June 30, 2011 / 3:12 PM / 6 years ago

Afghanistan arrests two former officials over bank fraud scandal

KABUL, June 30 (Reuters) - Two former executives from Afghanistan’s biggest bank have been arrested over massive fraud that led to the bank’s collapse, prosecutors said on Thursday, with the fallout from the scandal putting at risk tens of millions of dollars in aid.

Former Kabulbank chairman Sher Khan Farnood and former chief executive officer Khalilullah Fruzi were arrested on embezzlement charges, Deputy Attorney General Rahmatullah Nazari told Reuters.

“We had to make arrests because Haji Khalil (Fruzi) and Sher Khan are the kind of people who can easily slip away from the country,” Nazari said.

“Both are responsible for millions of dollars of losses in Kabulbank and they must appear in court before they go too far from our hands,” he said.

Corruption, bad loans and mismanagement cost the politically well-connected bank hundreds of millions of dollars in what Western officials in Kabul describe as a classic Ponzi scheme.

Kabulbank collapsed last year and was later taken over by Afghanistan’s central bank and split into two. It had outstanding loans of about $926 million, of which the International Monetary Fund (IMF) says about $900 million is at risk, or about 7.5 percent of aid-reliant Afghanistan’s GDP.

Farnood, who has played in high-stakes poker tournaments, and Fruzi, who ran a general business in Russia and traded in gems, had been put under house detention after being forced to step down last September.

LUXURY VILLAS

Farnood and Fruzi seemed to move freely around Kabul since their original detention, although were prevented from leaving the country. Both owned about 28 percent of the bank each.

Both have luxury villas in Dubai. Almost $170 million in Kabulbank loans was spent buying 35 luxury villas in Dubai, investigations have shown, most of them registered in Farnood’s name.

Nazari said both would go to trial within a month, although he did not give specific charges, and would remain in custody until then.

The Kabulbank collapse has a potentially massive fallout for Afghanistan, one of the poorest countries in the world, and international donors have already started withholding aid.

On Monday, central bank governor Abdul Qadir Fitrat told Reuters in a hotel in Virginia he had quit his job and fled to the United States in fear of his life for his role in investigating the scandal.

The Afghan government said soon after his resignation that warrants had been issued for Fitrat’s arrest.

The scandal has engulfed some of the most powerful families in Afghanistan. One former shareholder is Mahmoud Karzai, the brother of Afghanistan President Hamid Karzai, although he denies any wrongdoing and is not under investigation in Afghanistan.

Also under investigation is Mohammad Haseen, the brother of Afghanistan’s First Vice President Mohammad Qasim Fahim.

Fitrat was central bank governor since 2007. His bank has been criticised for failing to detect irregularities at Kabulbank, where $467 million in undocumented, unsecured loans were doled out to 207 borrowers, investigations have shown.

The IMF and the Afghan government are at loggerheads over how to wind up Kabulbank, recovery of lost assets and how to strengthen Afghanistan’s financial sector to prevent such a scandal from happening again.

The IMF also wants an audit of a second private lender, Azizi Bank, as part of those measures, officials have said.

The fund has failed to sign off on a new support agreement for Afghanistan while those measures are addressed, and talks appear to have broken down.

Many foreign donors look to the IMF and the World Bank for a seal of approval before signing off on pledges and have warned of a “cash crunch” within weeks.

The impasse means that tens of millions of dollars in scheduled aid payments have been withheld so far this year and hundreds of millions more is at risk unless it is resolved. (Writing by Paul Tait; Editing by Sugita Katyal)

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