USAID OIG Afghanistan and Pakistan Oversight Report, April-June ...

In response to USAID/Afghanistan’s request, OIG conducted this review to determine what opportunitiesUSAID and contractor staff members had to learn of fraudulent activities at Kabul Bank through USAID’sEconomic Growth and Governance Initiative and its predecessor, the Economic Growth and Private SectorStrengthening Activity. The review also sought to determine how staff members learned of the fraud andwhat actions they took once they became aware of the fraud.The audit found that BearingPoint and Deloitte advisers who were embedded at DAB encounteredindications of fraud at Kabul Bank on a number of occasions over a span of 2 years before the run on KabulBank in early September 2010. However, they did not aggressively follow up on these indications. Also,Deloitte advisers did not report fraud indicators at Kabul Bank to USAID, and the mission did not have apolicy requiring contractors and grantees to report indications of fraud in host-government institutions orpossible problems that could reasonably be considered to be of foreign policy interest to USAID and the U.S.Government. OIG auditors also concluded that USAID/Afghanistan’s management of its task order withDeloitte was weak. If senior program managers and technical experts had been on staff at the mission,USAID would have had greater capacity to detect deficiencies in Deloitte's technical assistance activities, toquestion Deloitte advisers’ written and oral reports, and to delve more deeply into those reports, rather thanaccepting them at face value.In hindsight, Deloitte’s lead adviser acknowledged that Deloitte should have taken more aggressive actionsin November 2009, such as resuming participation by Deloitte’s advisers in onsite bank examinationsalongside the DAB examiners. This practice was suspended in November 2008 because an adviser receiveddeath threats. The lead adviser said that if Deloitte’s onsite assistance had restarted in November 2009, thefraud could have been detected earlier, and the magnitude of losses would have been smaller.Review of Cash Disbursement Practices Employed by Selected USAID/Afghanistan Contractors andGrantees (Report No. F-306-11-002-S, March 7, 2011)In late 2001, following decades of conflict, the financial and banking systems of Afghanistan weredevastated. Afghanistan had six licensed, state-owned commercial banks that were almost entirely based inKabul and, to a large extent, inactive. Besides lacking connectivity and reliable information on assets andliabilities, the banks did not follow generally accepted accounting standards. Vital functions of the centralbank were not defined or carried out, and Afghanistan lacked a credible, formal payment system. Lack ofconfidence in the banking system and uncertainties and difficulties faced by the population and the businesssector led them to rely almost exclusively on the hawala money transfer system, an informal network ofcash brokers who operate based on trust and reputation.OIG examined the cash disbursement practices of ten USAID contractors and grantees. Selected contractorsand grantees represented about 42 percent of USAID/Afghanistan’s total active awards ($3.4 billion) andincluded six of the mission’s program areas: infrastructure, democracy and governance, education, health,economic growth, and stabilization in support of the U.S. Government’s counterinsurgency strategy. Usingan OIG risk assessment of USAID/Afghanistan’s contractors and grantees, we evaluated internal controlsover cash disbursements, performed a walk-through of the process for cash voucher payment, reviewed ajudgmental sample of cash vouchers and supporting documents, identified areas for improvement, andnoted best practices employed.USAID OIG Afghanistan and Pakistan Oversight Report 75