On August 10, a group of more than 70 international economists sent an open letter to U.S. President Joseph R. Biden Jr. and Treasury Secretary Janet Yellen urging the U.S. administration to promptly return more than $7 billion of Afghanistan’s foreign exchange reserves, held at the New York Federal Reserve Bank, to Afghanistan’s central bank (Da Afghanistan Bank; DAB). The letter followed similar pleas by U.N. officials and others. However, following the killing of al-Qaida leader Ayman al-Zawahiri in a U.S. drone strike in Kabul on July 31, the administration announced it will not release any of the reserves for recapitalization of DAB. The economists’ letter, though well-intentioned like other requests to return the reserves to DAB, does not take into account the very real constraints imposed by the U.S. legal system and judicial proceedings, as well as serious problems at DAB.

People wait in line to use an ATM machine at an Azizi Bank branch in Kabul, Afghanistan on Wednesday, Aug. 25, 2021. (Victor J. Blue/The New York Times)
People wait in line to use an ATM machine at an Azizi Bank branch in Kabul, Afghanistan on Wednesday, Aug. 25, 2021. (Victor J. Blue/The New York Times)

The concerns raised in the letter about Afghanistan’s dire economic situation and humanitarian crisis are valid. However, the letter betrays a lack of understanding of the legal issues surrounding Afghanistan’s foreign exchange reserves, specifically the long-standing Havlish civil case in federal court involving some families of 9/11 victims as plaintiffs. Moreover, both in its addressees and in its content, the letter does not appear to acknowledge that the United States is a country governed by the rule of law, with constitutional separation of powers between the executive, legislative and judicial branches. 

The Biden administration’s actions regarding the Afghan reserves can be questioned and debated, but that should be done in full awareness of the legal constraints and the options available within those limits. 

Legal Impediments

The broad scope of post-9/11 U.S. laws that allowed plaintiffs to sue numerous disparate defendants, including sovereign countries, for damages from acts of terrorism can be criticized. In the original Havlish suit, there were nearly 170 named defendants, including Iran, Iraq and Afghanistan, as well as numerous individuals and entities ranging far beyond the 9/11 hijackers, al-Qaida and its leaders, and the Taliban. Other named defendants were in locations from Somalia, the West Bank, the Bahamas, the Middle East, and the United States to Europe, as well as many with unknown addresses, plus 500 unnamed defendants (“John Does”). U.S. courts’ practice of awarding summary judgments (more than $7 billion in this case) if defendants — many of whom would have been taken into custody had they surfaced — don’t show up in court can seem unfair. But in the absence of major changes in the relevant laws, the administration had to act within these legal parameters. 

The New York federal district court’s summary judgment of 2012 held all defendants separately and wholly responsible for the full $7 billion of damages payable to the plaintiffs. After the Taliban’s August 2021 takeover, Afghanistan’s central bank reserves held at the New York Fed (coincidentally amounting to over $7 billion) were frozen by the U.S. Treasury. These reserves were quickly targeted by the plaintiffs to satisfy the judgment through a writ of attachment in September 2021, arguing that the reserves now belonged to the Taliban, and the court initiated procedures for them to obtain the assets. Hence, though the Biden administration faced difficult choices, doing nothing could have resulted in all of the reserves being turned over to 9/11 plaintiffs.

The Administration’s Response

The U.S. government, after several months of delay, declared a U.S. national emergency on account of the dire economic and humanitarian situation in Afghanistan. On that basis, its executive order asked the court to separate $3.5 billion of the reserves for the benefit of the Afghan people, while leaving the remaining more than $3.5 billion subject to the ongoing litigation. 

In its Statement of Interest (SOI) to the court, the Department of Justice (DOJ) did not take a position on the court case but presented careful legal reasoning that (1) the size of the summary judgment award was far too large since under the relevant law punitive damages (which accounted for most of the summary judgment award) are not applicable; (2) the amount remaining subject to litigation would be more than sufficient to satisfy the maximum allowable claim of the plaintiffs; (3) central bank assets have a special status under U.S. law which needs to be taken into account; (4) the U.S. government does not recognize the Taliban regime as the legitimate government of Afghanistan — a foreign policy decision squarely within the purview of the executive branch; and, therefore, (5) a court decision to turn over reserves to plaintiffs cannot be based on Taliban ownership of the reserves (implying recognition of the Taliban government by the court, contrary to the constitutional separation of powers).  

Alternative Options

Could the Biden administration have handled things differently? Yes, but other options also faced risks, pitfalls and trade-offs. There was no easy solution. An effort to simply return all the reserves to DAB (as recommended in the economists’ letter) likely would have been stayed by the court in view of the ongoing legal case. And attempting to turn over just the separated $3.5 billion to DAB under its current leadership could have strengthened the 9/11 plaintiffs’ case that the Taliban indeed are the owners of the reserves, which, therefore, are subject to the summary judgment. 

The administration could have taken a formal position in the court case, as laid out by the SOI’s legal reasoning, that none of the reserves should be turned over to the plaintiffs because the Taliban are not the recognized government of Afghanistan and hence the reserves do not belong to them. In addition to possible political blowback, this option would have tied up all the reserves for an indefinite period of time while the court case was being adjudicated and likely appealed by one side or the other. Perhaps the administration assessed that preserving half of the reserves for the Afghan people now was a better choice, which would still leave open the possibility that the remaining half would eventually become available for the Afghan people if the ultimate judicial decision reflected the DOJ’s legal reasoning.

A different constraint, not addressed in the economists’ letter, is that DAB, which had functioned reasonably well in the past, has lost most of its capacity and ability to manage the economy. During the final years of the pre-August 2021 Ghani administration, DAB was gravely weakened by politicized personnel changes and micromanagement, leading to the departure of many DAB managers and professionals. This flight of personnel accelerated, as in other agencies, after the Taliban takeover, leaving DAB with very limited capacity. DAB lacks strong technical and managerial leadership, and its current deputy governor is under U.S., U.N. and EU counterterrorism sanctions

Hence even with access to the foreign exchange reserves, DAB would be unable to effectively handle macroeconomic management, bank supervision, anti-money laundering oversight and other basic functions. Simply turning over the reserves to DAB would be far from sufficient to restore confidence in DAB, let alone revive the Afghan economy. Moreover, in the absence of major improvements and restoration in DAB as well as meaningful oversight, such an action could be harmful, for example if the reserves end up being used for non-central banking purposes, misused or rapidly dissipated.  

What Needs to Be Done Now

This all said, the urgency expressed in the economists’ letter is undeniable. Progress in the disposition of the $3.5 billion insulated from the court case appears to have been slow. The sense of urgency embodied in the highly unusual February presidential declaration of a U.S. national emergency on account of the dire economic and humanitarian situation in Afghanistan needs to be rekindled, with strong signals to this effect from the top. The administration should urgently prioritize putting in place the necessary financial engineering for this money (including a sound governance structure) and expeditiously moving the funds to a trust fund account that needs to be set up — planned to be located in Switzerland, according to news reports. The Taliban need not and should not be involved at all in this process. 

With credible oversight, limited amounts of the money could be deployed in appropriate ways that begin to build confidence in the Afghan economy and banking system, such as paying electricity bills from neighboring countries that supply most of Afghanistan’s grid power, covering the cost of printing new Afghani banknotes (reportedly underway), servicing debts to international financial institutions to remain current and eligible for future funding, and beginning to rebuild confidence in commercial banks.   

The DOJ also needs to follow closely the ongoing court proceedings around the other half of the central bank reserves and stand ready to intervene if decisions there contradict the legal reasoning in its SOI.

In parallel, international dialogue with DAB should continue and focus on essential measures to begin to restore its credibility and confidence in the institution. These measures most likely will need to include outside oversight and third-party monitoring in the short run, as well as meaningful capacity building. Given policy constraints affecting the U.S. government and the International Monetary Fund’s absence from the discussions, this work may best be orchestrated by another country that has a strong central bank and closer relations with the Taliban, along with engagement by the World Bank which was extensively involved in supporting macroeconomic management and the banking system pre-August 2021.

Finally, the Taliban themselves need to play a major role in restoring confidence in DAB as well as, more generally, in the Afghan economy. Building on positive aspects of their economic management over the past year, in addition to reaffirming DAB’s statutory autonomy, the Taliban should appoint a nonpolitical, qualified and experienced leadership team in DAB. Internal capacity rebuilding — especially by bringing back as many experienced professional, technical and managerial staff as possible — and external support and oversight, as needed for core DAB functions, will be essential.

Related Publications

Want more accountability for the Taliban? Give more money for human rights monitoring.

Want more accountability for the Taliban? Give more money for human rights monitoring.

Thursday, September 29, 2022

By: Belquis Ahmadi;  Scott Worden

Ahead of the U.N. General Assembly last week, U.N. Special Rapporteur on Human Rights in Afghanistan Richard Bennett released his first report grading the Taliban’s treatment of Afghans’ rights. It was an F. In the past year, the Taliban have engaged in a full-scale assault on Afghan’s human rights, denying women access to public life, dismantling human rights institutions, corrupting independent judicial processes, and engaging in extralegal measures to maintain control or to exact revenge for opposition to their rule. That is one of the main reasons — along with their continued support of al-Qaida and a refusal to form a more inclusive government — that Afghanistan has no representation at the U.N.

Type: Analysis and Commentary

Human RightsJustice, Security & Rule of Law

U.S. to Move Afghanistan’s Frozen Central Bank Reserves to New Swiss Fund

U.S. to Move Afghanistan’s Frozen Central Bank Reserves to New Swiss Fund

Wednesday, September 28, 2022

By: William Byrd, Ph.D.

For almost seven months, Afghan central bank reserves frozen by the United States and set aside to somehow help the Afghan people, have sat, immobilized. Now those funds — $3.5 billion — are at long last on the move. On September 14, the U.S. and Swiss governments unveiled the “Fund for the Afghan People” as a Geneva-based foundation with its account at the Bank for International Settlements. The Fund will preserve, protect and selectively disburse this money. With this major policy step accomplished, new questions arise: What do these developments mean, what are realistic expectations for the reserves, and what needs to happen next?

Type: Analysis and Commentary

Economics

View All Publications