UPDATE 2-Afghan court jails 20 men in landmark bank fraud case
* Kabulbank collapse triggered unrest, financial crisis
* Scandal also embarrassed U.S. government, unnerved donors
* Trial seen as litmus test of commitment to fighting graft (Adds quotes from Western official)
KABUL, March 5 (Reuters) - An Afghan court gave jail terms on Tuesday to 20 of 22 men convicted in a multi-million dollar bank fraud case seen as a test of Afghanistan's commitment to fighting corruption.
The collapse of Kabulbank in 2010 triggered a financial crisis, civil disorder and a run on deposits, worrying foreign donors and embarrassing the U.S. and Afghan governments, which had touted its credentials as a modern lender integral to developing a tiny economy crippled by war and mismanagement.
The two former heads of the bank, founder Sher Khan Fernod and former Chief Executive Haji Khalil Ferozi, convicted of taking $810 million of the $935 million stolen, were both sent to jail for five years.
The case was viewed as a crucial barometer of Afghanistan's commitment to stabilising the economy, less than two years before the withdrawal of most foreign troops and a winding down of billions of dollars in foreign aid. It appears to be the first major bank fraud trial in Afghan history.
Brothers of President Hamid Karzai and his first vice-president, Mohammad Qasim Fahim, who were both shareholders, were spared jail sentences in the rulings thanks to a presidential decree a year ago that granted immunity from prosecution to those who returned funds.
"Ferozi and Fernod have been sentenced for five years each in jail for the theft of Kabulbank assets valued at $531 million and $279 million respectively," said Judge Shamsul Rahman Shams, head of a special court set up for the Kabulbank investigation.
Those sentences were condemned as "relatively light" by the Independent Joint Anti-Corruption Monitoring and Evaluation Committee "given the extent of the fraud and sentences handed down to others who appear to have had little or no involvement in the fraud", a statement said.
The remaining 18 men, four of whom are Indian nationals, received prison terms of four or five years.
A Western official in Kabul heralded the trial as a step in the right direction for the fledgling judicial system in Afghanistan, one of the world's most corrupt countries.
"There's no precedent for anything like this. They did it, and that's pretty good," he said on condition of anonymity.
All those convicted now face two more appeal trials if they decide to go through that process, which entails additional charges that could increase or decrease their jail sentences.
According to the Afghan judicial system, if convicted of the charges against them, which include money laundering and embezzlement, they could face more than 20 years behind bars.
The government was forced to bail out the country's then biggest bank after it collapsed. It was later relaunched as the state-run New Kabul Bank.
In addition to jail time, Ferozi and Fernod are required by law to return the money to the government, said Shams, who has said that no one, regardless of political or business connections, would be spared in the investigation.
Returning the money could pose difficulties, said the Western official. "Now how they go ahead and make that happen is another priority. It's almost like a moral obligation. If you took the money, you've got to give it back. How do you enforce that? I'm not sure," he told reporters.
Last year, Karzai's brother, Mahmoud, said he had paid back $22 million and the vice-president's brother, Haji Hasseen, said he returned $18 million. Both had denied wrongdoing.
Contrary to popular assumption that most of the money ended up in Dubai, as little as 10 percent was smuggled overseas and channelled into luxury villas.
The rest was invested in Afghanistan, including in an oil storage facility, a television station, a gas firm and property developments, some of which the government had agreed to buy. (Writing by Amie Ferris-Rotman; Editing by Louise Ireland)