With a Taliban-controlled Afghanistan in the grips of a humanitarian catastrophe, one of the most disturbing findings from the US government’s Special Inspector General for Afghanistan Reconstruction (SIGAR) has been getting renewed attention both inside and outside Afghanistan.
As SIGAR reported in its August “lessons from twenty years of Afghanistan reconstruction,” an audit of 60 infrastructure projects built in Afghanistan with US funds found 91% of the cash had gone toward assets that were “unused or abandoned, were not used as intended, had deteriorated, were destroyed, or some combination of the above.” In effect, by spending money faster than it could be accounted for, “the U.S. government ultimately achieved the opposite of what it intended: it fuelled corruption, delegitimized the Afghan government, and increased insecurity”.
While SIGAR audits have played a key role in illustrating the scale of fraud in the aid sector over two decades of Western intervention in Afghanistan, another recent scandal – the collapse of Dubai-based impact investing firm Abraaj – has made clear that not even auditors can always be relied on to stop graft in humanitarian spending.
Instead, Abraaj’s formers auditors at KPMG are now the target of a $600 million lawsuit filed in Dubai earlier this month, in which two units of the now-liquidated firm allege the Big Four accounting firm “failed to maintain independence and an appropriate attitude of professional scepticism” towards the firm whose financial records they were supposed to be policing.
Unchecked aid facilitated the Taliban takeover
As Taliban fighters staged their lightning offensive across Afghanistan in August, one question roiled observers: how could the Afghan army, equipped with state-of-the-art American equipment and two decades of Western training, implode so quickly in the face of guerrilla fighters?
The answer, as SIGAR made clear over years of devasting reporting, is simple: corruption. A staggering percentage of US aid and investment in Afghanistan was misappropriated, with some money ending up directly in the pockets of those the Afghan army was fighting. By not enforcing its own mechanisms of accountability in regard to the money pouring into Afghanistan, the US lost control over spending that totalled nearly $89 billion in military aid and over $150 billion in non-military aid.
The resulting theft left the Afghan army and government in a much weaker position than their Western allies realized. Well before Western troops withdrew from the country, Afghan serviceman complained the billions spent in military assistance were not making it to the frontlines, where soldiers were left without enough food to eat or clothes to keep them warm in winter. The educational system – the most important pillar of the nation-building effort – was equally impacted, with phantom schools and teachers siphoning millions of dollars from government budgets and real teachers forced to pay nearly half a years’ salary in bribes to secure a job.
Even as SIGAR issued warnings about the dangers posed by corruption in Afghanistan, successive US administrations failed to take any serious action to address the misuse of aid and development funding. Only now does the plight of the Afghan people speak to the human toll of this unchecked graft.
But the mismanagement of reconstruction funds in Afghanistan is only the most dramatic example of a deeper problem in the development sector. Money intended for charitable purposes is easier to misappropriate than other kinds of investment, with lower standards of transparency and accountability in the international aid scene regularly giving rise to fraud.
The lack of accountability on the part of governments, international organisations, and NGOs has fed beliefs that private sector investors may be more efficient in doling out development spending, but as major examples of fraud in the private sector have shown, this “impact investing” is not necessarily more transparent. Now-defunct private equity fund Abraaj, for example, hoodwinked not only the US and several European governments but also the Bill & Melinda Gates Foundation, with Abraaj’s Pakistan-born CEO Arif Naqvi stealing hundreds of millions of dollars while claiming to fund humanitarian projects.
Promising his investors both financial and moral returns, Naqvi managed to attract billions in funding for Abraaj, which was meant to generate profit while also building hospitals in sub-Saharan Africa. Even as he was defrauding his funders, Naqvi was being hailed a hero by the likes of Bill Clinton and Prince Charles, and it was not until investors including the Gates Foundation, the World Bank, CDC Group, and Proparco Group questioned its spending patterns in 2017 that Abraaj’s irregularities came to light.
Unlike SIGAR, Abraaj’s auditors at KPMG Lower Gulf (an Emirates-based Middle Eastern arm of the global accounting and consulting firm) stand accused of complicity in the scheme, signing off on years of fraudulent accounting and ignoring serious conflicts of interest between the companies.
Those allegations lie at the heart of the new lawsuit against KPMG, which served as auditor to Abraaj for six years and allowed Abraaj executives such Ashish Dave to create a revolving door between the two entities. Dave, who was recently sentenced to pay a $1.7 million fine by Dubai’s Financial Services Authority, alternated between working as a CFO at Abraaj and as a partner at KPMG.
The need for an overhaul
Not that Abraaj is the only scandal to rock the accounting firm in emerging markets. KPMG was also forced to pay fines this year for its role in the misappropriation of funds from 1Malaysia Development Berhad (1MDB), a state-run development fund in Malaysia, and fired a number of executives from its South African division for failing to catch years of improprieties in their audits of firms owned by the Gupta family. Without serious changes in how KPMG and its Big Four competitors operate, similar scandals are sure to continue emerging.
Of course, despite these scandals, charitable investment still does immeasurable good. The billions that went into Afghanistan did improve the lives of millions of people over 20 years of US-led nation-building, and further aid will be crucial to avoid disaster now that the Taliban has taken over the country. Moving forward, however, charitable sectors clearly need to undertake an overhaul of how they hold themselves accountable; the lives of millions depend on it.