June 13, 2014

AFGHANISTAN: Afghanistan Must Pass An Anti-Money-Laundering Law Next Week Or Its Banks Could Be Cut Off By International Financial System

The Wall Street Journal
written by Nathan Hodge, Yaroslav Trofimov, Maria Abi-Habib and Ehsanullah Amiri
Wednesday June 11, 2014

KABUL — Afghanistan faces the possibility of being cut off from the international financial system unless it quickly passes an anti-money-laundering law that President Hamid Karzai has indicated he will block.

The Financial Action Task Force, an intergovernmental body that sets standards to combat money laundering and terrorist financing, is due to meet this month to decide whether to place Afghanistan on its black list.

While such a blacklisting doesn't automatically trigger sanctions, the few international banks still doing business with Afghan financial institutions would come under serious pressure to sever those links, Western officials say.

The blacklisting would also compound a looming revenue crunch for the Afghan government, which has seen investment slow in recent months amid political uncertainty and the withdrawal of U.S. and international forces.

The Afghan parliament, which was due to consider the anti-money-laundering bill this week, didn't muster enough votes for a quorum. The law is scheduled to come before lawmakers again on Monday, parliament speaker Abdul Raof Ibrahimi said.

That day is also the deadline for the FATF to assess Afghanistan's progress ahead of the formal meeting a week later. "The clock is ticking," said a senior international official.

Even if parliament enacts the law, it is far from clear that Mr. Karzai will enact it. Though the country's next president is slated to be picked in elections on Saturday, Mr. Karzai will remain in power until the inauguration, currently planned for August.

Mr. Karzai is concerned about provisions required by the FATF that would impose rules on banks to prevent their misuse by political figures, their family members, and close associates, said Rangin Dadfar Spanta, Mr. Karzai's national-security adviser.

"Crime is an individual thing—you cannot extend it from Person X to an entire family," Mr. Spanta said. "If this paragraph is part of the money-laundering law, the president will not sign."

"This is a legal issue, not a political issue," he said, adding that the required provisions "would collectively punish people. And collective punishment is fascism."

Mr. Karzai, who has declined to endorse a strategic security deal with the U.S. and repeatedly lashed out at Washington, views Western pressure to enact the money-laundering law as yet another attempt to undermine Afghan sovereignty, a Western diplomat said.

The prospect of a blacklisting by the FATF is just the latest threat to Afghanistan's financial system amid a global crackdown on money-laundering.

The country accounts for the bulk of global production of illicit opiate drugs, and therefore presents a particular risk for money-laundering. Corruption is endemic, according to Western and Afghan observers.

The country got a taste of the trouble a blacklisting could cause last year, when German lender Commerzbank AG CBK.XE -0.08% , which handled U.S. dollar transactions for most Afghan banks, cut off all its clients in the country except for a handful of banks that had separate correspondent banking arrangements with U.S. financial institutions. Commerzbank made the move months after the U.S. imposed massive penalties on Standard Chartered and HSBC HSBA.LN -0.74% for alleged money laundering.

One of the Afghan banks affected by the Commerzbank pullout was privately owned Ghazanfar Bank. Its CEO, Ahmed Siar Khoreishi, said the bank was still able to route some dollar transactions through two Chinese banks. That, however, restricted his clients to sourcing goods in China, he said.

"For example, our tradesmen importing flour from Kazakhstan…it's very difficult for us to route the remittances," he said.

Should the FATF blacklisting take effect, banks in China, Turkey and Malaysia that still maintain Afghan relationships would likely see their own Western correspondent banking ties put at risk, a Western official said.

Mr. Khoreishi said he and other Afghan bankers have met with Mr. Karzai to argue for the quick passage of the anti-money-laundering law. "We can't opt out from that," he said.

Afghanistan International Bank, which acquired the Afghan assets of Standard Chartered, has been assured by Standard Chartered and Commerzbank that the correspondent relationships will remain, said AIB CEO Khalil Sediq.

Still, a blacklisting by the FATF, Mr. Sediq said, would "absolutely" make doing business more difficult for his clients.

Western officials say the new law would, among other things, help facilitate a thorough investigation of the 2010 collapse of Kabul Bank, then Afghanistan's largest private lender.

At the time, Kabul Bank's management and key shareholders—including Mr. Karzai's older brother Mahmood—took out some $900 million in loans from the bank, in what the financial investigator Kroll Associates described as a "pyramid scheme." The bank had to be bailed out by the Afghan government, which draws most of its resources from Western aid. Several Kabul Bank managers and employees were tried and sentenced to prison terms following the bank's collapse.

Mahmood Karzai said in an interview that he is urging both presidential front-runners, former Finance Minister Ashraf Ghani and former Foreign Minister Abdullah Abdullah, to probe further into the bank's demise.

"If Ghani wins, I want him to reopen Kabul Bank and do a good job at exposing who did what there," he said. "This is my request as well for Abdullah. If I'm clean, I have nothing to hide."

Mr. Ghani told The Wall Street Journal he would "make sure the [anti-money laundering] law is passed" if elected. Mr. Abdullah couldn't be reached for immediate comment on the proposed legislation.

Some of the countries on the FATF black list, such as Turkey and Indonesia, still retain a robust financial system. Except in the cases of Iran and North Korea, where the FATF urges active "countermeasures," the group merely "calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction" on the black list.

But while such warnings can be tempered by the business potential of fast-growing economies, compliance risks would likely outweigh any rewards from doing business with Afghan banks should Afghanistan be put on the black list, diplomats say.

"Other countries cannot be compared with Afghanistan because they are not totally dependent on imports," a senior Afghan official said. "That's why it's critical for Afghanistan."

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