Kabul Bank was never a Ponzi scheme. It had elements of a Ponzi scheme, but it was not a bonafide Ponzi scheme. Kabul Bank was a case of embezzlement. It was a straight theft of the public’s money.
The media and various Western financial bodies mistakenly characterized Kabul Bank as a Ponzi scheme because they did not understand what happened.* They did not understand the thinking of the two leaders behind the bank, Sherkhan Farnood and Khaliullah Fruzi.
Alternatively, it may be that Western financial bodies did understand the theft but floated the Ponzi scheme charge to avoid having to pressure the Afghan government to seize the assets of Kabul Bank’s secret borrowers –some of the most powerful men in Afghanistan, who used the bank’s money through illegal loans to invest in their businesses. If Kabul Bank were a Ponzi scheme, then there is no money left, right? Of course, this latter possibility deals with motive and, without evidence, is conspiratorial.
While both embezzlement and Ponzi schemes are acts of theft, it is the kind of theft that is of interest. Kabul Bank was similar to a Ponzi scheme in at least one respect, but different in two.
Ponzi schemers are under enormous pressure to get evermore deposits from investors, or their victims, since the Ponzi schemer’s money is being devoured in luxurious living and being handed out to the investors in order to keep up the image of a sound investment. Likewise, Kabul Bank, particularly in its early years, was pressed to increase its deposits, since its money was rapidly exiting the bank in the form of illegal loans.
The most important difference between Kabul Bank and a Ponzi scheme is that Kabul Bank had assets. At the end of the day it still had the bank’s money. Kabul Bank’s shareholders were using the bank’s money for their own businesses. Yes, a smaller portion of the bank’s money was spent on luxurious living. In fact, on the first day of the deposit run on Kabul Bank (August 31, 2010) that almost brought down the entire Afghan financial system, the bank held a whopping $458 million in cash, or about 35% of its $1.3 billion in deposits.
Kabul Bank’s remaining deposits made up its loan portfolio, almost all of which was loaned to the shareholders’ rather impressive businesses: an airline, a cement manufacturing plant, a natural gas company, an apartment complex, a shopping center, a television company, and numerous luxury real estate properties in Dubai. Simply put, these businesses could have been sold off to repay the illegal loans, but that did not happen.
Another way that Kabul Bank differed from a Ponzi scheme was that Kabul Bank was a bonafide bank: it did real banking. In contrast, Ponzi schemers claim that their money is being invested in a legitimate venture when it is not.
In the end, putting oneself in Sherkan and Fruzi’s shoes is the best way to understand what Kabul Bank was. These guys lived in post-war Afghanistan, a nation with an uncertain future. They were ambitious businessmen that wanted hundreds of millions of dollars to start up capital-intensive ventures. Where could they get that kind of money? Not in Afghanistan and not from Western financial institutions, which were reluctant to lend.
What to do? They would start up their own bank and lend to themselves! However, legally, they could not lend to themselves in the dollar amount that they wanted. What to do? They set up shell companies and lent hundreds of millions of dollars to these companies. To trick the central bank auditors, they falsified the prerequisite financial documents needed to secure loans the legal way.
So, while Kabul Bank was never a Ponzi scheme, it was a story of embezzlement and, as such, the Afghan government should have seized the assets acquired by the illegal loans, but they never did. As the Afghan Penal Code states:
If a person, who is punished in accordance with the provisions of this law, has acquired a good through crime he shall be adjudged to return the good, and if the good should not be available, to return the same or its price to its owner. A person who inflicts a loss as a result of committing a crime shall be adjudged to compensation of the inflicted loss, too. …The court can in cases where the law has not anticipated confiscation as a punishment, order confiscation of goods obtained through commitment of crime…. (Articles 6 and 119:1)**
Likewise, Article 31 of the United Nations Convention Against Corruption (UNCAC), to which Afghanistan is a signatory, requires signatories to freeze, seize, or confiscate property acquired by corruption. Sadly, the Afghan government did not follow these laws to redress the Kabul Bank embezzlement.
*Soon after the Kabul Bank crisis began, it was erroneously reported that Kabul Bank borrowers were not expected to repay their loans. This was not the case. What happened was that many of the borrowers that used the illegal loan route stopped repaying their loans. Sherkhan and Fruzi had difficulty getting these borrowers to repay. They could not pursue these borrowers legally since their loans were illegally issued in the first place. Examples of some of the no-payers included Adbul Ghafar Dawi, Haseen Fahim, and Gulbahar Habibi.
**Returning what was taken in crime, or its monetary equivalent, is a reoccurring theme in the Afghan Penal Code. See Articles 48:2, 151, 273:1 (in embezzlement), 463 (in larceny), 473 (in fraud), 515:3 (in kidnapping). The court also has the power to confiscate goods associated with crime. See Articles 117, 119, and 132.