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Cablegate: Corrected Copy: Treasury a/S Cohen Urges Major Afghan Banks

VZCZCXRO5207
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0711/01 0590635
ZNY EEEEE ZZH
P 280635Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5917
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0991
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC

UNCLAS E F T O SECTION 01 OF 03 KABUL 000711

NOFORN
SENSITIVE
SIPDIS

DEPT PASS AID/ASIA SCAA DRAY
TREASURY FOR DCOHEN, LMCDONALD, MNUGENT, JCASAL, AKIFAYAT

E.O. 12958: N/A
TAGS: EFIN ECON SNAR KTFN KCOR KCRM PGOV PINS AF
SUBJECT: CORRECTED COPY: Treasury A/S Cohen Urges Major Afghan Banks
to be more Vigilant

REF: A. KABUL 551
B. KABUL 455

---------
SUMMARY
---------

1. (SBU//NF) In meetings with the heads of Kabul Bank, Azizi Bank
and Afghan United Bank on February 11, Treasury Department Assistant
Secretary for Terrorist Financing David Cohen strongly encouraged
the Afghan banking sector to implement stronger controls against
money laundering and terrorist financing, and urged the banks to be
more vigilant, especially if they want to pursue linkages with U.S.
and other international institutions. A/S Cohen expressed
particular concern about Kabul Bank's correspondent relationship
with banks in Iran, as well as Afghan United Bank's association with
the New Ansari Hawala network, an organization under investigation
by Afghan law enforcement for its alleged involvement with illicit
finance cash flows and narcotics traffickers. A/S Cohen also met
with Minister of Economy Haji Abdul Hadi Arghandewal to emphasize
the need to strengthen the Ministry's oversight of NGOs and
charities operating in Afghanistan. A/S Cohen delivered a strong
message to both the banks and Ministry of Economy on the need to
dramatically enhance efforts to combat illicit financing in
Afghanistan. End Summary.

--------------------------------------
KABUL BANK, AFGHANISTAN'S LARGEST BANK
--------------------------------------

2. (SBU//NF) Treasury Assistant Secretary for Terrorist Financing
David Cohen travelled to Afghanistan as part of the delegation led
by Treasury Deputy Secretary Neal Wolin. On February 11, A/S Cohen
met with several Afghan banking leaders, beginning with Kabul Bank
President Khalil Frozi, Director of Internal Audit Raja
Gopalakishnan, Compliance Director Mahboob Frotan and Head of
International Banking, Samir Cena. With the most extensive branch
network and over $1.05 billion in deposits, Kabul Bank is the
largest bank in Afghanistan. Frozi reported that the bank has
approximately one million customers and provides services for
approximately 350,000 civil servants in the form of electronic
salary transfers/payments. Bank officials added that its primary
international customers are foreign NGOs, the U.S. Embassy, the U.S.
Army and ISAF.

-----------------------------
KABUL BANK AML/CFT COMPLIANCE
-----------------------------

3. (SBU//NF) President Frozi maintained that his bank's compliance
practices are strong and that it regularly submits reports of
suspicious and large cash transactions (exceeding Afs 500,000 -
equivalent to USD 10,000) to FinTRACA, Afghanistan's financial
intelligence unit. Additionally, he asserted that the bank profiles
its larger account holders every six months to ensure there are no
unusual transactions. Asserting that Kabul Bank understands the
importance of combating terrorist financing, Frozi requested that
Treasury provide the bank with more specific details/identifiers
associated with "blacklisted" individuals, particularly from the UN
list.

4. (SBU//NF) In response to Frozi's comment that his bank is working
to develop its capacity to match international standards and gain
access to U.S. markets, A/S Cohen expressed support for this
approach but reminded the bank officials that the risk of money
laundering and terrorist financing in Afghanistan is unusually
significant. He commended Kabul Bank for establishing stronger
controls, but urged the bank to be extraordinarily vigilant against
money laundering and terrorist financing.

5. (SBU//NF) Kabul Bank indicated it is preparing to introduce
plastic "stored value" cards to transfer cash/value to diminish the
role of money exchangers and service providers in Afghanistan.
(Note: While Kabul Bank aims to diminish the role of money service
providers, it maintains bank accounts for many of these providers.
We also know, for example, that Kabul Bank uses Shaheen, a hawala
controlled by a key Kabul Bank shareholder, to move money between
Kabul and Dubai. End Note)

-------------------------
KABUL BANK'S TIES TO IRAN
-------------------------

6. (SBU//NF) A/S Cohen discussed the risks of doing business with
Iranian financial institutions and urged Kabul Bank to exercise

KABUL 00000711 002 OF 003


vigilance. Kabul Bank acknowledged correspondent banking
relationships with several Iranian banks, including the Export
Development Bank of of Iran, a bank designated by the U.S. for its
involvement in Iran's proliferation program, as well as Post Bank of
Iran (Ref A). (Note: In an earlier meeting with Kabul Bank, its
leadership indicated a desire to conduct business with Post Bank of
Iran and asked for U.S. Treasury's position. End Note) A/S Cohen
stated that U.S. and international financial institutions will
carefully consider the risks of maintaining correspondent
relationships with foreign banks that facilitate transactions for or
on behalf of Iran. Kabul Bank explained that Iran is one of
Afghanistan's largest trading partners, with some $3 billion per
annum worth of trade between the two countries. Frozi responded
that Kabul Bank will immediately cease its dealings with all Iranian
institutions and close any existing accounts, adding that his bank
would provide Treasury with a record of all transactions from the
Iranian accounts. (Note: The Treasury Attache office will follow
up on Kabul Bank's offer. End Note)

----------------------------
AZIZI BANK, A DISTANT SECOND
----------------------------

7. (SBU//NF) Following his meeting with Kabul Bank, A/S Cohen met
with Azizi Bank President Noor Khan Haider, Deputy CEO Inayatullah
Fazli, and Branch Operations Manager Frogh Lateef. Haider said
Azizi Bank has 230,000 accounts, and is Afghanistan's second largest
bank after Kabul Bank. (Note: Azizi Bank is the second largest in
terms of account holders, but third in terms of assets; Afghan
International Bank is second in total assets. End Note) Haider
asserted that Azizi Bank is fully compliant with Afghan Central Bank
rules and regulations regarding illicit finance and regularly
reports large cash transactions to FinTRACA.

8. (SBU//NF) A/S Cohen asked about Small and Medium Enterprise (SME)
lending and Azizi Bank's issuance of stored value cards. Haider
responded that, per a request from the Minister of Agriculture,
"Azizi is in the process of looking into SME lending, that it is
very risky," but that the Minister had agreed to share some of the
risk. (Note: We are not aware of an agreement between the Ministry
of Agriculture, Irrigation, and Livestock (MAIL) and Azizi Bank for
SME lending -- or of an agreement to share risk. A broader
agriculture finance plan of action is under discussion between
Embassy Kabul and Washington. End Note) Azizi Bank also complained
that USAID funds are not held in Afghan banks and are instead
immediately transferred to foreign banks operating outside of
Afghanistan. Bank officials argued that keeping this money in
Afghan banks would provide an indirect benefit to both the financial
sector and broader economy.

9. (SBU//NF) A/S Cohen explained that Afghanistan is a high risk
country for terrorist financing and urged Azizi Bank officials to be
vigilant and to raise their threshold of awareness for terrorist
financing and money laundering. As with Kabul Bank, Azizi Bank is
pursuing correspondent relationships with U.S. Banks (specifically
Citibank) but were (according to Azizi Bank officials) told by Citi
that Afghan government standards are unsatisfactory. Azizi
maintains correspondent relationships with Commerzbank (Germany) and
Habib American Bank (U.S.).

------------------------------
OVERVIEW OF AFGHAN UNITED BANK
------------------------------

10. (SBU//NF) A/S Cohen then met with Afghan United Bank (AUB)
Chairman Mohammad Jan, CEO Mohammad Hassan and Deputy CEO Haji
Bashir Ahmad. AUB reported that it is in the process of purchasing
and customizing new Oracle software to ensure compliance with
anti-money laundering and combating the financing of terrorism
(AML/CFT) controls. A/S Cohen r---------------
AFGHAN UNITED BANK'S LINK TO THE NEW ANSARI NETWORK
--------------------------------------------- ------

12. (SBU//NF) A/S Cohen expressed particular concern that AUB is
part of the Ansari Financial Network, the hawala which is under
investigation by Afghan law enforcement. He asked how AUB is
protecting itself against the potential for illicit financial flows
associated with the New Ansari Hawala. CEO Mohammad Hassan
responded that "AUB is not involved with the hawala network nor
influenced in any way by New Ansari." However, when A/S Cohen asked
whether New Ansari Hawala had accounts with AUB, Hassan replied
affirmatively, stating that New Ansari Hawala and other licensed
money service providers have deposit accounts with AUB, but that
international money transfers are prohibited via AUB. AUB Chairman
Mohammad Jan explained that only eight years ago, all financial
transfers in Afghanistan were done through hawalas, but Afghans had
begun to use banks, adding that the Central Bank should "tax hawala
transfers" to encourage people to move money into banks (Ref B).
A/S Cohen noted that Treasury would like to encourage the banking
sector to expand and to assist in the broader efforts to bring the
regulation of hawalas in line with the regulation of the formal
financial sector. Stressing that hawalas are higher risk bank
customers, he said more enhanced procedures are needed, including
ongoing monitoring of hawala accounts. A/S Cohen encouraged AUB
officials to work closely with law enforcement and the Central Bank
to make sure they are in compliance with international law and best
practices. Hassan reiterated that AUB is cooperating and will
continue to do so.

--------------------------------------------- ----
STRENGTHENING MINISTRY OF ECONOMY'S NGO OVERSIGHT
--------------------------------------------- ----

12. (SBU//NF) A/S Cohen also met with Minister of Economy Abdul Hadi
Arghandewal to follow up on concerns regarding the Ministry of
Economy's (MOE) role in monitoring the Afghan NGO sector, as
charities are required to register with the MOE, which also has
responsibility for supervising the sector.

13. (SBU//NF) A/S Cohen emphasized that limited NGO oversight is a
serious vulnerability in Afghanistan, and noted that NGOs can be
manipulated by insurgent finance networks for fundraising in
jurisdictions with limited regulatory oversight or insufficient CFT
controls. Arghandewal responded that there are 1,625 registered
NGOs in Afghanistan and acknowledged that, of these, some are
actually for-profit entities and that the Ministry of Economy does
not monitor the operations of many. Observing that he has only been
in his position for 20 days and is therefore "starting from
scratch," he noted that capacity throughout the MOE is very low and
Ministry does not have enough capable staff or the appropriate
institutional mechanisms to monitor projects properly. A/S Cohen
stressed that the Ministry of Economy should play a key role moving
the Government in a direction that results in better supervision of
this important sector.

--------
COMMENT
--------

14. (SBU//NF) Assistant Secretary Cohen's visit sent a powerful
message on "increased vigilance" to the Afghan financial sector,
which many consider the country's most powerful business grouping.
While the Central Bank's financial supervision department has made
progress, serious concerns remain in the sector, in particular the
level of due diligence exercised by those banks transacting business
with domestic and international customers, which requires further
tightening at both the bank and financial regulator levels. It was
also clear from these meetings that the MOE needs to strengthen NGO
and charity oversight functions immediately.

EIKENBERRY

KABUL 00000711 003 OF 003


KPMG, PricewaterhouseCoopers, Ernst and Young, and Deloitte to
better understand their relationships with their parent companies
and other area audit firms. End Note)

--------------------------------------------- ------
AFGHAN UNITED BANK'S LINK TO THE NEW ANSARI NETWORK
--------------------------------------------- ------

12. (SBU//NF) A/S Cohen expressed particular concern that AUB is
part of the Ansari Financial Network, the hawala which is under
investigation by Afghan law enforcement. He asked how AUB is
protecting itself against the potential for illicit financial flows
associated with the New Ansari Hawala. CEO Mohammad Hassan
responded that "AUB is not involved with the hawala network nor
influenced in any way by New Ansari." However, when A/S Cohen asked
whether New Ansari Hawala had accounts with AUB, Hassan replied
affirmatively, stating that New Ansari Hawala and other licensed
money service providers have deposit accounts with AUB, but that
international money transfers are prohibited via AUB. AUB Chairman
Mohammad Jan explained that only eight years ago, all financial
transfers in Afghanistan were done through hawalas, but Afghans had
begun to use banks, adding that the Central Bank should "tax hawala
transfers" to encourage people to move money into banks (Ref B).
A/S Cohen noted that Treasury would like to encourage the banking
sector to expand and to assist in the broader efforts to bring the
regulation of hawalas in line with the regulation of the formal
financial sector. Stressing that hawalas are higher risk bank
customers, he said more enhanced procedures are needed, including
ongoing monitoring of hawala accounts. A/S Cohen encouraged AUB
officials to work closely with law enforcement and the Central Bank
to make sure they are in compliance with international law and best
practices. Hassan reiterated that AUB is cooperating and will
continue to do so.

--------------------------------------------- ----
STRENGTHENING MINISTRY OF ECONOMY'S NGO OVERSIGHT
--------------------------------------------- ----

12. (SBU//NF) A/S Cohen also met with Minister of Economy Abdul Hadi
Arghandewal to follow up on concerns regarding the Ministry of
Economy's (MOE) role in monitoring the Afghan NGO sector, as
charities are required to register with the MOE, which also has
responsibility for supervising the sector.

13. (SBU//NF) A/S Cohen emphasized that limited NGO oversight is a
serious vulnerability in Afghanistan, and noted that NGOs can be
manipulated by insurgent finance networks for fundraising in
jurisdictions with limited regulatory oversight or insufficient CFT
controls. Arghandewal responded that there are 1,625 registered
NGOs in Afghanistan and acknowledged that, of these, some are
actually for-profit entities and that the Ministry of Economy does
not monitor the operations of many. Observing that he has only been
in his position for 20 days and is therefore "starting from
scratch," he noted that capacity throughout the MOE is very low and
Ministry does not have enough capable staff or the appropriate
institutional mechanisms to monitor projects properly. A/S Cohen
stressed that the Ministry of Economy should play a key role moving
the Government in a direction that results in better supervision of
this important sector.

--------
COMMENT
--------

14. (SBU//NF) Assistant Secretary Cohen's visit sent a powerful
message on "increased vigilance" to the Afghan financial sector,
which many consider the country's most powerful business grouping.
While the Central Bank's financial supervision department has made
progress, serious concerns remain in the sector, in particular the
level of due diligence exercised by those banks transacting business
with domestic and international customers, which requires further
tightening at both the bank and financial regulator levels. It was
also clear from these meetings that the MOE needs to strengthen NGO
and charity oversight functions immediately.

EIKENBERRY

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