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"Our government is weak and ineffective in comparison to other governments, we've just begun ... But the big corruption, the hundreds of millions of dollars of corruption, it was not Afghan. Now everybody knows that. It was foreign. ... The contracts, the subcontracts, the blind contracts given to people, money thrown around to buy loyalties, money thrown around to buy submissiveness of Afghan government officials, to policies and designs that the Afghans would not agree to. That was the major part of corruption..."
Hamid Karzai, 07 October 2013

Corruption

The magnitude and importance of Afghanistan’s opium economy are virtually unprecedented and unique in global experience — it has been roughly estimated as equivalent to 36% of licit (i.e. non-drug) GDP in 2004/05, or if drugs are also included in the denominator, 27% of total drug-inclusive GDP. The sheer size and illicit nature of the opium economy mean that not surprisingly, it infiltrates and seriously affects Afghanistan’s economy, state, society, and politics. It generates large amounts of effective demand in the economy, provides incomes and employment including in rural areas (even though most of the final “value” from Afghan opium accrues outside the country), and supports the balance of payments and indirectly (through Customs duties on drug-financed imports) government revenues.

The opium economy by all accounts is a massive source of corruption and undermines public institutions especially in (but not limited to) the security and justice sectors. There are worrying signs of infiltration by the drug industry into higher levels of government and into the emergent politics of the country. Thus it is widely considered to be one of the greatest threats to state-building, reconstruction, and development in Afghanistan.

Several factors did not bode well for the Karzai government's tenuous hold on power. The Karzai government was increasingly unpopular throughout the country, despite its attempts to build support with various giveaway programs, such as free seed distribution. It is widely seen as corrupt and having embraced the very warlords who pillaged the country in the lawless years preceding the Taliban and impotent in the face of rising terrorist violence.

"Transparent" is not an apt description of the general business culture of Afghanistan. Corruption and collusion between government and business is believed to be commonplace. Business is conducted based on personal, familial, ethnic and historical relationships, and businesses must negotiate a maze of bribes, taxes and murky government requirements that raise the risks and costs of doing business. Those businesses with the right connections are able to sidestep many of these costs and risks. They are also more successful in getting access to land and capital, two critical constraints in the business enabling environment of Afghanistan. However, for small businesses and potential new investors or entrepreneurs without political influence, there are significant and sometimes insurmountable barriers to entry.

Rural Afghans are extremely conservative and generally resistant to new ideas from the outside. The resistance seems to come from a combination of limited education, decades of isolation from modern advances, the necessity for extreme self-reliance to survive protracted periods of conflict, and the distrust, suspicion and presumption of corruption that permeates society after so many years of conflict.

Afghanistan is one of the poorest countries in the world, and the last few decades of war have seriously disrupted its mainly agricultural economy. The illicit opium trade is the one economic activity that not only survived, but flourished, during and after the war. Now it accounts for more than half of GDP and is said to involve corrupt government officials at every level. Tribal warlords control the poppy-growing areas, using the proceeds to fund their militias and arms purchases.

Some experts assert that the Afghan market and economy are actually highly regulated by informal social norms that restrict competition and participation and ultimately result in a consolidation of market benefits in the hands of the already wealthy and powerful. According to these experts, the major traders in today's market are the same ones who emerged in the 1970s and operated under the mujahideen and the Taliban, often from Pakistan. They are a relatively small group of businessmen who dominate the sectors in which they are involved, having access to capital and political influence that small and medium-sized businesses do not. Most deal in many commodities within their region of operation, e.g. carpets, dried fruits and nuts, televisions and fertilizers - depending on price and demand - allowing an exporter of carpets to import televisions to get his money back into the country.

" ... last February, ... Joseph R. Biden Jr., then a senator, sat down to a formal dinner at the palace during a visit here. Between platters of lamb and rice, Mr. Biden and two other American senators questioned Mr. Karzai about corruption in his government, which, by many estimates, is among the worst in the world. Mr. Karzai assured Mr. Biden and the other senators that there was no corruption at all and that, in any case, it was not his fault. The senators gaped in astonishment. After 45 minutes, Mr. Biden threw down his napkin and stood up. "This dinner is over," Mr. Biden announced, according to one of the people in the room at the time. And the three senators walked out, long before the appointed time. Today, of course, Mr. Biden is the vice president."

Afghan Leader Finds Himself Hero No More
It has been observed by these same experts that many of the traders operating today originally obtained their capital base through illicit activities, even though they may now be dealing mainly in licit commodities. Whatever they are involved with now, they must maintain good relationships with those involved in the illicit economy because they are often the ones who control the supply routes and transport systems.

The judicial branch is quite weak and regarded as corrupt. Property rights are a major constraint on business expansion. Land ownership is required as collateral for bank loans, and many people do not have title to the land they have occupied for generations. Other land has been appropriated by the military, police or government. Popular perception is that property rights are for sale by the government to insiders with influence. Thus acquiring land or the rights to use land for business purposes is regarded as a bureaucratic ordeal fraught with many risks, including that the government might grant title to land but then re-appropriate it after investments have been made. Whether this is actually a prevalent practice or not, the perception that it is seems to be a strong hindrance to new investments.

The war criminals of the post-Soviet period have gone unpunished; indeed, many of the worst offenders are now members of the current local, provincial or national administrations. This has angered the population, sowing mistrust and bitter disillusionment that yet another corrupt, predatory regime has replaced the last. The Afghan National Police is part of the problem; ill trained and badly paid, they are notorious for preying on the citizens they are supposed to protect. Security is a problem throughout the country, and getting worse in the east and southeast. Insurgents attack the population, government and international peacekeeping forces. The police are widely seen as incompetent and corrupt, allowing criminal behavior to increase and perpetrating a fair amount of it themselves. Police, like bandits, are said to stop trucks hauling produce to market and order them to pay "taxes" and bribes before they can continue.

The term “mobile money” is the use of cell phones to store currency, pay for goods, and receive and transfer funds. Because more than half of Afghan households own a mobile phone, U.S. agencies continued to encourage greater access to mobile money services as a way to spur economic growth and reduce corruption.

A material loss review was commissioned by USAID/Afghanistan and completed in May 2010 indicating that $850 million, or 94 percent of the value of the bank’s outstanding loans, had been fraudulently diverted to “insiders” connected with the bank. Kabul Bank’s controlling shareholders, key supervisors and managers led a sophisticated operation of fraudulent lending and embezzlement predominantly through a loan-book scheme. This resulted in Kabul Bank being deprived of approximately $935 million by 2010, funded mostly from customer’s deposits.

The loan-book scheme provided funds through proxy borrowers without repayment; fabricated company documents and financial statements; and used information technology systems that allowed Kabul Bank to maintain one set of financial records to satisfy regulators, and another to keep track of the real distribution of bank funds. Shareholders, related individuals and companies, and politically exposed people were the ultimate beneficiaries of this arrangement. Over 92 percent of Kabul Bank’s loan-book – or approximately $861 million – was for the benefit of 19 related parties (companies and individuals).

To improve accountability, in 2015 the MoD increased its internal collaboration on corruption investigations and inspections, which will help facilitate more and swifter prosecutions. The Attorney General’s Office (AGO) prosecuted and convicted multiple responsible officials at the ANA 203rd Corps, 207th Corps, and 209th Corps for dereliction of duty for failure to maintain proper fuel accountability.

As of 2015 a requisition from the RLSCs required between twelve and eighteen signatures before the Central Supply Depot can issue an item. Coalition advisors have routinely found that reported shortages in operational units are most often the result of failures in accounting and distribution rather than actual deficiencies. Common supply chain management complications include the loss of paper records, difficulty identifying specific needs for corps units, overflow of stocks at the Central Supply Depot, misplaced stock, and the theft or hoarding of items at the depots and in transit.

The independent Monitoring and Evaluation Committee, or MEC, in its half yearly report released in Kabul 25 February 2016 expressed its concern about the ability of members of President Ashraf Ghani’s national unity government, or NUG, to work together to effectively address issues related to corruption. Despite “small signs” of progress in the fight against corruption, Afghanistan’s official commitment to effectively address the problem is weakening, eroding public trust in the administration's ability to govern. "Despite campaign promises by both leaders to prioritize the fight against corruption, there are significant and increasing concerns about the ability of the National Unity Government (NUG) – after more than one year in power – to effectively address issues related to corruption, let alone other critical areas, such as security or employment."



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