Friday, August 15, 2008

Drug Financing, Money Laundering and Corruption Abound in Afghanistan

The Pakistani side of the climb up to the Khyber Pass.
Photo by James Molliso, Wikipedia Commons

Money Laundering Bulletin July/Aug 2008

After the US-led invasion in 2001 to overthrow the Taliban, Afghanistan took some important steps to curb money laundering and terrorist financing. The continued conflict, the profit that impoverished farmers can earn from poppy cultivation and entrenched corruption have, however, rendered these developments largely ineffectual, says Paul Cochrane.
In 2004, Afghanistan enacted anti-money laundering (AML) and counter terrorist financing (CTF) law, which also set the parameters for a Financial Investigation Unit (FIU). But instability, coupled with Afghanistan being the world’s top opium supplier, has stymied these measures. Corruption is wide spread, the government has minimal control over much of the country, and borders are porous despite attempts by NATO to better regulate entry points. In addition, there are concerns such as those aired by the International Crisis Group when it told the US House Foreign Affairs Committee last October that “Afghanistan is in danger of becoming a failed state, in part because it is in danger of becoming a narco-state.”
Following the installation of the Islamic Republic of Afghanistan led by President Hamid Karzai, the state was reorganized under a new constitution, and by 2003 the Central Bank, Da Afghanistan Bank (DAB), was re-establishing relations with the international community. New licences were issued to commercial banks (currently 15 foreign and Afghan banks), and by late 2004 an AML and CTF legislative framework had been adopted designed to meet the recommendations of the Financial Action Task Force (FATF).
In 2006, Afghanistan became a member of the Asia Pacific Group (APG), and has observer status in the Eurasian Group. According to the APG Secretariat, the APG will carry out a country evaluation in late 2009. The Central Bank is also to establish a Financial Services Tribunal to review certain decisions and orders of the DAB.
The country’s AML law addresses criminalization of ML and TF, customer due diligence, international cooperation, extradition, and the freezing and confiscation of funds in addition to cross-border currency reporting. Transactions and cash transactions equal or exceeding 1,000,000 Afghani (US$19,890) have to be declared to the FIU, a semi-autonomous unit within DAB established in 2005, which has the legal authority to freeze assets for up to seven days.
According to the US State Department’s March 2008 International Narcotics Control Strategy (INCS) Report, the FIU receives approximately 10,000 large cash transaction reports from financial institutions each month, up from the 4,000 reports received and processed per month in 2006.
The FIU has over 140,000 large transaction reports currently stored in its database that can be searched using a number of criteria, while institutions have to keep records for at least 10 years.
AML examinations have been conducted at all commercial Afghan and foreign banks, up from half assessed last year.
There is reportedly growing awareness of AML requirements in banks, bolstered through DAB’s work with the recently created Afghan Bankers Association (ABA). The ABA has drawn up a “know your customer” (KYC) form that has been adopted by the sector and is providing seminars on identifying suspicious transactions. According to the INCS report, seven suspicious transaction reports were received in 2007 by the FIU, one of which was referred to law enforcement for investigation.
But despite such moves, commercial banks are confined to major cities, resulting in Afghanis relying on money dealers and the hawala system, an alternative remittance system (ARS) popular throughout Asia, Africa and the Middle East. There are over 300 hawaladars in Kabul, with some 100-300 additional dealers in each of the country’s 34 provinces. Hawaladars are supposed to be licensed by the DAB, and from September 2006, a new ARS regulation system was introduced to replace former regulations. The DAB has issued approximately 100 licences in Kabul, and this year embarked on a scheme to register hawaladars in other major cities.
But as the INCS report notes, “Given how widely used the hawala system is in Afghanistan, financial crimes undoubtedly occur through these entities.”
And therein lies the nub of the problem in curbing ML and TF in Afghanistan. Not just better regulating hawaladars, but enforcement of AML and CTF legislation in the face of corruption and the narcotics trade.
“The Afghan AML documents looks good, but it’s going to be really tough to make a dent on the endemic corruption and opium trade that permeates the economy in addition to border issues,” said John Solomon, a Central Asia specialist at World-Check, a British company that runs an intelligence database on financial risk.
According to the April 2008, UNODC Illicit Drug Trend Report, Afghanistan accounts for 93 percent of the global annual output of opium, utilizing 4 percent of the country’s farmland and involving 14 percent of the population. Warlords and the Taliban benefit directly and indirectly from the trade, said Solomon, issuing an usher tax on opium production of up to 20 percent, 15 percent on processing at laboratories, and 15 percent on transport. Furthermore, with such large amounts of money involved, there is suspicion that the opium trade is linked with the upper strata of the political establishment as well as law enforcement agencies.
“The Anti Narcotics chief, or police chief, gets an official salary of US$60 a month, and to land a job like that there are bidding wars reaching as high as US$100,000 for a six-month appointment, so clearly there must be bribes involved, and related to the opium trade,” said Solomon.
He added that there was anecdotal evidence that drug money is being laundered through purchasing real estate in Kabul, particularly in the upmarket and “surprisingly expensive” area of Sherpa.
But for more extensive ML related to opium, observers say the money and drugs flow out of the Central Asian countries to the North of Afghanistan, through neighbours Pakistan and Iran, and also via Dubai. Solomon added that there were reports that Ariana Afghan Airlines is being used to smuggle drugs and money.
To counter cross-border movements of people, weapons, money and cash, the NATO-led International Security Assistance Force in collaboration with the Afghan and Pakistan intelligence services embarked this year on the first of six joint intelligence centres to be built on either side of the Durand Line. But with borders of 3,435 miles, curbing illegal crossings will prove difficult.
“Most of the border is not policed or regulated in anyway, and there are loads of smuggling routes so this initiative will not solve the problem,” said Solomon.

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