Kabul Bank and Pamir Airways

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Special Forward by Michael Semple

On May 17th 2010 an Antonov AN-24 passenger plane crashed en route from Kabul to Kunduz, killing all forty-four people on board. This was Pamir Airways’ Flight 112. The tragedy provoked a series of questions around operating practices in Afghanistan’s new private sector airline business. It ultimately led to Afghanistan’s Ministry of Transportation and Civil Aviation announcing the withdrawal of Pamir Airways’ operating license in March 2011. This study will help ensure that the right lessons are learnt from the collapse of Pamir Airlines.

Michael Huffman has delved inside a rather different “black box” from the one which was recovered from the mountainside north of Kabul. The report is a continuation of his investigation of illegal financial practices of those responsible for Afghanistan’s pioneering private sector financial institution, Kabul Bank. Based on detailed testimony from banking whistle-blower “Q”, Michael has documented how the former chairman of Kabul Bank acquired Pamir Airways and tried to build up the company with capital diverted from the bank. By the time Pamir went out of business Kabul Bank had incurred some $93 million in losses from its investment in the company.

This report details how the Pamir collapse was due to gross “pilot error” by those who jointly owned and managed Kabul Bank and the airline. Most of the investment took the form of illegal loans from Kabul Bank. The Pamir-Kabul Bank corporate leadership systematically evaded audit, withheld documentation and avoided due diligence oversight in their investment decisions. In Kabul Bank’s boom years the bank’s leadership played elite politics, cultivating relationships with power-brokers around the Afghan government to evade regulations and gain advantage over rivals. As Kabul Bank’s fortunes changed, the same elite politics played against the airline and bank, as rivals used their positions in government to hasten the demise of the enterprises.

The basic lesson that “Q” proposes is that the leaders of Kabul Bank were brought down by arrogance as much as greed. Modern corporate governance rightly imposes limits on the ability of executives and owners to dispose of corporate funds, limits which were routinely transgressed in Kabul Bank. This kind of forensic work can help take us beyond “Afghan exceptionalism”. What Sher Khan did to Kabul Bank and Pamir has obvious international parallels, such as in Ireland’s elite corruption and the collapse of the Anglo-Irish Bank. The broader lesson is that one of the main threats to the survival of the political system in Afghanistan is the unaccountable, reckless, greed of a chunk of the post-2001 elite. This report carefully documents the hubris-driven demise of one part of the project of building a new Afghanistan.

Michael Semple

Anna Lindh Research Fellow, Carr Center for Human Rights Policy

Harvard Kennedy School

 

Introduction

As noted in “How They Robbed Kabul Bank,” a former senior Kabul Bank official contacted this author in January 2012 after reading another paper that this author wrote about Kabul Bank, in 2011, entitled “The Kabul Bank Scandal and the Crisis that Followed.” The former official, referred to as “Q” in order to protect his identity, wanted to share his eyewitness account of what really happened at Kabul Bank.

The current paper is the second written in collaboration with Q. It is a case study on Pamir Airways, one of the businesses that received over $90 million illegally from Kabul Bank. The Pamir story is significant in part because it showcases the bank’s underground illegal loan service as well as Afghan business politics, the later through Pamir’s intersection with Zamari Kamgar, Zabiullah Shaikhani, Ahmad Zia Massoud, Abdul Rashid Dostum, Abdul Ghafar Dawi, Abdul Qadir Fitrat, and Daud Ali Najafi. The Pamir story is also important because of the 44 people who died on May 17, 2010, aboard Flight 112.

Kabul Bank (now “New Kabul Bank”) was Afghanistan’s largest private, or commercial, bank. It opened on June 24, 2004, and by August 2010 had 75 branches with at least one branch in each of Afghanistan’s 34 provinces.[1] At the end of August 2010, Kabul Bank had received $1.3 billion in deposits from the Afghan public.[2] Kabul Bank also managed a $1.5 billion annual contract to pay the salaries of about 80% of Afghanistan’s government workers.[3]

Kabul Bank’s two leading shareholders, Sherkhan Farnood and Khaliullah Fruzi, the chairman of the Board of Directors and the CEO respectively, were fired for mismanagement on August 30, 2010. Their dismissals triggered a deposit run on September 1, which led to a government bailout. The bank went into receivership in April 2011. The functioning part of the bank continued as New Kabul Bank.

 

Sherkhan Acquires Pamir

In 2006, Kam Air, an Afghan-owned airline, took out a consortium loan with Kabul Bank and the National Bank of Pakistan (NBP) to purchase a used Boeing 737-200. Kabul Bank’s loan to Kam Air was for $3.5 million and NBP’s loan was for $2.5 million. Kabul Bank’s loan to Kam Air was a legal loan. Zamari Kamgar is Kam Air’s owner.

Zabiullah Shaikhani, the owner and manager of Pamir Airways, heard about Kam Air’s Kabul Bank loan and wanted to get a consortium loan for his airline too. Zabiullah was good friends with Ahmad Zia Massoud, the former Afghan Vice President and the brother of famed Northern Alliance leader Ahmad Shah Massoud. Zabiullah and Zia approached Sherkhan for a loan but were turned down because of Sherkhan’s close ties to Kamgar. Also, Sherkhan was doubtful over Zabiullah’s business capabilities in running his airline.

Sherkhan and Kamgar are ethnic Uzbeks, one of Afghanistan’s four major ethnic groups.[4] Sherkhan did not want to offend Kamgar by enabling one of Kamgar’s rivals –Pamir Airways- to purchase a plane. However, as a gesture to Zia, Sherkhan extended Zabiullah a $300,000 line of credit to assist Pamir’s day-to-day operations. Sherkhan did not offer Zabiullah an illegal loan, or a loan issued using a so-called “fictitious” name, because this exclusive borrowing route was reserved for only Sherkhan, Fruzi, and their close associates, many of whom were Kabul Bank shareholders.

Sherkhan Farnood is an accomplished poker player. This photo is used with permission by PokerNews.com.

Sherkhan Farnood is an accomplished poker player. This photo is used with permission by PokerNews.com.

Pamir Airways had only one airplane, a used Boeing 737-200, that was old and in constant need of repair.[5] The result was that flights were frequently cancelled, which led to customer erosion. While Pamir had route permissions and licenses to fly through several major hubs, such as Jeddah, New Delhi, and Riyadh, its lone 737 flew each day from Dubai to Kabul, from Kabul to Herat (in western Afghanistan), and from Herat back to Dubai.

In February 2008, Sherkhan moved to Dubai permanently to handle his business interests there. At the time, Fruzi was Kabul Bank’s Deputy CEO. He became CEO that June. With Sherkhan in Dubai, Zia, who was friends with Fruzi, approached Kabul Bank again on behalf of Pamir. After Zia asked Fruzi for a loan, Fruzi suggested instead that Zabiullah sell Pamir to “Kabul Group,” which was an unregistered (legally non-existent) parent company composed of Kabul Bank’s shareholders and a few other businessmen.[6]

Beset with minimum resources, an old plane, a lack of vision, and competition from rivals Kam Air, Safi Airways, and state-owned Ariana Afghan Airlines, Zabiullah painfully agreed to sell his airline. The purchase was finalized in April 2008 and the price was agreed at $3.5 million, all of it provided by Kabul Bank in the form of illegal loans made out to “fictitious” borrowers. Kabul Bank injected an additional $6.5 million into Pamir Airways to revitalize the airline. This money too was drawn from illegal loans.

EX-311_JPC_Van_Heijst

Above is Pamir Airways EX-311, a Boeing 737-200 and the only Pamir plane at the time of the airline’s acquisition by Kabul Group. The photo was taken at the Kabul International Airport on February 8, 2008, by Christiaan van Heijst from airliners.net. The photo is used with special permission from AirTeamImages.com.

At the time of Pamir’s acquisition, Sherkhan and Fruzi alleged that the initial $10 million invested into Pamir comprised Pamir’s new shareholding. The money functioned as investment capital. At Kabul Bank, the illegal Pamir loans were identified by the fictitious names; however, at the Sherkhan-owned Shaheen Exchange in Dubai, whose computer system mirrored Kabul Bank’s illegal loans with the exception that the latter had both the fictitious names and the real borrowers’ names, these loans were marked as either “Pamir” or “Zahir Group” loans.[7]

According to Q, Sherkhan agreed to purchase Pamir for two reasons. The first was that Kamgar had refused to give Sherkhan shares in Kam Air following Kam Air’s loan approval. Sherkhan believed that he deserved Kam Air shares since Kabul Bank’s loan empowered Kam Air to bring in additional revenue through the purchase of an extra plane. Q says that rather than displaying an attitude of gratefulness to Sherkhan and Kabul Bank, Kamgar grew arrogant and began treating Sherkhan like any other lender. Kamgar’s cultural insult motivated Sherkhan to retaliate.

The second reason why Sherkhan agreed to acquire Pamir was because he saw the profit potential in the aviation sector and he believed that Kamgar was blowing his opportunity through poor management. Sherkhan thought that Kam Air should have acquired considerably more market share by 2008 than it had in 2006, especially given that in 2008 Safi Airways had just begun operations and Ariana Afghan Airlines was in shambles. Sherkhan complained that Kamgar was spending Kam Air’s revenue on girls and villas rather than reinvesting the money to expand his airline. According to Q, Sherkhan’s attitude was that since Kamgar was wasting his opportunity to dominate Afghanistan’s commercial aviation sector, then he (Sherkhan) was going to do so.

Fruzi argued that since Kamgar refused to give Sherkhan Kam Air shares then Sherkhan should teach Kamgar a lesson by purchasing Pamir. He also noted that owning an airline would keep all of air transportation in the hands of non-Pashtun ethnic groups.[8] Fruzi was concerned that Pamir’s financial weakness would have eventually forced Zabiullah to sell the airline in which case its future ownership was uncertain.

Given Afghanistan’s underdeveloped land transportation infrastructure, a monopoly on air transportation would bring in huge profits and give the airline owners considerable influence with the Afghan president and the government. Fruzi, who is a Tajik from Panjsher Province, also argued that owning an airline would boost his and Sherkhan’s image in the Tajik and Uzbek business communities.

Khailiullah Fruzi, Kabul Bank's CEO (Q photo)

Khailiullah Fruzi, Kabul Bank’s CEO (Q photo)

Pamir’s new shareholding was composed of six people: Sherkhan, Fruzi, Haseen Fahim (the first vice president’s brother), Mohammed Tahir, Ghulam Farooq Naseeb, and Zabiullah. The latter was made a shareholder to hold him accountable for any past liabilities. With the exception of Zabiullah, the other five shareholders were Kabul Bank shareholders, which made Pamir a “related party” to Kabul Bank.[9]

Significantly, Mahmoud Karzai, the president’s brother, was not made a Pamir shareholder even though he was a part of Kabul Group, or Sherkhan and his associates. Sherkhan’s decision to exclude Mahmoud from Pamir’s shareholding infuriated the latter and marked the beginning of the Sherkhan-Mahmoud Karzai split.

Pamir’s administration was led by Sherkhan, the chairman, Fruzi, the director, and Tahir, the CEO, until Sherkhan fired the latter after less than three months on the job and replaced him with Amanullah Hameed in June. Other administrators included Momin Khan, the Deputy CEO of Operations, and Bassam Abdul Rahman, the Deputy CEO of Administration and Finance.

The news of Kabul Group’s acquisition of Pamir Airways did not go over well with Kam Air, which knew that with Kabul Bank’s vast resources, it could pump millions of dollars into Pamir and bite into Kam Air’s market share. Zamari Kamgar was allied with Uzbek warlord General Abdul Rashid Dostum, who fought against the Taliban in the 1990s and whose militia worked alongside U.S. Special Forces to topple the Taliban in late 2001. Q describes Dostum as the “godfather” of Kamgar, and Kam Air as a “Dostum fiefdom.”

Sherkhan also cultivated an acquaintance with Dostum. They first met in the 1980s during the Russian occupation of Afghanistan. Sherkhan understood Kamgar’s relationship to Dostum, so he knew that as an Uzbek he could not also start up an airline that operated in northern towns without running into problems with Dostum, Kam Air’s protector.

According to Q, Sherkhan responded to the political challenge by naming shareholders that would appease Dostum and by bribing him regularly.[10] A pro-Dostum shareholding would permit Dostum to shake down the new Pamir shareholders for money whenever he wanted to and they would willingly comply. Consequently, none of the shareholders could be Pashtun, which excluded Mahmoud Karzai who hails from the Pashtun Popalzai tribe in the southern Kandahar region of Afghanistan.

Generally speaking, Sherkhan showed flexibility in his business politics toward all Afghan ethnic groups. For example, Sherkhan made Mahmoud Karzai a Kabul Bank shareholder and engaged in business ventures with him. Sherkhan also made Abdul Ghafar Dawi, a Pashtun discussed shortly, a Kabul Bank shareholder. In fact, while Sherkhan is Uzbek, his wife is Tajik and his mother is Pashtun.[11] However, Sherkhan was constrained in Pamir’s case because of Dostum’s political and financial interests.

Pictured above is Pamir Airways EK-10151, a McDonnell Douglas DC-10, which the airline operated in 2005 only, according to planespotters.net. The photo was taken at the Sharia International Airport (UAE) on March 27, 2005, by Konstantin Von Wedelstaedt from airliners.net. Mr. Wedelstaedt granted permission to use the photo for this paper.

Pictured above is Pamir Airways EK-10151, a McDonnell Douglas DC-10, which the airline operated in 2005 only, according to planespotters.net. The photo was taken at the Sharia International Airport (UAE) on March 27, 2005, by Konstantin Von Wedelstaedt from airliners.net. Mr. Wedelstaedt granted permission to use the photo for this paper.

Q says that Sherkhan’s bribe to Dostum went into the millions of dollars, which is the sort of money that Kamgar was funneling to Dostum. For example, in 2006, while finalizing Kabul Bank’s loan to Kam Air, a senior Kam Air official, who was also a relative of Kamgar, explained to Q that Kam Air would be late making its monthly installments because of the regular bribes it was paying to Dostum.

Sherkhan also regularly funneled money to Dostum, even before Pamir’s acquisition. Many times over his years at Kabul Bank, Q heard Sherkhan and Fruzi say that they had bribed Dostum with “x” amount and “y” amount of money. These were six-digit figure bribes in U.S. dollars. One of the more colorful bribes was in 2008. Dostum swapped three of his used Land Cruisers with Sherkhan in exchange for three brand new bulletproof Land Cruisers. Kabul Bank used Dostum’s old Land Cruisers.[12]

After Kabul Group’s acquisition of Pamir, Kabul Bank’s internal audit department started a due diligence audit of the acquisition for compliance requirements since Kabul Bank shareholders were required to disclose their business interests. While purchasing a small item, such as a shirt, is quick and simple, requiring only a receipt for the buyer, purchasing an airline is complicated. There are a number of documents involved, various agreements need to be signed, a business plan must exist, and much more. The following is an extensive, but not an exhaustive, list of the types of items that the audit department requested to see from Pamir Airways:

  • the memorandum and articles of association,
  • bylaws,
  • the business plan,
  • proof of shareholder transfer,
  • the regulatory filing with respect to change of ownership agreement (with no objection certificate),
  • the balance sheet as on the date of acquisition,
  • the fixed asset list,
  • outstanding liabilities,
  • profit loss statements as on the date of acquisition,
  • bank statements,
  • audit reports by aviation oversight regulatory bodies,
  • tax returns,
  • the tax clearance certificate,
  • the aircraft purchase agreement together with the log books and manual,
  • insurance details,
  • the air operator license,
  • route permits,
  • landing and parking permits,
  • the aircraft inspection certificate and airworthiness certificate,
  • details of maintenance hubs and agreements with third party service providers if any,
  • the history of the aircraft with its logs and maintenance logs including checks performed on the aircraft,
  • the employee list,
  • the ticketing agents’ list and their agreements and details of deposits held by Pamir if any,
  • Biographical and Financial Reports (BioFins) for the pilots and other crew members,
  • a letter from a legal counsel detailing any litigations and their probable outcomes if any,
  • details relating to training facilities if any, and
  • any other details as may be requested from time to time.

Zabiullah was stalling on the delivery of about half of the above listed items. Both Zabiullah and Sherkhan were heavily stalling on submitting documents relating to the shareholding. According to Sherkhan and Fruzi, the shareholding was made up of the initial $10 million dollars that was injected into Pamir at its acquisition; however, there were no documents to prove the shareholding.

The reason why Pamir Airways and Sherkhan and his associates did not provide the documents attesting to Pamir’s new shareholding was two-fold. First, Zabiullah was unwilling to disclose the true selling price of Pamir to avoid paying taxes on the $3.5 million he received for the airline’s sale. Second, after obtaining the shareholding documents, Kabul Bank’s internal audit department would have requested the source of the $10 million to which Sherkhan and Fruzi could not have revealed without exposing Pamir’s illegal Kabul Bank loans.

In 2010, a close associate of Pamir Airways and Q’s friend, gave Q details on Pamir’s true shareholding as it stood that year. As Table 1 below shows, Pamir’s shareholding in 2010 was actually $3 million, not $10 million. Kabul Group did initially invest $10 million into Pamir, but only $3 million of it actually comprised the shareholding. Sherkhan and Fruzi stated that the shareholding was $10 million because such a high amount was appropriate for such a large company. Zabiullah does not appear in the shareholding in 2010 because by that time he had sold his shares, probably to Sherkhan.

Pamir Airways' Shareholding in 2010

Two particular items that Zabiullah did not provide to Kabul Bank’s audit department were Pamir’s tax returns and the tax clearance certificates. Due to the Afghan government’s limited resources, it has devised a peculiar system to ensure that businesses pay their taxes. The government has linked the paying of taxes to the renewal of the business license, which in Afghanistan must be done annually.

In Afghanistan, one of the main requirements for renewing the business license is that businesses must produce a tax clearance certificate from the Ministry of Finance (MoF). To get the tax clearance certificate, a business must file its tax return and pay its taxes for the previous year to the MoF. The fact that Pamir could not produce tax returns and the tax clearance certificates suggests that it did not have them (it was not paying its taxes), which also suggests that Zabiullah was able to renew Pamir’s business license each year by bribing one of the two bodies that issue the business licenses, either the Ministry of Commerce (MoC) or the Afghanistan Investment Support Agency (AISA). Q says that Zabiullah may have even bribed the MoF for the tax clearance certificate.

Q notes that Sherkhan and his associates viewed the acquisition of companies like the person buying the shirt in the above example –quick, simple, and with no concrete plans for its future. Eventually, Zabiullah complained to Ahmad Zia Massoud, who complained to Fruzi, who told the audit department to stop the audit.

 

Pamir Struggles to Become Profitable

Pamir Airways set up its running account with Kabul Bank, which meant that it deposited its proceeds into the account and made withdraws from the same account as needed. However, Pamir continued to lose money even after the acquisition. This meant that more money was withdrawn from Pamir’s account with Kabul Bank then was deposited into it. Kabul Bank provided the automatic funding for Pamir whenever Pamir’s revenue was insufficient to cover its expenses.

Pamir’s losses each month ran into the millions of dollars. More illegal loans were issued to cover the losses. However, the loans were not the only funding mechanism for Pamir as cash was needed each month to pay for things like airplane parking fees, fuel, and other expenses, which needed to be paid in advance. What Fruzi did was to wire money to the various creditors but not account for the money in Kabul Bank’s books. The money was snatched from the settling differences in Kabul Bank’s NOSTRO accounts. NOSTRO accounts are accounts that banks open with other banks for transfer and clearing purposes. Referred to as an “unadjusted loan amount,” the money taken through this mechanism amounted to $26 million by the end of August 2010.

The settling difference between Kabul Bank’s NOSTRO accounts occurred because of the time it took for a wire transfer to take effect.[13] There is always a difference between the balance of a bank’s NOSTRO account –as recorded in its own books, in this case Kabul Bank- and the balance in the books of the bank holding the NOSTRO account. Auditors relied on the “reconciliation work sheet” prepared by Kabul Bank and the balance confirmation provided by the other banks that held Kabul Bank’s NOSTRO accounts. Fruzi and Sherkhan hid the differences between wire transfers in the reconciliation worksheets.

In order to determine why Pamir Airways was losing money, Kabul Bank’s audit department advised Fruzi, both at the time of the acquisition, and on numerous occasions thereafter, to hire independent auditors to perform an independent due diligence audit. Such an audit would also permit Sherkhan and Fruzi to get an expert opinion about Pamir so that they could run the company professionally. Behl, Lad and Al-Sayegh, Kabul Bank’s own independent auditors from 2004 to 2008, were selected to perform the audit, but they were forced to stop the audit because, like the internal audit that preceded theirs, they too could not obtain some of the acquisition papers, particularly the shareholding documentation, which meant that neither the capital structure nor the shareholders’ identities could be proved.

The stopping of the audit was a serious blow to Pamir Airways because, as previously noted, in Afghanistan business licenses must be renewed annually and one of the requirements for the business license renewal is an audit, in order to determine how much tax a company owes. In addition, the accounting firm that would audit Pamir Airways at the end of its first business year (under the new management) would likely discover that a previous independent audit had been stopped before completion and would want to know why. Put simply, if the audit of Pamir stopped, it could prevent Pamir’s business license from being renewed. Moreover, given the sort of scrutiny that Pamir was under by the Afghan central bank due to Pamir’s ties to Kabul Bank, Q says that it would have been difficult for Sherkhan to bribe his way through as Zabiullah had done.

There was a meeting called between Pamir and Behl, Lad and Al Sayegh. Kabul Bank’s chief advisor, Johnson Rapai Malakial, previously Kabul Bank’s general manager and acting CEO, negotiated on behalf of Pamir. The result of the meeting was that Behl, Lad and Al Sayegh agreed to accept Pamir’s capital structure as given by Sherkhan without independent verification.

By June 2008, Pamir CEO Mohammed Tahir failed to stop Pamir’s losses. Sherkhan’s reputation with Kabul Bank’s shareholders began to suffer because it was evident to everyone that Pamir was an investment fiasco. That month, Sherkhan took a radical action. He fired Tahir and replaced him with Amanullah Hameed, a member of Kabul Bank’s Board of Directors. Next, Sherkhan personally involved himself with management, flying to Kabul from time to time as needed, as he was now in Dubai. Q notes that when Sherkhan flew to Kabul, he did not visit Kabul Bank, since Fruzi had taken charge of the bank from February 2008.

Sherkhan took dramatic action to help Pamir Airways to post a profit. Apart from firing Tahir, Q has identified eight other actions that Sherkhan implemented to save the airline. The steps presented here are not necessarily in chronological order. One, Sherkhan hired an advisor, Hashim Karzai, President Hamid Karzai’s cousin. Hashim was a U.S. citizen and rumored not to be on good terms with Mahmoud Karzai. Hashim was living in the U.S. when Sherkhan asked him to come to Afghanistan to serve as a Pamir advisor.

Two, Sherkhan instituted online booking. Prior to Sherkhan taking over management, the mechanism for managing ticket sale revenue was susceptible to theft from the ticketing agents. The agents were allowed to deduct their own commissions and then remit the net proceeds to the company. However, management’s collection oversight was weak and the ticketing agents were left to their own good will to remit the net proceeds. Pamir ticketing agents’ commission was also the highest among Afghan-owned airlines. Online booking reduced the money passing through the ticketing agents and guaranteed that the money went to the company.

Three, Sherkhan leased six planes from East Air in hopes of bringing in more revenue from ticket sales. Pamir’s six leased planes were wet leased. There are three types of leases: wet, dry, and damp. The wet lease means that the lessor, in this case East Air, does everything and the lessee, or Pamir, pays for it. The lessor provides the planes, crew, food (if any), maintenance, and fuel.

In the dry lease, the lessee rents the plane but provides for everything else –the crew, food, fuel, and maintenance. The damp lease, the most popular of the leases, is a combination of the wet and dry leases. The lessee still rents the plane and provides for some portion of the services needed to run the plane. For example, the lessee may agree to supply the cabin crew and food, but let the lessor supply the pilots. Various service arrangements may be made under a damp lease.

A fourth action that Sherkhan took was that he lowered ticket prices to such an extent that the other Afghan airlines could not compete and Pamir began to win significant market share. The move was controversial because Sherkhan was trying to drive his competitors out of business, and his competitors suspected that Kabul Bank financing had enabled Pamir to lower its ticket prices without putting itself out of business. As Q puts it, Kabul Bank was Pamir’s “milk cow,” meaning that whenever Pamir needed extra milk –a figurative reference to money- it would get whatever it needed from Kabul Bank, which was subsidizing Pamir Airways.

The lowering of ticket prices was not without drawbacks. Kabul Bank was pouring money into Pamir to compensate for the low-ticket prices since the ticket proceeds were not enough to cover all of Pamir’s expenses, let along turn a profit. Viewed alternatively, Kabul Bank was effectively pouring millions of dollars of its depositors’ money into an abyss. The artificially low-ticket prices also generated animosity among Pamir’s competitors. The other airlines felt cheated because Kabul Bank was giving Pamir an unfair competitive advantage. They did not have a problem with Pamir competing in terms of offering a superior service or product, but no one could match Pamir’s cheaper prices and Afghans flocked to Pamir as a result.

Consequently, Pamir’s competitors stirred up negative publicity against Pamir by raising the specter of a Pamir monopoly to Western agencies and countries. According to Q, Sherkhan did not take too seriously the anti-Pamir publicity campaign because he believed that at the end of the day flyers would remain with Pamir due to its cheaper ticket prices. However, Q adds that Sherkhan would have raised ticket prices had he succeeded in putting his competitors out of business.

In 2009, Sherkhan took a fifth action by starting a company in Dubai called Royal Pamir Airlines, which was designated as a general travel agent (GTA) for Pamir Airways, and staffed with “Russian professionals,” as Q calls them. Sherkhan shifted Pamir’s operations to Royal Pamir, using the latter to recruit experienced pilots from reputable airlines. Q says that the move to Dubai was a good one because it put the airline in competent hands and enabled Pamir to recruit the best pilots. However, Pamir’s Kabul headquarters remained opened, which led to some disorganization since Pamir’s operations were being run from two separate locations.

 

The Purchase of Boeing 737-400, YA-PIB

Even with the additional six leased planes and Sherkhan’s other initiatives, Pamir still could not post a profit. Two drawbacks to leasing planes are that the lessee has to pay to the lessor the amount agreed upon, whether the aircraft flies or not, and the airline does not get an asset. The leased plane always belongs to the lessor. Consequently, Sherkhan decided on a sixth action and that was to purchase planes instead of leasing them. Sherkhan negotiated with a General Electric intermediary to purchase a 160-seat used Boeing 737-400 for $11.5 million.

The Kabul Bank loan for the plane was a legal one and it was the only legal loan that Kabul Bank ever issued to Pamir Airways. To obtain the Kabul Bank loan, Pamir had to meet two separate sets of criteria. The first set of criteria had to do with applying for the loan and the second pertained to related party lending regulations. Kabul Bank’s credit policy required borrowers of business loans to fill out a loan application and to provide certain financial and statutory documents. The loan application established the identity of the borrower, stated the desired loan amount, and identified collateral in case of default. The financial documents that Kabul Bank required from businesses were:

  • a business license,
  • tax returns for the last two years (if applicable),
  • independently audited balance sheets (lists all assets, liabilities, income, cash flow, and various schedules) for the last two years (if applicable),
  • the documents that prove these assets and liabilities existed and truly belonged to the business (invoices, receipts, titles, etc.), and
  • a business plan.

Statutory documents included the memorandum and articles of association and byelaws. The business plan was significant because it showed how much funding was required and explained step-by-step how the business would turn a profit with the new funding. Business plans are usually prepared with a consultant’s assistance and worked out from the audited balance sheets. Start-up businesses do not have balance sheets to work from.

Upon receiving these documents, Kabul Bank investigated to confirm their legitimacy, and after understanding the business plan, tried to determine if the loan amount was sufficient and if its purpose would in fact make profit for the business. While the loan application process may sound tedious, it was designed to protect the bank’s money.

The second set of criteria that Pamir Airways had to meet addressed related party lending since some of the Pamir shareholders were also Kabul Bank shareholders. First, Kabul Bank had to demonstrate that Pamir had not influenced the loan decision process.[14] Second, no favorable terms could be extended to Pamir, such as a lower than normal interest rate. And, third, following loan approval, the bank was obliged to rigorously monitor the performance of the loan, which required the borrower to make adequate disclosures throughout the life of the loan.

Kabul Bank approved the loan for $11 million. The plane’s price was $11.5 million but Pamir was required to pay $500,000 of its own money towards the plane according to the loan’s terms. The loan was an eight-year term loan with a six-month moratorium, meaning that Pamir did not begin making its monthly payments until six months after the plane’s delivery. The six months were needed to receive the plane, to get it ready for service, to re-register it, and then to bring it into service to generate revenue for Pamir. After Pamir’s loan was approved, Kabul Bank voluntarily disclosed the existence of the loan to the central bank.[15]

The central bank responded to Kabul Bank’s disclosure by sending a team to Kabul Bank to scrutinize the loan. According to Q, the central bank was very pleased because the Pamir loan was by the books. Even Sherkhan and Fruzi were happy. Pamir had been thoroughly scrutinized by an internal audit and the bank before loan approval, and after loan sanction, by an independent auditor and the central bank. The loan was legal and served as a textbook example of how to correctly address related party lending regulations in Afghanistan.

The 737-400 was registered with the Ministry of Transportation and Civil Aviation (MoTCA) in Afghanistan as YA-PIB.16 The “YA” is the country code for Afghanistan, the “P” stands for Pamir, and the “IB” refers to the individual aircraft. Registration codes are painted on planes and may be thought of as airplane license plates. A plane’s history may be traced backward through the registration code. For example, for YA-PIB’s history, one would look at the plane’s file with the MoTCA, and discover where the plane was registered previously, and continue working backward from there. Today, public aviation websites, such as rzjets.net, planespotters.net and airport-data.com, make it easy to quickly learn about an airplane’s ownership history.

Pictured above is Pamir Airways YA-PIB, a Boeing 737-400. Note the registration code painted under the wing. The photo was taken at the Dubai International Airport on August 17, 2009, by Sergey Frolov from airliners.net. Mr. Frolov granted permission to use the photo for this paper.

Pictured above is Pamir Airways YA-PIB, a Boeing 737-400. Note the registration code painted under the wing. The photo was taken at the Dubai International Airport on August 17, 2009, by Sergey Frolov from airliners.net. Mr. Frolov granted permission to use the photo for this paper.

After the plane was registered, Kabul Bank placed a lien on the plane with the MoTCA because the plane was financed. The lien would prevent Pamir Airways from selling the plane before it had paid off the Kabul Bank loan, since purchased planes must be deregistered with their old owner and re-registered with the new one.

Kabul Bank also asked YA-PIB’s new insurer to assign the proceeds to Kabul Bank, except for third party/passenger liability, in the event of an accident. Since YA-PIB was financed, in the event it was destroyed in a crash, for example, the insurer would issue the payout to Kabul Bank and not to Pamir. Q notes that the central bank team that visited Kabul Bank to inspect the Pamir loan file, did not understand why Kabul Bank placed a lien on the plane or why it requested the insurance assignment.

YA-PIB was insured for $11.5 million through Insurance Corporation of Afghanistan (ICA), Afghanistan’s first private insurance company. The annual premium was $750,000 paid quarterly. The policy was underwritten by Lloyds of London and had four components: the hull, the engine, the equipment, and third party/passenger liability.

The purchase of YA-PIB was a huge accomplishment for Pamir Airways. Soon afterward, Pamir Airways tried to get a second legal loan from Kabul Bank to purchase a second plane but was rejected because Pamir’s business model did not support the purchase of a second plane. One of the most important requirements for any loan is the borrower’s repayment ability, and Pamir could not show that it would be able to repay a second $11 million loan for another Boeing 737-400.

What to do? Sherkhan and Fruzi pressed on with the purchase of additional aircraft via the illegal loan route. They spent $34 million for three additional 737-400s and $12 million for five Russian-made Antonov planes, the kind with the propellers. All of these additional purchases were for used planes. Q notes that all Afghan-owned airlines only purchase used planes as new ones are cost prohibitive.

Like YA-PIB, all of Pamir’s other planes were insured by ICA, although the underwriter varied. The Antonovs were underwritten by Kapital Insurance, a Russian insurance company and a subsidiary of Moscow-based Kapital Insurance Group.[17] Johnson negotiated with ICA to insure all of these latter planes. In the end, Pamir owned a total of ten planes, including its original 737-200 that it got from Zabiullah, and stopped leasing completely. Pamir’s massive fleet made it the largest Afghan airline.

Antonovs are smaller than the Boeing 737, and the models that Pamir purchased sat about 50 people. However, the Antonovs are more rugged than the Boeings and can take off and land on short, unpaved runways.[18] Due to Afghanistan’s poor aviation infrastructure, apart from Pamir’s international flights, its Boeing 737-400s could only fly in and out of Kandahar, Herat, and Mazar-E-Sherif. The Antonovs were used at all other locations, including at Kabul where the existence of dangerous crosswinds over the runway is best handled by the Antonovs. The biggest problem with the Antonovs was the lack of onboard radar. They were completely reliant on air traffic control in bad weather and low visibility weather conditions. The 737-400s were not manufactured with onboard radar but Pamir had them retrofitted with it.

As for the condition and safety of Pamir’s planes, Q insists that they were top of the line. Airplane maintenance checks may be divided into four categories: A, B, C, and D checks.[19] A checks are the least intrusive and are performed by the flight engineers. D checks are the most intrusive and include ripping apart the fuselage and reconstructing it. All of Pamir’s planes, even the ones purchased with illegal loans, underwent D checks before entering service. In addition, all of Pamir’s planes were given airworthiness certificates in the countries where they were refurbished.[20]

YA-PIB and the other Boeings’ maintenance contracts were undertaken by authorized Boeing service centers in the EU and some of the central Asian states. Russian engineers stationed at service centers in Kabul, Tajikistan, and Uzbekistan performed the maintenance for the Antonovs.

The seventh action that Sherkhan took to help Pamir turn a profit was to push Pamir’s fleet of planes to the limit by having them fly in and out of many locations each day thereby reducing the fleet’s idle time. An aircraft earns money only when it is in the air. Known as “tight window schedules,” Pamir flights often had as little as 30 minutes in between flights, which was insufficient to respond logistically to passenger turnover between flights or to repair a plane that had incurred minor damage caused by Afghanistan’s poor runways. Delays were inevitable, and this led to customer dissatisfaction. Pamir’s competitors, who feared Kabul Bank’s patronage of Pamir, argued that Pamir’s frequent delays were evidence of a poor safety record.

 

Abdul Ghafar Dawi

One of an airline’s biggest expenses is fuel. In 2009, Sherkhan began considering an eighth action to help Pamir turn a profit by addressing the high cost of fuel in Afghanistan. Sherkhan already owned an oil company, called Kabul Neft. His thinking was that he could purchase his own aviation refueling trucks and then use the fuel from Kabul Neft to supply the Pamir fleet. Airplane refueling in Afghanistan is provided exclusively by Dawi Oil, which is owned by Abdul Ghafar Dawi.

Above is Pamir Airways YA-PIR, a Boeing 737, and one of the planes purchased with illegal Kabul Bank loans. Note the registration code painted near the tail and under the wing. The photo was taken at the Dubai International Airport on March 15, 2010, by Szabo Gabor from airliners.net. Mr. Gabor granted permission to use the photo for this paper.

Above is Pamir Airways YA-PIR, a Boeing 737, and one of the planes purchased with illegal Kabul Bank loans. Note the registration code painted near the tail and under the wing. The photo was taken at the Dubai International Airport on March 15, 2010, by Szabo Gabor from airliners.net. Mr. Gabor granted permission to use the photo for this paper.

When Kabul Bank first opened in 2004, its main headquarters was located on a piece of Sherkhan’s own property on Flower Street in Kabul. However, in 2005, Sherkhan moved Kabul Bank to a new location that Dawi owned. The new property had been used by the Pakistani embassy before the fall of the Taliban government in late 2001. Dawi had managed to secure a 99-year lease for the property and then re-leased it to Kabul Bank. Sherkhan developed an acquaintance with Dawi in 2005 through the leasing of the new property.

At the same time, Dawi and his wife, Shukria Barakzai, were both running for seats in the September 2005 Parliamentary election. Sherkhan hosted an election campaign function for both of them on Kabul Bank’s new premises. The function cemented the Sherkhan- Dawi relationship. Dawi ended up losing in the election but his wife won, and with the help of her political influence and Kabul Bank financing, Dawi negotiated a contract with the Afghan government in October 2006 to be the sole supplier of aviation fuel at ten airports across the country, a government-sanctioned monopoly by any other name.[21]

After observing Dawi’s business potential and ambition, and not wanting to lose the property that Kabul Bank was leasing, particularly since he had invested so much into the property itself, Sherkhan brought Dawi into Kabul Bank’s Board of Directors in 2007. As he did with Kam Air, Sherkhan also tried to get shares of Dawi Oil because from his point of view Dawi could not have gotten the aviation-refueling contract without Kabul Bank’s financing, but like Kamgar, Dawi would not allow Sherkhan into his company.

The Sherkhan-Dawi relationship was short-lived. While at Kabul Bank, Dawi entered into the business of the credit department because, according to Q, he was obsessed with taking out more money whenever he wanted to in order to fund his businesses. Khaliullah Fruzi was in charge of loan disbursements at the time and a power struggle emerged between Dawi and Fruzi. Dawi also fell out with Johnson.

Q explains that Dawi even tried to circumvent Sherkhan. For example, Dawi began to bring “his people” into Kabul Bank for jobs and tried to sanction loans for his business associates. These were powers reserved only for Sherkhan, and later Fruzi. Dawi even began to take money out without Sherkhan’s knowledge, something that was never done before in the history of Kabul Bank. When the central bank refused to approve Dawi as a director, Sherkhan breathed a sigh of relief and used the opportunity to relieve Dawi of his director’s position.

With Dawi out of the bank, Fruzi began delaying Dawi’s loan disbursements, as Dawi’s loans were of the working capital type, and froze all future loans to him.[22] Dawi retaliated by opening up an account with Kabul Bank’s rival, Azizi Bank, and rerouted the proceeds from Dawi Oil and his other businesses to Azizi. The result was that all of Dawi’s illegal loans with Kabul Bank went unpaid from 2008.

To complicate matters, Dawi even denied that he owed Kabul Bank money. His refusal to repay his loans set off a small crisis within the bank because Sherkhan and Fruzi did not know how to get Dawi to repay. The loans were illegal so there was no legal body that Sherkhan and Fruzi could turn to without exposing themselves for issuing the illegal loans in the first place.

One noteworthy repayment proposal that Sherkhan offered to Dawi was that Dawi could refuel Pamir’s planes in exchange for subtracting the fuel’s price from the money that Dawi owed Kabul Bank. However, Dawi refused the offer and insisted that Pamir pay for its own fuel with cash or with wire transfers to Dawi’s running accounts with other banks, as Dawi had borrowed from other banks too.

In March 2010, Mahmoud Karzai and Haseen Fahim brokered a meeting with Sherkhan, Fruzi, and Dawi. During the meeting, Dawi acknowledged that he still owed Kabul Bank $35 million and signed a letter attesting to it before all the parties at the meeting. He also signed a separate agreement to refuel Pamir’s planes partly on credit, the amount of which was to be apportioned to his Kabul Bank loans, and part on cash, in exchange for Sherkhan dropping his plans to refuel Pamir’s planes with his own fuel trucks.

While Dawi had the aviation-refueling contract for all the airports in Afghanistan, he feared that Sherkhan could have bribed the Council of Ministers (the Afghan Cabinet) into making an exception for Sherkhan and Pamir Airways. Dawi’s signed letter attesting to his owing Kabul Bank $35 million was sent to the central bank, but according to Q, the central bank did take any action against Dawi.

Some time after leaving Kabul Bank, Dawi was inducted into the Board of Directors of Bank-E-Millie, one of Afghanistan’s state-owned banks. Q notes that the same central bank that had rejected Dawi as a director at Kabul Bank approved Dawi as a director for Bank-E-Mille. The episode suggests that Dawi paid a bribe to the central bank for his confirmation. Central bank Governor Abdul Qadir Fitrat gave final approval to Dawi’s candidacy.

Dawi’s approval at Bank-E-Millie is particularly troubling since he still owed Kabul Bank $35 million and the central bank had in its possession Dawi’s signed statement attesting to the fact. Afghan banking law demands financial integrity for bank shareholders and administrators, but in Dawi’s case, that requirement was ignored. Pamir’s losses slowed under Sherkhan’s management and eventually the airline broke even in 2010, but profit remained elusive.

 

Flight 112

The crash of Pamir Airways flight 112 on May 17, 2010, that killed all 44 people on board, was a turning point for the airline, and culminated in the revoking of Pamir’s Air Operator Certificate (AOC) and the subsequent demise of the airline.23 The AOC is an airline’s license to fly. Pamir’s competitors used the crash to ratchet up their anti-Pamir publicity campaign by claiming that the crash was evidence of an unsafe airline. It was the second major crash of an Afghan airline in the post-Taliban era. The first was a Kam Air 737-200 that crashed on February 3, 2005, killing all 104 people on board.[24]

Pamir Airways Flight 112 had just flown from Kabul to Kunduz and was returning to Kabul when it disappeared over the mountains in the Shakar Darah District of Kabul Province about 25 miles (40 km/h) north of the city of Kabul.[25] The plane was an AN- 24B (“AN” stands for Antonov) and its Afghan registration code was YA-PIS.[26] At first there were rumors that terrorists may have taken over the plane but later the worst was realized, that it had crashed into Shakar Darah’s mountains.

YA-PIS was purchased for only $486,000 in early 2010, or less than three months before the crash, from Aviostart, a private Bulgarian charter airline, headquartered in Sofia, Bulgaria.[27] The plane was 37 years old and was placed in storage in 2008 after it was reportedly grounded.[28] However, after Pamir purchased YA-PIS, an authorized Antonov service center refurbished, retrofitted, and performed a D check on the plane.

Q says that the services to make YA-PIS operational cost Pamir about $3 million. All of this money came from illegal Kabul Bank loans. Afterwards, the authorized service center issued YA-PIS a Certificate of Airworthiness, which is required by law in Afghanistan before a plane can enter service.

While age is a factor when considering a plane’s condition, it is only one factor among many. The most important factor is maintenance. If a plane’s maintenance is top notch and current, then the plane will remain airworthy. In the U.S., one need only look at automobiles to see the preeminence of maintenance. Every day “classic” and “vintage” cars ride on America’s roads. There are no worries so long as these old cars are maintained. Likewise, the U.S. military continues to use planes that are older than the AN-24. If the maintenance is kept up then the planes will fly safely.

The National Transportation Safety Board (NTSB) assisted with the investigation into the crash.[29] The black box was discovered several days after the crash and was sent to Russia for analysis.[30] Public attention focused on YA-PIS’ advanced age and, consequently, there was a general presumption that the plane was unfit for operations.[31] Family members of those who died in the crash wondered why Pamir was permitted to fly such an old plane.[32]

The investigation was coming to a close in mid-August, or three months after the crash.[33] Feeling free to discuss the crash’s cause, Pamir’s CEO, Amanullah Hameed, reported that pilot error was the real cause of the crash, not the plane’s age or some other safety factor. Hameed explained that a misunderstanding between air traffic control (ATC) and YA- PIS’ pilot caused the crash. Another Pamir official noted that the cause of the crash was learned from “voices in the black box.”[34]

Q says that he learned that pilot error was the cause of the crash in the first week of June, or just three weeks after the crash. CEO Hameed had discussed the crash at length with Pamir’s pilots and ATC officials.[35] The black box was already decoded by then and the cause of the crash was quite clear. Hameed personally told Q that pilot error caused the crash, and that the proof was the decoded black box and the information provided by ATC about the moments immediately preceding the crash.

YA-PIS’ pilot was from one of the central Asian states and had extensive experience with over 25,000 flight hours on Antonov planes. It should be noted that every year planes crash around the world and, time and time again, subsequent investigations reveal that pilot error was the cause. According to Q, the crash should not have happened, could not have happened, but happened anyway.

In Afghanistan, NATO and ISAF (International Security Assistance Force) manage ATC. YA-PIS was flying over Shakar Darah’s mountains “in heavy wind and dense fog” when it asked ATC if it could descend due to the bad weather conditions.[36] As an older Antonov plane, YA-PIS did not have onboard radar, so due to the poor visibility on the day of the crash, the pilot was completely dependent on ATC for descent authorization.

ATC did not immediately respond to YA-PIS but some time later gave authorization to descend to a different aircraft, which also was experiencing inclement weather. YA-PIS began to descend thinking that it had received authorization.[37] It flew right into a mountain while traveling at 250 mph (about 400 km/h), instantly killing everyone on board.[38]

The dead included men, women, children, five Pamir crewmembers, and up to 15 foreigners.[39] All of the bodies were burned beyond recognition and dismembered due to the force of the crash and the resulting fireball. A week after the crash, “180 bone and tissue samples… were transferred to the Afghan National Army morgue in Kabul.”[40] DNA tests were conducted in Turkey and in Great Britain.[41] By the tenth day, the remains of 18 bodies had been identified and were given to their next of kin.[42] The last of the remains was handed over to their families two months after the crash.[43]

According to Afghanistan’s 2003 civil aviation law, the “air transport establishment,” in this case Pamir Airways, is responsible to compensate in the event of a passenger’s death as a result of “flight or during boarding, disembarking operations.”[44] Article 64 of the same law sets the compensation for death at 16.375 kilograms of pure gold per passenger, which on the day of the crash was valued at $646,345.35.[45]

However, today in Afghanistan, insurance companies ignore Article 64 and instead follow international aviation conventions and protocols that proscribe a significantly smaller payout. Q notes, “Everyone is silent about this contradiction.” The current international law payout figure is based on the 1999 Montreal Convention that limits an airline’s monetary liability for the death of a passenger to 100,000 Special Drawing Rights (SDR).[46]

The SDR is an “international reserve asset” that was created by the International Monetary Fund “to supplement its member countries’ official reserves.”[47] Its value is based on an average of four currencies: the U.S. dollar, the euro, the British pound, and the Japanese yen.[48] Afghanistan is not signatory to the Montreal Convention, but in 1969 it did sign both the 1929 Warsaw Convention and the 1955 Hague Protocol.[49]

After YA-PIS crashed, Pamir representatives told the surviving family members to expect $155,000 per family, which likely was the equivalent of 100,000 SDR.[50] To date, Pamir has given each family $11,000 as an interim payout, similar to a deposit, to be adjusted against the final settlement.[51] The interim payout appears to have gone to Afghan families only and not to the families of the foreigners that died.[52]

YA-PIS’ insurance policy with ICA included “third party/passenger” liability. Passenger liability insurance obliges the insurer to make the payout to surviving family members in the event of a passenger’s death. Typically, insurance payments occur soon after an investigation is finished. However, after the NTSB finished its investigation, ICA refused to make insurance payments to the surviving family members. Neither did ICA settle with Pamir for the destroyed plane. According to Q, ICA refused to honor its insurance contract with Pamir because Pamir never submitted YA-PIS’ “export certificate” to ICA.

The export certificate is a document that is needed when a plane is sold to a party that resides outside of the seller’s country. It may be thought of as a safety measure to prevent a plane from being sold out of the country, which has a lien or some other encumbrance attached it. Consequently, the seller produces the export certificate. To get an export certificate for a plane, the seller must demonstrate that the plane’s title is clean and that all taxes relating to the plane’s sale have been paid. ICA had insured YA-PIS without having the plane’s export certificate.

Johnson was the one responsible for getting to ICA all of YA-PIS’ papers. He promised ICA that he would submit the export certificate and, based on that promise, ICA insured YA-PIS. Q argues that maybe a day or two delay might have been acceptable, but three months later and no export certificate was beyond the pale.

Q says that “business compulsion” motivated ICA to insure YA-PIS without the export certificate. It was a big insurance contract and ICA wanted the premium. ICA received the export certificate about three weeks after the crash but discovered that it was a forgery. Q says that Aviostart (YA-PIS’ seller) forged the export certificate after Johnson forcefully demanded it.

According to the ICA insurance contract for YA-PIS, the insurance coverage began “as soon as the first premium” was paid.[53] Pamir had begun the premium payments so YA- PIS was under contract at the time of the crash. Legally speaking, the only way that ICA could have avoided making a payout to Pamir, was for Pamir to have committed certain violations at the time of the crash.

For example, ICA’s third party/passenger liability coverage for YA-PIS contained several exclusions, which would exclude ICA from liability if certain violations were found to have occurred at the time of the crash. However, there are only three exclusions that address an airline’s actions at the time of a crash. Two of the exclusions address the pilot’s and the operator’s licenses and a third deals with the airplane’s condition in terms of its compliance with the law.[54] None of these violations had existed with YA-PIS at the time of the crash.

Most important, nowhere do ICA’s third party/passenger liability exclusions pertain to missing documents that the insured should have submitted before beginning coverage. That is to say that ICA’s insurance contract does not take into account even the possibility of missing documents that are needed to secure the insurance policy in the first place. This is because the insurance contract assumed that all necessary paperwork would have been submitted, verified, and approved before the policy was issued.

Simply put, YA-PIS was under contract at the time of the crash. Q argues that once ICA’s insurance policy with YA-PIS started, then ICA was legally responsible to honor the contract. He faults Sherkhan and Johnson for purchasing YA-PIS without receiving the export certificate.

Q also faults ICA for insuring YA-PIS prematurely, but insists that once ICA placed the plane under contract, ICA was legally bound to honor the contract. Q also argues that the surviving family members are entitled to the larger payout according to Afghan law, not the paltry sum identified in the Montreal Convention that Afghanistan never signed.

While ICA’s stated reason for not making the passenger payout was due to the missing export certificate, Q believes that politics was the real motivation for withholding the payout. Q suspects that Pamir’s competitors, and other detractors, pressured ICA to withhold the passenger payout in order to heap more trouble on Pamir. If the insurance was not paid to the next of kin, then Pamir’s reputation would suffer and customers would no longer wish to fly with Pamir. Taking down Pamir, with its Kabul Bank subsidy, would benefit Kam Air, Safi Airways, and Ariana Afghan Airlines.

Q also suspects that ICA’s underwriter for Pamir’s Antonovs, Kapital Insurance, did not want to make the payout. According to Q, Russian underwriters have a reputation of denying legitimate claims. In Flight 112’s case, Kapital Insurance may have viewed the lack of an export certificate as an excuse not to make the payout.

Pamir chose not to take ICA to court over ICA’s refusal to honor the insurance contract. From Sherkhan’s point of view, he likely did not want to be exposed for purchasing a plane that did not have its export certificate, which may have landed him in legal trouble. Instead, Sherkhan and the other interested parties to the plane crash, looked to their own interests, which left the surviving family members without either a straight explanation for why the plane crashed or a payout for their lost loved ones.

The question remains as to why YA-PIS’ seller forged the export certificate. An examination of public aviation records and photos may shed some light. According to rzjets.net, Aviostart acquired YA-PIS in 2000 and registered the plane as LZ-ASZ.[55] However, a Macedonian airline, Airlift Service, acquired YA-PIS from Aviostart in 2008, registering it as Z3-AAJ.

On September 25, 2009, when YA-PIS was in storage (and labeled Z3-AAJ), an Austrian photographer, Thomas Posch, photographed it at close range at the Sofia airport in Bulgaria. The Airlift Service logo and the Z3-AAJ registration code are clearly visible on the two-tone blue paintjob.[56] This very plane is the same YA-PIS that crashed eight months later.

The AN-24B above is the very same plane that was later sold to Pamir Airways and crashed on May 17, 2010, killing all 44 people aboard. Thomas Posch from airliners.net granted permission to use the photo for this paper.

The AN-24B above is the very same plane that was later sold to Pamir Airways and crashed on May 17, 2010, killing all 44 people aboard. Thomas Posch from airliners.net granted permission to use the photo for this paper. 

Posch was granted ramp-access at the Sophia airport on the day he took the photo and confirmed to this author that the plane was in storage. Posch was under the impression that the outdoor location where he filmed the plane was the same location where the plane was stored. That is to say that the plane was kept outside under the elements the entire time it was in storage.

Curiously, the plane bears the registration code Z3-AAJ. There was already another plane in service at the same time bearing the same registration code. It was like two cars in California, for example, having the same license plate. The other Z3-AAJ was a Boeing 737-300 that belonged to Skywings International Airlines. Photographs of the Skywings 737 are also on aviation websites.[57]

This author was unable to find credible English language source material to verify the relationship between Aviostart, Airlift Service, and Skywings International Airlines, all of which are from the Balkans. However, all three appear to be related parties.[58] Airlift Service and Skywings International Airlines might be subsidiaries of Aviostart. This likely explains why Aviostart, and not Airlift Service, is found on YA-PIS’ deed of sale to Pamir Airways.[59]

According to Q, the fact that YA-PIS shared a registration code with another plane suggests that its underlying paperwork was problematic, which may be why Aviostart could not obtain the export certificate from the Bulgarian aviation authorities when it sold the plane to Pamir.

Q wonders why the Afghan government and other Western agencies did not pursue Aviostart over the forged export certificate. If such details about YA-PIS’ history can be uncovered by a basic Internet search of aviation websites, then the U.S. and Afghan governments should have been able to uncover much more information about Pamir’s purchase of YA-PIS. It is not known whether the two governments aggressively researched the transaction.

 

The End of Pamir Airways

Pamir’s troubles compounded after central bank Governor Fitrat fired Sherkhan and Fruzi from Kabul Bank on August 30, 2010. Their firing triggered the panic and the subsequent deposit run that eventually wiped out about half of Kabul Bank’s deposits.[60] Fitrat replaced Sherkhan and Fruzi with Masood Ghazi, Fitrat’s closest confident at the central bank. Shortly after August 30, Fitrat discovered the truth about Pamir Airways’ illegal relationship with Kabul Bank, that Kabul Bank was indeed funneling tens of millions of dollars to Pamir via illegal loans.[61]

After his firing from Kabul Bank, Sherkhan remained over Pamir Airways, but he (and Fruzi) no longer had authority to release Kabul Bank money to Pamir. According to Q, Fitrat now had the authority over Pamir’s Kabul Bank account. Sherkhan would tell Fitrat what bills needed to be paid and Fitrat would authorize the withdrawals from Pamir’s bank account. Fitrat had effectively become Pamir’s new manager, given that Pamir’s revenues were still linked to Pamir’s Kabul Bank account and Fitrat controlled that account.

Q says that closing Pamir’s Kabul Bank account and opening a new account with a different bank was not possible after August 30, 2010, because no other bank would open a new account for Pamir, given the public outcry against Kabul Bank following its scandal and the fact that Pamir was closely identified with the bank.

Immediately after the central bank took control of Kabul Bank, Fitrat began delaying the payment of Pamir’s bills even though Pamir’s account had the money to pay for them. As previously noted, even though Pamir was not turning a profit, by 2010, it had reached a point of break even, meaning that its ticket sale revenue was able to cover its operational costs.

Fitrat stalled the payment for Pamir’s fuel, airport parking fees, overflying fees, maintenance bills, and even salaries. Q believes that Fitrat’s actions were a deliberate effort to hurt Pamir by causing unpaid obligations to pile up in order to force the airline out of business.

One of the consequences for Fitrat’s payment delaying strategy was that three Pamir planes were trapped in hangers in three different countries, one in London, one in Dubai, and one in Uzbekistan. Rent for the three planes began accruing. In mid 2011, the Afghan government paid about $3 million of its own money to pay the rent and to have the three planes returned to Afghanistan.

As for the cause of the plane crash, the MoTCA commented in mid-August 2010 in response to CEO Hameed’s revelation to the public that the crash was due to pilot error. The MoTCA spokesman stated that it was “premature to presume that a misunderstanding had caused the crash,” and that the MoTCA would announce the cause of the crash in two days.[62]

This author was unable to locate any MoTCA announcements that identified the Afghan government’s position for the cause of YA-PIS’ crash in the following days, weeks, months, or even over the next two years. However, findthedata.org states that the incident report (the results of the investigation) was issued on October 7, 2010, but the MoTCA never made the report public.[63]

On February 26, 2011, or eight and a half months after the crash, Daud Ali Najafi, then the acting minister of the MoTCA, made a startling announcement.[64] He said that YA- PIS’ black box was blank and was either “intercepted” or never recorded anything at all due to technical problems, and that he was referring the case to the Afghan Attorney General’s Office.[65] According to Q, Najafi was a close ally and friend to Zamari Kamgar, Kam Air’s founder, and, consequently, an enemy of Pamir.

Najafi’s black box statement was incredulous. For one, it was puzzling that Najafi waited eight and a half months to tell the public that the black box was blank. Two, he pretended not to know the fate of the black box. The black box had been sent to Russia for analysis, so if it were defective at the time of the crash, Najafi would have known about it from the investigators.

Q thinks that Najafi ordered the black box erased some time after it was decoded since its contents pointed to pilot error as the cause of the crash and not to a safety problem with the plane. If the Afghan public believed that YA-PIS was an unsafe aircraft then Najafi would have the political cover to shut down Pamir’s operations.

At the same time, Najafi also announced that Pamir Airways had forged YA-PIS’ “registration documents,” and subsequently threatened to ban the airline.[66] As noted earlier, Q says that it was the export certificate only that was forged, and it is the seller that produces the export certificate. While it is possible, maybe even probable, that Johnson and Sherkhan knew that Aviostart forged the export certificate, such complicity would have been difficult to prove in a court of law. Yet, Najafi was threatening to hold Pamir accountable for Aviostart’s actions.

To what do registration documents refer to? These were the documents that Pamir needed to present to the MoTCA to register the plane, or the deed of sale, the title deed, proof of insurance, an export certificate (since the plane was purchased outside the country), and an airworthiness certificate. As is evident from this list, registering a plane is similar to registering a car in the United States The MoTCA also required a registration.

The airworthiness certificate is the critical document that indicates a plane is safe to fly. As already noted, after YA-PIS was purchased from Aviostart in Bulgaria, it was flown to an authorized Antonov service center in one of the central Asian states, either in Tajikistan or Uzbekistan, to undergo the major refurbishment, retrofitting, and D check. YA-PIS received a temporary registration certificate that allowed it to fly out of Bulgaria. It was the country of the authorized service center –either Tajikistan or Uzbekistan- that issued YA-PIS its airworthiness certificate.

When Pamir Airways submitted all of the required documents to the MoTCA to register YA-PIS, the MoTCA was required by law to verify the authenticity of all the documents. The fact that YA-PIS was registered in Afghanistan suggests that Pamir bribed the MoTCA to register the plane without the export certificate. Viewed alternatively, Najafi’s admission that Pamir had forged “registration documents” at once implicated Najafi’s own ministry in corruption, since it was supposed to check off and verify each of the documents, but did not.

Incidentally, it should be noted that Pamir Airways still would have needed to bribe the MoTCA to register YA-PIS, even if the plane had its export certificate. According to Q, passing bribes in exchange for government services is standard practice across Afghanistan. For every plane that Pamir registered in Afghanistan, it had to pay a bribe to the MoTCA just to get the ministry to do its job.

In early March 2011, Najafi suspended Pamir’s AOC for one month due to “violations of regulations of Afghanistan,” specifically for forging documents and failing to compensate the surviving families.[67] Without an active license, Pamir’s fleet could not fly. However, on March 4, Afghanistan’s first vice president, Mohammed Qasim Fahim (or Marshal Fahim), the brother of Kabul Bank shareholder, Haseen Fahim, overruled Najafi’s order, only to be overruled himself the following day by the Council of Ministers.[68] By mid March, it was reported that Pamir salaries were not being paid and pilots and engineers were leaving the company.[69]

The fact that the Council of Ministers overruled Fahim’s veto may suggest that Najafi was not acting alone when he temporarily suspended Pamir’s AOC.[70] Najafi may have been acting under President Karzai’s orders. The president wields immense influence over his cabinet and his decision not to intervene by supporting Fahim suggests that Karzai sided with Najafi and his cabinet. Q notes that the Kabul Bank scandal humiliated President Karzai. It was the biggest corruption scandal in the post-Taliban era and the Western media used it to criticize the Karzai administration’s corruption problem.

In late April 2010, the myth continued that YA-PIS was unsafe to fly. Rather than report the true cause of Flight 112’s crash, Najafi perpetuated the safety myth by claiming that YA-PIS’s “forged documents” allowed the plane to avoid safety inspections.[71] Najafi said, “When a company submits forged documents regarding the safety of the plane, that company is no longer trusted.”[72] However, according to Q, YA-PIS did get its airworthiness certificate and, therefore, was safe to fly. It was the export certificate only that was forged, and the export certificate is not linked to the airworthiness certificate. YA-PIS crashed due to pilot error, not because of safety problems.

In May, the MoTCA indefinitely suspended Pamir’s AOC. The official reason given was “fraudulent documents.”[73] Pamir Airways was finished. Sherkhan protested the revoking of Pamir’s AOC. He told President Karzai and the Council of Ministers that Najafi’s action was illegal because the civil aviation law did not give the MoTCA minister the authority to unilaterally revoke an airline’s AOC. Sherkhan also told them that since Najafi killed off Pamir’s ability to make money, Pamir was no longer responsible for repaying what it owed to Kabul Bank and that all of the negative consequences of Najafi’s action would be Najafi’s responsibility to clean up.

The immediate result of Najafi’s revoking Pamir’s AOC was the loss of jobs. Next, there was the problem of returning the fleet to Kabul, which was scattered when Najafi issued the ban. Q says that what Najafi should have done was to reroute the 737s to Kabul, ground them, and then ground the Antonovs one at a time as they passed through Kabul. Next, Najafi should have revoked Pamir’s AOC once the entire fleet was assembled in Kabul. Instead, Najafi’s hastiness stuck the Afghan government with a hefty bill for rent and transportation fees for having another party return the fleet.

 

The Truth Comes Out

On May 17, 2011, or the one-year anniversary of YA-PIS’ crash, Irwin Mitchell LLP, the legal firm for the surviving family members of three Britons who had worked in counternarcotics in Afghanistan, posted an article on its website announcing that the surviving family members still had not received from Pamir Airways or the Afghan government even the most fundamental answers regarding the plane crash. The families still did not know why the plane crashed and they were still under the impression that the plane was unsafe. The article stated:

“We are deeply concerned about a number of issues surrounding the crash of flight 112. Firstly, we still have no idea why this aircraft crashed causing such a devastating loss of life. Secondly, we have received reports that the Afghan Government has actually grounded all Pamir flights due to concerns about the airline’s safety and solvency. Thirdly, we have received reports that critical documentation in relation to the aircraft and its airworthiness were forged. As a result, we have been informed that the insurers of the aircraft are refusing to compensate the families of those who died.”[74]

Perhaps coincidentally, three days later, the FBI released a story on Flight 112 that explained how FBI staff helped to identify the victims of the crash.[75] It was an informative piece extolling the FBI’s “Humanitarian Effort in the War Zone,” as the subtitle read. However, at the end of the story, as if noted in passing or as a second thought, the author identified the cause of YA-PIS’ crash. It was “ruled a weather-related accident.” Q puts it this way: it was pilot error triggered by bad weather.

The following year, on August 20, 2012, the Telegraph & Argus, a local British paper, reported that the wife of one of the Britons killed on Flight 112 was “still battling for a full explanation as to what led to the disaster.”[76] In a major breakthrough, the same newspaper announced that, using the Freedom of Information Act, it had obtained a copy of Flight 112’s incident report from Britain’s Foreign Office. The U.S. Civil Aviation Assistance Team “at the US Embassy in Kabul” had prepared the incident report. That is to say that the U.S. government had the incident report in its possession all along but never made the report pubic.

Addressing the cause of the crash, the Telegraph & Argus quotes from the incident report that the “probable cause of this accident was the failure of the captain to maintain adequate clearance from the terrain.” The report states that the flight crew likely saw the mountain just before impact because the plane appears to have attempted to increase its altitude in the final moments.

The incident report evidently makes no reference to the crash being caused by a safety problem. However, it does affirm Q’s version that he received first hand from Pamir CEO Amanullah Hameed, that YA-PIS crashed due to pilot error in the context of poor weather. As noted earlier, this was the same story reported by Hameed in August 2010 to which the MoTCA spokesman replied that it was “premature to presume that a misunderstanding had caused the crash.”[77] Clearly, the MoTCA knew within weeks why YA-PIS crashed but chose to keep the public in the dark.

Unless Najafi is prepared to deny that he ever read it or that no one at his ministry told him about the report, the incident report proves that Najafi knew that pilot error was the true cause of the crash but instead chose to perpetuate a lie that YA-PIS was unsafe to fly, inferring that poor safety caused the crash. By not correcting the safety myth, Najafi let the Afghan public and the surviving family members believe that YA-PIS crashed due to safety reasons.

Had Najafi reported the true cause of the crash in October 2010 when the incident report was issued, he would have had difficulty revoking Pamir’s AOC. He would have been limited to replacing Pamir’s management, but not achieving his true goal of taking down Pamir. Actually, Q says that if Najafi were truly concerned with Pamir’s safety record, he should have conducted a review of the airline or even fired Pamir’s senior management. Najafi did neither.

 

Conclusion

Q says that a country’s banking law and the credit policies of individual banks exist to protect the depositor’s money and to ensure a strong banking and financial system. These rules, laws, and regulations, limit by design what people can and cannot do with a bank’s money, but Sherkhan and his associates disregarded them and the result was staggering losses to Kabul Bank.

When Pamir closed its doors, it had swallowed up $93 million of Kabul Bank’s money (Table 2). Only $11 million of that sum was taken legally for the purchase of YA-PIB, the Boeing 737-400. Adding the $3 million that the Afghan government spent to return three planes to Afghanistan, which was tacked on to the Kabul Bank bailout by the Afghan government, but subtracting $1 million from the YA-PIB loan, which was roughly the amount that Pamir had paid back, and Pamir’s total loss to Kabul Bank rises to $95 million.

Kabul Bank Money used by Pamir Airways

What happened to Pamir’s fleet? Government-owned Ariana Afghan Airlines began leasing YA-PIB for $100,000 a month in 2011.[78] Airliners.net has a photo of YA-PIB that was taken in November 2011 showing its new paintjob with the Ariana logo (see photo below).[79]

Above is Ariana Afghan Airways YA-PIB. This is the same Boeing 737-400 that Pamir Airways purchased with a legal loan in 2009. The photo was taken at the Dubai International Airport on November 14, 2011, by Reza Hajari from airliners.net. Mr. Hajari granted permission to use the photo.

Above is Ariana Afghan Airways YA-PIB. This is the same Boeing 737-400 that Pamir Airways purchased with a legal loan in 2009. The photo was taken at the Dubai International Airport on November 14, 2011, by Reza Hajari from airliners.net. Mr. Hajari granted permission to use the photo.

As for the rest of Pamir’s fleet, a rumor circulated in late July 2012 that the Afghan government wanted to pay $102 million for seven Pamir planes, presumably for the three 737-400s and the four remaining Antonovs that were all purchased with illegal Kabul Bank loans.80 Sherkhan had purchased these seven planes for $46 million. Noting the actual price tag of the seven planes, Q quips: “some other scandal is brewing….”

***To view the endnotes, please view or download the PDF copy of this paper here.***