Kabul Bank’s True Borrowers’ List

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

Special Foreword

Kabul Bank was Afghanistan’s largest private bank. It opened on June 24, 2004, and by August 2010 had over 75 branches with at least one bank 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 bank’s chairman of the Board of Directors and chief executive officer respectively, were fired for mismanagement on August 30, 2010. Their dismissals triggered a deposit run on September 1, which led to an $825 million government bailout of the institution, an amount far above what was actually needed to save the bank.[4] The functioning part of the bank continued as “New Kabul Bank.”

This is my fifth paper written in collaboration with Q about Kabul Bank so I would like to share a little more detail with you, the reader, about how I became involved with Kabul Bank and Q.

My involvement with Kabul Bank began in early 2011 when I decided to write a research paper on Afghanistan for my website, USpolicyinaBigWorld.com, that I hoped would contribute to the discussion as to why a long-lasting success was alluding the post-Taliban era.

I already had a general idea of the sort of problems plaguing Afghanistan, including the problem of corruption and the ethnic issue, and I had written many short articles for my website about some of these problems, but now I wanted to go a little deeper.

To narrow the topic for the research paper, I decided to peruse the many hundreds of Afghanistan-related bookmarks accumulated in my Internet browser. The bookmarks had become unmanageable so I was obliged to sort them into separate folders before narrowing my topic.

For example, all the articles that addressed the subject of education went into the folder labeled “education,” the articles on refugees went into the “refugee” folder, etc. Of course, I found myself reading through the articles as I placed the bookmarks into their respective folders and, as I did, I was a little surprised that such a large proportion of the bookmarked articles in my browser addressed corruption.

I knew corruption was a hot topic but the amount of articles that discussed the corruption problem in Afghanistan was remarkable. It drove home the fact that there was a general consensus that corruption was a central factor that was hampering the success of the Afghan government, led by President Hamid Karzai.

Before telling you what happened next, you should know that I am obsessed with “why” and “how” questions. It is not enough for me to receive a fact and to be content with that fact’s existence. I must know also why and how it exists. Something inherent to the wiring of my mind prods me to think in terms of why and how after I have learned a particular fact.

Sherkhan Farnood, Kabul Bank's former CEO. Photo is used with special permission from PokerNews.com

Sherkhan Farnood, Kabul Bank’s former CEO. Photo is used with special permission from PokerNews.com

For example, when I was a young boy I was always fascinated that what seemed to be a mere block of metal, called an “engine”, could propel cars and trucks. Wanting to know “how” this was possible, in the 11th grade I chose auto mechanics as an elective when the opportunity presented itself. I was amazed to discover that explosions within the engine pushed down pistons connected to rods that turned a crankshaft, which eventually turned the wheels –the mystery solved at last!

So I noticed among the corruption-related articles in my browser that one of the common denominators was self-interest. This was an answer to a “why” question, or why the people were doing it. The people engaging in corruption did so either for money, for advancement, or for fear of getting harmed or killed if they did not engage in corruption.

Some of the corruption-related stories addressed corruption among lower-level government employees but other stories spoke about high-ranking government officials stealing money from their ministries (departments), money that donor countries gave to the Afghan government for the Afghan people.

Some government officials allegedly were involved in drug trafficking. For example, one of the president’s brothers, Ahmad Wali Karzai, who was a political leader in the insurgency-racked southern part of the country and was murdered in July 2011, was rumored to be a major drug kingpin. The corruption in Afghanistan appeared to flow all the way to the presidential palace and even to flow in the opposite direction, or from the palace to corrupt officials.

I had also bookmarked stories about the movement of money gained through corruption. These particular stories answered how and why questions. For example, money gained through corruption was being taken out of Afghanistan and sent mainly to Dubai by plane or by local money exchanges called “hawalas”. The money was used to purchase villas and other luxury items or even to fund businesses.

Moving the money out of Afghanistan through planes and hawalas was done for secrecy. These people preferred not to use banks because when money is wired, various international bodies can discover the identities of those wiring the money, and then questions might be asked, law enforcement might get involved, and incidents might get reported to the media.

For example, the salaries of police chiefs, military commanders, and parliamentarians in Afghanistan are modest compared with their counterparts in developed countries. Now what if an Afghan parliamentarian was found wiring $50,000 to a Dubai bank account? Someone will want to know how the person got that kind of money, since it could not have come through his or her government salary.

Some of the bookmarked articles spoke about corruption networks. President Karzai’s national security advisor, Rangin Dadfar Spanta, explained:  “In this government, we have mafia networks…[and they]…begin with the financial banking system, with corruption networks, with reconstruction and security firms and also with drugs and with the Taliban; they are in parliament and they are in government.”[5]

Spanta’s quote challenges us to view so-called “high corruption”, or corruption among the Afghan elite, as corruption which links powerful government figures across ministries in the executive branch of government with parliamentarians and non-government criminal elements, including wealthy businessmen and even Taliban insurgents.

Through wiretapping, U.S. officials also learned a lot about these corruption networks. A U.S. official stated, “All these people talking about bribes and pretty much any kind of corruption you can imagine started coming up…. It was all connected.”[6] Another U.S. official said, “We looked around and realized how deep all this ran. The corruption went from the top [of the government] to the bottom…. It ran sideways to the Taliban. It went in every direction.”[7]

From the wiretaps, the U.S. government even drew up charts and made PowerPoint slides to physically map out the corruption networks. Confirming Spanta’s description of “mafia networks” within the Karzai government, the charts and slides vividly illustrated “webs of connections between members of President Hamid Karzai’s family, businessmen, corrupt officials, drug traffickers and Taliban commanders.”[8]

I soon observed that many of my browser’s bookmarks were of the scandal at Kabul Bank that rocked Afghanistan’s banking sector from September 2010. The scandal engulfed the richest men in Afghanistan, senior government officials, parliamentarians, and even President Karzai.

It dawned on me that the Kabul Bank scandal was an example of a major corruption network similar to that described by Spanta, which involved the Whose Who in Afghanistan. I wondered if what happened at Kabul Bank had the potential to unlock the mystery of high corruption in Afghanistan. That is, to methodically explain why and how it is happening, at least from Kabul Bank’s perspective. How were these Kabul Bank guys stealing the money? How were the Karzai government, parliamentarians, and other powerful figures linked to Kabul Bank? Why was Kabul Bank linked to the government -who needed who?

Khaliullah Fruzi

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

Perhaps an understanding of the Kabul Bank scandal could lead to an understanding of the bank’s corruption network, which could lead to the crafting of a policy to help reduce the corruption within the Karzai government and successive governments.

Consequently, I decided to make the Kabul Bank scandal the topic of the research paper and, throughout 2011, I read every article on it that I could find. In September, I finished the paper and titled it “The Kabul Bank Scandal and the Crisis that Followed.” The paper was reworked and re-issued in December of the same year.

While I was somewhat happy with how the paper turned out, there were many unanswered why and how questions that festered in me. I felt like I finished a paper that was not truly finished and could not be finished because the information in the media and other sources was insufficient. It was largely non-technical, financially speaking, and generalized -too far removed from the event. I needed someone on the inside of the bank, someone who was an eyewitness to the events and understood banking, finance, and politics.

For example, despite all the reporting on Kabul Bank, I still did not have a grasp on the illegal loan mechanism. In addition, I knew little about the Kabul Bank shareholders and what happened with their businesses that were funded with illegal Kabul Bank loans. How much of the bank’s money did these shareholders and their businesses receive and how was the money spent?

Knowing that $90 million or more was spent on Pamir Airways did not suffice. I wanted to know how the airline spent that money and how precisely the airline went out of business. Also, I did not understand why Fruzi led a coup to eject Sherkhan from the bank. If they were both a part of the fraud then why did they fight? It was not enough to say the two had a falling out and to leave it at that. I wanted to know why they had a falling out and how it transpired.

Most important, the links between Kabul Bank and the Afghan government remained shrouded. My lofty goal of cracking the Kabul Bank corruption network failed miserably because of insufficient sources. Concluding that the odds were about 0% of ever connecting with someone on the inside of Kabul Bank, I determined that my failure would remain.

Then, in January 2012, a former senior Kabul Bank official contacted me after reading the research paper. I thought to myself, “I can’t believe this just happened!” He gave me his name and job title, describing himself as someone “closely associated” with the bank. I refer to him as “Q” in order to protect his identity.

Q commended me for an honest attempt to get out the Kabul Bank story but added that “certain facts” in the paper were misrepresented. He then offered to share his eyewitness account of what really happened at Kabul Bank.

While I understood that the true story behind Kabul Bank could only surface through an eyewitness, I was shaken –scared really- soon after Q contacted me. Yes, I was thrilled at first, but reality quickly checked the initial emotion. Since media reports characterized the bank as a leadership-orchestrated fraud, and since Q was a part of the bank’s leadership, I understood from the start that I was taking a risk even listening to what he had to say.

At the same time, the opportunity came to me. I knew that only an eyewitness could unlock the scandal. I could bombard him with all of the unanswered how and why questions I had from my research paper, and perhaps finally understand what happened at Kabul Bank. The possibility that Q’s account could peel back the lid on the Kabul Bank corruption network motivated me to hear him out.

My first big question was if Q was going to tell the truth, or give only part of the story and try to protect himself. However, I reminded myself that I had just come away from a year of intensely researching the public record of Kabul Bank, so I was at least somewhat well positioned to test what he shared. In addition, he promised me that he would back up everything he said with Kabul Bank and Afghan government documents.

My role from the start was to be a listener, a prober, and a writer. I wanted to receive Q’s eyewitness account during his time at Kabul Bank, to probe it from various angles through questioning, and then to write it down in a story format for others to read. What I thought would be a two or three-month collaboration at most, thus far has ballooned to a nearly two-year project that has churned out five papers.

I do not view myself as Q’s judge even though I make many judgments along the way. However, I will say that like other senior Kabul Bank officials, Q maintains his innocence. He says that he was not a part of the shareholders’ “designs” and never benefitted monetarily from the fraud, but he also cautions that he is no angel and, by virtue of his position, “found out a lot of things” before the September 2010 crisis. He asked me to be open-minded and to reserve judgment until the end. He said that at that time I would know what his role was at the bank through hearing him out and drawing my own conclusions.

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)

So is Q telling the truth? I will leave that for you to decide, but what I can say is that when a person gives a testimony, particularly an extended testimony, such as what we have with Q, which covers a seven-year period at Kabul Bank and was delivered to me over a period of nearly two years through the exchange of nearly 2,300 emails thus far, which I indexed in order to manage the massive quantity of information, when that kind of testimony is chopped up into small pieces with the sharp knife of questioning and remains standing, then such a testimony is at the very least worth your consideration.

I did in fact index Q’s emails. He was giving me so much information and so many documents that by the second month it was evident that I needed a data management system; otherwise, I would lose the ability to recall information from earlier emails. At first, I tried summarizing each of his emails as succinctly as possible but when this system reached 40 pages after less than two months, I knew I needed a better system.

In a Microsoft Word document (and in alphabetical order) I put together an email index. I began writing down terms (aggressive depreciation, business receipt tax, equity capital, etc.), the names of people, businesses, and bodies (Sherkhan, Fitrat, Gas Group, Gulbahar Center, Bearing Point, Financial Supervision Department, etc.), and names of events or activities (deposit run, salary disbursements, Dubai real estate portfolio, etc.).

Each name, word, and event in the index was followed by the date of each email containing the same. After filling up several pages, I then grouped the names, terms, and events into sections. The first section was “Names of People,” followed by “Names of Corporations and Bodies,” then “Names of Concepts or Items,” etc. I did this for quick reference. For example, if I want to look up all the emails on the word “Tazkira,” which is the Afghan ID card, I jump to the “Names of Concepts and Items” section and then alphabetically locate the word Tazkira.

However, having the dates of five or more emails after a particular term proved cumbersome, because if I wanted to recall something that Q said about the Tazkira, for example, I would have to re-read all the emails where the term came up. So I expanded the index by briefly summarizing each email.

Below is a sample entry from the email index on the term Tazkira. Note that five emails address the term. Also, to distinguish 2012 emails from 2013 emails, the 2013 emails have their times in bold font. In the example below, only the last email is from 2013.

  • Tazkira –Feb. 21 (1:05pm, needed for business license), May 2 (1:21pm, a note on back of tazkiras could have prevented fraud), May 3 (12:30am, sample tazkira), May 15 (11:49am, how borrowers got others’ tazkiras), Jan 28 (8:57pm, don’t have fingerprints)

The email index currently has almost 50 pages and has helped me to successfully manage what Q has shared. Many times I have raised questions to Q about things he addressed well over a year ago in order to connect it with new material. Having the email index has streamlined that recall process.

Incidentally, the email index has helped to establish linear time, which is necessary for telling a story. For example, the third paper Q and I did, entitled “Kabul Bank’s Golden Age,” is about the period when Kabul Bank became Afghanistan’s biggest private bank. The information in that paper was not necessarily provided sequentially as Q relayed it to me; however, with the help of the email index, I was able to assemble all relevant parts of the story in a sequential order.

The current paper is the fifth written in collaboration with Q. It identifies where most of Kabul Bank’s money was spent. The overwhelming majority of Kabul Bank’s money was spent on businesses that belonged to the bank’s shareholders. Another portion of the bank’s money was stolen outright by Sherkhan and hidden in Kabul Bank’s books by artificially inflating the book value of its illegal Dubai real estate portfolio. The current paper tells the story of the two above recipients, or the businesses and the Dubai real estate.

Q says that a third portion of Kabul Bank’s money was illegally issued to Sherkhan, Fruzi, and the other shareholders to be spent as they wished. Only they know the full details of how this portion of the bank’s money was spent.[9] If they needed money for whatever reason –hotels, trips, cars, clothes, food, bribes, etc.- they just took it. For example, $20 million was spent on Afghan President Hamid Karzai’s 2009 re-election campaign.[10]

Q says that in the end it is impossible to trace where every last dollar of Kabul Bank’s money was spent, as receipts usually were not submitted to the bank. It is likely that even a portion of the money that was lent to the shareholders’ businesses may have been diverted to the shareholders’ personal needs and wants. That being said, still the lion’s share of the bank’s money may be traced back to the shareholders’ businesses and to the inflated Dubai real estate portfolio, which is the subject of this present paper.

A cash counter at Kabul Bank’s headquarters branch in Kabul is pictured above. (Q photo)

A cash counter at Kabul Bank’s headquarters branch in Kabul is pictured above. (Q photo)

Sherkhan was able to hide the way that Kabul Bank’s money was being spent in part by keeping two sets of books: a phony set at the headquarters branch in Kabul and the true set at Sherkhan’s money exchange business, called Shaheen Exchange, in Dubai.

Kabul Bank’s “books” were not physical books. Modern banks use computers and special software to perform their many tasks. Kabul Bank’s main software initially was Virmati and then Oracle, but the true borrowers’ list used Microsoft Excel. Q gave me a copy of the true borrowers’ list. It is the basis for most of the figures in this paper. It is not our intention to release all of the names on the list. Only those individuals directly related to the major businesses, and others who received large amounts of Kabul Bank money, are fair game.

How might Kabul Bank be described? Q says it was a “heist”. It was like a robber who steals from a fine jewelry store. He smashes through the glass to seize the jewelry then replaces the real jewelry with imitation jewelry. Next, he tries in vain to clean up the glass shards and to replace the broken glass before he leaves so that no one will know that a theft has occurred.

Michael Huffman




Sherkhan’s New Path

Kabul Bank began operations in June 2004. Over the next two years, Sherkhan focused on building up his bank. By early 2006, Kabul Bank had become Afghanistan’s largest private bank.[11] At the end of March 2006, Kabul Bank had $125 million in deposits, a year after that $349 million, then $500 million, then $624 million, and then $908 million (Graph 1).[12] On the eve of the bank run in August 2010, Kabul Bank had amassed $1.3 billion in deposits.

Graph 1_Deposit Growth

Kabul Bank’s biggest borrowers during its first two years were Afghan tycoons’ Mirwais Azizi, Abdur Rahman Alokozay, and Abdul Ghafar Ghazanfar. Sherkhan watched these men reap windfall profits from their businesses that were built with Kabul Bank money in the post-Taliban era. Goods and services of all kinds were flooding Afghanistan. Q says, “There was no price control mechanism. So whatever these guys fixed the price was the price.” The profits made by Azizi, Alokozay, and Ghazanfar were crazy, even after paying 30% to 36% interest rates for their Kabul Bank loans.[13]

However, in the first half of 2006, Sherkhan fell out with the tycoons, mostly because he arbitrarily raised their interest rates in order to bring in more cash for the bank.[14] The result was that the tycoons rapidly paid down their loans and closed down their Kabul Bank accounts. Azizi and Ghazanfar even started their own banks so that they could continue to fund their business empires through the illegal loan mechanism that they learned from Sherkhan. That mechanism was to create shell companies and then loan money to these shell companies when the actual recipients were the bank’s owners and their associates.

From the middle of 2006, Kabul Bank’s cash position improved sharply. The tycoons were paying back the tens of millions of dollars that they borrowed and deposits were surging, aided by a new deposit scheme called “Bakht Deposit.”[15]

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.

Around this same time, Kabul Bank inducted many new shareholders. Notably, Sherkhan inducted Khaliullah Fruzi as a prominent shareholder. He was a rising star at Kabul Bank in 2006 and eventually became the bank’s CEO. He functioned as a co-equal to Sherkhan from early 2008. In early 2007, two other prominent shareholders were inducted: Mahmoud Karzai and Haseen Fahim, the brothers of Afghan President Hamid Karzai and First Vice President Marshal Fahim respectively.[16] Both men were businessmen and both were Kabul Bank borrowers before they became shareholders.

Q says that from the first half of 2006, Sherkhan set about a new path. Flush with cash and surrounded by a new group of associates –Fruzi, Mahmoud Karzai, and Haseen Fahim- Sherkhan began using Kabul Bank money to start his own businesses and to demand shares from those borrowers who owned very large and profitable businesses. From the first half of 2006, if a big businessman wanted Kabul Bank financing, he had to induct into his shareholding Sherkhan, Fruzi, and sometimes the first brothers and other Sherkhan associates. It was in this way that Sherkhan and company became intertwined in many of the same businesses.

However, Sherkhan’s new path failed because his personal businesses went bankrupt due to poor management, and his investment in Dubai’s real estate market ended in steep losses following the 2008 worldwide recession. In addition, Sherkhan’s decision to own shares in the companies of Kabul Bank’s borrowers was a double-edged sword. While owning shares in these companies enriched Sherkhan personally, it also handcuffed him from taking action when the borrowers did not repay their loans.

Q has identified at least three principles that motivated Sherkhan’s business decisions. The three principles are fundamental to understanding Sherkhan the businessman, because they guided his tactical (short-term) and strategic (long-term) spending of Kabul Bank’s money. The first of these principles is that one must spend money to make money.[17] Principle one is evident in all of Sherkhan’s businesses. Money needed to be invested so that these businesses could make money.

The second principle that motivated Sherkhan’s business decisions was that one must be number one in order to be successful in business. While business students are taught in school to deliver the best possible product and to refine their operations, Sherkhan was obsessed with his competitors. His priority was to force them out of business by lowering his prices. Kabul Bank money subsidized Sherkhan’s losses that were sustained by offering goods and services at below cost. Sherkhan used principle two in Kabul Neft, Pamir Airways, and Bakhtar TV.[18]

Kabul Bank CEO Khaliullah Fruzi (Q photo)

Kabul Bank CEO Khaliullah Fruzi (Q photo)

Principle three is what Q refers to as Sherkhan’s desire to be “kingmaker.” Sherkhan was not interested in a political position, but instead preferred to help place people in political positions who would help further or protect his business interests. In fact, Sherkhan turned down a political post working for the president.[19] Q says that Sherkhan wanted to influence the placement of government ministers and department heads so that he could not be touched by law enforcement.

Donations to the 2009 presidential election campaign and the money given to up to 103 ministers and members of Parliament were parts of Sherkhan’s kingmaker strategy.[20] Relationships with parliamentarians were cultivated because Afghan lawmakers can confirm or deny President Karzai’s ministerial appointments and they make new laws that might affect Kabul Bank. The bank had such extensive influence in the Afghan government that Fruzi once boasted: “If there is no Kabul Bank, there will be no Karzai, no government.”[21]

Guided by the above three philosophical principles, linked to a new group of business associates, and flooded with an ever increasing amount of capital by way of Kabul Bank, Sherkhan set about to duplicate what he saw the tycoons do. However, Sherkhan believed that he would be more successful than them. To Sherkhan, he had helped make the tycoons by lending them the money to build their empires. Now Sherkhan would lend to himself and to his new set of associates to start multi-million dollar businesses.


Afghan Investment Company (AIC)

Afghanistan’s first cement manufacturing business began operations in 1959.[22] It was called “Ghori Cement Works” and was built by Czechoslovakian engineers in a northern town called “Ghori,” located in Baghlan Province’s Pol-e Khomri District. Ghori was the perfect location for a cement factory since the area was rich in limestone and clay, the main ingredients in cement, and four coalmines were less than 20 kilometers (12 miles) away.[23]

The coal is used to fire up the “kilns,” large ovens that bake the cement-like mixture until it solidifies into small, gray nodules called “clinker.”[24] After the clinker cools, it is ground into powder. Gypsum is added to the mixture to prevent moistened cement from hardening too quickly. Next, the cement is bagged and shipped.

Afghanistan’s first cement factory is tiny by today’s standards, with a maximum daily production rate of 400 tons per day (TPD) of clinker, or 146,000 tons per year. In the 1980s, during the Soviet occupation of Afghanistan, Ghori Cement Works was expanded with the addition of a second cement facility constructed near the original location. The original facility was renamed “Ghori I” and the new one was called “Ghori II” and was designed to produce two and a half times the quantity of clinker as Ghori I, or about 1,000 TPD. However, Ghori II was never completed. Fighting between Soviet troops and the Afghan Mujahideen froze the construction.

Cement manufacturing requires a lot of electrical power. Ghori I receives its electricity from a three megawatt (3 MW) dedicated power line from a hydroelectric power plant located three kilometers away along the Pol-e Khomri River. The hydroelectric plant has its own diesel generator to produce electricity during the winter months when the river freezes over.

Ghori I was still operational following the overthrow of the Taliban government in late 2001, but its daily production capacity was a fraction of its 400 TPD potential. From 2002 to 2007, Ghori I produced between 11,000 to 28,000 tons of clinker a year, or about 7% to 20% of its potential. During the same period, Afghanistan was importing a couple of million tons a year of cement from Pakistan, Iran, Russia, and some of the central Asian states. In 2005, for example, Afghanistan imported 2.5 million tons of cement, of which 1.8 million tons was Pakistani cement. In lay terms, Ghori I had “no relevant” cement production.

A worker monitors the baking process in the Ghori cement factory in Pol-e Khomri, Afghanistan, on September 18, 2006. This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

A worker monitors the baking process in the Ghori cement factory in Pol-e Khomri, Afghanistan, on September 18, 2006. This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

By 2005, Western agencies and governments were encouraging Afghanistan to restart some of its industries, preferably through privatization, and cement was one such industry that was identified. According to Afghanistan’s 2005 Minerals Law, all of Afghanistan’s natural resources belong to the Afghan government (“state”).[25] Consequently, the Afghan government cannot sell off its cement industry since it is fundamentally linked to the limestone, clay, gypsum, coal, and other mineral deposits nearby. It can only lease (rent) the land and all “moveable property” on the land. Ghori Cement Works and the surrounding limestone, clay, and gypsum quarries would have to be leased. In addition, since the four nearby coalmines provide the fuel needed for the kilns, the coalmines would also need to be leased.

The decision to privatize key industries of the Afghan economy created lucrative opportunities for the Afghan government and the Afghan people, the former benefiting from lease and royalty fees, the latter from the new jobs. However, the process to privatization is tricky. Privatization can end in failure and disaster if it is poorly implemented, which is what happened with Ghori Cement Works and the coalmines.

The first step in privatization is to determine what to privatize. In this case, the Afghan government decided in 2005 to privatize its ailing cement industry. The second step that the Afghan government took was to conduct a study. Privatizing Afghanistan’s cement industry was not as simple as leasing a vendor a few square meters to set up a hamburger stand. The cement market had to be carefully studied and the Afghan government needed to know what to do with Ghori Cement Works and the coalmines.

Should it just bulldoze Ghori I and II and start over with a new facility, or could Ghori I be renovated? Could Ghori II be completed and put into operation? Would these factories’ output be enough to make a significant contribution to meeting Afghanistan’s annual cement consumption? If not, should a third cement plant be built? Also, what about power? A new power plant will need to be built if production is expanded. Will the coalmines need renovating?

On September 21, 2005, the U.S. Trade and Development Agency (USTDA) awarded a $1.2 million contract to the Afghan Ministry of Mines and Industries (or “mines ministry”) to help fund a study that would present a roadmap for developing Afghanistan’s cement industry.[26] Mir Mohammad Sediq, the head of the mines ministry, was present at the grant signing in Washington DC.[27]

An Afghan man works in the Ghori cement factory in Pol-e Khomri, Afghanistan, on September 18, 2006. This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

An Afghan man works in the Ghori cement factory in Pol-e Khomri, Afghanistan, on September 18, 2006.
This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

The mines ministry awarded its cement study contract to Texas-based “Box International Consulting LLP.” In the summer of 2006, Box International finished its survey of Afghanistan’s cement industry and released its report to the mines ministry.[28] Box International’s findings were no surprise to the mines ministry since it was receiving interim reports throughout the contract.[29]

The next step towards the privatization of Ghori Cement Works was straightforward because the Minerals Law outlined a step-by-step process. The Afghan government was required to issue a “tender,” or a public notification announcing that the government would be accepting bids to lease Afghan Cement Works and the nearby coalmines.[30] The tender needed to state the timeframe for which the bidding would be open and explain what information had to be included in a bid. Once companies submitted their bids, the Minerals Law required that the government fairly evaluate each bid based on the following criteria:

  1. “Plan of work proposed, manner of implementation and the amount of investment committed thereto;
  2. Financial and technical capacity of the bidder;
  3. Previous experience of the bidder…;
  4. Having an Afghan partner (s)….”[31]

The above criteria indicated the type of successful bidder that the Afghan government was supposed to be looking for: a highly skilled company that had existed for some time and had the finances to do the job. Also, if it was a non-Afghan company, it was supposed to have an Afghan partner.

Since privatizing Ghori Cement Works required an investment of more than $50 million, the Minerals Law required the Council of Ministers (the Afghan Cabinet) to choose the winning bid.[32] In addition, the Parliament needed to endorse the Cabinet’s selection

11 days after the USTDA awarded the mines ministry the $1.2 million to study Afghanistan’s cement industry, Mahmoud Karzai, held a meeting of Afghan businessmen in Washington D.C. to discuss the possibility of investing in “major infrastructure projects in Afghanistan.”[33] The meeting was called the “U.S.-Afghanistan Business Matchmaking Conference” and was organized by the “Afghan-American Chamber of Commerce” (AACC).[34] Mahmoud Karzai was AACC’s chairman.[35]

Amitava Basu (left) speaks with Mahmoud Karzai (right). Basu was Kabul Bank’s  chief credit officer before his promotion to the Board of Directors in 2008. (Q photo)

Amitava Basu (left) speaks with Mahmoud Karzai (right). Basu was Kabul Bank’s
chief credit officer before his promotion to the Board of Directors in 2008. (Q photo)

Over the next four and a half months, Mahmoud Karzai recruited 50 Afghan investors to become the shareholders in a new business called “Afghan Investment Company” (AIC).[36] AIC was registered (became a legal business entity) with the Afghan government on February 18, 2006.[37] At least ten of the investors held U.S. citizenships and were part of the so-called “Afghan Diaspora,” or Afghans who fled their country over the preceding decades due to fighting and civil war.[38]

Sherkhan and his associates were not at the Matchmaking conference. Mahmoud approached Sherkhan in December 2005/January 2006 during his recruitment efforts. From the start, Sherkhan did not try to take control of the company by becoming the biggest shareholder as he did with Pamir Airways and Kabul Neft. Q says that Sherkhan respected Mahmoud’s unique role in AIC. It was Mahmoud’s “brainchild” so Sherkhan let him “run the show.”

In fact, Sherkhan advised Mahmoud to bring in as many shareholders as possible. He did this in part because the cement industry required hundreds of millions of dollars in capital and Kabul Bank at the time had less than $125 million in deposits, and much of that was already lent out. Moreover, many Afghan businessmen took pride in playing a part in a “national resurrection,” as Q puts it, of an important Afghan industry.

Initially, Mahmoud had decided on capitalizing AIC with $25 million.[39] After recruiting 50 businessmen to be the future AIC shareholders, he secured pledges from each person to invest $500,000 ($500,000 x 50 = $25 million). The result was that each of the 50 shareholders would own 2% of the company. Everyone would have an equal ownership and an equal voice. Sherkhan, Fruzi, Haseen Fahim, and other Sherkhan associates, became AIC shareholders and paid for their shares using Kabul Bank money acquired through illegal loans.

However, just before AIC was registered in mid-February, Sherkhan abruptly increased the shareholding by $20 million, bringing the new shareholding total to $45 million.[40] Q notes that during this time Sherkhan, Fruzi, Haseen Fahim, and Mahmoud Karzai were holding closed-door meetings at Kabul Bank each day for about one week. The additional $20 million also was drawn from Kabul Bank through illegal loans. In all, total Kabul Bank lending to AIC came to almost $32 million.

While Kabul Bank could have lent money to AIC legally (although the loan would have needed to undergo additional scrutiny for related party reasons), it was not legally permitted to lend money for AIC shares.[41] When someone or some party owns shares in a business, that person or party becomes an “equity partner” in that business, and Afghan banking law forbids banks from operating or owning non-financial businesses.[42]

Why did Sherkhan add $20 million more to AIC’s shareholding? Sherkhan may have determined that the shareholding needed to be increased commensurate with the large amount of outside financial assistance (loans) that AIC would be seeking. Q says that when a business needs outside assistance, international business norms demand that the company seeking assistance should come up with a respectable portion of the desired total.

However, the additional $20 million that Sherkhan added to AIC’s shareholding was not dispersed evenly. It was spread out between Sherkhan and his associates, including to Mahmoud Karzai. The result was that a small group of the shareholders held over 50% of the total, effectively giving them control of the company. In lay terms, Sherkhan and his associates hijacked the shareholding just before the company was registered.

A miner works the deep pits of the Karkar coalmine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

A miner works the deep pits of the Karkar coalmine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

Subsequently, there was a sudden falling away of shareholders. 16 of the 50 investors pulled out of the shareholding, leaving AIC to register with 34 shareholders. Q thinks that the 16 who withdrew from AIC did so for a couple of reasons. Some may have become impatient with their investment after realizing that it would take more time than previously anticipated before they could reap profits from their shares. Others may have pulled out to invest in Dubai’s real estate market, which was attracting investors from all over the world.[43]

However, Q thinks that most left the project because they believed that Sherkhan and his associates seized the company. The investors were sold on the idea that everyone was equal in the company and that AIC was established for humanitarian and nationalist reasons, but at the last minute a small group had taken it over.

AIC shed several more shareholders over the next three years. By March 2009, it was down to 28 shareholders, 12 of which had paid for their shares using Kabul Bank money. The names of those individuals who paid for their AIC shares with illegal Kabul Bank loans are asterisked in the table below. Kabul Bank money paid for $31.79 million of the $45 million shareholding, or about 70% of the total shareholding.[44]

AIC Shareholders

The AIC shareholders voted in Sherkhan as the new chairman of the board and Haseen Fahim as the vice-chairman. On AIC’s business license, Sherkhan was also made the company president and Haseen the vice-president. While Sherkhan held only about 5% of the shares, he was the one who provided the money for his associates’ shares so that is why they voted him as company president.

Mahmoud Karzai was voted as the CEO. Mahmoud was AIC’s third largest shareholder behind Haseen Fahim and Khaliullah Fruzi. Q says that Mahmoud Karzai could not take the dominant role in AIC’s ownership because he could not on his own meet the enormous capital requirements. Consequently, AIC’s shareholding should be understood in terms of venture capital funding and, as a result, the company reflected a collective ownership.

AIC’s first major project was to secure the government leasing rights for Ghori Cement Works and the associated coalmines, but it would not be easy since AIC would be competing against other companies, particularly against Box International that had over 40 years of experience in the cement industry “in building and operating their own plants and developing and managing state-of-the-art facilities for their clients.”[45]

Pictured above is AIC’s renewed business license dated May 7, 2007. Afghan business licenses expire after one year. The photos are of Haseen Fahim (left) and a very young Sherkhan Farnood (right). The back of the license identifies AIC’s shareholding as $45 million.

Pictured above is AIC’s renewed business license dated May 7, 2007. Afghan business licenses expire after one year. The photos are of Haseen Fahim (left) and a very young Sherkhan Farnood (right). The back of the license identifies AIC’s shareholding as $45 million.

Box International’s president, Tom Box, strongly believed that his company would be awarded the leases.[46] As the company that conducted the cement study, and presumably had an exploration license to do so, Box’s confidence likely was based on the strength of his company and the Minerals Law itself. In the event that the leading bids are roughly equal in strength, the Minerals Law states that the Afghan government must award the leases to the company with the exploration license.[47]

From mid-February to March 2006, or soon after AIC was registered as a company, its leadership began an aggressive lobbying campaign of senior mines ministry officials to persuade them to award the leases to AIC. The timing of AIC’s lobbying effort was odd because Box International had not yet submitted its study of the cement industry; consequently, neither had the Afghan government issued a tender to solicit bids.

In March, after Mir Mohammad Sediq, the mines minister, resisted AIC’s “overtures,” an “emissary” from President Karzai visited Sediq and announced that he had been fired.[48] In April, the president promoted Sediq’s deputy, Mohammad Ibrahim Adel, as acting mines minister pending Parliament approval.[49] “Within days” of Adel’s promotion, AIC was awarded the cement and mines leases for 49 years each.[50]

The details of Adel’s actions in April 2006 are sketchy, but it appears that within a day or two after he was promoted as acting mines minister, he unilaterally awarded the leases to AIC and then quickly issued a tender to solicit bids for Ghori Cement Works and the four associated mines.[51] Recall that the Council of Ministers is the authorized body for awarding government leases for projects valued in excess of $50 million and then the Parliament must approve the council’s decision.

In the final days of the bidding period, Adel issued a new demand that bidders submit a $25 million bond to the mines ministry to demonstrate that they were “serious.”[52] The unusual demand likely was issued to discourage cement businesses from submitting bids. Afghanistan’s insecurity problem makes it difficult “to carry even $100,000 from one place to another.”[53]

One of the competitors for the cement and coalmine leases was “Aria Zamin Company.” It’s bidding representative, Nasir Khisrow Parsi, later recalled what he said to Adel about the $25 million demand: “This violates the rules of the process. This is totally wrong.”[54] The representatives of only one company managed to show up to the mines ministry with $25 million in cardboard boxes and “flanked by gunmen”: AIC.[55] They were permitted to take the money away after presenting it.[56] That is to say, AIC’s bid was the only bid that was submitted for the tender. It won the leases by default. In the summer, Parliament approved the awarding of the leases to AIC.

Bids for winning a construction contract are actually quite technical and very different from placing a bid at an auction. In the latter, a bidder places a bid with a wave of the hand or a click of a computer mouse. In contrast, a bid on a construction contract may be as detailed as a business plan. It is a company’s best attempt to prove that it is the ideal candidate for the job. A bid lays out, step-by-step, how a company will fulfill the project. Documentation is included that shows the company’s financial resources, prior experience, the qualifications of its engineers, and much more.

As previously noted, Box International had not yet finished its cement study for the mines ministry; however, it was submitting periodic reports. AIC’s bid was “identical” to the information found in Box International’s periodic reports, which suggests that someone from the mines ministry, or from President Karzai’s office, was secretly passing Box International’s reports to AIC.[57]

An Afghan worker takes a shower in the bathroom of the Karkar coalmine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. The photo is courtesy of Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

An Afghan worker takes a shower in the bathroom of the Karkar coalmine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. The photo is courtesy of Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

AIC’s bid committed to renovating Ghori I, completing the construction of Ghori II, and building a modern “Greenfield plant,” or Ghori III, capable of producing 4,000 TPD of clinker, or ten times that produced by Ghori I. AIC also committed to renovating the four coalmines and building two power plants: one “2 x 10 MW” power plant for Ghori I and II and a 25 MW power plant for Ghori III.[58]

This author has a draft copy of the cement lease awarded to AIC, but not the coal lease. The annual rent for Ghori Cement Works and its associated land was $1 million, or $83,333.33 per month. In addition, there were royalty fees for each ton of cement processed. The cement lease contained a list of demands on AIC in regards to its employees. AIC was required to:

  • hire “all existing employees of Ghori 1 & 2”,
  • “provide its employees with health clinics, kindergartens, gyms, parks, cultural centers and other social services”,
  • provide training,
  • “reconstruct the residential buildings”, and
  • “support sports teams and help them both financially and morally.”[59]

The lease also laid out a three-year plan to begin when the lease went into effect, or from the summer of 2006, when Parliament approved the leases. Rent and royalty fees were waived during the three-year period. For the first six months, AIC was required to conduct a “techno-scientific study.” For the next two and a half years, AIC was required to renovate Ghori I, complete Ghori II, and construct Ghori III.[60]

Of special note, AIC was permitted “to sell or transfer” the lease “to a third party” but only “after” Ghori Cement Works reached “its highest level of production.”[61] The fact that AIC could have flipped the cement lease only “after” it rebuilt Ghori Cement Works is significant because it proves that Mahmoud Karzai genuinely intended to rebuild the cement industry. Despite his shenanigans in acquiring the leases, it was not Mahmoud’s intention to fast flip the leases shortly after their acquisition.[62]

An important omission in the cement lease is that there is nothing explicitly stated in the event that AIC fails to do its job of renovating Ghori I, completing Ghori II, and building Ghori III. Does it forfeit the lease? Can the Afghan government annul the lease unilaterally? The lease only addresses “disputes” in a general sense, that they should be resolved through friendly negotiation, and if that fails, then the offended party may take the other to court.[63]

However, the lease may be adapted, abolished, or added to only “after written agreement between the parties.”[64] Presumably, if the mines ministry determined that AIC failed to fulfill the contract then it could negotiate with AIC to abolish the lease, but AIC would have to agree to such a course.[65]

In retrospect, the most disturbing part of the cement lease is where AIC is required to invest $140 million into renovating Ghori I and completing Ghori II.[66] The $140 million figure may be Box International’s estimate to do the work, and somehow found its way into the lease. The construction of Ghori III was expected to cost about $250 million.[67] Box International’s cement study reportedly put the total project costs at $570 million.[68] That figure included the work for Ghori I and II, building Ghori III and a new “coal-fired” 25 MW power plant for Ghori III.[69]

The importance of the $140 million figure is that it highlights the enormous financial costs for just two parts of the project. Simply put, AIC and the Afghan government knew beyond a shadow of a doubt that the overall project required more than a half a billion dollars. Therefore, given the enormous costs of resurrecting Afghanistan’s cement industry, on what basis did the Afghan government award the cement and coal leases to AIC? As already noted, the government was supposed to consider a bidder’s experience and financial capacity. Was AIC really the best bidder that the Afghan government could get?

Miners work the deep pits of the Karkar coal mine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. Describing the horrific conditions of the coalmine, one miner said in 2010, “We are never sure if we will come out alive. It is our choice to go in, but it’s up to Allah if we come out.”  This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

Miners work the deep pits of the Karkar coal mine on June 7, 2007, in Pol-e-Khomri, Northern Afghanistan. Describing the horrific conditions of the coalmine, one miner said in 2010, “We are never sure if we will come out alive. It is our choice to go in, but it’s up to Allah if we come out.”[70] This photo is used with permission by Balazs Gardi (www.balazsgardi.com and Flickr ID “Balazs Gardi”).

As a company, AIC had no experience in the cement or coal industries. In fact, it had no experience as a company at all. As already noted, it was registered with the Afghan government in February 2006 and was awarded the cement and coalmine leases two months later. In fact, AIC seemed to be in full learning mode throughout 2006 because it registered two new subsidiaries to handle the project: “Afghan Cement” in September and “Afghan Coal” a couple of months after that.

Perhaps Mahmoud Karzai could argue that AIC’s shareholders were experienced businessmen who knew how to operate in the Afghan context. That may have been true but such experience cannot equal what a mature cement business, with decades of experience in constructing cement factories, has to offer.

As for financing, AIC had $45 million in share capital. That was a lot of money but it was less than 7% of the required $570 million needed for the project. Q says that to obtain outside financing for large construction projects, a company needs to raise a minimum of 30% of the total expected costs. Box International puts the figure closer to 50%.[71] In any case, AIC was not even close to having the necessary capital, but still got the leases.

According to Q, part of Mahmoud Karzai’s original recruiting talking points was that obtaining financing from donor agencies and/or banks was certain. However, Mahmoud quickly discovered that outside lenders were apprehensive to lend to a business located in a country with rampant insecurity, corruption, and a full-blown insurgency. Lenders were concerned that they might not get back their money.

In early 2006, Export-Import Bank of China (or Exim Bank) was willing to finance up to 85% of the project’s cost, but it demanded a loan guarantee from the Afghan government before releasing the funds.[72] The way the guarantee worked was that the Afghan government would take over AIC’s loan repayment if AIC defaulted. However, the Afghan Ministry of Finance (MoF) declined to issue the guarantee and Exim Bank backed out.

Q says that the Export-Import Bank of India was willing to finance the project, but it also backed down after the MoF refused to guarantee the loan. Other lenders that declined to give AIC a loan included the Asian Development Bank, the World Bank, and Afghanistan International Bank (AIB).[73]

Q notes that Mahmoud Karzai asked Sherkhan for more money in 2007 and in 2008. While Sherkhan was limited in what he could lend to AIC in early 2006, Kabul Bank’s deposits skyrocketed over the following 24 months. Kabul Bank’s deposits were $125 million in March 2006, $349 million in March 2007, and $500 million in March 2008. However, Sherkhan refused to lend more.

Q says that the reason that Sherkhan would not lend more money to AIC was because he would not have personally benefitted from a greater Kabul Bank investment in AIC. AIC was never Sherkhan’s focus and, consequently, his AIC shares were only about 5%. Q says that the only way that Sherkhan would have lent more to AIC was if, and only if, he had “absolute control” of the company via the shareholding. In such case, he would have lent an additional $100 million or more to AIC in the years following the securing of the leases, similar to what he lent to Gas Group.

AIC’s website claims significant progress in renovating Ghori I and completing the construction at Ghori II.[74] However, the claims are questionable given that the work for both factories was supposed to cost $140 million and AIC raised about a third of that. Moreover, in the second half of 2010, a reporter visited Ghori Cement Works and noted that only one of the two kilns at Ghori I was functioning and Ghori II was quiet.[75] The reporter was told that Ghori II’s construction was complete but it was not yet operational due to the lack of coal needed to fire up its kilns.

Today, AIC’s lease obligations remain unfulfilled. AIC failed to resurrect Afghanistan’s cement industry because it did not secure the necessary financing to do the work. The Karzai administration and President Karzai, in particular, bear an equal share of the blame for this catastrophe since they helped to award the leases to a new and untested company. A mines ministry advisor summed up the fiasco: “It was such a bad deal. …It was just wrong, wrong, wrong. Everyone was complicit. It’s tragic. It was a sham.”[76]

Among the many lesson’s learned from the AIC debacle, one that may be noted here is the folly of issuing illegal loans. Less than 20% of them were backed by collateral.[77] Banks are responsible for protecting their deposits. Consequently, banks are required to demand collateral for the loans that they issue so that in the event that the borrower defaults, the bank still has an asset. In lay terms, legal loans try to pass the risk of the loan to the borrower by way of collateral.

To better understand the importance of collateral, consider the following. In the U.S., in the case of auto loans, the automobile itself is the collateral. If a person fails to repay an auto loan, the bank that lent the money for the vehicle can repossess the vehicle. Likewise, in home mortgage loans, if a borrower fails to make the monthly repayments, the bank can repossess the house. In both cases, the bank is left with an asset if the borrower defaults.

However, in the case of an entrepreneur seeking a business loan, banks also want to know what kind of collateral the borrower has in case of default. Sometimes an entrepreneur will put his or her house up as collateral. If the entrepreneur’s business fails, the bank will seize the entrepreneur’s house. The concept of collateral may seem heartless toward the borrower, but the demand for collateral exists in order to protect the bank’s money, which it gets from the public.

Q believes that Sherkhan’s practice of continually giving loans to businessmen without consistently or fully demanding collateral in return, detached the borrower from the personal sacrifice that capitalism requires. Capitalism makes it possible for an entrepreneur to risk his or her own money to succeed or fail. Since success brings profit and failure leads to loss, an entrepreneur will think long and hard before spending his or her own money. He or she will carefully study every aspect and process of the business venture. However, if an entrepreneur borrowers money without putting up collateral, he or she knows that if the business fails, the bank will have difficulty getting its money back.

When it became clear that AIC would not get the financing to fulfill its lease, the shareholders did not repay their illegal loans for the AIC shares, and Kabul Bank was out almost $32 million. The bank had no collateral for recovering the $32 million. It could not seize Ghori Cement Works because it belonged to the government.


Kabul Neft, General Oil, Zitz Oil, and the Zakhira Oil Tank Farm

Kabul Neft was Sherkhan’s oil company that went out of business when crude oil prices crashed at the end of 2008. To better understand Kabul Neft’s very specific operations, it will be helpful to summarize Afghanistan’s recent oil exploitation efforts and, as a point of reference, to describe Ghazanfar Neft Gas’ operations, which span nearly every aspect of the oil industry.

Afghanistan, like other countries, depends on oil to run its cars and trucks, to provide heat, to feed its oil lamps, and more. Q jokes that if one day there is no more oil in Afghanistan then President Karzai will have “to roam in tora bora mountains fearing for his life.” Osama bin Ladin hid in these mountains in 2002.

What is referred to loosely as “oil,” in its natural unrefined state, technically, is called “petroleum” or “crude oil”. Petroleum must be refined before it can become commercially viable. Oil refineries heat petroleum at very hot temperatures until it evaporates, separating its component parts into various commercially viable substances, the most popular being gasoline (“petrol”), diesel, kerosene, liquid petroleum gas, lubricating oils, and bitumen (for asphalt).[78]

While Afghanistan has its own oil in the northern part of the country, it is only beginning to exploit it. The Soviet Union helped to build 15 oil wells in Afghanistan in the 1960s in the so-called Angot field in Sar-i-Pol Province, which sits atop the Amu Darya Basin, but those wells were later closed.[79] Current oil exploitation in Afghanistan is progressing in three phases. Phase one resulted in the unsealing of the 15 Soviet-made wells, which Ghazanfar Neft Gas accomplished in 2011.[80]

Kabul Neft’s giant fuel storage containers located outside of Kabul. The picture was  taken in November 2008 and is used courtesy of Oliver Strong at www.StrongSnaps.com.

Kabul Neft’s giant fuel storage containers located outside of Kabul. The picture was
taken in November 2008 and is used courtesy of Oliver Strong at www.StrongSnaps.com.

Phase two called for the development of new oil wells in the same region as phase one, under a “production-sharing” contract, where the Afghan government would receive a percentage of the profits.[81] China National Petroleum Corp (CNPC) won the contract in July 2011 and began extracting oil in October 2012.[82] Phase three will see oil extracted in Balkh Province from the “Afghan-Tajik Basin.”[83]

Afghanistan’s oil industry has three limitations due to decades of political instability and war, as well as the smallness of the Afghan economy. First, since Afghanistan does not yet produce enough of its own oil, it must import for most of its oil needs. Second, since Afghanistan does not have sufficient oil refinery capacity, oil must be refined before it crosses into Afghanistan. Third, since Afghanistan does not have oil and gas pipelines, refined oil must enter Afghanistan by train or by truck.

Afghanistan imports most of its oil from its neighbors, namely Russia, the Central Asian states, Iran, and Pakistan, the latter being a non-oil producing transit state. Oil entering from Iran comes through Herat, a province in western Afghanistan. Oil coming from the Middle East transits Pakistan and enters Afghanistan’s southern border. Oil coming across Afghanistan through its northern border enters mainly through Hairatan, an Afghan border town in Balkh Province located at the Afghanistan-Uzbekistan border. A small amount of oil passes through Sher Khan Bandar, another northern Afghan border town in Kunduz Province.

Hairatan is particularly important because of the “Friendship Bridge” that crosses the Amu Darya River, which is the natural boundary between Afghanistan and Uzbekistan. While cars, trucks, and pedestrians may cross the Friendship Bridge, trains also may cross along a train track that is built into the bridge.[84] Consequently, as much as 70% of Afghanistan’s oil enters Afghanistan by railway over the Friendship Bridge, imported by Afghan oil companies.[85]

“The “Friendship Bridge” runs across the Amu Darya River between Uzbekistan and Afghanistan. The friendship bridge connects Mangusar, Uzbekistan, with Hairatan, Afghanistan. (U.S. Air Force Photo By Staff Sgt. Bradley Lail) (released)” This photo is used in accordance with the terms stated in isafmedia’s Flickr profile page.

“The “Friendship Bridge” runs across the Amu Darya River between Uzbekistan and Afghanistan. The friendship bridge connects Mangusar, Uzbekistan, with Hairatan, Afghanistan. (U.S. Air Force Photo By Staff Sgt. Bradley Lail) (released)” This photo is used in accordance with the terms stated in isafmedia’s Flickr profile page.

From the Hairatan railway station, fuel products such as gasoline, diesel, and jet fuel are unloaded and placed into giant storage containers that look like several story tall cans of paint. LPG goes into missile-shaped storage containers that lay on their sides.

Before discussing Kabul Neft, it is necessary to describe briefly GNG’s operations, as outlined on its website, www.ghazanfargroup.com, because GNG is involved in every aspect of the Afghan oil industry.[86] It is an oil importer, wholesaler, and retailer. In contrast, Kabul Neft was a wholesaler only. Understanding what GNG does will help pinpoint Kabul Neft’s operations.

For the import side of the business, GNG has offices in Moscow and several of the Central Asian states (in Kazakhstan, Turkmenistan, Uzbekistan, and Kyrgyzstan) where it purchases petroleum. The petroleum is refined in Uzbekistan before continuing to Hairatan. GNG also purchases refined oil products directly from refineries in the Central Asian states.

GNG has leased a fleet of 500 train wagons, or “rail track carriages” (RTCs), to transport its refined oil products into Afghanistan. After the oil laden RTCs arrive in Hairatan, they are directed to “Ghazanfar Port,” a dry port and a processing center, which forwards them to either GNG-owned “Hairatan 1” or “Hairatan 2,” two locations where GNG stores its oil goods.[87] The RTCs unload their refined oil products to the storage containers.

A train pulls oil-laden RTCs in Azerbaijan. The photo is used with special permission from Peretz  Partensky (Flickr user “peretzp”). Peretz explains that each RTC can carry “20,000 gallons of oil.”

A train pulls oil-laden RTCs in Azerbaijan. The photo is used with special permission from Peretz
Partensky (Flickr user “peretzp”). Peretz explains that each RTC can carry “20,000 gallons of oil.”

For the retail side of the business, “Ghazanfar Transport” uses its fleet of trucks to take GNG’s gasoline and diesel to various GNG service stations across the country. However, GNG is also a wholesaler because it sells refined oil products at marked up prices to other retailers who fill up their tanker trunks at Hairatan 1 and Hairatan 2.

By the second half of 2006, Kabul Bank had lent a considerable amount of money to the oil industry, or just over 40% of its total loan portfolio. Sherkhan grew increasingly concerned about the repayment of these loans since most of them were issued using the illegal loan network and, consequently, were not backed by sufficient collateral.

For example, Mohammed Humayun Sediqui, a borrower from Mazar-E Sherif, Afghanistan, owned two oil companies: “General Oil” and “Zitz Oil”. Sherkhan’s son got shares in General Oil after Kabul Bank awarded the company its first loan. Kabul Bank lending to General Oil and Zitz Oil eventually reached an astonishing $60 million, none of which was ever repaid. Zitz Oil is no longer in business.

To encourage the recipients of Kabul Bank’s illegal loans to repay their loans, Sherkhan promoted Fruzi in 2006 to the position of “Deputy to Chairman on Security” and gave him the responsibility over loan disbursement and collections.[88] “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.”[89]

However, in addition to Fruzi, Sherkhan wanted more leverage over the “oil borrowers”. Aware that at the time Afghanistan had little oil storage capacity (Ghazanfar was in the process of constructing Hairatan 1), Sherkhan decided he was going to build his own fuel storage containers. He could then lease the container space to Kabul Bank borrowers. With their oil in Sherkhan’s storage tanks, oil borrowers would feel pressure to repay their loans. Also, leasing the container space would bring in revenue.

Kabul Bank’s general manager, Johnson Mallaikal Rappai, argued that since the storage containers linked the oil borrowers to the bank, Kabul Bank should pay for the storage containers from the bank’s reserve fund and not through illegal loans. In this way, the containers would be a fixed asset of the bank, much like the bank’s furniture and computers were fixed assets.

Johnson was confident that Kabul Bank could convince the central bank and the independent auditors that the containers functioned as a sort of indirect collateral for the bank’s borrowers who were in the oil industry. Also, Kabul Bank could argue that the bank was doing the borrowers a service by offering them storage for their oil products.

Other senior Kabul Bank staff disagreed with Johnson. They objected to the bank’s ownership of the containers on the grounds that it violated Afghan banking law, since banks are not permitted to own or operate non-financial businesses.[90] Banks can lend to non-financial businesses but they themselves cannot own such businesses. Moreover, there would be no legal way for Kabul Bank to account for the profits generated by leasing storage container space.

Sherkhan sided with Johnson. The containers were recorded as fixed assets in Kabul Bank’s balance sheet under the heading “Hairatan tankers.” Fruzi’s construction company, Hewadwal Construction Company, hired foreign engineers to help construct the storage containers. The project was called the “Zakhira Oil Tank Farm.” Total construction cost for the containers was $13.4 million.[91] The land for the containers belonged to Hewadwal.

Hewadwal constructed a second group of storage containers for Kabul Neft in 2008. However, these latter containers were paid for with illegal loans, as opposed to the bank’s reserve fund, and were made Kabul Neft assets. The Kabul containers cost well over $10 million but Q says that some it was repaid. At the time of the bank crisis of 2010, $9.5 million was still owed for Kabul Neft’s containers.[92] Q says that plans to build a third and fourth group of storage containers, in Herat and Kunduz provinces, never materialized.

Sherkhan started Kabul Neft in the first half of 2007. Kabul Bank shareholder, Jamal Khil, was Kabul Neft’s CEO. Unlike GNG, whose operations spanned the entire spectrum of the oil industry, Kabul Neft was strictly an oil importer, not a wholesaler or a retailer, and it sold only fuel-related oil products, namely gasoline, diesel, and jetA1 fuel. Q says that Sherkhan did not enter the retail side of the business because he viewed it as a nuisance and resource intensive. Retail in the oil industry for fuel requires a large fleet of tanker trunks and service stations where customers can fill up their vehicles.

Sherkhan’s plan for Kabul Neft was to control all of the fuel that entered along Afghanistan’s northern border, particularly at Hairatan, where as already noted, up to 70% of the oil for Afghanistan’s oil needs crossed into the country. Sherkhan wanted to be the sole supplier of gasoline, diesel, and jetA1 fuel to all Afghan wholesalers. Figuratively speaking, he wanted to be the “king” of Hairatan.

Sherkhan purchased his fuel directly from Central Asian refineries and brought it to Afghanistan by train. The refineries subcontracted shipping companies to transport Kabul Neft’s fuel to Hairatan where it was unloaded to Kabul Bank’s storage containers. Once the RTCs unloaded their fuel to Kabul Bank’s storage containers, they returned to their point of origin.

Q says that an “oil mafia” controls the oil industry in Afghanistan. The players in the mafia are the leaders of the big oil companies. Oil mafia members include those associated with GNG, Zahid Walid, Azizi Hotak General Trading, Sadaf Petroleum, Kam International Oil, Dawi Oil, General Oil, and any other big oil company. Q’s description of the oil mafia’s activities is similar to that of an oil cartel. It controls the oil supply entering Afghanistan in order to prevent the price of oil from dropping too low. The mafia’s presence is at the import and wholesale levels.

Sherkhan’s goal was to rapidly climb to the top of the oil mafia by selling his fuel to wholesalers at below cost in order to drive out of business all other importers along the northern border. Sherkhan believed that success in business came from being number one. Rather than trying to perfect his business and to compete head-to-head with his competitors by offering superior service, Sherkhan worked to annihilate his competitors.

Trying to drive his competitors out of business was ruthless, and perhaps even unethical, but not illegal. The illegality came from how Kabul Neft was getting Kabul Bank money, or through illegal loans. Eventually, Kabul Neft dominated the importing side of the business as wholesalers flocked to buy its cheaper oil. Q says that even Azizi had to withdraw his operations from Hairatan because he could no longer afford to operate there.

When the central bank issued its first annual audit report of Kabul Bank, in November 2007, it ordered Kabul Bank to dispose of its fuel storage containers at Hairatan. Fruzi was upset that the containers put Kabul Bank into trouble with the central bank and blamed Johnson for the decision to make the containers a fixed asset of the bank. The audit department advised Fruzi to sell the storage tanks through public auction to avoid further trouble from the central bank. Also, taxes on the sale would need to be paid since the bank would be selling its property.

In April 2008, Sherkhan and Fruzi agreed to sell the storage containers. Q says that in early May the containers were sold to Hewadwal Construction Company for a mere $3.16 million. Illegal loans were issued to pay the sum. There were four bids in all for the containers and three of the bids were from shell companies, which bid to give the appearance that the containers were fairly auctioned at current market value.

Part of Kabul Neft’s business model was to buy huge quantities of fuel when petroleum prices were low, to store it in the containers, and to sell it to wholesalers over several months, or preferably whenever petroleum prices were higher. This strategy enabled Sherkhan to sell cheaper than his competitors without inflicting losses to Kabul Bank.

In July 2008, petroleum prices soared to record highs of nearly $150 per barrel.[93] Some believed that petroleum could hit $200 or more per barrel. Q says that in the summer of 2008, the “poker player” in Sherkhan prompted him to make a big gamble. He wagered that if he placed a huge order for fuel -for tens of millions of dollars- when prices were near $150 per barrel, he might make windfall profits if oil climbed to $200 or more.

Historic Crude Oil Prices and Price Chart_Infomine

However, the worldwide recession hit with full force soon after Sherkhan placed his huge order and, consequently, the price of petroleum crashed. Oil graphs from this period tell the shocking story.[94] The arrow in Graph 2 identifies the 2008 crash in the price of oil. By October and November, a barrel of petroleum was selling for $60 to $70.[95]

Suddenly, Kabul Neft’s competitors had the advantage because they could purchase fuel at half the price that Sherkhan had paid for his fuel stockpile. Sherkhan was forced to match his competitors’ low prices or else his fuel would not sell. The result was that Kabul Neft lost about $20 million in a matter of months.

The sudden loss staggered Sherkhan. He had just acquired Pamir Airways and was spending millions of dollars of Kabul Bank’s money to keep the airline afloat and to begin purchasing a fleet of Boeing 737s and Antonov 24s.[96] In late 2008, Sherkhan decided to cut his losses and to exit the oil business. Kabul Neft was no more.

Excluding storage container costs, Kabul Neft had consumed $21.5 million in illegal loans from Kabul Bank. Including container costs, Kabul Neft’s total borrowing rises to nearly $31 million. Q says that the storage containers at Kabul sat idle until 2011 when the central bank began leasing space. The central bank has tried to sell the containers but Sherkhan reportedly contacts potential buyers “to dissuade them from making offers.”[97]


Zahid Walid, Aria Turk, and Gas Group

Haseen Fahim holds citizenships in Afghanistan and in Great Britain. His brother, Mohammed Qasim Fahim, or “Marshal Fahim,” is Afghanistan’s first vice-president. In 2001, Marshal Fahim became the leader of the Northern Alliance following the assassination of famed Northern Alliance leader, Ahmad Shah Massoud. Fahim worked with the U.S. Central Intelligence Agency and the U.S. Special Forces to topple the Taliban government.

In the first part of 2006, Haseen became a Kabul Bank borrower. He took out a legal loan for $7 million dollars for his two companies: Zahid Walid and Aria Turk. Each company received $3.5 million. Zahid Walid was a parent company and, initially, an oil importer only, but then added fuel transportation to its operations after purchasing a fleet of over 100 tanker trucks with Kabul Bank money.[98] Aria Turk was a construction company. Both companies were doing contract work for the NATO-led International Security Assistance Force (ISAF).

Aria Turk’s total borrowing from Kabul Bank remained $3.5 million. However, Zahid Walid’s borrowing increased, in part due to the fleet of tanker trucks. The trucks operate from a storage yard located outside Kabul along Jalalabad Road. Total Kabul Bank lending to Zahid Walid reached almost $41 million and all but the original $3.5 million was obtained through illegal loans.

Haseen Fahim, brother of Afghan Vice-President Marshal Fahim

Haseen Fahim, brother of Afghan Vice-President Marshal Fahim

In the second half of 2006, Haseen decided to start a third company, called Gas Group, which would span the entire LPG industry. Haseen wanted to import, bottle, and sell LPG to consumers across Afghanistan. Bottling and selling LPG is capital-intensive, requiring an investment of many tens of millions of dollars or more. To secure the necessary financing, Haseen presented the idea to Sherkhan who agreed to provide the financing in exchange for a broad business arrangement.

Sherkhan and Fruzi would become shareholders and their collective shares would exceed 50%, effectively giving them control of the company. However, Haseen would manage the company. He would “run the show” just as Mahmoud Karzai did with AIC. Haseen also would be permitted to put his name on the business license as the president of the company. One of his relatives would be the vice president.

LPG is one of the products of refined oil but it also comes from natural gas. LPG includes propane, butane, or a mixture of both. The LPG market is limited in the United States, where central heating systems running on natural gas or electricity are commonplace. In the U.S., LPG is used in homes in rural locations, trailer homes, recreational vehicles (RVs), and outdoor grills. However, in Afghanistan, for those who can afford it, LPG is more mainstream and is used for heating and cooking.

Selling LPG is not as simple as selling gasoline. For example, in a developing country like Afghanistan, someone can set up a barrel of gasoline on the side of the road and use glass bottles to fill up cars. In contrast, LPG is sensitive and delicate. LPG can only be stored in a “cylinder” (a capsule) that has a special nozzle to release the contents. Also, storing LPG under pressure in a cylinder causes LPG to transform from a gas to a liquid. In its liquid state, a LPG cylinder can hold much more volume than in its gaseous state and is safer to transport.[99]

Gas Group purchases LPG from Turkmenistan and brings it to Afghanistan by train.[100] Gas Group has bottling facilities where LPG is placed inside 11kg or 44kg-sized cylinders. It also owns warehouses and a fleet of as many as 200 flatbed and tanker trucks that transport LPG capsules to its network of retail facilities. The trucks also transport capsules back and forth from customers.

Kabul Bank lending to Gas Group soared to $112 million. All of the money was acquired through illegal loans awarded to shell companies whose real beneficiary was Haseen. Haseen took out a total of 107 illegal loans, most ranging between $700,000 to $1.5 million. As with all borrowers who took out illegal Kabul Bank loans, Haseen received monthly bank statements for each one of his 107 loans.

Haseen’s preference for taking out many smaller loans, as opposed to a few larger loans, was to avoid the additional scrutiny Kabul Bank’s audit department imposed on loans over $2 million. The audit department audited the loan files monthly. All loans over $2 million faced a higher level of scrutiny than loans of lesser value. For the rest of the loans, the audit department extracted a random sample and just audited that sample. Since the central bank and the independent external auditors used the internal audit department’s reports to assist in their own reporting, all Kabul Bank loans over $2 million received attention from those auditing bodies as well.

Haseen did not initially put up collateral for his loans but as his borrowing increased, he put up two properties in Kabul. The deeds to both properties were signed over to Kabul Bank by placing Sherkhan’s name on them. Sherkhan would have reversed the transaction by deeding the land back to Haseen after his loan was paid off. The first property was a jewelry market opposite Pashtany Bank, and the second was a business complex overlooking the U.S. embassy in the Wazir Akbar Khan neighborhood. Q says that both properties today would fetch about $60 million.

Gas Group proved to be a very profitable business. Revenue poured in but instead of channeling the money back to Kabul Bank to pay down his loans, Q learned from Sherkhan, Fruzi, and one of Haseen’s executives that Haseen diverted the money for other purposes.[101] Some of the revenue was used to pay for security for Gas Group, to protect its bottling plants and tanker trucks from Taliban attacks. Some of the money was used to purchase real estate in Afghanistan and in Great Britain. The real estate was purchased in Haseen’s name and in the names of his relatives.

Another part of the revenue was used to purchase non-military armored vehicles, which Haseen leased to NATO/ISAF for many thousands of dollars per month per vehicle. Q says that the leasing fees were so high that he wonders why the U.S. government, in particular, did not purchase such vehicles outright. The rest of the money went “to feed” Marshal Fahim’s personal army, which was a part of the Northern Alliance.

Pictured above is Gas Group’s Kabul bottling plant. It is located next to Kabul Neft’s fuel storage containers (see cover photo). The photograph was taken in November 2008 and is courtesy of Oliver Strong at www.StrongSnaps.com.

Pictured above is Gas Group’s Kabul bottling plant. It is located next to Kabul Neft’s fuel storage containers (see cover photo). The photograph was taken in November 2008 and is courtesy of Oliver Strong at www.StrongSnaps.com.

Sherkhan knew that Haseen would need some period of time before repayment of his loans could begin. Haseen needed time to build the warehouses, bottling facilities, and offices, to hire staff, to purchase the trucks and office equipment, etc. Once operational, Haseen needed additional time to make sales and grow a customer base. Only then could repayment start. However, the repayment of the loans never happened, even long after Gas Group opened its doors.

Q says that two factors, in particular, made Sherkhan complacent with the repayment of Haseen’s loans. First, as noted above, Haseen had signed over $60 million in real estate collateral. Sherkhan knew that he could always sell the properties. Second, Sherkhan and Fruzi owned large stakes in Gas Group, which was an inherently valuable company. It had assets that could easily be sold off. Its customer base also added value to the company.

The above factors led Sherkhan not to view Haseen’s refusal to repay his loans as detrimental to Kabul Bank. Through the shareholding, a large part of Gas Group belonged to Sherkhan and Fruzi, so even in a worst-case scenario, Sherkhan reasoned that Kabul Bank could sell Gas Group and recover the money that Haseen borrowed.

Nevertheless, in August or September 2008, Q says that Sherkhan finally confronted Haseen over his mounting debt to Kabul Bank and the insufficient collateral, which was no longer able to cover the $158 million principal he owed to Kabul Bank. Sherkhan asked Haseen to put up additional collateral for his debt. When Haseen refused, Sherkhan and Fruzi seized Gas Group’s business license by making themselves the president and vice president of the company. Q says that Haseen was angry about the new arrangement but there was nothing he could do about it since Sherkhan and Fruzi controlled the shareholding.

Pictured above is a LPG delivery truck in Valletta, Malta.  The truck is similar to the flatbed trucks  used by Gas Group. The photo is used with permission by Flicker user “SemmyTrailer.”

Pictured above is a LPG delivery truck in Valletta, Malta. The truck is similar to the flatbed trucks
used by Gas Group. The photo is used with permission by Flicker user “SemmyTrailer.”

However, what Sherkhan and Fruzi did not calculate was that when they put their names on Gas Group’s business license, they also assumed the company’s liabilities.[102] During the bank crisis of September 2010, Haseen turned the tables on Sherkhan and Fruzi. He argued that he was only Gas Group’s CEO, and not its president or vice president; therefore, he was not responsible for repaying Gas Group’s loans -Sherkhan and Fruzi were.

Like AIC, the Gas Group episode illustrates the folly of issuing illegal loans to borrowers, no matter how wealthy or influential the borrowers may be. However, Gas Group’s enormous capital requirements also highlight the legitimate challenge that big Afghan companies confront when seeking financing. Today, there are no Afghan banks that can legally lend even $10 million to a single borrower. Big companies must use the illegal loan route if they insist on large scale lending from a single Afghan bank.

All banks have a “legal lending limit” (LLL). The LLL is determined by a bank’s “regulatory capital,” or indirectly by the diversification of assets.[103] In lay terms, big banks can lend more than smaller ones. To put this in perspective, Kabul Bank became Afghanistan’s largest private bank in 2006; yet, its LLL that year was only $3.5 million.[104] How could Gas Group legally obtain the rest of the money that it needed?

Gas Group’s legal borrowing course would have been to obtain a loan from a single large bank or financial institution based outside of Afghanistan, such as the World Bank or the Asian Development Bank. Alternatively, Gas Group could have sought “consortium lending,” where more than one bank joins together to lend to a single borrower.

Q says that the latter option is easier said than done. For example, in 2006, the Afghan-owned airline, Kam Air, engaged in consortium lending with Kabul Bank and the National Bank of Pakistan (NBP) to purchase a used Boeing 737-200 for $6 million. Kabul Bank provided a $3.5 million loan and NBP provided the remaining $2.5 million.

However, consortium lending in Afghanistan has its limits, because even if every one of Afghanistan’s 16 or so private banks joined together to lend to a single company, the combined total of the 16 or so loans would not reach $50 million. Consequently, Sherkhan chose the illegal loan route for legitimate companies like Gas Group that needed large scale lending.

Haseen Fahim never tried to obtain lending from outside financial institutions or through consortium lending. Q says that such financing requires the borrowers to provide extensive record keeping, business plans, and more, and Haseen was not thinking in these terms. He just saw the opportunity in LPG and pursued the financing for it in the simplest and most straightforward way as he knew how, or through Sherkhan.

In August 2010, on the eve of the Kabul Bank crisis, the interest on Haseen’s $158 million in loans had ballooned the principal to $178 million. The $178 million figure is the same figure that Sherkhan used when identifying Haseen’s debt total to the special tribunal for Kabul Bank in November 2012.[105]

In response to Sherkhan, Haseen told Afghan-based Tolo News, “I owed about $36 million and I paid, you can check the documents. Farnood himself is accused of owing $400 million but he wants to decrease his crime so he named Mahmood Karzai and me.”[106] Q says that Haseen arrived at the $36 million figure by excluding his borrowing for Zahid Walid and Aria Turk and focusing exclusively on Gas Group’s $112 million principal. Next, he subtracted certain expenses and divided the remainder by three, or by each of Gas Group’s biggest shareholders –Sherkhan, Fruzi, and Haseen.


Palm Jumeirah and the Two Towers

“Palm Jumeirah” is an exclusive residential and tourist resort in Dubai that sits atop a man-made island that is in the shape of a palm tree.[107] 120,000 people live and work on the island.[108] A 7.1 mile (11.5 km) seawall defense, called a “breakwater,” surrounds the island. Hotels are built along the breakwater.

The “trunk” of the island extends one mile (1.6 km) from Dubai’s coastline. Hotels, condos, apartments, and shopping centers line the trunk. Extending outward from the trunk are 16 “fronds” that resemble the branches of a palm tree and hold over 1,800 multi-million dollar villas. Letters of the alphabet identify each frond, from ‘A’ to ‘P’, and each frond contains two rows of villas thereby providing each villa with its own beachfront.

The photo above is of Palm Jumeirah taken from a helicopter and looking backwards at the island. The Atlantis Hotel, sitting atop the breakwater, is in the foreground. Dubai’s spectacular skyscrapers line the background. The photo is courtesy of Alex at user ID “Left Foot” on Flickr. Alex’ website is “postshootprocess.blogspot.com”.

The photo above is of Palm Jumeirah taken from a helicopter and looking backwards at the island. The Atlantis Hotel, sitting atop the breakwater, is in the foreground. Dubai’s spectacular skyscrapers line the background. The photo is courtesy of Alex at user ID “Left Foot” on Flickr. Alex’ website is “postshootprocess.blogspot.com”.

There was a high degree of interest and fascination with Palm Jumeirah during its construction. Many people thought it could not be built as envisioned. However, when the first batch of villas was completed and released for sale in 2005, it sold out in three days. At that time, the most expensive villa sold for $1.2 million.[109] Later villas sold for much more, and those who resold their villas through part of 2008 received far more than the original sale price

For example, when Mahmoud Karzai bought a villa in July 2007, he paid about $1.9 million for villa “D35”, or villa 35 on frond D.[110] Seven months later he resold the same villa at a 30% higher price, or for roughly $2.7 million, a difference of just over $800,000.[111] Q says that a buyer could pay for a new villa to be built and the villa’s value would sharply increase by the time the construction was finished.

In December 2006, Sherkhan began a 10-month $80 million spending spree in Palm Jumeirah. From December 19, 2006 to October 21, 2007, he purchased 15 villas from six different fronds and one luxury condo located in the trunk. Prices per villa ranged from about $2 million to many times that. None of the properties were purchased in Kabul Bank’s name. They were purchased in the names of Sherkhan and his wife, Farida.[112]

The above photo shows the backyard of “Villa Atlantis View,” courtesy of Dubai Holiday Villas (dubai-holiday-villa.com). Dubai Holiday Villas is not associated with Kabul Bank.

The above photo shows the backyard of “Villa Atlantis View,” courtesy of Dubai Holiday Villas
(dubai-holiday-villa.com). Dubai Holiday Villas is not associated with Kabul Bank.

In addition to the Palm Jumeirah properties, in 2007, Sherkhan also purchased a plot of land in Business Bay, Dubai, for about $25 million. His plan was to build two towers, each 20-stories tall, for Kabul Bank’s new Dubai headquarters. Eventually, Sherkhan hired a consultant to draw up a construction plan. In June 2010, a groundbreaking ceremony was held and the foundation work started. However, the construction froze after Sherkhan and Fruzi were fired from Kabul Bank in late August 2010. By that time, Sherkhan had invested an additional $15 million in the property’s development.

In September 2010, when Sherkhan’s Palm Jumeirah’s properties received considerable media attention, the purchases were widely characterized as outright theft, that Sherkhan bought the villas for himself and members of the Afghan elite who occupied them.[113] The Dubai villas were cited as evidence of a Ponzi scheme at Kabul Bank. However, according to Q, the villas initially were purchased as investment properties. Later, they evolved into an embezzlement scheme to hide Kabul Bank money that Sherkhan was stealing for his personal use.

Sherkhan was intimately acquainted with Dubai’s real estate market. When he bought the villas, he was 100% convinced that he was going to make a lot of money from reselling, or “flipping,” the properties. In September 2010, Mahmoud Karzai also referred to Sherkhan’s Palm Jumeirah purchases as investments: “He was flipping properties like hamburgers.”[114]

Palm Jumeirah villas’ have equally beautiful interiors. The above photo is the living room of “Villa Nancy,” courtesy of Dubai Holiday Villas (dubai-holiday-villa.com). Dubai Holiday Villas is not associated with Kabul Bank.

Palm Jumeirah villas’ have equally beautiful interiors. The above photo is the living room of “Villa Nancy,” courtesy of Dubai Holiday Villas (dubai-holiday-villa.com). Dubai Holiday Villas is not associated with Kabul Bank.

From Sherkhan’s perspective, he reasoned that with the $80 million of Kabul Bank money that he invested into Palm Jumeirah’s villas, he could make more profit from buying and reselling the villas than from simply loaning out that same amount of money for interest and fees. Sherkhan planned to flip all of the villas within two or three years for double what he paid for them. After subtracting what he paid for the villas, other real estate fees, and taxes, Sherkhan believed he could clear $70 million or more in profit. His plan was to pocket the profit for himself.

After Sherkhan purchased the villas, he did something else. It did not make sense for him to leave the villas uninhabited for a couple of years. Luxury assets such as these could serve an additional purpose of furthering Sherkhan’s role as kingmaker. By offering the villas to select members of the Afghan elite, effectively treating the villas as bribes, Sherkhan could cultivate relationships to his advantage. Some influential Afghans who occupied Sherkhan’s villas, as reported in the media, included: Haseen Fahim, Mahmoud Karzai, Ahmad Zia Massoud (the brother of Ahmad Shah Massoud), and Hashim Karzai (the cousin of President Hamid Karzai).[115]

In addition to the above names, Q says that there were others who occupied the villas, although this latter group did so through the names of other people, usually relatives, in order to hide their identities. The Dubai government requires the occupants of all properties in its territory, whether by lease or by mortgage, to register with the government. That is to say that even though Sherkhan owned the properties, the occupants had to make themselves known. This latter group of villa occupants included: Uzbek warlord, Abdul Rashid Dostum, the second vice-president of Afghanistan, Karim Khalili, and speaker of the Parliament, Mohammad Yunus Qanuni (also spelled “Qanooni”).

Sherkhan’s purchase of the villas with Kabul Bank money was illegal. He paid for the villas using illegal loans, not with genuine mortgages. Q says that there were two options available to Sherkhan to purchase the villas legally. Sherkhan could have applied for mortgages from a Dubai-based bank authorized to issue mortgage loans. Alternatively, Kabul Bank could have issued a legal mortgage for a Dubai property if it had set up a branch in Dubai and obtained permission to issue mortgages from the Dubai central bank. Actually, Kabul Bank did set up a branch in Dubai in 2006 but never pursued the authorization for issuing mortgages in Dubai.

When Sherkhan purchased his 16 Palm Jumeirah properties, he bought them before they were built. He did not pay the $80 million up front, but in steps, at different phases of the construction. By the time Sherkhan’s villas were completed, their property values had soared.

In 2007, Sherkhan already began to account for money that he was stealing from Kabul Bank by hiding it in the villas’ rising property values.[116] He began selling the villas to Farida at marked up prices, paying off the original illegal loans for the villas, and pocketing the difference. The concept of capitalizing on the villas’ equity was somewhat similar to what U.S. homeowners were doing during the U.S. housing bubble before the recession. As home values soared, millions of Americans took out “home equity loans” against the rising values of their homes. However, in Sherkhan’s case, he was stealing Kabul Bank money and accounting for it in his villas’ rising property values.

For example, Sherkhan buys villa A at the end of 2006 with an illegal loan for $2 million. He sells villa A to Farida in 2007 for $3 million. With the $3 million, Sherkhan pays off the original $2 million illegal loan and pockets the remaining $1 million.[117] Kabul Bank is left with a new illegal loan for $3 million for villa A and Sherkhan has $1 million to spend as he wishes.

While the sale of villa A was not a real one, a legal sale had taken place because closing costs and taxes were paid for villa A, and villa A’s title deed was transferred to Farida. Q does not know if Sherkhan’s “flipping” was done with Farida’s knowledge because Dubai does not use title companies to settle real estate sales. It uses brokerage firms.

It is not every Palm Jumeirah villa that has a swimming pool, but the magnificent “Villa Riverdance” certainly has a large one. The photo is used with special permission by Dubai Holiday Villas (dubai-holiday-villa.com), which is not associated with Kabul Bank.

It is not every Palm Jumeirah villa that has a swimming pool, but the magnificent “Villa Riverdance” certainly has a large one. The photo is used with special permission by Dubai Holiday Villas (dubai-holiday-villa.com), which is not associated with Kabul Bank.

Sherkhan was using his own Dubai real estate company, Sherkhan Farnood General Trading, and a real estate company belonging to Dawood Naseeb, a business associate and a Kabul Bank borrower who will be discussed later. Therefore, Farida’s signature may have been forged repeatedly without her knowledge.

Some time later, as Palm Jumeirah’s property values climbed further, Sherkhan repeated the sale process but in reverse. For example, villa A was “sold” to Sherkhan for $4 million. Sherkhan took the $4 million, paid off the previous $3 million loan and pocketed the remaining $1 million. Sherkhan repeated the process of selling and re-selling of all 16 of his Palm Jumeirah properties.

In 2008, the worldwide recession crashed Dubai’s real estate market.[118] The result was that by August 2010, on the eve of the Kabul Bank crisis, the bank was sitting on a pile of inflated properties. The book value of Sherkhan’s villas and the Business Bay plot was $151 million; yet he had only actually paid about $120 million for these.[119] Sherkhan had stolen the $31 million difference.[120]

Sherkhan’s Dubai real estate purchases suggest something about Sherkhan the man. He treated Kabul Bank’s deposits as though they were his own money. In Sherkhan’s mind, Kabul Bank was his bank and its money was his money to spend as he wished, even to invest tens of millions of dollars unilaterally for his own profit. The embezzlement scheme, like the illegal loan network, also speaks to the problems of greed and dishonesty.


Gulbahar Center

Gulbahar Center is a group of 10-story luxury condominium towers and an equally luxurious three-story shopping mall. The mall wraps around the towers like a wall protecting a medieval castle. The residential section of Gulbahar Center is called “Gulbahar Residence” and the shopping center is called “Gulbahar Shopping Mall.”[121] Gulbahar Center is located in Kabul just opposite the Ministry of Foreign Affairs and adjacent to Vice-President Fahim’s office. The ISAF headquarters is nearby also.

The idea behind Gulbahar Center was to bring Dubai’s world-renowned opulence to Kabul residents. The construction was completed in late 2009 following the success of a similar venture called “Safi Landmark Hotel & Suites.” Gulbahar Center was built by “Gulbahar Investments,” which is one of six subsidiaries owned by “Gulbahar Group”.[122] Kabul Bank financed the project.

Pictured above is Gulbahar Center. The photo is used with special permission by Ahmad Sohrab Taki  (Flicker user “Ahmad Sohrab Taki”). Ahmad’s website is www.sohrab-taki.blogfa.com.

Pictured above is Gulbahar Center. The photo is used with special permission by Ahmad Sohrab Taki
(Flicker user “Ahmad Sohrab Taki”). Ahmad’s website is www.sohrab-taki.blogfa.com.

Gulbahar Habibi and his brother owned the land where Gulbahar Center was to be constructed. Initially, when Habibi approached Sherkhan for a loan in 2006, all he wanted was to construct a “simple shopping complex.” However, given the land’s superb location in Kabul, Q says that Sherkhan challenged Habibi to build something impressive that could become a landmark building, such as luxury condominiums with a first class shopping mall. Habibi agreed.

The project’s architecture design called for a luxury shopping mall and six 10-story condominium towers. However, the Kabul municipality government limited the height of the towers to four-stories each due to their location to important government buildings. In late 2006, Sherkhan awarded Habibi a legal loan for $5 million. Habibi signed the loan document on behalf of Gulbahar Investments.

From Kabul Bank’s perspective, it was the perfect loan. Habibi came from a wealthy family so he was presumed to be a credible borrower. Moreover, the shops and condos seemed guaranteed to sell. There was even good collateral, or the land and the buildings. Habibi was supposed to repay the loan as people purchased the condos and rented the shops.

Afghanistan does not yet have mortgage law so the common practice for construction loans in Afghanistan is for the borrower to transfer the deed for the land to the lender, which Habibi did. Everything on the land transfers with the deed. Once the loan is repaid then the lender (the bank) reverses the transaction by deeding the land back to the borrower. The collateral was important because in the event that the loan failed, Kabul Bank could seize Habibi’s land, including any buildings on it, or Gulbahar Center.

Habibi actually transferred the land’s deed to Sherkhan’s wife, Farida, in her purported capacity as a Kabul Bank shareholder, in order to avoid the bank paying a 6% tax rate that would have been due had the land’s deed been registered in the name of Kabul Bank.[123] In Afghanistan, transferring the title to a person incurs a much smaller .5 to 2% tax.

According to Q, there were unexpected construction delays and the project ran over budget. The $5 million loan was insufficient to complete Gulbahar Center. Only three towers could be built, not six. Moreover, instead of repaying the loan, as condos were sold and shops rented, Habibi channeled a portion of the revenue he got from the shops and condos into completing the construction project and spent the remaining revenue on himself.

Sherkhan and Fruzi told Q that Habibi was using the revenue to pay for bodyguards, expensive cars, and trips to Dubai. The result was that Habibi was not making his monthly loan payments. Kabul Bank’s Management Board told Fruzi that if Habibi successfully sold all the condos and rented all the shops, without repaying the loan with the revenue, then the loan might never get repaid.

Fruzi apprised Sherkhan of the situation who at this time was in Dubai. (Sherkhan moved to Dubai in February 2008.) In early 2010, Fruzi and Habibi flew to Dubai to meet with Sherkhan. Since the Kabul Bank loan to Habibi was a legal one and Kabul Bank owned the land, the bank had leverage against him. Sherkhan and Fruzi told Habibi that the remaining unsold condos and unrented shops must be sold and rented through Kabul Bank. In this way the remaining revenue would go to pay down the loan. If Habibi refused the offer then Kabul Bank would seize Gulbahar Center and not finance Habibi’s future real estate project, or Gulbahar Towers, a much larger luxury residential complex.

Habibi agreed to the offer. He let Kabul Bank sell and rent out the remaining properties. In return, Sherkhan and Fruzi agreed to help Habibi expand the project by adding the extra floors to each tower, as per the original architectural design, and by building the three remaining towers. Kabul Bank also would finance Gulbahar Towers.

The deal was a disaster for Kabul Bank. Q says that Sherkhan believed that Kabul Bank could not lose its investment in Gulbahar Center since it possessed the deed to the land. The result was that complacency set in, as had happened with Gas Group and Zahid Walid, and Sherkhan let Habibi do as he saw fit. Later media reporting interpreted incorrectly Habibi’s failure to repay what he borrowed from Kabul Bank as evidence of a Ponzi scheme, inferring that Kabul Bank did not care if Habibi repaid the bank or that the money was outright gifted to him. Q says that the real problem was Habibi’s unwillingness to repay and Sherkhan’s poor management.

Kabul Bank’s attempt at selling Gulbahar Center’s condos and renting the remaining shops was more difficult than expected. Q explains that Kabul residents struggled with the concept of living in a condo within a high-rise tower, with no land of their own, and having to walk down long public hallways before reaching the outside.

Also, the price of the condos was prohibitive, even for Afghans working for non-governmental organizations (NGOs) and other private companies that paid top salaries. Condo prices ranged from $125,000 to as high as $1 million for a presidential suite. Given the Afghan extended family culture, a single breadwinner typically provides for the needs of many relatives. Q says that for an Afghan making a Western-like salary, little is left for a monthly mortgage payment after covering the needs of a train of relatives.

To hasten the sale of the condos, Kabul Bank encouraged some of its own employees to purchase one. Q says about 10 to 15 staff members bought condos. The interest rates for the loans were between 8% and 10% for eight to 15-year terms. Normally, banks transfer the home borrower’s money directly to the seller, which in this case was Habibi, but given the circumstances of Habibi’s loan, Kabul Bank should have used the mortgages to pay down Habibi’s loan, effectively replacing one loan with another loan. Instead, based on the deal reached with Habibi in Dubai, Sherkhan and Fruzi gave the money for these mortgage loans to Habibi so that he could complete the expanded construction.

Complicating matters for Kabul Bank, the mortgages issued to the Kabul Bank employees were granted moratoriums, meaning that payments for those loans would begin only after the employees moved into their condos. Q also notes the odd collateral arrangement for all who bought condos. Since Habibi did not pay off his loan with the mortgage money he received from the buyers, his loan still existed. This meant that both parties had the same collateral. Habibi’s collateral for his loan was Gulbahar Center. Likewise, the collateral for those who purchased condos was their condos, or Gulbahar Center. The arrangement brought unnecessary risk to the bank.

The expansion of Gulbahar Center posed financial and legal challenges, but Habibi now had help. He had Sherkhan, Fruzi, and the first brothers in his corner. The combined influence of these men, plus a bribe given to the Kabul municipality authorities, enabled Habibi to build the additional floors to the towers.

Habibi still needed more money to finance Gulbahar Center’s expansion so he applied for a second Kabul Bank loan (a legal one) but the Management Board rejected his application due to his horrible repayment history with his first loan. Habibi managed to secure the additional funding by selling the new condos at the conceptual stage, a sort of advanced booking scheme. He offered condos to many of the businessmen who were renting the shops. Kabul Bank financed the mortgage loans for these people and transferred the money to Habibi; however, Q says that the shopkeepers never made their mortgage loan payments. Sherkhan and Fruzi also marketed the future condos to their associates and Kabul Bank provided the financing for these people as well. All of the buyers of the future condos received moratoriums for their loans.

The fact that Habibi’s loan was not being repaid, that many of the mortgages for the condos were given moratoriums, and that the shop owners who took out mortgages for some of the condos were refusing to repay, resulted in many millions of dollars in Kabul Bank loans not being repaid. Habibi’s total debt owed to Kabul Bank for Gulbahar Center rose to $16.8 million.[124]

Sherkhan and Fruzi learned two important lessons from their experience with Gulbahar Center. The first lesson learned from Gulbahar Center was that all the loans associated with the project passed the audits with ease, both Habibi’s legal loan and all the condos that Kabul Bank financed. Q says that even with the problem of Habibi not repaying his legal loan, neither the central bank nor Kabul Bank’s independent auditor ever had a problem with the loan because it was backed by solid collateral, or the project itself. Kabul Bank could always seize Gulbahar Center.

The second lesson was the profitable of real estate development. At minimum, profits could be nearly double of the total amount invested. Sherkhan and Fruzi concluded that real estate development could function as the proverbial “silver bullet” to help pay back the losses to the bank from the illegal loan network. In theory, a considerably larger real estate project than Gulbahar Center could bring in many tens of millions of dollars in profit.

For example, suppose a developer invested $75 million to construct a 1,500 unit residential complex. The $75 million would pay for the land and all construction costs. Homes could be sold for $100,000 each, which would bring in $150 million in revenue ($100,000 x 1,500 = $150 million). Subtracting the $75 million investment and the developer is left with $75 million in revenue before taxes.

If Sherkhan and Fruzi were behind such a project, they could channel much of that $75 million to pay off some of the illegal loans. Q says that the illegal loans would never see “the light of day.” In addition, the bank’s profits would rise due to the mortgages that Kabul Bank would finance. These would be legal loans also backed by solid collateral, or the homes themselves.


Bakhtar TV

In 2008, Sherkhan wanted to enter into the media business so he started Bakhtar TV the same year. The plan was to use Bakhtar TV to advertise for Kabul Bank and his other businesses. The thinking was that television publicity for Kabul Bank would lead to more customers opening up bank accounts, which would provide more money for lending to the businesses of Sherkhan and his associates.

There was also the possibility of Bakhtar TV turning a profit. Television stations make their money primarily by selling airtime to advertisers. That is to say that businesses pay stations to run their commercials. For television stations, they try to air popular broadcasts in order to increase viewership because advertisers prefer to run their commercials on popular television stations where more people will see them. Since Indian soap operas and movies are popular in Afghanistan, Sherkhan sought the transmission rights for them.

Sherkhan also tried to drive his media competitors out of business by reducing Bakhtar TV’s rates for advertisers. He reasoned that businesses would choose Bakhtar TV to run their commercials if it had a large viewership and offered cheaper advertisement rates than other television companies.

Q says that while the business concept was good, Sherkhan did not hire professional people to lead Bakhtar TV; consequently, the station consumed a lot of money “without making much headway in its plans.” The result was that, similar to Pamir Airways, Sherkhan kept Bakhtar TV afloat with Kabul Bank money via illegal loans. Kabul Bank lending to Bakhtar TV reached $20 to $30 million.[125] After Sherkhan and Fruzi were forced out of Kabul Bank, the Afghan central bank eventually seized Bakhtar TV and sold it to a private party.


Naseeb Food Industries

Naseeb Food Industries is owned by the Naseeb brothers. Ghulam Farooq Naseeb was a Kabul Bank shareholder whose shares really belonged to Dawood, his brother.[126] Dawood got acquainted with Sherkhan in Dubai. In fact, many Kabul Bank shareholders and borrowers met and developed acquaintances with Sherkhan in Dubai. Before Kabul Bank opened an office in Dubai in 2006, Sherkhan used to meet his associates and other acquaintances at the luxurious Fairmont Hotel where he had a permanent room set aside. The first Kabul Bank shareholder meeting took place at the Fairmont.

The Naseeb brothers owned a bakery in Afghanistan but expanded into confectionary with Kabul Bank financing. The Naseebs’ first loan was a legal one for $2 million. It was issued in 2006 to Naseeb Food Industries in Dawood’s name. The legal loan was followed by numerous illegal loans. On August 31, 2010, or the day before the deposit run began, the Naseebs owed Kabul Bank almost $9 million.

The Naseebs’ business was very successful but instead of repaying their Kabul Bank loans by routing their sale proceeds to Kabul Bank, as the Naseebs were supposed to do, they used the proceeds to begin a real estate business in Dubai. Properties were purchased and flipped at a higher price for a quick profit. Other properties were rented out. Some of the Naseebs’ real estate deals in Dubai were joint ventures with Sherkhan in connection with Sherkhan Farnood General Trading. The Naseebs’ real estate businesses took a hit when Dubai’s real estate market crashed in 2008.

Bread is made at the Kolomenskoye bakery factory in Moscow, Russia. The photo is used  with special permission from Sergey (Flickr user ID “serg-157”).

Bread is made at the Kolomenskoye bakery factory in Moscow, Russia. The photo is used
with special permission from Sergey (Flickr user ID “serg-157”).

In 2009, the Indian embassy in Kabul contacted Naseeb Food Industries with a business proposal. India is the major donor to the World Food Program (WFP) in Afghanistan. The WFP was supplying Afghanistan’s schools with fortified biscuits. Indian companies were making the biscuits and shipping them over land through Pakistan to get to Afghanistan. However, the Pakistani government threatened to stop the biscuits from transiting its territory because the food biscuit crates were marked “Made in India.” Diplomatic ties between India and Pakistan have been strained since the two gained their independence from Great Britain in 1947.

When diplomacy failed to get the Pakistani government to change course, the Indian government decided to look for an Afghan business that could make the fortified biscuits in Afghanistan. The Indian government was ready to transfer the necessary technology to the Afghan business that received the contract. There would be no need to transit through Pakistan anymore and an Afghan business would benefit from a substantial contract, which also would create local jobs.

Talks started between Naseeb Food Industries, the WFP, and the Indian government. The deal would require Naseeb Food Industries to carry out the initial modernization of its factory and to purchase the needed machinery from India only. Dawood sought Sherkhan’s help for the financing. Also, priority in production would always go to the WFP, and the Indian embassy and the WFP would carry out mandatory inspections of Naseeb Food Industries.

In the end, an agreement was never reached. Q later discovered that Fruzi tried to bully the Naseebs into giving him shares of their company. Sensing the huge profits that Naseeb Food Industries would make from the WFP contract, Fruzi demanded shares in Naseeb Food Industries in exchange for Kabul Bank financing. The Naseebs refused to let Fruzi into their company and, consequently, Fruzi held up their loan.

The Naseebs were very close to Sherkhan and Q says that they contacted Sherkhan and asked him to get Fruzi to back off, but Sherkhan refused to get involved. Either Sherkhan was playing the Naseebs, because he wanted Fruzi to get a piece of the brothers’ business, or he could not act because Fruzi was too powerful and capable of acting with complete independence. Q says that the latter was the case. From February 2008, Sherkhan was in Dubai and Fruzi ruled Kabul Bank as a co-king with Sherkhan.[127] Sherkhan could no longer give Fruzi orders.


Tallying the No-Payers

A combination of a fundamentally flawed and illegal loan service, Sherkhan’s mismanagement, and outright theft of a portion of Kabul Bank’s deposits, resulted in nearly a $1 billion loss to the bank. The true borrower’s list records who received Kabul Bank’s money. However, its ability to tell the whole story is limited by at least two factors.

First, Kabul Bank’s illegal loan recipients usually did not return receipts to the bank showing how their loan money was spent. For example, the true borrower’s list shows that Mahmoud Karzai received $22.19 million from Kabul Bank. What is certain is that about half of that money paid for his Kabul Bank and AIC shares. Another portion was invested in a Toyota dealership in Kabul. Whatever else Mahmoud used his Kabul Bank money for is unknown.[128]

The only way to discover how Mahmoud spent all of his Kabul Bank money is to access his accounting records –assuming he kept them. Simply put, only Mahmoud knows how he spent all of his Kabul Bank money. The same may be said for the others who took out illegal Kabul Bank loans.

Second, the ability of the true borrowers’ list to tell the entire story also is limited because almost half of the loans are attributed to either Zahir Group or Shaheen Exchange, two generic identifiers Sherkhan used for money that he withdrew. These loans totaled $507 million. Q’s role as an eyewitness, a 2011 forensic audit, the 2012 Kabul Bank inquiry, and other media sources shed light on how this $507 million was spent. For example, some of the Zahir Group and Shaheen Exchange loans paid for the Dubai real estate, Kabul Bank and AIC shares, Pamir Airways, Bakhtar TV, and President Karzai’s re-election campaign.

Below is a list of companies that have been identified in this paper, and in the previous papers written in collaboration with Q, and what they still owed to Kabul Bank as of August 30, 2010, or the day Sherkhan and Fruzi were fired from the bank.[129] The list is not exhaustive. There were many other smaller companies, as well as individuals, that received Kabul Bank money via legal and illegal loans –too many to recount in the confines of this paper.

Major Recipients of Kabul Bank's Loans



The Kabul Bank scandal fundamentally is about one man who wanted to become very, very rich. That man started his own bank in order to use the bank’s deposits to fund his businesses. As that man’s vision unfolded, it required that he develop relationships with fellow businessmen, senior government officials, parliamentarians, and anyone else who could help him to realize his vision.

The Kabul Bank fraud may be traced to the illegal loan service that Sherkhan set up at the start of the bank in 2004. However, the motives for setting up the illegal loan service were arrogance, greed, and dishonesty.

Sherkhan arrogantly believed that he could make more profit with Kabul Bank’s deposits by spending the money how he wanted to, rather than by charging interest and fees for lending and other legal banking services. Greed and dishonesty empowered Sherkhan to disregard Afghanistan’s banking and other laws. Including unpaid interest on loans, Sherkhan’s actions resulted in nearly $1 billion in losses to Kabul Bank.

In addition to Sherkhan, others bear responsibility for the fraud. First in this group is Fruzi, followed by other members of Kabul Bank’s leadership. Next come the borrowers of the illegal loans, particularly the no-payers. These individuals were Kabul Bank shareholders and/or close Sherkhan associates.

In 2010, Kabul Bank was saddled with hundreds of millions of dollars in losses. Could this money be repaid? If so, how? Moreover, who was to blame for these losses? Could Fruzi pin the carnage on Sherkhan?

To be continued in the 6th and final paper:


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


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