In May 2011, the USAID Office of the Inspector General published a report on the agency’s supervision and oversight of assistance activities in Afghanistan in relation to the Kabul Bank crisis. This report was quickly withdrawn and the Federation of American Scientists’ Steven Aftergood quoted a USAID official as saying that “At the time our report was issued, it was written utilizing information from non-classified sources. After our report had been issued, USAID subsequently classified two documents that were cited in our report. This action resulted in the report becoming classified and we removed it from the web site.”
Now that an “unclassified” version of the report has been released, a comparison of the two versions reveals the classified portions of the report that were concealed by USAID. These sections of the report indicate that a material loss review was commissioned by USAID/Afghanistan and completed in May 2010 indicating that $850 million, or 94 percent of the value of the bank’s outstanding loans, had been fraudulently diverted to “insiders” connected with the bank. The concealed sections also indicate that Deloitte and Da Afghanistan Bank failed to provide this report to USAID for nearly six months.
A comparison of the two reports is given below. Classified passages are indicated by bold text. Some sections of the report have been omitted from this comparison because they contain no significant differences.
| Unclassified Version | Classified Version |
|---|---|
| Since 2003, USAID/Afghanistan has supported a number of capacity-building activities at the Afghanistan Central Bank (DAB) to help DAB regulate the banking sector. Currently, Deloitte1 provides DAB technical assistance in bank supervision and examination through a $92 million task order for the Economic Growth and Governance Initiative, which includes many activities in addition to bank supervision and examination. The purpose of the task order was to increase Afghanistan’s ability to develop and implement sound economic and regulatory policies that provide the foundation for private sector growth in a market economy. According to Deloitte’s work plan, one of the main goals of the assistance Deloitte provided to DAB was to assist DAB in fulfilling its statutory responsibilities ―to promote the stability and contribution to economic growth of the financial sector and to prevent avoidable losses. Deloitte provided onsite technical advisors at DAB’s Directorate for Financial Supervision.
After the run on Kabul Bank, senior officials in the U.S. Embassy raised concerns about Deloitte’s performance. Specifically, they were concerned that Deloitte staff did not warn the U.S. Government about looming problems at Kabul Bank before the first news reports broke in February 2010. They also questioned Deloitte’s effectiveness and performance because Deloitte staff had provided bank supervision assistance to DAB for 7 years, yet DAB supervisors were unable to prevent the near collapse of Afghanistan’s largest bank. In January 2011, USAID/Afghanistan requested the assistance of the Office of Inspector General (OIG) in determining whether USAID or Deloitte staff members were negligent in failing to report the Kabul Bank fraud. In response to USAID/Afghanistan’s request, OIG/Afghanistan conducted this review to determine:
What opportunities did USAID and contractor staff have to learn of fraudulent activities at Kabul Bank? BearingPoint and Deloitte advisers who were embedded at DAB had several opportunities to learn about fraudulent activities at Kabul Bank over a span of 2 years before the run on Kabul Bank in early September 2010. Because contractors did not keep USAID/Afghanistan fully informed of developments at DAB, USAID staff had fewer opportunities to learn of the fraud. BearingPoint and Deloitte staff could have been more aggressive in following up on indications of serious problems at Kabul Bank. The most important opportunities to learn of the fraud are detailed below:
How did USAID staff and its contractors learn of the fraud? Nearly all of the USAID staff members we interviewed stated that they learned of the fraud through the Washington Post article in February 2010. One USAID staff member indicated that the existence of fraud at Kabul Bank was widely believed to exist as early as 2008, even though no specific evidence of the fraud was available at that time. According to key Deloitte staff members involved in providing banking supervision assistance to DAB, they learned of the fraud either through the Washington Post article published on February 22, 2010, or through the numerous news articles that appeared almost simultaneously with the run on Kabul Bank in August and September 2010. However, they acknowledged the existence of indications of fraud before that date. What actions did USAID and contractor staff members take once they became aware of the fraud? The February 2010 Washington Post article was widely discussed at the U.S. Embassy, including by USAID and Treasury Department officials. Their recollections and perceptions of events differed somewhat. For their part, USAID officials indicated that they understood that the Treasury Department would take the lead in responding to the February 2010 news article detailing insider lending abuses and irregular investments in Dubai real estate. On February 24, 2010, the DAB governor asked the Treasury Department to arrange for a forensic audit of Kabul Bank and a second bank that was also of concern to DAB, but Treasury was initially unable to find a firm that would undertake such an audit and then the Government of Afghanistan decided to pursue audit options that would not involve the U.S. Government. Treasury officials, in contrast, indicated that it was difficult for them to persuade USAID to engage in responding to the news article. Deloitte officials indicated to us that, in the aftermath of the February 2010 news article, they began to work with the DAB Directorate for Financial Supervision to plan a response. Was USAlD’s oversight of its contractor adequate? According to USAID’s Automated Directives System (ADS) 203.3.2, Assessing and Learning,” missions and their offices are responsible for monitoring a contractor’s performance in achieving the contract’s purpose. ADS 302.3.7.1a, Direct Contracting,” Mandatory Reference: ―Procedures for Designating the Contracting Officer’s Technical Representative (COTR) for Contracts and Task Orders,‖ states that the COTR is in a unique position to monitor how well the contractor is progressing toward achieving the contract’s purpose and is responsible for providing technical liaison between the contractor and the contracting officer, a function critical to ensuring good contract performance. However, USAID/Afghanistan’s oversight of the task order with Deloitte was weak. Because the mission was short-staffed, it did not have adequate technical expertise to recognize the warning signals at Kabul Bank or to provide adequate direction to Deloitte. As a result, USAID lost opportunities to take appropriate actions and work with Deloitte, Treasury, State, DAB, and the donor community to contain the problems at Kabul Bank. The next section of this report provides details on the following review results:
To address these issues, this report recommends that USAID/Afghanistan:
Comments on the draft report were provided by the Acting Assistant Administrator, Office of Afghanistan and Pakistan Affairs. These comments expressed agreement with the report recommendations and indicated that USAID/Afghanistan has decided to terminate the bank supervision component of its task order with Deloitte. However, the comments stated, Deloitte cannot be held responsible for the fraud that occurred at Kabul Bank. The comments also provided additional information and perspectives on some of the events described in the report (pages 10 and 13). Appendix I contains a discussion of the review’s scope and methodology, Appendix II presents management comments on the draft report, and Appendix III contains a timeline of key events associated with the Kabul Bank crisis. REVIEW RESULTS Deloitte Advisers Did Not Follow Up Aggressively on Fraud Indicators BearingPoint and Deloitte advisers who were embedded at DAB had encountered fraud indications at Kabul Bank on a number of occasions over a span of 2 years before the run on Kabul Bank in early September 2010. However, they could have been more aggressive in following up on indications of serious problems at Kabul Bank. The most important opportunities to learn of the fraud are detailed below:
Deloitte’s lead adviser indicated that his professional judgment and risk tolerance were probably clouded by the Afghanistan context of incessant rumors of fraud and corruption and that consequently he did not take the fraud indications seriously. At the time, he thought that the Kabul Bank issues, if any, could be contained. Also, USAID staff members were too inexperienced or too busy to ask appropriate questions about this part of Deloitte’s work at DAB. Because Deloitte staff did not follow up aggressively on indications of fraud at Kabul Bank, Deloitte and the mission lost opportunities to contain the problems at Kabul Bank. In hindsight, Deloitte’s lead adviser acknowledged that Deloitte should have taken more aggressive actions in November 2009, such as resuming participation by Deloitte’s advisers in onsite bank examinations alongside the DAB examiners. This practice was suspended in November 2008 because an adviser received death threats. The lead adviser said that if Deloitte’s onsite assistance had restarted in November 2009, the fraud could have been detected earlier, and the magnitude of losses would have been smaller. Further, in a written communication to USAID dated September 27, 2010, Deloitte’s lead adviser wrote: Recommendation 1. We recommend that USAID/Afghanistan develop and implement an action plan to address the performance issues with the bank supervision and examination assistance provided to the Afghanistan Central Bank by Deloitte. Recommendation 2. We recommend that USAID/Afghanistan arrange for more robust assistance to the Afghanistan Central Bank in bank supervision and examination, including onsite examination assistance and fraud detection training. |
In early September 2010, rumors and news articles about insider lending and investments in Dubai real estate led depositors to rush to withdraw funds from Kabul Bank, the largest bank in Afghanistan. According to the Report of Kabul Bank in Conservatorship dated October 30, 2010, cited in a draft material loss review commissioned by USAID/Afghanistan, fraudulent loans were used to divert $850 million to insiders. This amount reportedly represented 94 percent of the bank’s outstanding loans.
Since 2003, USAID/Afghanistan has supported a number of capacity-building activities at the Afghanistan Central Bank (DAB) to help DAB regulate the banking sector. Currently, Deloitte1 provides DAB technical assistance in bank supervision and examination through a $92 million task order for the Economic Growth and Governance Initiative, which includes many activities in addition to bank supervision and examination. The purpose of the task order was to increase Afghanistan’s ability to develop and implement sound economic and regulatory policies that provide the foundation for private sector growth in a market economy. According to Deloitte’s work plan, one of the main goals of the assistance Deloitte provided to DAB was to assist DAB in fulfilling its statutory responsibilities ―to promote the stability and contribution to economic growth of the financial sector and to prevent avoidable losses.‖ Deloitte provided onsite technical advisors at DAB’s Directorate for Financial Supervision. After the run on Kabul Bank, senior officials in the U.S. Embassy raised concerns about Deloitte’s performance. Specifically, they were concerned that Deloitte staff did not warn the U.S. Government about looming problems at Kabul Bank before the first news reports broke in February 2010. They also questioned Deloitte’s effectiveness and performance because Deloitte staff had provided bank supervision assistance to DAB for 7 years, yet DAB supervisors were unable to prevent the near collapse of Afghanistan’s largest bank. In January 2011, USAID/Afghanistan requested the assistance of the Office of Inspector General (OIG) in determining whether USAID or Deloitte staff members were negligent in failing to report the Kabul Bank fraud. In response to USAID/Afghanistan’s request, OIG/Afghanistan conducted this review to determine:
What opportunities did USAID and contractor staff have to learn of fraudulent activities at Kabul Bank? BearingPoint and Deloitte advisers who were embedded at DAB had several opportunities to learn about fraudulent activities at Kabul Bank over a span of 2 years before the run on Kabul Bank in early September 2010. Because contractors did not keep USAID/Afghanistan fully informed of developments at DAB, USAID staff had fewer opportunities to learn of the fraud. BearingPoint and Deloitte staff could have been more aggressive in following up on indications of serious problems at Kabul Bank. The most important opportunities to learn of the fraud are detailed below:
How did USAID staff and its contractors learn of the fraud? Nearly all of the USAID staff members we interviewed stated that they learned of the fraud through the Washington Post article in February 2010. One USAID staff member indicated that the existence of fraud at Kabul Bank was widely believed to exist as early as 2008, even though no specific evidence of the fraud was available at that time. According to key Deloitte staff members involved in providing banking supervision assistance to DAB, they learned of the fraud either through the Washington Post article published on February 22, 2010, or through the numerous news articles that appeared almost simultaneously with the run on Kabul Bank in August and September 2010. However, they acknowledged the existence of indications of fraud before that date. What actions did USAID and contractor staff members take once they became aware of the fraud? The February 2010 Washington Post article was widely discussed at the U.S. Embassy, including by USAID and Treasury Department officials. Their recollections and perceptions of events differed somewhat. For their part, USAID officials indicated that they understood that the Treasury Department would take the lead in responding to the February 2010 news article detailing insider lending abuses and irregular investments in Dubai real estate. On February 24, 2010, the DAB governor asked the Treasury Department to arrange for a forensic audit of Kabul Bank and a second bank that was also of concern to DAB, but Treasury was initially unable to find a firm that would undertake such an audit and then the Government of Afghanistan decided to pursue audit options that would not involve the U.S. Government. Treasury officials, in contrast, indicated that it was difficult for them to persuade USAID to engage in responding to the news article. After the run on Kabul Bank in September 2010, and after inquiries by the leadership of the U.S. Embassy, USAID/Afghanistan arranged for a material loss report on Kabul Bank and a rapid assessment of Deloitte’s performance on the Economic Growth and Governance Initiative task order. Deloitte officials indicated to us that, in the aftermath of the February 2010 news article, they began to work with the DAB Directorate for Financial Supervision to plan a response. A DAB examination of Kabul Bank, begun in January 2010 and completed in May 2010, found serious control weaknesses that were relevant to the fraud, including weak controls over loan approvals and collateral, but the examiners did not perform any direct verification of loans and did not report any direct evidence of fraud at Kabul Bank. Neither Deloitte nor DAB provided the examination report to USAID/Afghanistan until October 2010, when USAID asked Deloitte for the report. Was USAID’s oversight of its contractor adequate? According to USAID’s Automated Directives System (ADS) 203.3.2, ―Assessing and Learning,‖ missions and their offices are responsible for monitoring a contractor’s performance in achieving the contract’s purpose. ADS 302.3.7.1a, ―Direct Contracting,‖ Mandatory Reference: ―Procedures for Designating the Contracting Officer’s Technical Representative (COTR) for Contracts and Task Orders,” states that the COTR is in a unique position to monitor how well the contractor is progressing toward achieving the contract’s purpose and is responsible for providing technical liaison between the contractor and the contracting officer, a function critical to ensuring good contract performance. However, USAID/Afghanistan’s oversight of the task order with Deloitte was weak. Because the mission was short-staffed, it did not have adequate technical expertise to recognize the warning signals at Kabul Bank or to provide adequate direction to Deloitte. As a result, USAID lost opportunities to take appropriate actions and work with Deloitte, Treasury, State, DAB, and the donor community to contain the problems at Kabul Bank. The next section of this report provides details on the following review results:
To address these issues, this report recommends that USAID/Afghanistan:
Comments on the draft report were provided by the Acting Assistant Administrator, Office of Afghanistan and Pakistan Affairs. These comments expressed agreement with the report recommendations and indicated that USAID/Afghanistan has decided to terminate the bank supervision component of its task order with Deloitte. However, the comments stated, Deloitte cannot be held responsible for the fraud that occurred at Kabul Bank. The comments also provided additional information and perspectives on some of the events described in the report (pages 10 and 13). Appendix I contains a discussion of the review’s scope and methodology, Appendix II presents management comments on the draft report, and Appendix III contains a timeline of key events associated with the Kabul Bank crisis. REVIEW RESULTS Deloitte Advisers Did Not Follow Up Aggressively on Fraud Indicators BearingPoint and Deloitte advisers who were embedded at DAB had encountered fraud indications at Kabul Bank on a number of occasions over a span of 2 years before the run on Kabul Bank in early September 2010. However, they could have been more aggressive in following up on indications of serious problems at Kabul Bank. The most important opportunities to learn of the fraud are detailed below:
Deloitte’s lead adviser indicated that his professional judgment and risk tolerance were probably clouded by the Afghanistan context of incessant rumors of fraud and corruption and that consequently he did not take the fraud indications seriously. At the time, he thought that the Kabul Bank issues, if any, could be contained. Also, USAID staff members were too inexperienced or too busy to ask appropriate questions about this part of Deloitte’s work at DAB. Because Deloitte staff did not follow up aggressively on indications of fraud at Kabul Bank, Deloitte and the mission lost opportunities to contain the problems at Kabul Bank. In hindsight, Deloitte’s lead adviser acknowledged that Deloitte should have taken more aggressive actions in November 2009, such as resuming participation by Deloitte’s advisers in onsite bank examinations alongside the DAB examiners. This practice was suspended in November 2008 because an adviser received death threats. The lead adviser said that if Deloitte’s onsite assistance had restarted in November 2009, the fraud could have been detected earlier, and the magnitude of losses would have been smaller. Further, in a written communication to USAID dated September 27, 2010, Deloitte’s lead adviser wrote: … [I]t is clear that the examiner training in fraud detection, which was planned well in advance of the current crisis, should have begun sooner. Examiners are not normally trained in fraud detection, and fraud is often not even spotted at banks until it has become so widespread as to threaten solvency. However, there are techniques that could have been applied to uncover at least some of the abuses. Recommendation 1. We recommend that USAID/Afghanistan develop and implement an action plan to address the performance issues with the bank supervision and examination assistance provided to the Afghanistan Central Bank by Deloitte. Recommendation 2. We recommend that USAID/Afghanistan arrange for more robust assistance to the Afghanistan Central Bank in bank supervision and examination, including onsite examination assistance and fraud detection training.
|
| In the immediate aftermath of the Kabul Bank crisis, USAID requested this review of USAID and Deloitte’s efforts – as providers of training and technical assistance. We are grateful for the efforts of the OIG and are already taking decisive steps based on the recommendations in this report. We are pleased that the review found no indications of fraud, waste or abuse by USAID or Deloitte.
USAID/Kabul has decided to terminate the bank supervision component of the Deloitte task order. Though Deloitte cannot be held responsible for the fraud, failure, or the run on Kabul Bank, given the changed conditions on the ground, we have terminated this part of the Deloitte contract in order to ensure that our technical assistance is as effective as possible. At the same time, it should be made clear that Deloitte could not have stopped the massive fraud that occurred at Kabul Bank. To this end, we want to underscore that USAID and Deloitte’s scope of work and mandate under Component 2 of the Economic Growth and Governance Initiative (“EGGI”) task order was to provide trainers and technical experts to build the capacity of the Bank Supervision unit within the Central Bank of the Government of Afghanistan, Da Afghanistan Bank (“DAB”), and not for Deloitte itself to supervise private banks. Other entities in the Government of Afghanistan and the international community also supported the Central Bank and the various oversight and investigatory bodies involved in preventing, investigating, and responding to the Kabul Bank crisis. The Deloitte advisors worked on human capacity building efforts and skill set building for Afghan bank examiners working in the bank supervision department of the Central Bank. The fraud committed by Kabul Bank officers and shareholders was criminal in nature, deliberately concealed by major shareholders and senior bank management. In the Fall of 2010 as the fraud within Kabul Bank came to light, USAID took several proactive steps, including the request for this OIG review. USAID also commissioned a rapid assessment to identify losses and to recommend remedies for action. This assessment, called a “Material Loss Review (MLR),” identified the ways in which the fraud was perpetrated and made recommendations on how the Central Bank could improve its supervisory and regulatory functions for the Afghan banking system. The MLR confirmed that the massive fraud was a criminal act by the Chairman of the Board and the CEO, aided and abetted by other senior managers and board members. The Chairman of the Board, the CEO of Kabul Bank, and the Chief Risk Officer caused loan documentation to be fabricated for fictitious companies registered at the Afghan Investment Support Agency. Loan funds were then diverted to these individuals for their personal use. Kabul Bank’s shareholder/officers’ fraud and self-dealing caused these massive losses and concealed them using fake documentation and other means of obfuscation. The initial outline of this fraud and revelation of the unprecedented level of loss did not occur until the Chairman of the Board of Kabul Bank began talking with Central Bank Authorities in the summer of 2010. Notwithstanding previous rumors and comments that were being made, depositors and donors and their various assistance programs were essentially caught by surprise by the scale of the crisis. Below are some clarifying details about alleged indicators of fraud identified in the OIG report. The eight summary fraud indicia are listed in the same chronological order presented in the February 9, 2011 OIG Ramonas-Gast Report.
Although not discussed in the draft OIG report, it was widely known in Afghanistan at the time that Kabul Bank’s senior management and shareholders were politically well-connected, and this comment appears to be an expression of real-world political constraints in Afghanistan. It is not clear that this serves as an indicator of fraud.
Deloitte took some action during this period in response to the rumors. Deloitte’s lead adviser drafted a memorandum to the DAB Governor dated January 7, 2010, regarding “[m]easures to reduce or eliminate shareholder involvement in bank affairs.” The memorandum included recommendations on on-site supervision “enhancements” to help DAB trace funds back to shareholders. The lead adviser also sent several emails to his team of advisers regarding the need to focus on the detection of fraud and abusive loans. See emails from Deloitte lead adviser dated December 20 and 21, 2009, and January 27, 2010. Deloitte advisers also inquired and received repeated assurances from DAB examiners that the allegations of insider shareholder abuse had been investigated in targeted examinations, and no links were found between Kabul Bank’s funds and the questionable investments. When Deloitte did learn of evidence about an interest-free loan issued at another bank as a result of corruption during this time period, it informed USAID promptly. See November 19, 2009, email from Deloitte to USAID. USAID agrees that Deloitte should have aggressively reported evidence of fraud at Kabul Bank to the Mission. USAID/Afghanistan intends to formally address the scope of confidentiality between advisers and DAB, if any, and the type of information that must be shared by contractors with USAID in future contracts involving banking supervision.
After the February 22, 2010, Washington Post article was published, Deloitte proactively proposed actions to USAID on how to respond, including proposing a forensic audit of Kabul Bank as the first and most important action. The Mission agreed with Deloitte that such an audit was crucial to detect fraud at Kabul Bank. Following a March 7, 2010, meeting between the USG interagency and the DAB Governor, it was agreed that the USG would take the lead on procuring a US audit firm to conduct a forensic audit, but USAID would not be a participant. USAID emailed Deloitte on March 9, 2010, instructing Deloitte to “hold off on identifying a forensic accountant” since “[i]t looks like this will be picked up by someone else.” Therefore Deloitte can not be faulted for not taking action on a forensic audit after this time. During the spring and summer of 2010, Deloitte advisers did not attend meetings between US Treasury and DAB officials regarding the forensic audit. Treasury conducted a successful procurement of a firm willing to undertake the audit and was prepared to sign a contract with the firm until GIRoA indicated a desire to pursue audit options that did not involve the U.S. government.
The Mission agrees that this should have raised concerns among both Deloitte advisors and the Central Bank and that USAID should have been advised. However, we note that the Central Bank apparently did not look into this allegation and did not ask the Deloitte advisors for advice at the time. Deloitte did take action in raising the issue of insider shareholder abuses in the banking system, including Kabul Bank with both Central Bank officials and the examination staff. We agree that USAID should have been informed and that this was a missed opportunity for USAID to provide contractor guidance on strengthening its capacity building with training on identification of fraud indicia.
We would note that after this article was published, and as the OIG states in its report, the Central Bank asked its examiners to look for support for the allegations made but the examiners reportedly found none. Deloitte had many meetings with Central Bank management on a response and USAID and the Embassy country team had many meetings to discuss a coordinated response. In response to a March, 2010, letter of request from the DAB Governor Fitrat to Secretary Geithner, Treasury agreed to fund a forensic and prudential audit of Kabul bank and Azizi bank.
The Mission notes that Deloitte continued its capacity building and training at the Central Bank to build up capacity of the examination staff. The OIG report states that there was increased intimidation of examiners although this was not reported to USAID. USAID/Afghanistan notes that Deloitte generally did not provide the Mission copies of examination reports of banks done by the Central Bank. The audit performed by an affiliate of PricewaterhouseCoopers (PwC) was not directly mentioned in the body of the OIG report but it was a significant source of information to the Central Bank’s examination staff. The resulting clean bill of financial health of Kabul Bank issued by PwC may have acted to delay understanding of the gravity of Kabul Bank’s true financial condition both among the examination staff and the international community. On February 10, 2010, A.F. Ferguson & Co., a Pakistani affiliate of PwC, issued an annual audit of Kabul Bank, giving an analysis of Kabul Bank’s financial position as of December 31, 2009. Ferguson was contracted by Kabul Bank to perform the audit, as required by Afghan banking law. Neither USAID nor any agency of the US Government had any role or input in this audit. The PwC audit team did not identify any fraud at Kabul Bank. In fact, it gave Kabul Bank a clean bill of health. Bank supervision departments around the world use the annual audit and the audit firm’s opinion and findings to supplement their bank examination analyses. The PwC affiliate mentioned no problems at Kabul Bank and also stated that the financial information analyzed represented the condition of Kabul Bank. This “clean audit” opinion from a professional accounting and auditing firm with world-wide operations demonstrates the difficulty of identifying fraud at Kabul Bank at the time. |
In the immediate aftermath of the Kabul Bank crisis, USAID requested this review of USAID and Deloitte’s efforts – as providers of training and technical assistance. We are grateful for the efforts of the OIG and are already taking decisive steps based on the recommendations in this report. We are pleased that the review found no indications of fraud, waste or abuse by USAID or Deloitte.
USAID/Kabul has decided to terminate the bank supervision component of the Deloitte task order. Though Deloitte cannot be held responsible for the fraud, failure, or the run on Kabul Bank, given the changed conditions on the ground, we have terminated this part of the Deloitte contract in order to ensure that our technical assistance is as effective as possible. At the same time, it should be made clear that Deloitte could not have stopped the massive fraud that occurred at Kabul Bank. To this end, we want to underscore that USAID and Deloitte’s scope of work and mandate under Component 2 of the Economic Growth and Governance Initiative (“EGGI”) task order was to provide trainers and technical experts to build the capacity of the Bank Supervision unit within the Central Bank of the Government of Afghanistan, Da Afghanistan Bank (“DAB”), and not for Deloitte itself to supervise private banks. Other entities in the Government of Afghanistan and the international community also supported the Central Bank and the various oversight and investigatory bodies involved in preventing, investigating, and responding to the Kabul Bank crisis. The Deloitte advisors worked on human capacity building efforts and skill set building for Afghan bank examiners working in the bank supervision department of the Central Bank. The fraud committed by Kabul Bank officers and shareholders was criminal in nature, deliberately concealed by major shareholders and senior bank management. In the Fall of 2010 as the fraud within Kabul Bank came to light, USAID took several proactive steps, including the request for this OIG review. USAID also commissioned a rapid assessment to identify losses and to recommend remedies for action. This assessment, called a “Material Loss Review (MLR),” identified the ways in which the fraud was perpetrated and made recommendations on how the Central Bank could improve its supervisory and regulatory functions for the Afghan banking system. The MLR confirmed that the massive fraud was a criminal act by the Chairman of the Board and the CEO, aided and abetted by other senior managers and board members. The Chairman of the Board, the CEO of Kabul Bank, and the Chief Risk Officer caused loan documentation to be fabricated for fictitious companies registered at the Afghan Investment Support Agency. Loan funds were then diverted to these individuals for their personal use. Kabul Bank’s shareholder/officers’ fraud and self-dealing caused these massive losses and concealed them using fake documentation and other means of obfuscation. The initial outline of this fraud and revelation of the unprecedented level of loss did not occur until the Chairman of the Board of Kabul Bank began talking with Central Bank Authorities in the summer of 2010. Notwithstanding previous rumors and comments that were being made, depositors and donors and their various assistance programs were essentially caught by surprise by the scale of the crisis. Below are some clarifying details about alleged indicators of fraud identified in the OIG report. The eight summary fraud indicia are listed in the same chronological order presented in the February 9, 2011 OIG Ramonas-Gast Report.
Although not discussed in the draft OIG report, it was widely known in Afghanistan at the time that Kabul Bank’s senior management and shareholders were politically well-connected, and this comment appears to be an expression of real-world political constraints in Afghanistan. It is not clear that this serves as an indicator of fraud.
Deloitte took some action during this period in response to the rumors. Deloitte’s lead adviser drafted a memorandum to the DAB Governor dated January 7, 2010, regarding “[m]easures to reduce or eliminate shareholder involvement in bank affairs.” The memorandum included recommendations on on-site supervision “enhancements” to help DAB trace funds back to shareholders. The lead adviser also sent several emails to his team of advisers regarding the need to focus on the detection of fraud and abusive loans. See emails from Deloitte lead adviser dated December 20 and 21, 2009, and January 27, 2010. Deloitte advisers also inquired and received repeated assurances from DAB examiners that the allegations of insider shareholder abuse had been investigated in targeted examinations, and no links were found between Kabul Bank’s funds and the questionable investments. When Deloitte did learn of evidence about an interest-free loan issued at another bank as a result of corruption during this time period, it informed USAID promptly. See November 19, 2009, email from Deloitte to USAID. USAID agrees that Deloitte should have aggressively reported evidence of fraud at Kabul Bank to the Mission. USAID/Afghanistan intends to formally address the scope of confidentiality between advisers and DAB, if any, and the type of information that must be shared by contractors with USAID in future contracts involving banking supervision.
After the February 22, 2010, Washington Post article was published, Deloitte proactively proposed actions to USAID on how to respond, including proposing a forensic audit of Kabul Bank as the first and most important action. The Mission agreed with Deloitte that such an audit was crucial to detect fraud at Kabul Bank. Following a March 7, 2010, meeting between the USG interagency and the DAB Governor, it was agreed that the USG would take the lead on procuring a US audit firm to conduct a forensic audit, but USAID would not be a participant. USAID emailed Deloitte on March 9, 2010, instructing Deloitte to “hold off on identifying a forensic accountant” since “[i]t looks like this will be picked up by someone else.” Therefore Deloitte can not be faulted for not taking action on a forensic audit after this time. During the spring and summer of 2010, Deloitte advisers did not attend meetings between US Treasury and DAB officials regarding the forensic audit. Treasury conducted a successful procurement of a firm willing to undertake the audit and was prepared to sign a contract with the firm until GIRoA indicated a desire to pursue audit options that did not involve the U.S. government.
The Mission agrees that this should have raised concerns among both Deloitte advisors and the Central Bank and that USAID should have been advised. However, we note that the Central Bank apparently did not look into this allegation and did not ask the Deloitte advisors for advice at the time. Deloitte did take action in raising the issue of insider shareholder abuses in the banking system, including Kabul Bank with both Central Bank officials and the examination staff. We agree that USAID should have been informed and that this was a missed opportunity for USAID to provide contractor guidance on strengthening its capacity building with training on identification of fraud indicia.
We would note that after this article was published, and as the OIG states in its report, the Central Bank asked its examiners to look for support for the allegations made but the examiners reportedly found none. Deloitte had many meetings with Central Bank management on a response and USAID and the Embassy country team had many meetings to discuss a coordinated response. In response to a March, 2010, letter of request from the DAB Governor Fitrat to Secretary Geithner, Treasury agreed to fund a forensic and prudential audit of Kabul bank and Azizi bank.
The Mission notes that Deloitte continued its capacity building and training at the Central Bank to build up capacity of the examination staff. The OIG report states that there was increased intimidation of examiners although this was not reported to USAID.
USAID/Afghanistan notes that Deloitte generally did not provide the Mission copies of examination reports of banks done by the Central Bank. The audit performed by an affiliate of PricewaterhouseCoopers (PwC) was not directly mentioned in the body of the OIG report but it was a significant source of information to the Central Bank’s examination staff. The resulting clean bill of financial health of Kabul Bank issued by PwC may have acted to delay understanding of the gravity of Kabul Bank’s true financial condition both among the examination staff and the international community. On February 10, 2010, A.F. Ferguson & Co., a Pakistani affiliate of PwC, issued an annual audit of Kabul Bank, giving an analysis of Kabul Bank’s financial position as of December 31, 2009. Ferguson was contracted by Kabul Bank to perform the audit, as required by Afghan banking law. Neither USAID nor any agency of the US Government had any role or input in this audit. The PwC audit team did not identify any fraud at Kabul Bank. In fact, it gave Kabul Bank a clean bill of health. Bank supervision departments around the world use the annual audit and the audit firm’s opinion and findings to supplement their bank examination analyses. The PwC affiliate mentioned no problems at Kabul Bank and also stated that the financial information analyzed represented the condition of Kabul Bank. This “clean audit” opinion from a professional accounting and auditing firm with world-wide operations demonstrates the difficulty of identifying fraud at Kabul Bank at the time. |
| TIMELINE OF KEY EVENTS
09/2003 – USAID/Afghanistan’s assistance to the Afghanistan Central Bank (DAB) Directorate for Financial Supervision begins under a contract with BearingPoint (which sold its public sector business units to Deloitte in 2009). 2007 – With assistance from BearingPoint, the DAB Directorate for Financial Supervision conducts its first full-scope bank examinations on all 18 banks in Afghanistan. 02/2008 – An International Monetary Fund study finds that “bank supervision needs further strengthening,” and USAID steps up training in the Directorate for Financial Supervision. 11/2008 – BearingPoint’s onsite bank examination adviser receives two death threats apparently in conjunction with an examination of Kabul Bank and another bank. BearingPoint and USAID agree to discontinue BearingPoint’s participation in onsite bank examinations. BearingPoint staff members continue to assist with the examinations through offsite training, desk reviews of examination reports, etc. OIG comment: The death threats should have been recognized as a ―red flag‖ signaling a high risk of fraud at Kabul Bank. In response to this development, DAB, BearingPoint, and USAID/Afghanistan should have reinforced off-site assistance for bank examinations or taken other steps to search for fraud at Kabul Bank. 05/2009–07/2009 – BearingPoint advisers encounter indications of political interference in financial supervision functions. For example, in a training class, a trainer states that DAB has the power to remove the management of Kabul Bank. Trainees respond that, in reality, Kabul Bank has the power to remove the management of DAB. OIG comment: With more than 5 years of financial supervision experience in Afghanistan at this point, BearingPoint surely had a good understanding of the political economy of Afghanistan even before this incident. Nonetheless, this incident reinforced the message that weaknesses in the control environment were undermining the effectiveness of regulation and other checks and balances and internal controls. 08/2009 – USAID assistance to the Directorate for Financial Supervision continues under the Economic Growth and Governance Initiative (EGGI) contract with Deloitte. Key BearingPoint staff members continue to provide the same services under the new contract with Deloitte. 08/2009–09/2009 – Routine monitoring of Kabul Bank continues. Reported regulatory capital is weak but above the required minimum and, in response to a demand by DAB, Kabul Bank agrees to raise paid-in capital. 10/2009–11/2009 – Concerned with the use of lottery-linked deposit accounts (in which account holders can win large prizes) by Kabul Bank, Azizi Bank, and a third bank, DAB and members of Parliament criticize these accounts as un-Islamic and preying on avaricious impulses. 11/2009 – The DAB governor raises serious concerns to Deloitte’s lead adviser about Kabul Bank’s behavior and the financial condition of bank shareholders. 12/2009 – Rumors circulate that Kabul Bank shareholders have invested in Dubai real estate using funds supplied by Kabul Bank. DAB staff members deny these rumors and indicate that they have been investigated and shown to be untrue. (Subsequent investigation showed that the rumors were true.) 01/2010 – DAB performs a regular onsite examination of Kabul Bank. The DAB governor and the acting director of the Directorate for Financial Supervision instruct the examiners to look for insider abuses. The examination team is reportedly indirectly threatened by Kabul Bank management. OIG Comment: The rumors and reported threats against the examiners should have been recognized as additional red flags signaling a high risk of fraud at Kabul Bank. 02/2010 – A.F. Ferguson & Co., a member firm of Price Waterhouse Coopers, issues an unqualified opinion on Kabul Bank’s financial statements for 2009. 02/22/2010 – A Washington Post article cites insider lending abuses and possible purchase of Dubai real estate with funds from Kabul Bank. The article prompts lengthy discussions at DAB and among U.S. Embassy officials, including those representing USAID and the Treasury Department. Deloitte advisers meet with the DAB governor to plan a response. OIG Comment: Recollections of responsible officials differ over what role USAID was supposed to take in responding to the allegations about Kabul Bank. USAID officials indicate they were told that Treasury would take the lead; Treasury officials indicate that they could not persuade USAID to be more engaged. 02/2010 – The DAB governor urges his examiners to look for support for these allegations, but examiners find none. The governor asks the U.S. Treasury Department to arrange a forensic audit of Kabul Bank and Azizi Bank, but Treasury is unable to find an international accounting firm that will undertake the audit. OIG Comment: Reportedly, communication between Treasury and USAID was poor at this time but has since improved. 03/2010 – The examination of Kabul Bank that began in January is completed, but the Directorate for Financial Supervision urges examiners to dig deeper. Efforts to intimidate DAB officials intensify. According to USAID, the Deloitte advisers remain detached, providing only theoretical advice instead of lending hands-on assistance to find evidence of the fraud that seemingly everyone believes exists. No one provides any warnings about a possible failure of Kabul Bank. OIG Comment: USAID officials indicate that the USAID staff responsible for managing the Deloitte contract were inexperienced and overcommitted. 06/2010 – DAB passes a resolution to end all participation by shareholders and board members in bank management decisions involving the commitment of bank resources. Other actions are taken to strengthen the Banking Law and DAB’s enforcement authority. 07/2010–08/2010 – DAB signs a memorandum of understanding with authorities in the United Arab Emirates to facilitate cross-border financial supervision and investigations. 08/2010–09/2010 – DAB places Kabul Bank under conservatorship on 8/28/2010. Further news articles cause a run on Kabul Bank. 09/2010–10/2010 – The Deputy Ambassador and the Coordinating Director for Development and Economic Affairs meet with USAID and Deloitte and later ask USAID to issue a cure notice to Deloitte. No such notice has yet been issued. 01/13/2011, USAID/Afghanistan officials did not take a position on whether Deloitte’s performance was satisfactory or unsatisfactory. 01/31/2011 — A New York Times article reports that fraud and mismanagement at Kabul Bank resulted in potential losses of as much as $900 million. |
TIMELINE OF KEY EVENTS
09/2003 – USAID/Afghanistan’s assistance to the Afghanistan Central Bank (DAB) Directorate for Financial Supervision begins under a contract with BearingPoint (which sold its public sector business units to Deloitte in 2009). 2007 – With assistance from BearingPoint, the DAB Directorate for Financial Supervision conducts its first full-scope bank examinations on all 18 banks in Afghanistan. 02/2008 – An International Monetary Fund study finds that ―bank supervision needs further strengthening,‖ and USAID steps up training in the Directorate for Financial Supervision. 11/2008 – BearingPoint’s onsite bank examination adviser receives two death threats apparently in conjunction with an examination of Kabul Bank and another bank. BearingPoint and USAID agree to discontinue BearingPoint’s participation in onsite bank examinations. BearingPoint staff members continue to assist with the examinations through offsite training, desk reviews of examination reports, etc. OIG comment: The death threats should have been recognized as a ―red flag‖ signaling a high risk of fraud at Kabul Bank. In response to this development, DAB, BearingPoint, and USAID/Afghanistan should have reinforced off-site assistance for bank examinations or taken other steps to search for fraud at Kabul Bank. 05/2009–07/2009 – BearingPoint advisers encounter indications of political interference in financial supervision functions. For example, in a training class, a trainer states that DAB has the power to remove the management of Kabul Bank. Trainees respond that, in reality, Kabul Bank has the power to remove the management of DAB. OIG comment: With more than 5 years of financial supervision experience in Afghanistan at this point, BearingPoint surely had a good understanding of the political economy of Afghanistan even before this incident. Nonetheless, this incident reinforced the message that weaknesses in the control environment were undermining the effectiveness of regulation and other checks and balances and internal controls. 08/2009 – USAID assistance to the Directorate for Financial Supervision continues under the Economic Growth and Governance Initiative (EGGI) contract with Deloitte. Key BearingPoint staff members continue to provide the same services under the new contract with Deloitte. 08/2009–09/2009 – Routine monitoring of Kabul Bank continues. Reported regulatory capital is weak but above the required minimum and, in response to a demand by DAB, Kabul Bank agrees to raise paid-in capital. 10/2009–11/2009 – Concerned with the use of lottery-linked deposit accounts (in which account holders can win large prizes) by Kabul Bank, Azizi Bank, and a third bank, DAB and members of Parliament criticize these accounts as un-Islamic and preying on avaricious impulses. 11/2009 – The DAB governor raises serious concerns to Deloitte’s lead adviser about Kabul Bank’s behavior and the financial condition of bank shareholders. 12/2009 –Rumors circulate that Kabul Bank shareholders have invested in Dubai real estate using funds supplied by Kabul Bank. DAB staff members deny these rumors and indicate that they have been investigated and shown to be untrue. (Subsequent investigation showed that the rumors were true.) 01/2010 – DAB performs a regular onsite examination of Kabul Bank. The DAB governor and the acting director of the Directorate for Financial Supervision instruct the examiners to look for insider abuses. The examination team is reportedly indirectly threatened by Kabul Bank management. OIG Comment: The rumors and reported threats against the examiners should have been recognized as additional red flags signaling a high risk of fraud at Kabul Bank. 02/22/2010 – A Washington Post article cites insider lending abuses and possible purchase of Dubai real estate with funds from Kabul Bank. The article prompts lengthy discussions at DAB and among U.S. Embassy officials, including those representing USAID and the Treasury Department. Deloitte advisers meet with the DAB governor to plan a response. OIG Comment: Recollections of responsible officials differ over what role USAID was supposed to take in responding to the allegations about Kabul Bank. USAID officials indicate they were told that Treasury would take the lead; Treasury officials indicate that they could not persuade USAID to be more engaged. 02/2010 – The DAB governor urges his examiners to look for support for these allegations, but examiners find none. The governor asks the U.S. Treasury Department to arrange a forensic audit of Kabul Bank and Azizi Bank, but Treasury is unable to find an international accounting firm that will undertake the audit. OIG Comment: Reportedly, communication between Treasury and USAID was poor at this time but has since improved. 03/2010 – The examination of Kabul Bank that began in January is completed, but the Directorate for Financial Supervision urges examiners to dig deeper. Efforts to intimidate DAB officials intensify. According to USAID, the Deloitte advisers remain detached, providing only theoretical advice instead of lending hands-on assistance to find evidence of the fraud that seemingly everyone believes exists. No one provides any warnings about a possible failure of Kabul Bank. 05/2010 – The examination report is presented to the DAB governor. It lists several violations of banking regulations and best practices and expresses concerns about controls to prevent money laundering and terrorist financing, loan approval requirements, and collateral requirements for loans. The report concludes that loss reserves should be increased. OIG Comment: Deloitte did not provide a copy of the report to USAID until USAID requested it in October. USAID officials indicate that the USAID staff responsible for managing the Deloitte contract were inexperienced and overcommitted. 06/2010 – DAB passes a resolution to end all participation by shareholders and board members in bank management decisions involving the commitment of bank resources. Other actions are taken to strengthen the Banking Law and DAB’s enforcement authority. 07/2010–08/2010 – DAB signs a memorandum of understanding with authorities in the United Arab Emirates to facilitate cross-border financial supervision and investigations. 08/2010–09/2010 – DAB places Kabul Bank under conservatorship on 8/28/2010. Further news articles cause a run on Kabul Bank. 09/2010–10/2010 – The Deputy Ambassador and the Coordinating Director for Development and Economic Affairs meet with USAID and Deloitte and later ask USAID to issue a cure notice to Deloitte. No such notice has yet been issued. 01/13/2011, USAID/Afghanistan officials did not take a position on whether Deloitte’s performance was satisfactory or unsatisfactory. 01/2011 – The preliminary draft report on a USAID-commissioned material loss review indicates that insiders at Kabul Bank used fraudulent loans to misappropriate $850 million, representing 94 percent of outstanding loans. 01/31/2011 – A New York Times article reports that fraud and mismanagement at Kabul Bank resulted in potential losses of as much as $900 million. |
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