Dialing down corruption in Afghanistan

Last week, Afghan president Hamid Karzai surprised
U.S. and coalition officials by announcing the creation of
a special tribunal and prosecutor to seek redress for the almost two year old
Kabul Bank scandal. And earlier this month, the Afghan House of Representatives
rejected the proposed federal budget in part because of the allocation of U.S. $80
million to Kabul Bank.
Already, the Central Bank has poured $450
million into the
beleaguered bank after it lost almost a billion dollars in the 2010
financial scandal. This money has been traced to interest-free loans given to
Mahmoud Karzai, brother of President Karzai, to buy shares in the
bank itself, and also to former CEO Khalil Frozi, who used bank funds to finance the
President’s 2009 election campaign.

Though Afghan authorities arrested Frozi and Kabul
Bank founder Sherkhan Farnood approximately nine months after the crisis, it
was recently reported that neither can
be found in their jail cells, and both are collecting rent from tenants
occupying Dubai villas bought with illegally obtained loans. A year after the
debacle, only 10% of the missing
money had been recovered.

Kabul Bank is more than a symbol of the pervasive
corruption plaguing Afghanistan’s government, it is the largest private
financial institution in the country and an integral piece of infrastructure
that has direct consequences for the country’s security and financial
stability. If Afghanistan is to have any chance at a legitimate economy and
stable future, it will need an efficient and trustworthy financial system.

In particular, Kabul Bank is a conduit for government
payments to Afghan soldiers, police, and teachers. The United States aims to reduce American troop
presence by 2013 and shift security duties to the Afghan military and police
force. Absolutely vital to a “successful” drawdown is the establishment of a
reliable and transparent payment system. 
The rampant corruption plaguing Kabul Bank shows that traditional
banking systems may not be suitable for the Afghan economy at all. However, the
United States Agency for International Development (USAID) is working with
Afghan companies to provide an alternate solution – mobile money.

In the past year, mobile phone-based money transfers
have taken off in Afghanistan. Three out of the four largest mobile network
operators now offer mobile money services, two of which were launched in the
last six months. Roshan, the telecommunication company that deployed the
country’s first mobile money product in 2008, M-Paisa (“paisa” meaning money in
Dari), has grown to 1.2 million registered customers that can receive salaries,
pay bills, and make domestic financial transactions over their mobile phones.
Last month, the company announced a partnership
with Western Union to allow these customers to receive transfers from around
the world directly to their mobile phones. 

USAID has made mobile money central to Afghanistan’s
financial development. According to USAID, while less than
five percent of Afghans have access to a bank account, more than 60 percent of
the population has access to a mobile phone. To accelerate the pace of its
development, USAID has allocated more than $2 million to mobile network
operators as part of its Mobile Money Innovation Grant Fund, and
spearheaded the forming of the Afghan Mobile Money Operators Association. Currently,
there are five USAID mobile phone payment projects underway, which range from
the payments of teacher stipends to police force salaries, and 14 more mobile
transfer projects in planning, according to a USAID official who spoke
off-the-record. With the scaling of mobile money, an estimated $60
million annually could
be retrieved that had been lost to corruption and fees.

Although promising, mobile money is not entirely
immune to the harsh realities on the ground. In 2009, the Afghan government
worked with Roshan to pilot a mobile phone-based salary payment system to 54
officers of the Afghan National Police Force who had previously received cash
from their superiors. When the policemen took their SIM cards to the local
M-Paisa offices to directly collect their entire salaries, they thought they
had received a 36 percent raise, while what they were really seeing was a full
salary untouched by crooked officials, according to a U.S. Air Force Colonel overseeing the
project. 

However, a confidential State Department cable released by
Wikileaks revealed that a corrupt Afghan commander, frustrated that he was no
longer able to skim off the top, fraudulently registered phones and collected
his officers’ salaries. In a separate incident, the same commander ordered
subordinates to handover their SIM cards and attempted to retrieve the salaries
himself. Though the local M-Paisa employee refused to hand over the salaries to
the commander, he was forced to go into hiding for fear of retribution. Despite
direct reports to the Ministry of Interior and pressure from the U.S.
Government, no one has been prosecuted.

The ability to efficiently pay Afghanistan’s security
apparatus is critical to any post-war strategy, especially in the face of a
U.S. drawdown and the ousting of private security firms. It is especially
important for USAID efforts because $899 million worth of development programs
they administer are in jeopardy without a functioning security force, according
to a recent letter from Steven
Trent, the acting Special Inspector General for Afghanistan Reconstruction.
Though USAID says this claim is exaggerated, it still highlights the
significance of dealing with the systemic corruption within Afghanistan’s
financial system and in particular Kabul Bank, given its central role in
government payments to soldiers.

Despite the importance of anti-corruption measures to
security efforts, a clear disconnect between Afghan and U.S. officials gives
reason to believe that Karzai’s recent announcement to prosecute those involved
in the Kabul Bank crisis will not amount to much. As Afghans rushed to withdraw
$800
million in deposits in
the two weeks following the scandal’s breaking, Mahmoud Karzai insisted the bank was
stable and not in danger of collapse while simultaneously asking the U.S.
Treasury for monetary help in averting a crisis. When the U.S. refused a direct
injection of capital, President Karzai publicly blamed the collapse on
a lack of foreign technical support rather than the illegal activities of the
bank’s leadership. A few months later, he banned U.S. government
advisers from working with the country’s central bank, as they attempted to
assist Afghan officials in regulating the financial system and tracking foreign
aid, both of which were conditions for releasing $1.8
billion of donor funds.

While the ideal situation for USAID is an end to
corruption’s hold on financial infrastructure, the reality is that they are
working within a delicate political climate. According to a NYT/CBS News poll released this
month, almost 70% of American respondents want an end to U.S. military efforts
in Afghanistan. With this dramatic fall in American public opinion and election
year politics putting the focus on a swift withdrawal of U.S. troops and
transition to Afghan forces, the Obama administration is loath to engage in a
battle with the Karzai government over corruption that is almost guaranteed to
fail. Yet there are still ways for USAID to recognize the restraints of
corruption and push forward; one of the promising solutions involves
integrating mobile money to build a stronger financial system and more
transparent post-transition payment system.

After all, the reality is also this: the results of
development projects will have significant bearing on America’s legacy in a
country where it has spent over 10 years, half a trillion dollars, and
countless lives. USAID’s success, and ultimately that of the entire U.S.
mission in Afghanistan, will depend on our ability to acknowledge that
“success” is not an all or nothing proposition. Corruption exists but that
doesn’t mean that the development community cannot adapt to work within its
confinements.

Anjana
Ravi is a Research Associate with the New America Foundation’s Global Assets
Project, where Eric Tyler is a Program Associate.

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