The World Bank sent me to India several years ago to assist their anti-corruption unit in revising their computerized systems that search for likely fraudulent procurement practices. I have to be vague to maintain the effectiveness of the system, but I believe I contributed to an improved understanding of a particular business practice that the World Bank had treated as indicia of a potential cartel. First, I explained why the existence of the practice proved that supposedly competitive bidders had in fact engaged in collusion to rig their bids. The practice was not simply a warning flag, but a clear badge of collusion.
Second, the practice constituted such conclusive evidence of collusion "“ and there were alternative practices that, for trivial increases in cost, would hide the collusion "“ that the only rational inference was that that the bidders believed that they could engage in collusion with impunity. They must believe that the risk of detection and sanctioning their bid rigging is so trivial that it was not worth $5 "“ the cost of making two additional short "tuk-tuk" drives "“ to avoid providing us with evidence of collusion in bids worth hundreds of thousands of dollars. Corrupt firms did not fear that World Bank and Government of India procurement officials would detect their obvious collusion. The World Bank and Government of India could have thrown out the collusive bids and excluded the bidders (debarred) them from being eligible for making future bids. The collusive bidders were willing to provide clear evidence of collusion, which they could have avoided hiding by bearing a trivial cost in order to disguise the collusion, because they viewed the risk of sanctions as less than trivial.
Government of India and World Bank procurement officials consistently failed to identify the business practices that were badges of collusion. The bidders' view of the risk of detection of sanction by the procurement officials of bid rigging schemes (close to zero) proved accurate. When the frauds don't fear the regulators and prosecutors it's a sure sign that "control fraud" is common.
Which brings us to Afghanistan's Kabul Bank "“ the nation's largest and, one fervently hopes, worst bank. Consider these passages from the New York Times' August 31 column (Troubles at Afghan Bank Jolt Financial System):
Investigators and bank regulators say Kabul Bank is also tied to the inquiry into New Ansari, the money-transfer firm, or hawala, that is suspected of moving billions of dollars out of the country for Afghan politicians, drug traffickers and insurgents. Kabul Bank used the firm, whose dealings are nearly impossible to track, to transfer at least $60 million out of the country, a bank shareholder said.
For a bank to use a hawala to move money is inherently suspect, investigators say, because a financial institution like Kabul Bank already has the means to transfer the money electronically. Electronic transfers are easier for regulators to follow.
Kabul Bank and its chairman, Mr. Farnood, lie at the heart of the political and economic nexus that sustains "” and is sustained by "” the government of President Hamid Karzai. Mr. Frozi was an adviser to Mr. Karzai's presidential re-election campaign last year, and Kabul Bank provided millions to Mr. Karzai's campaign.
American investigators say that Mr. Farnood's unorthodox financial dealings, which included lending tens of millions of dollars to himself and other politically connected Afghans, have long been shielded from scrutiny by his close ties to Mr. Karzai.
Later reporting claims that "at least $60 million" was actually roughly $1 billion and that Ansari had moved billions of dollars of cash out of Afghanistan.
As grotesque as the reported numbers are, the Washington Post reported on February 25, 2010 (Officials puzzle over millions of dollars leaving Afghanistan by plane for Dubai) that it represented only a portion of the looting of donor nations.
The total volume of departing cash is almost certainly much higher than the declared amount. A Chinese man, for instance, was arrested recently at the Kabul airport carrying 800,000 undeclared euros (about $1.1 million).
Cash also can be moved easily through a VIP section at the airport, from which Afghan officials generally leave without being searched. American officials said that they have repeatedly raised the issue of special treatment for VIPs at the Kabul airport with the Afghan government but that they have made no headway.
But here are the most telling passages from the same story:
The high volume of cash passing through Kabul's airport first came to light last summer when British company Global Strategies Group, which has an airport security contract, started filing reports on the money transfers at the request of Afghanistan's National Directorate of Security, the domestic intelligence agency. The country's notoriously corrupt police force, however, complained about this arrangement, and Global stopped its reporting in September, according to someone familiar with the matter.
Efforts to figure out just how much money is leaving Afghanistan and why have been hampered by a lack of cooperation from Dubai, complained Afghan and U.S. officials, who spoke on the condition of anonymity. Dubai's financial problems, said a U.S. official, had left the emirate eager for foreign cash, and "they don't seem to care where it comes from." Dubai authorities declined to comment.
The New York Times stated in its September 4, 2010 article (Afghanistan Tries to Help Nation's Biggest Bank):
A major shareholder in the bank, Mahmoud Karzai, the brother of the Afghan president, said Saturday that government assistance would be unnecessary considering that the bank still retained half of its assets, which officials say are about $2 billion. He said the government "will absolutely guarantee" the salaries of public servants and was transferring money to Kabul Bank each day.
First among the beneficiaries was Mr. Farnood himself, the officials said. He invested about $140 million of the bank's money in the real estate market in Dubai in the United Arab Emirates, said Mahmoud Karzai, the president's brother and a Kabul Bank shareholder. Among those properties were more than a dozen multimillion-dollar villas in Mr. Farnood's name, some of them on Palm Jumeria, an island off Dubai's coast, Mr. Karzai said.
The Dubai real estate market collapsed in 2008, wiping out much of Mr. Farnood's investment and leaving Kabul Bank with the losses. A senior Afghan banking official said that the bank's estimated losses were believed to be about $300 million, with assets of about $120 million.
Mr. Farnood closed his hawala and started Kabul Bank in 2004. From the beginning, the Afghan banking official said, Mr. Farnood ran Kabul Bank outside the law, daring regulators to rein him in. Kabul Bank often exceeded the limit of what it was allowed to lend on any particular project, and it sometimes skirted collateral and deposit requirements.
"Sherkhan Farnood is a very clever individual," the Afghan banking official said. "Keeping the bank in line with the law was a constant challenge for us."
New Ansari is known to be intimately connected to another financial institution, Afghan United Bank, officials say.
Asked why Mr. Farnood would use a hawala to transfer money abroad, Mahmoud Karzai, a shareholder, said he did not know. "This a very legitimate question," Mr. Karzai said. "You should ask Sherkhan."
The New Ansari case has drawn close attention, and not only because American investigators say the money trails lead to Afghan political elites, insurgents and suspected criminals. One of the men arrested in connection with the inquiry is a senior aide to President Karzai. The aide, Mohammed Zia Salehi, was released in early August after investigators were pressured by President Karzai himself.
Mr. Farnood and Mr. Frozi together owned more than half of the bank, meaning that the other shareholders had little leverage with them, officials said. It was only recently, as the bank's losses mounted, that the two men began to disagree.
The Financial Times reported on September 2, 2010 (Fraud Fears Lead to Run on Kabul Bank):
Read Full Article »