How the US failed Afghanistan, finance edition

By Felix Salmon
September 6, 2010
Bill Black has a detailed round-up of what we know about Kabul Bank, and where the US went wrong. He's particularly scathing about this quote from Stephen Biddle:


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Bill Black has a detailed round-up of what we know about Kabul Bank, and where the US went wrong. He’s particularly scathing about this quote from Stephen Biddle:

U.S. officials and defense analysts say that challenging local power brokers and criminal syndicates, many of which depend on U.S. reconstruction contracts and ties to the Afghan government for support, would likely add to the unrest in southern Afghanistan and produce a higher U.S. casualty rate. “Putting an end to these patronage networks would not come cheaply,” said Stephen Biddle, a senior fellow at the Council on Foreign Relations who has advised U.S. commanders in Afghanistan.

By contrast, allowing some graft among Afghan power brokers on the condition that they agree to limit their take and moderate predatory activities, such as their use of illegal police checkpoints, could promote near-term improvements, Biddle said. “We spend a lot more money in Afghanistan than the narcotics trade,” he said. “A lot of money that funds these networks comes from us. So we can essentially de-fund these networks, taking away their contracts.”

Black’s response pulls no punches:

He is wrong about corruption, fraud, and predation. Biddle finds it necessary to create this euphemism for corruption (“patronage networks”). He believes that he can calibrate graft and dial his desired level of corruption as if he were using a rheostat to change the intensity of a light. He thinks he can get them to “limit their take” and “moderate” “their “predatory behavior.” He thinks he can get Karzai to “defund” his political cronies. His appeasement strategy has never worked. It will fail and the failure will “not come cheaply.” It will kill and maim Afghans, NATO troops, and foreign aid and construction workers.

Black also asks a very important question I haven’t yet seen posed, let alone satisfactorily answered:

Where were the auditors? PWC was Kabul Bank’s auditor. It missed everything.

The big picture here is that Kabul Bank seems to have been acting as a conduit for taking as many foreign aid dollars as possible and transmogrifying them into offshore holdings belonging to the president’s cronies. And it did all of this openly, with impunity, knowing that the US government was unwilling or unable to put a stop to it.

The result could well be much more damaging to Afghanistan, and to US interests there, than any number of military failures.

I fear that during the crucial years when Kabul Bank was becoming dominant in the country, the US was looking elsewhere: it was more interested in Iraq than in Afghanistan, and insofar as it cared about Afghanistan at all, it cared about the military situation much more than about the financial one. Ann Marlow assured us on the WSJ op-ed page in April 2006 that “while Afghans are lacking in education and management skills, they have a culture that values honor and honesty”. So obviously, there was nothing to worry about. Right?

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Again PWC.. It’s amazing what these auditors (and E&Y & PwC especially) get away with because of their size. Failing Lehman oversight, E&Y failing the icelandic banks, signing off on practices similar to repo 105 fraud.. They’re almost as credible as Moody’s and the other CRAs.

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