Kabul Bank, the Central Bank, and the Rise of Khaliullah Fruzi

***For a printable and downloadable version, click here for the free PDF file.***

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.


Building State Institutions on a Weak Foundation

While Kabul Bank’s fraud was a product of its leadership’s desire and determination to run the bank the way it wanted to, the fraud was facilitated by weak oversight by Da Afghanistan Bank, Afghanistan’s central bank, which was evident during Kabul Bank’s earliest period, or when the shareholding was established, and continued thereafter. A significant part of the central bank’s weak oversight may be blamed on two factors: a lack of technical capacity and corruption.

It is difficult to determine which of these two factors played a dominant or a complimentary role in any given instance where the central bank did not do its job properly. Q only notes that Kabul Bank paid a bribe to the central bank for every annual audit, every policy approval, and every administrator that was ever confirmed.

Many of Kabul Bank’s banking law violations were related to the placement of unqualified shareholders and administrators. Other violations had to do with not having certain positions, departments, and policies in place when the bank began operations.

Since the central bank is the legal body charged with monitoring the Afghan banking sector, it bears most of the responsibility for sanctioning or ignoring Kabul Bank’s many violations. However, given that it takes many years to build a fully functional and effective oversight body, and given that Western advisors were attached to the central bank with the understanding that it needed outside assistance to become a successful oversight body, Q also points a finger at the Western advisors. He says that they were supposed to be “building capacity” but often looked the other way due to political expediency.

Pictured above is Kabul Bank’s lobby at its headquarters branch in Kabul. (Q photo)

Pictured above is Kabul Bank’s lobby at its headquarters branch in Kabul. (Q photo)

After the fall of the Taliban, the international community wanted to help build a new banking sector in Afghanistan, and banking laws by their very nature take effort to fulfill. Q believes that the Western advisors and the central bank authorities opted to ignore banking violations and permit new banks to begin operations without meeting all the legal requirements.

The thinking was that while the character of these financial institutions might not be desirable, at least Afghanistan would have such institutions to move money around. However, Q is emphatic that Sherkhan’s ability to get away with numerous and fundamental banking violations, as he laid the groundwork for Kabul Bank in 2003 and 2004, led him to conclude that he could get away with any banking law violation.

The central bank’s international advisors initially came from a private accounting firm called Bearing Point and operated under a USAID contract, called the “Economic Growth and Governance Initiative” (EGGI), that began in September 2005.[4] However, Q says that Western advisors were at the central bank before September 2005. He notes that they translated into English the Law of Banking in 2004.

In 2009, Deloitte LLP took over the EGGI contract and Bearing Point’s staff in Afghanistan transferred to Deloitte. Larry Boren was Bearing Point’s lead advisor at the central bank and Glenn Tasky succeeded him in 2008. Tasky was Deloitte’s lead advisor during the September 2010 Kabul Bank deposit run.


The Shareholder and Administrator Confirmation Process

Banking law requires the central bank to approve shareholders that have “qualifying holdings,” or those who hold at least 20% shares of a bank’s stock, plus all “administrators.”[5] The qualifying holding restriction is meant to protect a bank by preventing a single shareholder from wielding too much power.[6] Only three Kabul Bank shareholders ever held at least 20% shares and they were Sherkhan, Fruzi, and Obaidullah Khan Saderkhail.

The central bank never approved any of one of these qualifying holdings.[7] Sherkhan’s qualifying holding was particularly egregious because he held 57.24% of the bank’s shares from 2004 to 2006, which effectively gave him total control of the bank, because the decisions taken by the General Meeting of the Shareholders required a simple majority vote.

Banking law defines administrators as those sitting on the Board of Supervisors (or Directors), the Management Board, and the Audit Committee.[8] The central bank is “authorized to carry out full-scale financial, criminal, personal and professional background checks” of these individuals.[9]

Not requiring all bank shareholders to be confirmed by the central bank has its pros and cons. Q thinks that the upside to confirming only those shareholders with qualifying holdings is pragmatism. Shareholders come and go and banks may have many shareholders. It would sap the central bank’s limited resources if it needed to confirm every single shareholder. Moreover, it is mainly those shareholders with substantial shares that will be able to influence a bank, so confirming only these individuals makes sense. The downside to not confirming all shareholders is that unqualified people will become shareholders and this is not good given the technical and complex duties that their job demands.

The central bank’s primary tools for screening shareholders and administrators are the “Biographical and Financial Report” (BioFin) and the panel interview. The confirmation process works as follows.

  1. An applicant is required to complete and submit a BioFin.
  2. The central bank is supposed to investigate the claims made in the BioFin.
  3. The central bank interviews the applicant based on the information provided in
    the BioFin.
  4. The central bank confirms or rejects the applicant.

Any red flags identified during the investigation of the BioFin are supposed to be addressed at the interview. While the screening process appears sound, it is fundamentally flawed because, according to Q, the central bank does not investigate the BioFins.

The BioFin asks for extensive information. The biographical section of the form covers the applicant’s:

  • personal information (age, birthplace, names of parents, etc.),
  • employment history for the last five years,
  • education,
  • professional credentials (licenses and/or certifications),
    business and banking affiliations, and
  • legal and related matters (has the candidate ever defaulted on a loan, been
    arrested, etc?).

The financial section of the BioFin asks for the applicant’s:

  • cash on hand and in financial institutions,
  • marketable and other securities,
  • notes receivable (name of obligor, notes maturity, terms of repayment, etc.),
  • real estate and related loans,
  • proprietary interests (all businesses in which the applicant holds a beneficial interest),
  • other assets (items amounting to 10% or more of net worth),
  • notes payable and other loans (these are liabilities such as car loans, etc.),
  • other liabilities (liabilities amounting to 10% or more of net worth), and
  • cash flow statement (includes sources of cash (salaries, wages, etc.) and uses of
    cash (personal expenses, fixed obligations, income tax, etc.).

The BioFin’s biographical and financial questions suggest the kind of qualifications that the central bank desires to see in bank shareholders and administrators. On paper, the central bank is looking for shareholders and administrators who are formerly educated, have banking experience (as evidenced by their licenses, certifications, and work history), and whose finances and personal investments are in order (no defaults or related party issues).

The BioFin closes with the statement that the central bank “may conduct extensive checks” into the applicant’s “background, experience, and related matters in conjunction” with the material in the BioFin. The background investigation phrase noted in the BioFin agrees with the portion of banking law quoted earlier, that the central bank is “authorized to carry out full-scale financial, criminal, personal and professional background checks….” Simply put, the central bank is supposed to verify by investigation the information that applicants put in the BioFin, but Q says that it does not.

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

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

The BioFin’s strength is that it asks for extensive personal and financial information. The BioFin’s weakness is that the applicant is required to supply supporting documentation in only two places, for “real estate and related loans” and “proprietary interests.” The BioFin should be re-written to require documentation for everything the applicant writes down, including school transcripts, bank statements, tax returns, and other financial statements. As it stands today, given that the central bank does not verify statements and claims made in the BioFin, bank shareholders and administrators are more or less on an honor system to complete the BioFin.

Q passed through the shareholder and administrator confirmation process. He completed his BioFin and was interviewed by a panel of nearly 20 people. Some of those present included central bank department heads, the first deputy director (the number two leader at the central bank), and two U.S. advisors.

Q says that only about five of the 20 “appeared competent,” two of those being the U.S. advisors that “grilled” him the most. The interview lasted about three hours as Q fielded personal and banking questions, the latter ranged from the basics to hedging and derivatives. Q’s interview highlights the fact that the U.S. advisors were involved in the confirmation process.

That Afghan banking law demands that shareholders and administrators be qualified should not be a surprise. Running a bank is not the same thing as operating a hamburger stand or even a money exchange business. The latter’s main service is merely to transfer money from one place or party to another; it does not hold deposits. In contrast, managing a bank is a highly technical job that requires an intricate understanding of accounting and finance.

For example, among the many tasks that Afghan banking law assigns to shareholders, the following is but a sample. Shareholders are:

  • “to adopt amendments to the Charter of the bank,”
  • “to determine the general interest rate policies of a bank, the categories of assets
    that shall be suitable for investment of the available…resources of a bank, and the other general financial, accounting, administrative and personnel policies of a bank,”
  • “to decide on the participation of the bank in the capital stock of other financial institutions,”
  • “to appoint and to dismiss the members of the Board of Supervisors, the Management Board and the Audit Committee of the bank and to determine their remuneration,”
  • “to determine the budget of the bank,”
  • “to approve the procedures for employment of the administrators of the bank, and
    of bank employees, staff, and agents,”
  • “to determine the net income of the bank; and to decide what amount of such net
    income shall be transferred to any reserve or paid out
  • and “to establish special reserves on the books of the bank.”[10]

Likewise, among the many tasks that Afghan banking law assigns Supervisors (or Directors), they are mandated:

  • “to supervise the administration and operation of the bank,” and
  • “to advise the Management Board and the General Meeting of the

As for the Management Board, Afghan banking law states that it “shall be responsible for the management and execution of the bank’s activities.[12] What are a bank’s activities? The following is a sample.

“Banks shall: maintain adequate capital and liquid resources; make adequate provision for depreciation of assets, for discharge of liabilities, and for covering risk of losses; maintain adequate accounting and other records of business; observe effective risk controls; and ensure that their assets are diversified to avoid loss.”[13]

Thoroughly describing all of a bank’s activities lies outside of the scope of this paper, but if the above string of quotes from Afghanistan’s banking law appears technical and complex that is because it is. Banking is a highly technical business and cannot be successfully performed without the prerequisite experience, yet Kabul Bank repeatedly recruited shareholders and administrators who had no actual or significant “banking” experience.

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

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

The central bank approved and rejected many of these individuals. Others were never formally approved or rejected by making them pass through the shareholder and administrator confirmation process. The latter action had the effect of an approval because those individuals remained in their positions by default.

Sherkhan and Fruzi both have questionable backgrounds, which, according to Q, were well known in Afghanistan at the time of Kabul Bank’s founding, yet this information did not prevent the central bank from granting Kabul Bank’s license. Fruzi’s case will be looked at shortly, but Sherkhan is known to have fled to the Soviet Union after it invaded Afghanistan in 1979, and there set up a hawala (money exchange business). Hawalas were illegal in the Soviet Union.

Sherkhan had become a very successful mafia figure before the Soviet authorities discovered his business. He fled to Dubai before he could be arrested, but several of his employees were arrested and spent between five to eight years in jail. Sherkhan later made two of them, Ghulam Sakhi and Jamal Khil, Kabul Bank shareholders and placed them on its Board of Directors.[14] In Dubai, Sherkhan started two businesses: Shaheen Exchange, his hawala, and Sherkhan Farnood General Trading, a real estate firm.

Today, there is still an arrest warrant for Sherkhan in Russia for “illegal banking, money laundering, purchasing property for illegal use and organizing a crime syndicate.”[15] Interpol Afghanistan claims that it first discovered that Russian authorities wanted Sherkhan in 2007, but Q insists that Sherkhan’s shady past was well known to the Afghan business and political communities well before 2004.[16]

The central bank never confirmed Sherkhan, Obaidullah Khan, or Fruzi for their shareholder positions, nor did it approve their qualifying holdings. Sherkhan and Obaidullah submitted BioFins but never made it to the interview stage of the screening process. Fruzi was finally screened for his CEO position in 2008, but never granted final confirmation.


Central Bank Oversight Blunders

The following is a list of various central bank oversight blunders. While not legally requiring central bank approval since his shares did not amount to a qualifying holding, the central bank never objected to Zahid Fahim’s shareholding, the 10-year-old son of Haseen Fahim, the brother of Afghan Vice President Mohammed Qasim Fahim (or Marshal Fahim). Zahid was made a shareholder in the place of his father.

Q says that Haseen wanted shares of Kabul Bank but Mahmoud Karzai, the brother to Afghan President Hamid Karzai, advised him to place his shares in Zahid’s name in order to avoid related party scrutiny, since Haseen was also a Kabul Bank borrower. Had Haseen taken his Kabul Bank shares in his own name, he would have been required to resign from two of his multi-million dollar companies -Zahid Walid and Aria Turk- that had taken out legal Kabul Bank loans, and sell off his shares in those companies.[17]

Haseen Fahim, brother of Afghan Vice-President Marshal Fahim

Haseen Fahim, brother of Afghan Vice-President Marshal Fahim

How little Zahid could possibly fulfill his shareholder duties was anyone’s guess. Q says that the central bank should have at least written a letter to Kabul Bank voicing apprehension with Zahid’s shareholding, or noted Zahid’s shareholding in its annual audit of Kabul Bank that year, but did not.

Banking law forbids shareholders from sitting on the Board of Directors: “Members of the Board of Directors shall not be associated with the bank through ownership, management function, or employment, except as related to their function [as members of the Board of Directors].”[18] However, Kabul Bank’s five original shareholders were also the directors but that did not prevent the central bank from granting Kabul Bank its banking license.

While Sherkhan sat on the Board of Directors, the central bank approved his cousin, Shokrullah Shokran, as the bank’s chief operations officer. However, Afghan banking law expressly forbids relatives of administrators from sitting on the Management Board:

“A person shall be eligible to serve as a member of the Board of Supervisors, the Management Board, or the Audit Committee of a bank if: …he is not related to an administrator of the bank by marriage, relation [of blood or kinship] up to the second degree, and he is not the foster brother [of an administrator].”[19]

Afghan banking law states that administrators must make financial disclosures annually after they are hired.[20] However, Q says that this requirement exists only on paper. No commercial banks are bothering with it and the central bank does not bring it up.

Other banking law violations that Kabul Bank got away with had to do with not having certain positions, departments, and policies in place before beginning operations. In fact, Afghan banking law contains very specific steps that would-be banks must take in order for the central bank to grant them a banking license. Kabul Bank flatly ignored many of these regulations and still got its banking license.

For instance, Afghan banks must have four administrative bodies (Table 1).[21] Kabul Bank began operations without the Audit Committee or even an audit department. The bank had no audit functionality but still got its license. The Audit Committee was established in late 2007, or about three and a half years after the bank opened. The audit department was formed in April 2006.

A Bank's Four Leadership BodiesKabul Bank started without a CEO or other major department heads and staff positions. It did not have a chief credit officer, a chief audit officer, heads of compliance or anti-money laundering, or even a company secretary. Major policies were not yet in place when Kabul Bank began operations.

Kabul Bank did not have a credit policy (outlines a bank’s criteria for issuing loans), an audit policy, an anti-money laundering policy, a related party policy, a human resources policy, or even an operations policy. All it had on paper were the bylaws and the Memorandum and Articles of Association but it still got its banking license. Kabul Bank’s first independent auditor, Dubai-based Behl, Lad & Al Sayegh, did not identify any of these violations in its first annual audit of the bank.[22]

Q also notes that new banks typically do not lend immediately after they begin operations. Instead, they collect deposits and invest them in “investment grade” assets. For example, new banks will place some of their cash with their own central bank or with correspondent banks, which will pay interest on the money. Banks will also purchase debt securities from AAA+ countries through their correspondent banks. In Kabul Bank’s case, the situation was reversed. While not technically a banking law violation, it lent money soon after it started, even without a credit policy or other day-to-day policies and procedures in place.


Central Bank Audits and Bribes

In addition to the central bank’s work of approving shareholders with qualifying holdings, administrators, and banking policies, Afghan banking law requires the central bank to conduct annual audits (or “general audits”) of all commercial banks and targeted audits (or “special audits”) as needed. The central bank audits are separate from the routine audits performed by a bank’s internal audit department and the independent annual audits performed by private accounting firms. The audit is an essential tool in the central bank’s oversight role of Afghanistan’s banking sector.

The central bank’s first audit of Kabul Bank was a targeted audit conducted in September 2005. Its first annual audit should have been in June 2005, or one year from Kabul Bank’s opening. However, in violation of Afghan banking law, the central bank’s first annual audit of Kabul Bank occurred in November 2007, or more than three years after the bank began operations.

Q explains that normally central banks keep a close watch over new banks and then fall back to a regular supervision scheme after a bank has proven itself. However, the central bank did the opposite with Kabul Bank. Moreover, there was no annual audit for 2010, the year of the terrible deposit run.

The central bank’s “Financial Supervision Department” (FSD) is the department responsible for auditing banks. Before the FSD audits a bank, it sends the bank about 30 forms requesting certain banking information. The forms ask about such items as off-balance sheet liabilities, off-balance sheet assets, repossessed assets, loans extended to a bank’s officers and directors, customers who have deposited up to 2% of a bank’s total deposits, and more.

Next, the FSD sends an auditing team to the bank for an inspection. The teams sent to Kabul Bank generally had as many as 20 people including one team leader. Bearing Point, and later Deloitte, advisors were attached to each FSD team. Team members were tasked with one aspect of the audit. For example, one team member examined the bank’s liabilities, another the liquidity, another bank guarantees, etc. The advisors helped team members to complete their individual tasks.

For annual audits, FSD teams generally visited Kabul Bank each business day over a one- month period. The Western advisors visited Kabul Bank five to 10 days over the one- month period for a couple of hours each day. In contrast, targeted audits lasted for about five days.

Upon completion of their individual tasks, FSD team members write up a report and submit it to the team leader who consolidates all the reports into a single report. From that report, the team leader conducted the exit meetings with Kabul Bank. It was at the exit meeting that Kabul Bank got a good idea of what the central bank audit turned up and what corrective actions needed to be taken.

While the audit process seems sound, corruption has compromised its ability to effectively monitor banks. Q says that Kabul Bank paid a bribe to the central bank for every service that it rendered, including for every annual audit, every policy approval, and every administrator that was confirmed.

Bribes to the central bank ranged from $20,000 to $300,000. Annual audits ran about $300,000 since they required extensive effort on the part of the central bank and banks needed them to turn out favorably. Q does not know the size of the bribes that the other Afghan banks were paying to the central bank, but they were likely paying smaller bribes, commensurate with their size. The bribe paid for the 2008 annual audit is worth noting because it occurred in the context of an alleged death threat to a U.S. advisor.

In March 2011, the United States Agency for International Development (USAID) issued a report after its investigation into whether USAID or Deloitte “were negligent in failing to report the Kabul Bank fraud.”[23] The report includes an incident where a Deloitte advisor allegedly received two death threats in conjunction with the central bank’s 2008 annual audit of Kabul Bank and another unnamed bank. As a consequence of the alleged death threats, the advisors stopped visiting Kabul Bank during the audits.

The point of the death threat story in the USAID report was to provide a reason for why the advisors were unable to discover the Kabul Bank fraud: they could not inspect the bank personally because their lives were at risk. The account is worth noting in full because Q disputes it. The bribe Kabul Bank paid to the central bank that year suggests that the central bank was behind the death threats.

“In November 2008, one BearingPoint adviser received two death threats, apparently in conjunction with an onsite examination of Kabul Bank and another bank. With USAID’s concurrence, BearingPoint discontinued participation in onsite bank examinations, and limited its technical assistance to classroom training, coaching, and reviewing information obtained by bank examiners. Both USAID and BearingPoint dismissed the death threats as related to operating in a dangerous war zone environment rather than as a red flag signaling a high risk of irregularities or problems at Kabul Bank. A senior USAID official with extensive banking experience later explained that USAID and its advisers should have reinforced offsite assistance for bank examinations, taken other steps to search for possible fraud at Kabul Bank, or discontinued assistance altogether.”[24]

Q does not think that there were legitimate death threats against the unnamed advisor. He says that despite the rampant fraud at Kabul Bank, both Sherkhan and Fruzi were very careful to develop positive relations with Westerners, particularly with Americans. In a country like Afghanistan, relations with powerful actors are essential for survival and success.

Since the U.S. was the most powerful actor in Afghanistan, Sherkhan and Fruzi were careful to curry its favor. According to Q, the likely scenario is that the central bank invented the death threats to make the advisors keep away from Kabul Bank, and the other unnamed bank, so that the central bank could force bribes from the banks, undetected by the advisors.

Q also explains that the bribe that Kabul Bank paid to the central bank for the 2008 annual audit was unusual because it was spearheaded by the central bank’s newly created “Risk Management Department.” Previous bribes for audits were demanded by the FSD.

In 2008, the central bank ordered all private banks to create their own risk management departments. Risk management, as a banking concept with regard to loans, assumes that every loan that is issued is subject to some degree of risk of default no matter how small that risk may be. Even if the borrower is credible and has a steady income flow, risk management stipulates that there are always external factors that, if altered, could compromise the borrower’s repayment ability. The question that banks want answered is whether the risk to a particular loan is low enough to justify issuing the loan.[25]

The difference between risk management and audit is that audit is a postmortem function, meaning that it examines after an event has occurred. In contrast, risk management anticipates the scenario. A strong and effective risk management is necessary for banks to function in today’s global economy.[26]

The central bank audits changed significantly after the central bank created the Risk Management Department. Part of the new department’s work was to compliment the FSD’s annual audit. However, after hearing about the Risk Management Department’s duties for the first time, Kabul Bank was concerned about overlapping functions with the FSD and wrote a memo to the central bank explaining that the two departments would be in conflict. Time vindicated Kabul Bank’s concerns.

Central bank Governor Ahmad Qadir Fitrat led the risk management initiative and appointed Noorkhan Haidari to lead the new department. Q says that Haidari hailed from “Fitrat’s place.” The Risk Management Department added some of their staff to the FSD team and submitted their own report to the FSD team leader.

However, shortly after it was established, the Risk Management Department began usurping the powers of the FSD by conducting separate bank inspections and holding interviews with borrowers. Q says that several central bank and private bank officials complained to Fitrat that Haidari was out of control but Q says that Fitrat refused to act because he perceived the criticisms as political attacks on his special initiative.

The aforementioned 2008 annual audit of Kabul Bank occurred at the end of the year. The inspection took place in October. In November, Haidari met Fruzi at the “Café Shop” in “Kabul City Centre,” which is a modern shopping center located in the basement of the “Safi Landmark Hotel & Suites.”[27] Haidari demanded a $300,000 bribe from Fruzi or else he would prolong the central bank audit “under various disguises.” Fruzi paid the bribe as demanded by Haidari. Within days, the central bank’s audit was signed and delivered to Kabul Bank.

Shokrullah Shokran, Kabul Bank's chief of operations and Sherkhan Farnood's cousin

Shokrullah Shokran, Kabul Bank’s chief of operations and Sherkhan Farnood’s cousin

Q says that, like the 2008 bribe, the bribe that Kabul Bank paid to the central bank for the 2009 audit was also led by the Risk Management Department, except in 2009 it was initiated by a Mr. Gauz, Haidari’s deputy. Shokrullah Shokran met with Gauz at the “Grill Restaurant” in the Wazir Akbar Khan neighborhood and gave him a $50,000 deposit. An additional $250,000 was delivered later. Q says that he and other senior Kabul Bank officials assumed that bribes paid to the central bank were divided up between Fitrat, his department heads, and their deputies.

Gauz later became the deputy director of the FSD and, in 2009, Haidari became the CEO of Azizi Bank. Q notes that sometime before Haidari went to Azizi Bank, Governor Fitrat issued a circular forbidding commercial banks from hiring central bank staff. Nevertheless, Fitrat violated his own guideline and permitted Haidari to go to Azizi Bank, ironically, to a position that required central bank confirmation. Q says that every other commercial bank (with the exception of Azizi Bank) opposed Haidari’s appointment.


The Rise of Fruzi

Khaliullah Fruzi’s rise to become the CEO and unofficial “co-king” with Sherkhan is a good example of how the central bank failed in its oversight role of Kabul Bank. The story of Fruzi’s rise also offers a glimpse at Kabul Bank’s most powerful actors.

Fruzi is the quintessential ladder climber. He was born in 1967 in Afghanistan’s Panjsher Province. According to the BioFin that he submitted to the central bank in July 2008 for his CEO confirmation process, Fruzi worked for a “Ural Bank” in Russia as a “commercial manager” from 1992 to 1994.[28] Q does not know if this bank exists (or existed). If it did exist and Fruzi worked there, Q thinks it was for a sales or a marketing position.

From 1995 to 1997, Fruzi claims to have been the “president” of a “Rotaa Oil.” From 1997 to 2001, or the height of the Taliban era of government, Fruzi worked as a “sales manager” for “Intercoms,” a precious stones company. It was while working for Intercoms that Fruzi was purchasing counterfeit currency for the Northern Alliance and the Taliban.[29] The double-dealing nearly cost him his life.[30]

Khaliullah Fruzi (Q photo)

Khaliullah Fruzi (Q photo)

In 2001, Fruzi, and a close associate named Mohammad Ibrahim Nazari, started Hewadwal Construction Company where he served as its president.[31] Fruzi wisely calculated that the construction industry in Afghanistan would become profitable following the Western intervention to topple the Taliban government. He struggled to win construction contracts with the new Afghan government.

In 2005, Fruzi became a Kabul Bank borrower. Q says that Fruzi used to come to the bank shabbily dressed and arriving in taxicabs. What started as a $300,000 loan for Hewadwal grew to tens of millions of dollars over the next five years as Fruzi rose in stature at Kabul Bank.

According to Q, Fruzi was attracted to Kabul Bank because of its success and glamour. When Fruzi would visit the bank in 2005, he would pass some time visiting Sherkhan. He used these opportunities to boast about his business exploits and to develop a relationship with Sherkhan. In the second half of 2005, Fruzi became Sherkhan’s personal driver and bodyguard, a position reminiscent of that held by Obaidullah Khan Saderkhail (one of Kabul Bank’s original shareholders) in Dubai before Kabul Bank opened. Fruzi also served as Sherkhan’s spokesperson at various government-sponsored forums. The arrangement was odd because Fruzi was still running Hewadwal.[32]

In 2006, there was a major leadership shakeup at Kabul Bank that benefited Fruzi. It was triggered by Kabul Bank’s responses to two serious fiscal problems at Kabul Bank: an “open forex violation” and low “capital adequacy” ratios. The fiscal problems led to written warnings from the central bank. The term “forex” is an abbreviation for “foreign exchange.”

Afghan banking law permits banks to administer their accounts and loans in currencies other than the afghani. Kabul Bank used four currencies: the afghani, the U.S. dollar, the euro, and the Pakistani rupee. While operating in multiple currencies may give banking customers flexibility, such a policy may also put the bank at risk in the event of currency demands (customer withdrawals) and currency fluctuations.

Kabul Bank’s open forex violation resulted from its customers depositing mostly afghanis, euros, and U.S. dollars into their accounts, but preferring to take out loans exclusively in U.S. dollars. 94% of Kabul Bank’s deposits were in U.S. dollars and afghanis. The illegal loans were also being withdrawn in mainly U.S. dollars. This meant that deposits in other than U.S. dollars were converted into U.S. dollars and handed over as loans. The result was that there was an imbalance between liabilities and assets of individual currencies.[33]

Currency fluctuations aggravated the imbalance. Q says that the exchange rate between the U.S. dollar and afghani fluctuated between 2004 and 2010. In 2004 and 2005, it took about 35 to 40 afghanis to equal one U.S. dollar. By 2010, one U.S. dollar was closer to 50 afghanis. The correct response to Kabul Bank’s open forex violation should have been to match the liabilities and assets of individual currencies. In layman’s terms, lending should not have continued in U.S. dollars alone, but also in other currencies, particularly in Afghanis.

The second problem, or low capital adequacy ratios, had to do with the relationship between Kabul Bank’s “share capital” (a part of its reserves) and its assets. Assets include loans, cash (liquid assets), and fixed assets (land, buildings, vehicles, furniture, etc.). In layman’s terms, as fast as Kabul Bank took in deposits, it lent them out. Since loans are treated with 100% risk, banks must have adequate reserves to offset (counterbalance) that risk. The solution was for Kabul Bank to inject fresh capital into its shareholding and this led to new shareholders being added.

The low capital adequacy ratios actually plagued Kabul Bank from 2005 to 2008, and during this period Kabul Bank injected capital into its reserves six times.[34] Two of these injections were accompanied by the addition of new shareholders: in April 2006 four new shareholders were added (Fruzi being one of them), and in early 2007 nine new shareholders were added (the first brothers being two of them).[35]

Q says that all of the money for these capital injections came from Kabul Bank’s deposits via illegal loans. The money was wired from Kabul Bank to Shaheen Exchange, where it was returned to Kabul Bank under the names of the new shareholders to make it appear as though the money originated from the shareholders.

The man charged with fixing the open forex violation was then CEO Assankhan Akbar. Ironically, Assankhan was Johnson Mallaikkal Rappai’s old boss at the Federal Bank of India in Kerala. Johnson was Kabul Bank’s general manager and architect of Kabul Bank’s illegal loan scheme.[36] Johnson was fired as the Federal Bank’s manager for forgery and for accepting bribes in exchange for approving loans. Assankhan was Johnson’s old supervisor and the one who signed his termination letter.

After Johnson’s dismissal from the Federal Bank, Sherkhan hired him as Kabul Bank’s manager a couple of months after Kabul Bank began operations, although the central bank never confirmed Johnson. In April 2005, Sherkhan hired Assankhan as Kabul Bank’s CEO. The central bank confirmed Assankhan as CEO after the latter submitted his BioFin and was interviewed.

At first glance, Assankhan’s hiring at Kabul Bank seems odd, since he was the one who fired Johnson from the Federal Bank. However, Q recalls that the two were actually on very good terms. When Johnson was embroiled in his corruption scandal and Assankhan was forced to fire him, Johnson understood that Assankhan had no choice since the scandal had gone public. Later, when Kabul Bank needed a CEO, Johnson recommended Assankhan to Sherkhan. Assankhan accepted the new position because Kabul Bank offered to pay him considerably more than what he was getting at the Federal Bank.

Johnson Mallakkial Rappai, Kabul Bank's manager (passport photo)

Johnson Mallakkial Rappai, Kabul Bank’s manager (passport photo)

The central bank ordered Kabul Bank to submit an action plan to resolve the open forex violation. Q says that Assankhan was unable to draw up an effective plan. His “vague and evasive answers” to the central bank’s policy demands led Larry Boren, Bearing Point’s lead advisor, to advise then central bank Governor Noorullah Delawari to warn Kabul Bank.

Johnson advised Assankhan to convert some of the U.S. dollar loans into afghanis. To convert a loan’s currency legally, the borrower must consent and the converted loan must not be marked as a new loan. However, what Johnson had in mind was to cherry pick non-performing U.S. dollar loans, convert them into afghanis, and mark them as new loans. The new loans would instantly be marked as performing loans in Kabul Bank’s books, since they would be new and not overdue, and they would help correct the open forex violation since they would be in afghanis.

Assankhan rejected Johnson’s advice. However, while Assankhan was Johnson’s senior at Kabul Bank, Johnson had been with Kabul Bank since its opening and Sherkhan held him in high regard. Q says that Johnson advised Sherkhan to fire Assankhan since his inability to correct the open forex violation was bringing Kabul Bank trouble from the central bank. Sherkhan agreed. In February 2006, Johnson told Assankhan to submit his resignation papers. Q refers to the irony as a “turn of the wheels.” About three weeks later, Sherkhan promoted Johnson to acting CEO pending central bank approval.

Since Sherkhan did not want to slow lending, he decided on four strategies to correct Kabul Bank’s fiscal problems. First, for the open forex violation, Sherkhan took Johnson’s advice and converted non-performing U.S. dollar loans to afghanis. He did not get the borrowers’ consent and he marked the converted loans as new loans. Second, for the low capital adequacy ratios, Sherkhan expanded the shareholding as noted above.

However, in order to keep lending at full throttle, Sherkhan took two more actions. He started a rather creative banking program called Bakht Deposit that was designed to encourage deposits. Also, he arbitrarily raised the interest rates on existing loans –to the chagrin of the borrowers- in order to boost the bank’s profits, thereby raising cash.

Sherkhan heard about a banking program called “Meshraq Millionaire” from Meshraq Bank in Dubai that helped sharply increase that bank’s deposits. The program linked bank deposits with a lottery-like drawing once a month that promised to make the winner an instant millionaire.

Sherkhan wanted to learn more about Meshraq Millionaire and to see if it could be set up at Kabul Bank where it would be called Bakht Deposit. In June 2005, Sherkhan had hired Dr. Ahmad Fahim Yaqubi as an advisor. Yaqubi was an Afghan who owned a restaurant in Dubai where Sherkhan used to meet with his Dubai business associates. Yaqubi had no banking experience but he did have a Ph.D., a deep passion for art, and aspired to open an art gallery. Sherkhan tasked Yaqubi with researching and implementing Bakht Deposit.

For Kabul Bank customers who participated, they opened a Bakht account, which was classified as a savings account. They could deposit as much money as they wanted into their Bakht accounts. Every $100 gave them one ticket for the next drawing. For example, if someone held $1,000 in his Bakht account, he was allotted ten tickets for the next drawing, thus increasing tenfold his odds of winning.

The prize money for the drawings came from the interest Kabul Bank paid for the money in the Bakht accounts. Instead of paying interest to each Bakht account, the interest was pooled into a prize fund to be awarded at each successive drawing. The positive side to owning a Bakht account was that, unlike a lottery, the losers retained their deposit money. They only thing they “lost” was the interest that their deposit money earned, since that interest was pooled into a prize fund and awarded to the winners of each drawing.

According to Q, Kabul Bank’s vice president and one of the five original Kabul Bank shareholders, Fraidoon Noorzad, perceived Yaqubi as a threat to his power at Kabul Bank. One of Fraidoon’s job duties was to oversee Kabul Bank’s personnel. Consequently, he made sure that Yaqubi received little help from Kabul Bank employees in setting up Bakht Deposit.

However, Fruzi understood how much Sherkhan wanted to see Bakht Deposit set up at Kabul Bank, so he sided with Yaqubi. While officially Fruzi was only a chauffeur and a bodyguard to Sherkhan, by 2006, he held considerable personal influence with Sherkhan. Q says that Fruzi advised Sherkhan to fire Fraidoon.

The first Bakht Deposit drawing was on June 26, 2006. It was a large and glamorous event held on Kabul Bank’s second anniversary.[37] Fruzi handled the security at the event. The first Bakht Deposit drawing was an instant success and Yaqubi was vindicated. That same night, Sherkhan promoted Yaqubi to the position of “deputy CEO,” a newly created position at Kabul Bank. However, rather than fire Fraidoon, Sherkhan demoted him the same night from vice president to advisor, doing away with the position of vice president permanently.

Fraidoon was humiliated with his demotion and resigned from Kabul Bank two days later. Sherkhan offered Fraidoon $1,000 for each of his 1,000 shares of stock, or $1,000,000.[38] At the time, Kabul Bank’s shares were valued at only $281 per share.[39] Q explains that the $1000 per share figure functioned as a bribe. It was “shut up” money to keep Fraidoon happy and from revealing anything about Kabul Bank’s illegal loan network and any other Kabul Bank secret.

Sherkhan purchased Fraidoon’s shares with an illegal Kabul Bank loan and the shares were placed in Sherkhan’s name until he expanded the shareholding again. After Fraidoon left Kabul Bank, he worked for Azizi Bank briefly before starting Maiwand Bank, one of the banks that later competed with Kabul Bank for the Afghan government’s salary disbursement contract.

In August, wanting to place Fruzi on a near equal par with Yaqubi, Sherkhan created a new position for Fruzi bearing the odd title: “Deputy to Chairman on Security.” While Yaqubi, Fruzi, and Johnson received new administrator positions, as per banking law, the central bank needed to confirm them. The central bank confirmed Yaqubi after he submitted his BioFin and was interviewed. However, for Fruzi, the central bank asked Kabul Bank to elaborate on his job description.

Kabul Bank wrote to the central bank explaining that Fruzi would be in charge of security as well as work alongside the credit department, specifically in collections and the disbursing of loan funds. Sherkhan’s idea was to marry security with collections and loan disbursements in the person of Fruzi in order to provide muscle up front to Kabul Bank’s borrowers. It was a not so subtle form of intimidation befitting of gangsters and loan sharks, not banks.

The central bank responded by saying that since Fruzi was not given any executive powers, he did not need to pass through the shareholder and administrator approval process. Sherkhan was free to appoint Fruzi as he saw fit. However, the central bank said that since Hewadwal Construction Company was a Kabul Bank borrower, Fruzi needed to sever all ties to the company by resigning from his position as president and by selling all his shares in the company.[40]

Q says that Fruzi used his new position at Kabul Bank to develop associations with a number of influential people and, consequently, was able to funnel lucrative contracts to Hewadwal. He also wrote off some of Hewadwal’s older loans and offered it new loans at lower interest rates. Since Fruzi was believed to be no longer officially associated with Hewadwal, loans to that company were not considered related party loans and, consequently, not subjected to closer scrutiny.

Johnson’s CEO candidacy was not so fortunate. The central bank rejected him for CEO and he was forced to resign as acting CEO in October 2006. According to Q, Larry Boren had serious reservations about Johnson’s character and advised Governor Delawari to refuse Johnson’s candidacy.

Q notes that Johnson did not have a good reputation in or out of Kabul Bank. Afghan staff frequently had problems with Johnson, as did the expatriate staff. The latter he oversaw. When vice president Fraidoon Noorzad was overseeing Kabul Bank’s staff, Johnson shared the responsibility by overseeing the expatriate employees.

However, as what may be understood as a compromise or as a chance for Johnson to still receive confirmation, Q says that the central bank made Johnson’s confirmation conditionally based on Kabul Bank submitting several policies that it lacked. As noted earlier, Kabul Bank began operations without even credit, audit, related party, anti-money laundering policies, and more.

Johnson drew up the policies for Kabul Bank and submitted them to the central bank, but Q says they were written in a “diluted” manner and were “not exhaustive.” For example, the credit policy would have permitted Kabul Bank to lend with few encumbrances. In the end, the central bank rejected Johnson’s policies and his CEO candidacy too.

The rejection of his candidacy was a huge blow to Johnson because he was stripped of his executive (decision-making) powers. Johnson wanted to leave Afghanistan and to return to India, but in November, Fruzi convinced him to stay, and Sherkhan gave him the position of chief advisor. As an advisor, Johnson did not hold executive powers, but he remained a powerful force at Kabul Bank due to his link to Sherkhan.


The Tycoons and Khurasan Security Services

Fruzi’s position over loan disbursements infuriated Kabul Bank’s three biggest borrowers: Mirwais Azizi, Abdur Rahman Alokozay, and Abdul Ghafar Ghazanfar. Azizi dealt in oil, gas, real estate, and construction, Alokozay in tobacco, tea, and cooking oil, and Ghazanfar in oil, construction, and general trading.[41] The three tycoons were among the richest men in Afghanistan and were recipients of tens of millions of dollars in illegal Kabul Bank loans.

As was the general pattern with Kabul Bank’s borrowers who took out illegal loans, Azizi, Alokozay, and Ghazanfar’s first loans were legal. Sherkhan always began with one legal loan in order to get the borrower to reveal his true assets. The rest of the loans to these men were illegal. Kabul Bank went the illegal loan route to avoid lending restrictions on large exposure loans. Azizi, Alokozay, and Ghazanfar did it because their businesses and collateral could not justify the amount of money they were borrowing.

The tycoons received working capital loans. As such, they had to physically visit Kabul Bank’s loan disburser, which was Fruzi from 2006, and get his approval to withdraw money. Q says that to the tycoons, visiting Fruzi to withdraw their money was a humiliation because to them, Fruzi was just a small time businessman and a thug who was unworthy to hold a position of authority over them. The disagreement over Fruzi was particularly heated between Sherkhan and Azizi.

Azizi, Alokozay, and Ghazanfar were also angry with Sherkhan because he had arbitrarily raised their interest rates from 14%-21% to 30%-36%. As already noted, the extra interest paid on the loans showed up as more profit for the bank, enabling lending to continue unabated. Infuriated, Azizi decided to start his own bank –Azizi Bank- and when he did, Sherkhan demanded the immediate repayment of his loans. Azizi complied and paid them all off. Azizi Bank began operations in June 2006.[42] Alokozay and Ghazanfar also began repaying their loans at a faster pace and kept borrowing at a minimum. Ghazanfar started his own bank in 2009.

Mahmoud Karzai, brother to Afghan President Hamid Karzai (Q photo)

Mahmoud Karzai, brother to Afghan President Hamid Karzai (Q photo)

Sherkhan’s falling out with Azizi, Alokozay, and Ghazanfar was significant for three reasons. First, Sherkhan lost three wealthy borrowers who were repaying their loans with interest. Second, Azizi Bank became a fierce competitor to Kabul Bank. As Kabul Bank expanded and captured more market share, Azizi Bank, and other competitors, complained that Kabul Bank was becoming a monopoly. Third, in the same year, or 2006, Sherkhan turned to a new circle of business associates, the first brothers, Mahmoud Karzai and Haseen Fahim. Also, he increasingly relied on Fruzi to handle Kabul Bank’s operations.

Other senior management positions filled in 2006 included the chief operations officer, chief financial officer, chief credit officer, and chief audit officer. The central bank confirmed all four positions after receiving the candidates’ BioFins and interviewing them all. At this time, Shokrullah Shokran (Sherkhan’s cousin) was confirmed as the new chief operations officer.

In October 2006, following Johnson’s resignation as acting CEO, Sherkhan stepped down from his position as chairman of the board and made himself the CEO. He made his brother, Sherin Khan, the new chairman. Q says that Sherkhan and Sherin Khan submitted their BioFins to the central bank but neither one was called in to interview. Consequently, the central bank neither approved nor disapproved their candidacies, but its non-action had the effect of an approval because the men stayed in their positions. Sherin Khan is from Mazar-E-Sherif and Q notes that Kabul Bank issued many loans to borrowers from Mazar-E-Sherif when Sherin Khan was chairman.

Around the same time that Sherkhan named Fruzi the Deputy to Chairman on Security, Johnson recommended that Sherkhan start his own security company. Since Kabul Bank opened in 2004, Kabul Bank had provided for its own security. Sherkhan was able to write off Kabul Bank’s security expenses in the bank’s tax returns. Since businesses pay taxes only on their profit (revenue-expenses = profit) it was in Sherkhan’s interest to write off as many expenses as possible. Also, the more expenses that a business can write off, the more profit it can show and, consequently, its shares will hold greater value, which will yield higher dividends paid to the shareholders.

With his own security company, Sherkhan would still be able to write off the bank’s security expenses but now he could personally benefit from them. In September, Sherkhan and Fruzi started Khurasan Security Services (KSS) with Fruzi becoming the company president, holding 70% of the company’s shares.[43] KSS was considered a related party to Kabul Bank since Fruzi and Sherkhan also served at Kabul Bank. Over five hundred Kabul Bank employees who were responsible for the bank’s security (including for all branches) were shifted to KSS’ payroll.

KSS did not receive any Kabul Bank loans. The purpose of owning KSS was for it to bill Kabul Bank for as much as possible, in essence inflating Kabul Bank’s security expenses, which Kabul Bank could write off thereby paying fewer taxes to the Afghan government. However, overbilling Kabul Bank also had the effect of siphoning Kabul Bank’s profits to KSS. The real beneficiaries of the entire security scheme were KSS’ shareholders, or Fruzi and Sherkhan.

Q says that the KSS contract with Kabul Bank was intentionally written in vague language regarding what could be billed to Kabul Bank. For example, KSS even billed Kabul Bank for uniforms, weapons, and bullets, or items that should have been purchased by KSS with KSS money. Billing Kabul Bank for such items was improper because technically Kabul Bank became the owner of KSS’ uniforms, guns, and bullets. However, KSS claimed these items as its own assets.


Fruzi Eliminates his Rivals and Becomes Co-King with Sherkhan

In December 2006, Sherkhan recruited Dr. Avinash Chandra Jha, an Indian national and an imposing, fatherly figure, for the position of deputy CEO. Since Yaqubi was not a real banker by education or experience, Sherkhan’s idea was to compliment Yaqubi with a professional banker so that in the end there would be two deputy CEOs. However, Q says that Johnson immediately perceived Dr. Jha as a potential rival and advised Sherkhan to make Jha an advisor instead, to which Sherkhan consented. As an advisor, Jha answered to Johnson. Dr. Jha also led the Audit Committee.

Dr. Avinash Chandra Jha, Kabul Bank advisor and head of the Audit Committee

Dr. Avinash Chandra Jha, Kabul Bank advisor and head of the Audit Committee

Q believes that Johnson blocked Jha from becoming deputy CEO because he viewed Jha as a threat to his influence at Kabul Bank. Johnson did not want an unknown outsider from his own country of India wielding executive powers because that would reduce his influence at Kabul Bank. In the event that Jha and Johnson disagreed on a management issue, Johnson would have to defer to Jha, and if a disagreement escalated to Sherkhan, Johnson might lose out.

Also, as the creator of Kabul Bank’s illegal loan scheme, Johnson needed staff that would follow his orders even if his orders conflicted with the bank’s standard practices or Afghan banking law. Q says that when Johnson was general manager and acting CEO, he recruited most of the bank’s Indian staff and tended to pick people who he thought would be “subservient” to him. Finally, Johnson perceived Dr. Jha as a threat to the unique influence he held over the Indian employees. While many Indian staff did not like Johnson, they still feared and obeyed him.

In April 2007, there was another leadership shakeup at Kabul Bank. Deputy CEO Fahim Yaqubi was a cautious man and slow to sign loan documents requiring his authorization, and this put him into conflict with Sherkhan. At the time, only Sherkhan had the authority to approve loans but Yaqubi’s signature was still required on internal Kabul Bank loan documents before being sent to Sherkhan for final approval.

Q does not know what role Yaqubi may have played in the illegal loan scheme; however, Yaqubi’s reluctance to put his name on loan documents suggests that he knew about the illegal loans and did not want to be held responsible if ever Kabul Bank’s fraud were exposed. According to Q, Johnson and Fruzi teamed up to eliminate Yaqubi.

Khaliullah Fruzi (Q photo)

Khaliullah Fruzi (Q photo)

Johnson told Sherkhan that Yaqubi’s resistance to signing loan documents was unwarranted since Afghans were emerging out of decades of civil war and should, therefore, not be held to such high credit standards when seeking loan approval. Fruzi agreed with Johnson’s position and advised Sherkhan to remove Y aqubi because his actions were working against Kabul Bank’s interests.[44] Sherkhan sided with Johnson and Fruzi, and asked Yaqubi to resign.

In the same month, Sherkhan promoted Fruzi to deputy CEO, in effect replacing Yaqubi with Fruzi, but no one took Fruzi’s old position. Fruzi’s promotion made him second to Sherkhan at Kabul Bank. Sherkhan raised Fruzi’s Kabul Bank shares to 17.57%, commensurate with his rising stature.

The central bank chose not to require Fruzi to pass through the shareholder and administrator confirmation process. Consequently, he was not asked to submit a BioFin, to pass through an interview, or to be confirmed in his new position. Refusing to confirm Fruzi as deputy CEO was a dereliction of duty.

However, Q says that the legal requirement to confirm the deputy CEO was opposed by all banks on the grounds that since the CEO gets confirmed, and the deputy CEO serves at the CEOs good will, then the deputy CEO does not need confirmation. The central bank accepted this logic. In Kabul Bank’s case, the irony was that its CEO, or Sherkhan, was never confirmed as CEO either.

The argument against confirming deputy CEOs was nonsensical because the same could be said of the entire Management Board. Why confirm any of those administrators since they serve under the CEO?

Clearly, the argument exists because the commercial banks want the liberty to appoint people as deputy CEO who may not have the requisite banking experience and whose personal and financial backgrounds may be questionable. If the central bank’s priority were enforcing the Law of Banking then it would have rejected the banks’ argument. Q believes that banks are paying significant bribes to get the central bank not to screen deputy CEO candidates.

The central bank’s policy of not screening deputy CEO candidates is a good example of how laws can be subverted by later regulations or rulings. The Law of Banking’s confirmation clause provides the central bank with a mandate to investigate the financial integrity and qualifications of senior bank staff and the central bank subsequently put into place a confirmation process, but now the position of deputy CEO is excluded from that process. While the central bank is at fault for not insisting on confirming deputy CEOs, Q also asks, “Where was Bearing Point?” Where were the U.S. advisors who were supposed to be building capacity? How could they let this slide?

The November 2012 Kabul Bank inquiry reports a similarly incredulous, but vague, explanation for the central bank’s refusal to confirm Fruzi’s appointment as deputy CEO. It explains that the central bank at first inquired of Kabul Bank how a security chief could be qualified to take the position of deputy CEO; however:

By May 2007, Da Afghanistan Bank’s perspective inexplicably and drastically changed, as the Governor at the time [Noorullah Delawari] informed Kabul Bank that it was within the discretion of the Chairman to appoint employees under the banking law so there was no need to interview the ex-Chief Executive Officer.[45]

In August 2007, Sherkhan told his long-time associate and one of the original shareholders, Vice-Chairman Obaidullah Khan Saderkhail, to leave Kabul Bank. Q does not know the full details relating to Obaidullah’s exodus, but he believes in large part that Obaidullah was overstepping his authority at Kabul Bank and setting himself up as a rival to Fruzi at a time when Fruzi was already too powerful.

Q says that Fruzi did not like Obaidullah’s “interference” and helped to turn Sherkhan against him. In Obaidullah’s final months at Kabul Bank, he was adamant that Sherkhan should pay out some dividends to the shareholders. The disagreement was deep with Sherkhan who flatly refused.

While Obaidullah did not leave Kabul Bank on his own volition, he did leave a wealthy man. Q says that Sherkhan paid him $4 million in Dubai. There are no papers or receipts of the transaction because the payout was done off the record and by Sherkhan directly.

Part of the money was for Obaidullah’s shares and the rest was additional compensation. With this money, Obaidullah started his own real estate company in Kabul. He also became the chairman of the “Afghan Business Council.”[46]

Although at the end of 2006 Fruzi had asked Johnson to remain with Kabul Bank, and despite the fact that the two had worked together to bring down Yaqubi, the two did not remain allies for long because Johnson refused to yield his influence, as Sherkhan’s chief advisor, to Fruzi. Meanwhile, Amitava Basu, who was the credit manager at the time, also did not like Johnson and told Dr. Jha the truth that it was Johnson who blocked him from becoming deputy CEO. The result was that a Jha-Johnson “cold war” erupted. Most expatriate staff aligned themselves with Dr. Jha. In addition, a Fruzi/Jha/Basu power center formed that was waiting for the opportune time to take down Johnson.

Dr. Jha (left) and Amitava Basu (right). Q photo

Dr. Jha (left) and Amitava Basu (right). Q photo

Only one thing remained for Fruzi to become the true equal to Sherkhan at Kabul Bank: Sherkhan’s presence at Kabul Bank needed to be reduced or removed altogether. Sherkhan himself made this happen.

Dubai is the foremost luxury location in the Middle East. While Sherkhan was very fond of Dubai’s splendor and opulence, he also had businesses there. Q says that even before Sherkhan made himself CEO in late 2006, when he was chairman of the Board of Directors, he used to spend a lot of time in Dubai. From November 2007, Sherkhan began spending all of his weekends in Dubai.

In February 2008, Q says that Haseen Fahim played a central role in convincing Sherkhan that he could reside indefinitely in Dubai because Fruzi, he said, could fully handle Kabul Bank’s affairs. Accepting Haseen’s advice and trusting Fruzi, Sherkhan moved to Dubai indefinitely. According to Q, the pivotal moment when Fruzi’s power (in practical terms) equaled Sherkhan’s at Kabul Bank was when Sherkhan left Afghanistan. The management of Kabul Bank was completely in Fruzi’s hands from that moment even though his official position was still deputy CEO.

From 2008 to 2010, Sherkhan returned to Kabul from time to time to respond to various challenges presented by Pamir Airways. However, when he would come to Kabul, he would not visit Kabul Bank. Q also adds that soon after Sherkhan moved to Dubai, Fruzi “had enough” of Johnson and sent him to Dubai to join Sherkhan -permanently.

In June 2008, Sherkhan made Fruzi the acting CEO of Kabul Bank. Fruzi submitted his BioFin to the central bank in July and was interviewed the same month. According to Q, the central bank gave Fruzi a six-month provisional appointment. The central bank was supposed to evaluate Fruzi’s performance at the end of the six-months, interview him again, and then confirm or reject his candidacy. Q says the Fitrat-led central bank never called Fruzi back to interview.[47]

Also in July, Sherkhan resigned as CEO and his brother, Sherin Khan, resigned as chairman of the board. Sherkhan made himself the chairman again and Sherin Khan remained a shareholder. In 2009, Sherkhan increased Fruzi’s shares by removing some of his own shares and some shares represented by Farida, his wife.[48] The result was that Sherkhan and Fruzi each held 28.16% shares. With Sherkhan in Dubai, and Fruzi holding the position of CEO with equal shares to Sherkhan, Fruzi ruled Kabul Bank as a co-king with Sherkhan.



Given Sherkhan’s shady past, it should not be a surprise that Kabul Bank committed so many banking law violations. What should be a surprise is that the bank was able to do so with relative impunity and for so long. One notable violation was that Kabul Bank got its banking license and began operations without even a credit (lending) policy. A bank’s very reason for existence is to collect deposits and then to lend them out; yet, Kabul Bank did not even have a written policy for doing this.

In Afghanistan, the central bank is the government body responsible for monitoring banks, but it was not alone in this task. U.S. advisors worked alongside central bank employees to help them do their jobs. The central bank’s annual audit of private banks offers a snapshot of the advisors at work. In theory, U.S. advisors guiding central bank staff should have led to an effective oversight; however, corruption has derailed the mission. Q says that Kabul Bank paid a bribe to the central bank for every annual audit, every policy approval, and every administrator that was confirmed.

Part of the central bank’s monitoring role includes a confirmation process for administrators and key shareholders. The U.S. advisors assist the central bank in the process. The central bank should not have permitted Sherkhan Farnood and Khaliullah Fruzi to hold such prominent positions at Kabul Bank.

The events that led to Fruzi’s rise at Kabul Bank are particularly troubling because they vividly illustrate the central bank’s failure to do its job. Fruzi became deputy CEO and then CEO without the central bank’s approval. Kabul Bank bribes and central bank solicitation for bribes likely explain how Fruzi made it to the top of the bank without the requisite qualifications.

 ***To view the endnotes, click here for a printable and downloadable PDF file.***