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Afghan Aid Tracking Suffers on Karzai, U.S. Failures

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July 20 (Bloomberg) -- The U.S. can’t properly track cash aid to Afghanistan or help develop the country’s financial sector in part because President Hamid Karzai and other officials don’t fully cooperate, auditors said.

“The United States has poured billions of aid dollars into a country plagued by corruption, insurgency and the narcotics trade,” Herbert Richardson, acting special inspector general for Afghanistan reconstruction, said in a statement released with a 42-page report today. “U.S. agencies have not done all they can to safeguard U.S. funds, and the Afghan government has not provided the cooperation needed to build a strong, secure financial system.”

The auditors cited Karzai’s decision earlier this year to bar U.S. advisers from the country’s central bank after the International Monetary Fund suspended lending to Afghanistan in the aftermath of the near-collapse of the commercial Kabul Bank. Foreign donors also halted aid payments.

Afghan officials also have hampered attempts to fully control cash ferried through Kabul International Airport, and the country’s attorney general rarely prosecutes suspected financial crimes, the auditors found. U.S. agencies bear some blame, the inspector general’s office said, citing limited coordination and a lack of sufficient controls to track payments.

Growing Tensions

The findings reflect growing tensions between Karzai and U.S. officials pressing the Afghan leader to curb government corruption and improve public services. The 48-nation coalition led by the U.S. and the North Atlantic Treaty Organization is counting on improvements in security forces and governing capability to turn over lead responsibility to the Afghans by the end of 2014.

Afghanistan’s ambassador to the U.S., Eklil Ahmad Hakimi, couldn’t comment on specific incidents cited in the audit because he doesn’t have direct knowledge of them, said Abduljalil Ghafoory, a spokesman for the embassy in Washington.

Hakimi “does not agree generally that the government of Afghanistan would block anything,” Ghafoory said. “We are grateful for the assistance the United States is giving.”

$70 Billion in Aid

The gaps in cooperation and financial controls hamper the effectiveness of assistance and the ability to protect the part of U.S. aid that is converted to cash in the Afghan economy, the auditors concluded. The money affected is primarily in the form of payments to contractors and to Afghan police and civil servants that are routed through the country’s banking system.

It wasn’t possible to determine how much of the aid to Afghanistan -- $70 billion since 2002 -- ends up in cash and thus might be affected by the shortcomings, they said.

The auditors examined the ability of U.S. agencies to track their own funds to prevent fraud as well as the effectiveness of efforts to help Afghan government financial overseers regulate the country’s 17 commercial banks.

The Afghan government took over Kabul Bank, the country’s biggest commercial lender, in September, following a rush by depositors to withdraw money after they learned of losses stemming from potential fraud.

Fraudulent Loans

A U.S. review later found that the bank fraudulently lent as much as $850 million to its own shareholders and other company insiders, possibly 94 percent of the bank’s outstanding loans.

The run on the bank has led to improved coordination among U.S. agencies working to assist Afghanistan in developing its financial sector to help build a viable market economy, the auditors said. Prior to the crisis, officials from the U.S. Treasury, the Defense Department and the U.S. Agency for International Development didn’t meet regularly to discuss their assistance efforts.

The U.S. Treasury described working conditions for advisers at the central bank as “hostile,” the inspector general’s office said, and reported that the Afghan attorney general’s office pursued prosecutions in only four of 21 leads forwarded by an Afghan center that analyzes financial transactions for possible fraud.

At Kabul International Airport, Afghan officials insist on allowing VIPs to bypass the main security and customs screenings and don’t verify their declared cash with currency counters. The bulk counters are used only to count cash for regular passengers and don’t scan serial numbers for reporting to the analysis center, the auditors found.

To contact the reporters on this story: Viola Gienger in Washington at vgienger@bloomberg.net; Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net