Afghan Banks Face New Dollar Troubles

Via The Wall Street Journal, an article updating one of the challenges facing the Afghan banking marketplace:

Afghanistan’s fragile banking system is facing more turbulence after the German bank that was the main gateway to foreign transactions decided to sharply restrict its U.S.-dollar business in the country.

At a confidential meeting with Afghan banking executives in the Ritz-Carlton hotel in Dubai in April, Commerzbank CBK.XE -0.07% said it would shut down U.S.-dollar correspondent relationships with those Afghan banks that don’t open separate correspondent accounts with U.S. banks by June 30, participants said.

Few Afghan banks are expected to qualify for such accounts, largely because of U.S. banks’ concerns about the drug and terrorism money that is swirling through the country.

Much of the business in Afghanistan is carried out in U.S. dollars, by far the most widely used foreign currency.

Frankfurt-based Commerzbank, one of the world’s major clearing banks, explained its move by citing the need to curtail unprofitable operations, Afghan bankers say. Commerzbank spokesman Martin Halusa declined to comment “due to ongoing discussions.”

But the decision came in the wake of giant fines that British banks Standard Chartered STAN.LN -0.65% and HSBC HSBA.LN -1.49% agreed to pay in December to settle U.S. money-laundering accusations against them. That prompted global financial institutions to tighten their compliance with U.S. regulations.

Afghanistan’s central bank governor Noorullah Delawari, who participated in the Dubai meetings, said in an interview that the action against the British banks probably gave Commerzbank “some cold feet.”

“That could be a factor,” he said.

He said he didn’t expect the effect of Commerzbank’s exit to be “serious” because Afghan banks could still route their dollar transactions through other banks in countries such as Turkey or China. Commerzbank isn’t severing its nondollar relationships, Afghan bankers say.

Several Afghan bankers warned, however, that the precedent set by Commerzbank could spook other partners, in addition to raising transaction costs for doing business in Afghanistan.

“If a big bank is closing this account, then how can they resist and what would be the repercussions for them?” said Khalil Sediq, chief executive of Afghanistan International Bank, one of the country’s biggest lenders, and chairman of the Afghanistan Banks Association.

Mr. Delawari said he raised Commerzbank’s move with the U.S. Treasury and was told that the bank’s decision “wasn’t related to any sanction imposed by the U.S.” Afghanistan’s government plans to adopt a new anti-money-laundering law within weeks, he added, which he described as some of the toughest such legislation in the region.

A U.S. official also said Washington “didn’t play a behind-the-scenes role in urging Commerzbank to make its decision,” adding that the U.S. continues “to encourage the Afghan government to strengthen its banking supervision and anti-money laundering and combating the financing of terrorism.”

Afghanistan accounts for more than 90% of the world’s illicit opium exports, according to United Nations statistics, a global trade that is partially controlled by the Taliban and other militant groups.

The country’s banking laws are lax and frequently bent, meaning that much of that illicit money finds its way into the Afghan banking system, according to a senior U.S. law-enforcement official.

A tainted Afghan bank that has a correspondent banking relationship with a major international financial institution, such as Commerzbank, could transfer those funds around the world, exposing its counterpart to regulatory risk in the U.S. and elsewhere.

The U.S. has long had evidence that several Afghan banks knowingly launder proceeds from corruption and the drug trade, but has refrained from acting against them because of concerns that doing so might precipitate the collapse of the entire financial system, the U.S. law-enforcement official said.

That could torpedo an economy that is already suffering from the withdrawal of U.S. troops and aid, with most American forces slated to leave at the end of next year.

Commerzbank provided dollar correspondent accounts to almost all of Afghanistan’s 16 banks. Mr. Delawari, the central bank governor, said he expected four—one state-owned and three private—to maintain their Commerzbank ties. While he declined to name them, state-owned Bank-e-Mellie has long had a correspondent relationship with Citibank, and therefore qualifies under Commerzbank’s new conditions.

Another Afghan bank, Ghazanfar Bank, received a temporary reprieve from Commerzbank’s June 30 deadline as it tries to negotiate an agreement with a U.S. financial institution and beef up its compliance practices, said the bank’s CEO, Ahmed Siar Khoreishi.

“It is challenging, but we would like to turn these challenges into opportunities,” he said, adding that Ghazanfar could also route its dollar transactions for the time being through correspondent banks in Turkey and Malaysia.

“But in the long term, if these banks feel the same things as Commerzbank, they can come up with the same statements,” Mr. Khoreishi said in an interview. “So far, everything is normal, but you can’t guarantee the future.”

Standard Chartered, the last Western bank that was operating in Afghanistan, sold its Afghan assets to Mr. Sediq’s bank, AIB, last year, citing security fears, and agreed to maintain a correspondent relationship with it. Because of that tie-up, AIB is unaffected by Commerzbank’s move, Mr. Sediq said.

Afghanistan’s banking sector, which boomed after the 2001 ouster of the Taliban, has had a checkered history.

In 2011, the U.S. Treasury designated the top executives of Afghan United Bank, one of the largest in the country, as “narcotics kingpins,” barring any U.S. persons from doing business with them. The bank has since been sold to new owners.

The previous year, the Afghan government had to step in to prevent the collapse of Kabul Bank, at the time the largest private lender, after top managers and politically connected shareholders plundered some $900 million in depositor funds.

The Kabul Bank scandal prompted a depositors’ run, and remains a key controversy between the Afghan government and the international community, which has demanded action to recover the missing money.

This entry was posted on Saturday, June 15th, 2013 at 4:13 pm and is filed under Afghanistan.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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