WILL AFGHANISTAN BE FINANCIALLY BLACKLISTED?

BY MATTHIEU AIKINS

Afghanistan is on the verge of being blacklisted internationally for its failure to pass an anti-money-laundering law. For the past three years, the Financial Action Task Force (F.A.T.F.), an intergovernmental body that helps to combat money laundering and the financing of terrorism, has been pushing the country to adopt a law that meets global standards, and had finally warned Afghanistan that it will take action at its next plenary session, which begins on June 23rd, effectively setting a deadline. But the country’s government has left it to the last minute, and—with the final round of the Presidential election set for Saturday—it now seems all but impossible that parliament will pass the bill in time. Inclusion on the blacklist—technically known as the “high-risk and non-cooperative jurisdictions” list—would make it more difficult for international companies and financial institutions to do business with Afghanistan without legal risk to themselves. Afghanistan would join Syria and Myanmar, among others, on the list. Blacklisting would add to a growing consensus that the country’s greatest potential threat is not from the Taliban but from an economic and financial collapse sparked by a fall in foreign spending and the government’s extreme dysfunction and corruption.

Afghanistan’s financial system nearly fell apart in 2010, when it came to light that nine hundred million dollars had been stolen from Kabul Bank, the country’s largest bank, by a handful of insiders who were closely linked to President Hamid Karzai and other top officials. (Dexter Filkins has written about the case.) Since then, the government has been struggling to restore confidence among international donors and investors. Its own moves haven’t helped. In March, 2011, Karzai banned U.S. government advisers from working with the Central Bank, and they have not returned. Around the same time, Muhammad Mustafa Massoudi, the head of FinTRACA, the central bank’s financial-crimes unit, was put on trial for allowing the Kabul Bank crisis to occur, in what many Western observers saw as a politically motivated reprisal for having dug too deeply.

In November, 2011, at the behest of F.A.T.F., the International Monetary Fund completed a two-hundred-and-seventy-two-page report on the risk of money laundering and terrorist financing in Afghanistan. It contained a detailed list of recommendations that had to be carried out to make Afghanistan’s financial system F.A.T.F.-compliant—basic actions like establishing a system for freezing suspicious assets and criminalizing fund-raising for terrorist groups. The following summer, at a conference of Afghanistan’s biggest donors in Tokyo, the Afghan government promised, among other things, to implement those recommendations in return for sixteen billion dollars in aid pledges through 2015.

But it never did implement them. F.A.T.F. finally got tired of waiting and, in February, listed Afghanistan as a “jurisdiction not making sufficient progress,” and warned that it faced being blacklisted in June. Jolted from its inertia, early last month, the Central Bank sent the anti-money-laundering law to the Afghan cabinet, which passed it on to the Ministry of Justice for further changes. But, when the bill was at last sent to the lower house of parliament, the Wolesi Jirga, on May 24th, it had been modified to the point that it no longer met F.A.T.F. criteria. “They watered it down. They took away the independence of the financial-intelligence unit. Who knows why they did it?” a U.S. official who has monitored the process said. “There are a lot of vested interests, people thinking, ‘If this stuff is passed, they’ll know that I’m taking money.’ ”

The bill must now be reworked in parliament, a less than ideal process given its highly technical subject matter. But many lawmakers have left town for the Presidential elections; on Monday, they failed to make a quorum, and may not convene until after the deadline. Afghanistan’s parliament is, even by the country’s own standards, an abysmally dysfunctional and corrupt institution, filled with warlords and businessmen who have grown rich off international military contracts. “Many are illiterate; many don’t have any educational qualifications,” a Westerm adviser to the Afghan government said. “It’s a very delicate message to convey, that we have to ram this down your throats.” If and when the bill is passed in the Wolesi Jirga, it must be approved by the upper house and then sent on to President Karzai to be signed into law. “Unless the Wolesi Jirga ignores quorum, which it has not done very often, then it is difficult to see this going through before the deadline.”

The case of Hikmatullah Shadman illustrates some of the risks for financial institutions that wish to do business with Afghan banks. Shadman is a twenty-six-year-old former military translator turned logistics contractor whom the Department of Justice has accused of amassing $77.9 million in payments by bribing U.S. government subcontractors in Afghanistan to sign off on inflated logistics contracts. In November, 2012, a federal judge issued a warrant against Shadman’s account at Afghanistan International Bank, which is considered the country’s most reputable financial institution. (Shadman denies the allegations and is contesting them, along with the asset seizure, in a U.S. court.) The Department of Justice, with the help of the U.S. Embassy, was able to convince the Afghan attorney general’s office to recognize the warrant under Afghan law, and the account was frozen. “This was a major victory because it had never been done before,” a U.S. official familiar with the case said. But the celebrations were premature. After meeting with Karzai and making his case to Afghan officials, Shadman persuaded the attorney general’s office to lift the freeze. “They thumbed their nose at the D.C. District Court.”

Shadman transferred the money to banks in the United Arab Emirates and Pakistan. But U.S. law allows, when the funds are not in the original accounts, for the courts to seize funds held in other accounts with the correspondent banks, the big international firms that serve as intermediaries for large, cross-border dollar transactions. Places like Standard Chartered and Deutsche Bank had to help “recover the money from the banks they transferred to,” the official said. (Asked for comment, Deutsche Bank said, “We understand the importance of complying with all court orders and seek to do so unfailingly”; Standard Charter declined to comment.)

Already, a number of international banks have ceased or limited their business in the country, in order to avoid being exposed to what is perceived as an increasing risk of being unwittingly involved in money laundering or terrorist financing. Still, the blacklist will not mean the sudden, wholesale collapse of Afghanistan’s financial institutions. Given the turmoil of the past four years, many adaptations have been built into the financial system, which includes a large traditional money-changing sector of hawaladars, who courier bulk amounts of cash through methods of varying legality. But getting back off the list may take years, and, in the meantime, it will add to the country’s mounting economic woes.

In many ways, despite the great drama of the troop surge, Afghanistan’s true tests have yet to come. Much of the foreign aid previously appropriated is still in the pipeline; the real decline won’t begin until next year. Opium cultivation—which has nearly doubled since 2000—remains untamed. The country desperately needs to attract foreign investment, but—even putting aside corruption and insecurity—has failed to pass the basic legislation needed to do so, most notably mining and banking laws, which have been languishing in parliament for more than a year. With projected revenues of around $2.5 billion this year against expenditures of $7.5 billion, Afghanistan will remain dependent on international aid for the foreseeable future.

But international good will toward the Afghan government is at an all-time low, in part due to political fatigue in West and in part due to Karzai’s increasingly destructive and paranoid behavior. With President Obama having announced that almost all U.S. troops will be out by 2016, time is running short for the Afghan government to pull itself together. In the past year, Afghanistan’s Army has shown that it can hold its own against the insurgency, but it is reliant on $4.1 billion that must come each year from international donors. It is worth recalling that the demise of the Afghan Communist government was precipitated not by the withdrawal of Soviet forces in 1989 but by the collapse of the U.S.S.R. two years later, which led to a cutoff in financial support and the fragmentation of government security forces.

The F.A.T.F. episode illuminates a stark fact: having been coddled for a decade as the problem children of a spendthrift international military-and-development mission, Afghanistan’s élites are still unwilling to take responsibility—even in a case in which their own self-interest and dollar-denominated bank accounts are so clearly at stake. Thus far, the government has inhabited a consequence-free zone, but running up against an institution like F.A.T.F.—an independent, technical body with no particular interest in the Afghan project—may give those élites a glimpse of life on their own. “F.A.T.F. doesn’t give a shit,” the U.S. official said. “It’s not to punish Afghanistan; it’s to prevent Afghanistan from becoming a global money-laundering center—which it might already be.”