Kabul Bank loans have been made, and a total of US$75 million has been received in cash as reported in the MEFP.
In one instance, the agreement is for a lower amount than what is attributed to the party because the authorities believe that if they had insisted on the full amount, the party would have had to declare bankruptcy.