Afghan president hammers West over bank crisis

AP News
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Posted: Apr 11, 2011 10:57 AM
Afghan president hammers West over bank crisis

Afghanistan's president strongly rebuked his international backers Monday, saying Western financial advisers may be tried for contributing to the country's banking crisis and he would now dictate the terms of any future U.S. presence.

The statements highlight the tension between Karzai and the international community as Afghanistan struggles to take more control of security and funding. Both U.S.-led coalition and the Afghan government are eager to shift more authority to the Afghan government, but debates over how this should occur have repeatedly inflamed tensions.

Fixing the banking system is seen as a major hurdle for the Afghan government following the near-collapse of the nation's largest private lender last year. Kabul Bank was taken down by allegations of mismanagement, cronyism and questionable lending that implicated many members of the Afghan elite with ties to the government.

The fiasco has led many international donors to question the stability of Afghanistan's financial system. Some Western allies are holding back aid until it is clear the banking system is solid.

Afghanistan's central bank has taken over Kabul Bank but has not yet said if it plans to sell it. Kabul Bank plays a key role in the Afghan economy by handling payrolls for government workers and security forces.

A U.S. government report said this month that at Kabul Bank, "fraudulent loans were used to divert $850 million to insiders. This amount reportedly represented 94 percent of the bank's outstanding loans."

Karzai told reporters that all bank shareholders have been removed and those who do not return lent funds will face criminal investigation.

He also, however, blamed the crisis on international advisers who issued reports saying the bank was functioning normally. He said the government is investigating these outside advisers and auditors and will follow up any indications of misconduct with a criminal trial.

"Hundreds of millions of dollars have been paid to these individuals and organizations to help the banking system of the country and they failed in their task," Karzai said.

Karzai also promised to put strict conditions on the continued U.S. presence in the country as part of a compact currently being negotiated.

"We have tied up their hands and feet," Karzai said of the Afghan proposal for the strategic partnership agreement.

He said the Afghan government has been studying the U.S.-proposed agreement and will present a counter-proposal that includes rules for the conduct of soldiers, minimum funding levels and development priorities.

A spokeswoman for the U.S. Embassy in Kabul declined to discuss the details of the agreement because negotiations are still ongoing but said both governments agree on the main goals of the strategic partnership.

"Both sides have expressed a strong conviction that a new framework for our long-term strategic partnership and relationship should contribute to building up Afghanistan's capacity and institutions as well as improved economic and political relations between Afghanistan and its neighbors," Mireille Zieseniss said.

Karzai has repeatedly levied threats at his international partners in an attempt to make a point about his frustration with his allies, but only occasionally taken action. He is, however, taking steps to make good on a pledge to disband private security companies _ a move that the international community tried to forestall.

Frustration with the international community has been running particularly high in Afghanistan in recent weeks, following the publicity around a trial of U.S. soldiers charged with murdering Afghan civilians for sport and the burning of a Quran by a Florida pastor.

The Quran burning sparked countrywide demonstrations, including a protest in the northern city of Mazar-e-Sharif, in which gunmen stormed a U.N. compound, killing three staffers and four Nepalese guards.

Karzai condemned the killings, but continued to also call for the prosecution of the pastor.

Karzai singled out three Western firms for culpability in the financial crisis: PriceWaterhouseCoopers _ whose Pakistani subsidiary conducted audits of the bank _ and consulting firms Deloitte LLP and BearingPoint Inc.

"Whoever was involved in leading the bank into crisis, all those people will be brought to justice," Karzai said. The Pakistani auditor has previously said there were no basis for allegations that they had operated wrongly.

The U.S. international aid agency terminated its $92 million contract with Deloitte in March after the USAID inspector general issued a report saying that Deloitte employees acting as advisers to the central bank had failed to report signs of irregularities at Kabul Bank.

The report said, however, that Deloitte could not be held responsible for problems that brought down the bank.

Deloitte has claimed that the report did not provide any evidence of fraud by Deloitte employees and that the company had never audited Kabul Bank.

In May 2009, BearingPoint Inc. sold its public services business to Deloitte. The same advisers who worked for BearingPoint advised the central bank under USAID's contract with Deloitte.

Karzai's comments about the bank come just days before Afghanistan's top finance officials travel to Washington to attend the spring meeting of the World Bank and the International Monetary Fund, which has said it won't extend its program for Afghanistan until it clears up problems with the bank.

The United Nations has said that the impasse over the bank was weakening confidence in the entire country's financial system and without an IMF program, it would be difficult for Karzai's international partners to meet commitments they have made to help Afghanistan _ and direct funds through the government's budget as Karzai has pleaded with them to do.

In absence of an IMF program, some $70 million in spending for government activities could be withheld, the U.N. has said.

The IMF has strongly suggested that Kabul Bank be placed into receivership and then quickly sold off as part of a broader effort to stabilize the country's shaky financial system. U.S. Treasury Department officials agreed with the recommendation. Karzai did not address this point.

The wrangling over corruption and mismanagement comes as Afghans prepare for the traditional uptick in fighting that comes with warmer spring weather. International troops have spent the winter months battling insurgents in their traditional strongholds in the south and trying to prevent militants from crossing over from Pakistan along porous eastern borders.

In the east on Monday, a NATO service member was killed in a bomb attack, the military coalition said. The latest death makes 12 international service members killed so far this month.

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Amir Shah and Deb Riechmann contributed to this report from Kabul.