By Stephen Grey/ From Reuters: Full Report

He is the former economics professor behind an upstart bank that rode the Greek boom to become a publicly listed heavyweight with a loan book of over 35 billion euros. She is his devoted wife, who oversees the bank’s sponsorship of museums and the arts, and advised it on corporate social responsibility.

Michalis Sallas, executive chairman of Piraeus Bank, Greece‘s fourth largest, and Sophia Staikou are a Greek power couple, symbols of the fast-growth years after the country joined the euro in 2001.

But an investigation of public documents, including financial statements and property records, shows the couple may also be emblematic of the lack of transparency and weak corporate governance that have fueled Greece’s financial problems.

Greek banks will soon be recapitalized with an estimated 30 billion to 50 billion euros, part of the country’s second bailout, backed by the International Monetary Fund and European taxpayers. Analysts estimate Piraeus will take about 3 billion to 3.5 billion euros.

Sallas was put in charge of Piraeus by the government 21 years ago, before the bank was privatized. He owns about 1.5 percent of the bank, whose stock price has plunged 97 percent since its peak in 2007.

But Sallas and his wife and his two children have also run a series of private investment companies that public records show have sealed millions of euros in real estate business with Piraeus, deals that were not disclosed to shareholders.

In wealthy locations in Athens and its suburbs and on at least one Greek island, these companies bought properties with loans from Piraeus and then rented at least seven of the buildings back to the bank, which used them as branches. Piraeus also bought properties from the companies and financed other buyers to buy properties from them.

Among the most unusual deals were transactions involving companies linked to Staikou, Sallas’ children Giorgos and Myrto, as well as key former Piraeus executives. These centered on the sale to Piraeus in April 2006 of three different properties, via three different private businessmen. According to property records, each of the businessmen bought a property for a knock-down price from the family companies and then sold them on to Piraeus for more than double that price. On paper, they generated a 160 percent total cash profit for the men, nearly 6 million euros, within the space of three weeks.

According to real estate and legal experts in Athens, a pattern of quick sales is often used in complex tax avoidance schemes. Such deals are legal if all taxes were paid. But one businessman named in the sales documents told Reuters his name had been used without his knowledge. He had “never owned property in Athens in my life,” he said.

Neither Piraeus nor Sallas would answer questions about the property deals, saying they were unable to do so because of an ongoing legal case against an ex-Piraeus employee. Matthew Saltmarsh, a UK-based spokesman for the bank, told Reuters that Greek banks had become “the most thoroughly audited financial institutions in the world,” and there was no reason to question Piraeus’ governance.

But property records show the deals linked to Sallas were opaque and raise questions about how cleanly the lines between his family and Piraeus Bank were drawn. They also provide a window into some of the often byzantine money-making schemes that characterized what one Athens real-estate agent calls the “crazy times” – the years between the stock market boom in 1999 and the crash in 2009, a span that included Greece’s entry into the Euro and its hosting of the 2004 Olympics.

“It’s nothing compared to what was happening back then,” a businessman who helped run one of the Sallas’ family companies said of the property deals. “It would be unfair to limit your research to Sallas and Piraeus. Everybody in the business knows that there are other banks that used similar tricks to do much worse things than buying and selling a bank branch.”

“This period of time was a crazy party for some.”

FULL ARTICLE

Here’s another REUTERS Special Report that I helped put together:

SINGAPORE (Reuters) – Just before noon on a sticky, overcast Saturday morning earlier this month a truck carrying two white containers waited at an electronic checkpoint to leave Singapore’s main port. The containers bore the bright red letters IRISL, the initials of Iran’s cargo line, which has been blacklisted by the United Nations, United States and European Union.

Anchored just off Singapore’s playground island of Sentosa that same day, the container ship Valili was also stacked high with IRISL boxes. A couple of miles to the east the Parmis, another container ship, also carried IRISL crates. Shipping movements data tracked by Reuters shows the Parmis had pulled into Singapore waters from the northern Chinese port of Tianjin early that morning.

The ships and containers are key parts in an international cat-and-mouse game, as Iran attempts to evade the trade sanctions tightening around it. Washington and European capitals want to stop or slow Iran’s nuclear program. They believe Iran Shipping Lines(IRISL), which moves nearly a third of Iran’s exports and imports and is central to the country’s trade, plays a critical role in evading sanctions designed to stop the movement of controlled weapons, missiles and nuclear technology to and from Iran.

IRISL would not comment for this story. Last June the company said in an interview that there was no evidence it had been involved in arms trafficking. Iran says its nuclear program is peaceful and that IRISL has no links with any weapons program. Tehran complained vigorously last June when the European Union followed the United States with beefed-up sanctions that banned new contracts with IRISL. A United Nations resolution forces all states to inspect IRISL’s cargo.

But many in the West hold up IRISL as exhibit A for Iran’s ability to evade sanctions because the shipping line regularly reflags its ships and changes their official owners.

An analysis of shipping data sheds new light on that deception. Using data from IHS Fairplay, a ship tracking group that uses ship registration documents from various sources, and Reuters Freight Fundamentals Database, which compiles location data from every ship’s Automatic Identification System, shows that despite the sanctions 130 of the 144 banned ships in IRISL’s fleet continue to call at many of the world’s major ports hidden behind a web of shell companies and diverse ownership.

Dozens of Iranian ships have used Singapore several hundred times in the past two years, for instance, as a stop-off on their way to other destinations such as China.

The data shows that in the 48 months before U.S. sanctions began in September 2008, IRISL made 345 changes to its fleet including names, the flags ships sailed under, operators, managers and registered owners. In the 40 months since sanctions began there have been at least 878, including 157 name changes, 94 changes of flag, 122 changes of operator, and 127 changes of registered ownership.

Hugh Griffiths, head of Countering Illicit Trafficking-Mechanism Assessment Projects at the Stockholm International Peace Research Institute, says what’s unique about those changes is their pace and scale. Normally a ship’s name or flag changes when its owner sells it after a decade or so.

“In the Iranian case, none of these apply because it’s not based on the normal commercial reasons you’d expect,” he said. “Nothing on this scale has ever been seen before in recent history.”

John Dalby, a former oil tanker captain and chief executive of Marine Risk Management, a global consultancy and maritime security company, agrees. “When you add name changes, flag changes, changes of operators and then changes of registered owners – especially if it is, to all intents and purposes, the same owner – it means they are trying to hide. Especially so many in such a relatively short space of time.”

NO DISGUISE

The Parmis and Valili operate under the flag not of Iran but of Barbados and Malta, respectively. On paper they are no longer part of IRISL, having both changed owners, operators and flag in the past couple of years. But a unique seven-figure “IMO number” issued to each known ship in the world for its entire lifespan reveals the identity of each ship as a sanctioned vessel ultimately owned by the Iranian cargo line. The brightly painted IRISL containers sitting on the ships’ decks add to the impression that the ships are still Iranian.

“They certainly don’t work too hard to disguise themselves here,” said the owner of a tanker management company in Singapore.

The Iranian government has a knack for survival. Sanctions may be hurting ordinary Iranians – grain ships to the Islamic republic have been diverted as Tehran struggled to find credit to finance its food supplies – but Tehran often figures out a way around such blockages.

As far back as late 2010, according to a report from a Middle Eastern intelligence agency, which was confirmed by European diplomats with access to their own intelligence, an Iranian committee boasted that the West had only discovered half of the shell companies and front individuals it used to hide its trading empire; the sanctions were seen as “harmless in Asian countries.”

A WEB OF OWNERS

When the Singapore checkpoint light turned green earlier this month, the truck driver turned onto an expressway and headed towards the crossing to Malaysia. Just shy of the border he turned into an industrial estate. Within 10 minutes another three trucks with IRISL containers had arrived.

In every port a ship visits, it needs someone on the ground to sort out its paperwork and organize its cargo. In Singapore that used to be done for Iranian vessels by IRISL’s regional office, Asia Marine Network, which was placed under financial sanctions by the United States in 2008.

A June 2011 indictment by the Manhattan District Attorney, Cyrus Vance, alleges that IRISL’s Singapore head, Alireza Ghezelayagh, and Singaporean businessman Cheong Kheng Guan tried to get round those sanctions, in particular a ban on any U.S. dollar transfers by IRISL.

The two men were among five people and 11 companies in three countries named in the 317-count indictment that charged IRISL and its agents with illegal use of banks in Manhattan. The companies were said to have “deceived Manhattan banks into processing more than $60 million worth of payments using aliases or corporate alter egos to hide their conduct.”

The indictment says that one of Cheong’s eight shipping agencies in Singapore, Sinose Maritime, entered into a joint venture with Iran’s Asia Marine Network. Sinose Maritime then became the exclusive agent for IRISL in the city-state, the indictment says. Cheong and Ghezelayagh also established a new company, Leading Maritime, just eight days after Asia Marine was placed under sanctions.

The Manhattan DA’s office, which declined to comment because its investigations are continuing, alleges that bank records it has obtained show that two of the Singapore companies, Sinose and Leading Maritime, channeled a total of around $41.8 million through the American financial system on behalf of IRISL.

The money moved in 120 different wire payments that the DA’s office claims went via the New York branches of HSBC, Bank of New York Mellon, Standard Chartered and Deutsche Bank, causing them to inadvertently breach their sanction obligations. None of those banks were said to have any knowledge of the IRISL connection and none have been charged by the DA’s office.

After Cheong’s indictment last June, he stood down as a director and shareholder from eight of the 10 companies he was listed as holding, according to the Singapore Accounting and Corporate Regulatory Authority registry.

But his companies and employees remained active, and there is evidence to indicate that not all ties to IRISL were severed.

One of Cheong’s former companies, Global Maritime Investments, is listed as the manager of a newly built ship called the Adelina. Commissioned by IRISL and completed in 2010, the Adelina, a container ship, obtained a Singapore flag last December. But Thomson Reuters-owned due-diligence database Accelus lists the “Group Beneficial Owner” of Adelina as Iran Shipping Lines. The latest data from ship consultancy Alphaliner also shows the Adelina is still operated by IRISL.

The Adelina last left Singapore on January 18. Reuters tracked the ship as it steamed up the Red Sea, through the Suez Canal and the Aegean Sea. After stopping at Istanbul it sailed to the Russian port of Novorossiysk on the Black Sea where it moored yesterday.

“TOO MUCH POLITICS”

The day before Cheong stepped down last June, Global Maritime got a new director: Danny Yau, also the director of a further six companies owned or directed by Cheong. As well as now running Global Maritime, Yau has set up a new shipping agency, Hardsea Agencies Pte Ltd. Sitting in his new office overlooking Singapore’s Tanjog Pagar port, Yau said Hardsea is a simple shipping agency, unattached to IRISL.

“Not directly, we don’t deal with them, we’re just agents for certain ships to carry cargo, general cargo,” he said when asked of his firm’s relationship with the Iranian line. “It doesn’t break UN rules or sanctions.”

Yau declined to elaborate when contacted later about Global Maritime Investments and the Adelina’s links to IRISL. “I don’t say anything; it’s too much politics,” he said.

Another of Cheong’s employees at Sinose Maritime, Ling Chong Yung, is listed as the director of Adelina’s official owner, Pride Shipping Oriental Pte. Reuters visited Ling at the offices of Damilang Maritime, a newly established shipping agency two streets away from Yau’s new office.

Office staff said Ling had left for China on a business trip the day before, but all inquiries related to Pride Shipping had to go through Yau at Hardsea Agencies, who they referred to as “the boss”.

Cheong, meanwhile, is still at work in the shipping business.

Visited at a drab office block on an industrial estate in the Buona Vista area of Singapore, Cheong declined to speak. He later responded to questions via email. He said none of the companies he is involved in do any work on behalf of IRISL. Sinose Maritime, he said, is in the course of being liquidated.

“In so far as the indictment against me is concerned, it is entirely unjustified. I have instructed solicitors in the U.S. to defend the case vigorously and to defeat the charges which are totally without any foundation,” he said.

HIGH COURT SHERIFF

Not everyone agrees with Washington’s claims that IRISL is still in charge of ships that visit Singapore. When Singapore’s High Court Sheriff seized three IRISL ships in September 2010 for failing to meet their credit arrangements, the court considered whether Singapore should, under UN sanctions, continue to hold the ships even after the payments were made.

The city-state is clear on its attitude to sanctions: it will implement those agreed on by the United Nations, but will not take any unilateral action or subscribe to those issued unilaterally by the United States or European Union.

The UN embargo orders IRISL assets be frozen, including those of “any person or entity acting on their behalf or at their direction, and to entities owned or controlled by them.”

But the judge in the 2010 case, Justice Quentin Loh, decided that the UN sanctions target specific IRISL entities such as IRISL Benelux, and not the three companies listed as the owners of the ships. He also ruled that even if UN sanctions did apply, they did not imply that commercial assets such as ships should be seized. Singapore released the vessels.

Loh concluded: “Links to IRISL itself are, by themselves, neither here nor there.”

Reuters Freight Fundamentals shows that Singapore has received at least 150 visits by 83 ships believed to be IRISL-linked over the past two years.

A spokesman for the Singapore Ministry of Foreign Affairs said that “Singapore enforces all United Nations Security Council (UNSC) sanctions against Iran. We do not enforce the unilateral sanctions by any jurisdiction which go beyond the UNSC sanctions. In this regard, Singapore understands that IRISL in itself is not a UN-designated entity.”

The foreign affairs spokesman said Cheong Kheng Guan “faces proceedings under U.S. law for engaging in business dealings with and having facilitated the activities of U.S.-designated entities. Based on what we know, there has been no violation of UNSC sanctions or Singapore law in this particular case.”

U.S. diplomatic sources privately say that they wish Singapore would take a harder line.

SUNNY MALTA, IRANIAN HIDEOUT

And it’s not just Singapore. Twenty three sanctioned Iranian ships have visited 12 EU ports since July 2010, when the EU imposed its own first sanctions on IRISL, including 96 stop-offs in Malta, 14 visits to Antwerp and 10 to Rotterdam.

As well, 48 Iran-linked ships sail under the flag of Malta and 12 under that of Cyprus.

In the Mediterranean island of Malta, authorities say trade with Iran has been declining steeply, with exports down to 144,996 euros ($191,000) in 2010 from more than 2 million euros in 2008 and 2009. Joseph Cole, the chairman of the Maltese sanctions monitoring board, said a contract between IRISL and Malta Freeport will not expire until November 2013, but an intensive program of customs inspections had already driven the shipping line away.

“We have made it so difficult for IRISL ships that they have reduced their operation to Malta to almost nil – even though technically they can still come,” said Cole.

Movement data for IRISL’s fleet, however, show that 18 ships have visited Malta’s Freeport over the last two years, three of them as recently as November.

IRISL containers could be seen stacked on the concrete yards of the Freeport last week. Despite being a member of the European Union, Malta not only supplies flagging services to IRISL ships, but is also home to 24 shell companies that help conceal Iran’s ownership of vessels.

In the Grand Harbour of Malta, below the sandstone ramparts of the capital Valletta, a grey-painted building houses Transport Malta. The agency earns around 300,000 euros annually from registering IRISL ships, according to an estimate by Reuters based on a table of tariffs on the agency’s website. It declined to comment, citing commercial sensitivity.

It is also home to the country’s public shipping register where – recorded in longhand in large paper volumes – is the paper trail of Iran’s shell games, as well as evidence of those who have worked for the country.

As sanctions have tightened, the Maltese register shows, Iran’s ships have regularly switched not just flags, but names, registered owners, registered agents, and the addresses of owners and agents. The Alva, for instance, a 66,500-deadweight tonnes (DWT) container vessel, has had three different owners since it was built in Germany in 2008 and acquired by IRISL that year. It originally flew a German flag. IRISL switched that to a Maltese flag, then back to a German one in 2010, then again to Maltese last year.

READY TO SACRIFICE

Most Maltese lawyers and agents now refuse to act for IRISL. Not only are new commercial contracts with the Iranian line banned under EU sanctions, existing ties have been scrapped by most agents to avoid damage to their reputation, according to two Maltese lawyers. That has pushed most business into the hands of a small Maltese outfit, the Royal-Med Shipping Agency, which has an office on the sea front in the tourist resort of Sliema. The agency is now under direct U.S. sanctions as an alleged cover operation for IRISL.

The Royal-Med agency’s steel shutters were drawn shut one day last week. A phone call later to Royal-Med’s listed number was answered by an employee who said the agency “was in the process of closing down. We have no activity.”

The employee, who declined to give his name, said Royal-Med had previously acted as agents at the Freeport for IRISL and then for HDS Lines, a company named by the U.S. government and the EU as a subsidiary of IRISL. He said HDS had decided to end visits to the island last November, leaving Royal-Med with no business.

Dr Tonio Borg, Malta’s foreign minister, says IRISL has such a large Maltese fleet because the country has such a large shipping register. Malta’s role as Europe’s biggest registry was not the result of lax regulation. “We see it as a flag of confidence, not of convenience,” he said.

Asked about Malta’s connections to IRISL, he revealed that Malta was prepared to de-register Iran’s entire sanctioned fleet. “We’re moving in that direction,” he said. But Iran should not be allowed simply to relocate its ships to other European countries, he said.

“We believe that all services to IRISL should be prohibited,” said Borg. “We are ready to make that sacrifice – provided that all countries also make the sacrifice� Otherwise it would be masochistic.”

(Rachel Armstrong reported from Singapore, Stephen Grey from London and Valletta, and Himanshu Ojha from New York; with additional reporting by Jonathan Saul and Philip Baillie in London, Christopher Scicluna in Malta, and Mitra Amiri in Tehran; writing by Stephen Grey; edited by Simon Robinson and Sara Ledwith)

A REUTERS special report

By Stephen Grey    ATHENS | Thu Jan 12, 2012

ATHENS (Reuters)- With the money tight all over Europe, one high-flying Greek businessman allegedly found a novel way of getting easy credit: two years ago he bought a controlling share in a bank, installed his own managers and then loaned himself and his associates nearly 600 million euros ($760 million).

Greek prosecutors allege Lavrentis Lavrentiadis, 39, turned the country’s Proton Bank, which has since been nationalized, into what one Athens newspaper called a “bank of cronies.” Lavrentiadis, who vigorously denies the allegations and has accused the authorities of acting illegally, has been called to appear before public prosecutor Ioannis Dragatsis at an Athens court next week. He is formally under investigation over accusations of fraud, embezzlement and corruption, but has not been charged.

An audit by the Bank of Greece, which regulates the industry, found that more than 40 percent of Proton’s commercial loans in 2010 were made to companies related to Lavrentiadis. The report says this was part of a “misuse of the basic principles of lending and assurance.”

A separate investigation, signed by a senior prosecutor who heads the country’s money laundering authority, found that Lavrentiadis – once hailed as the rising star of Greek business and known as a leading patron of the arts – had with others “formed a criminal team” that embezzled up to 51 million euros from the bank. It alleged loans made to dormant companies had been wired from Proton to another bank, the Piraeus Bank, and then withdrawn by an employee in bags of cash.

“In every case the leading figure of the team was Lavrentis Lavrentiadis, president of the board and major shareholder in Proton Bank,” says the confidential report by Greece’s Financial Intelligence Unit (FIU), seen by Reuters. The bank’s management “developed continuous, intense and to a great extent criminal activity which led to the deception of depositors.” The bank used “unusually high interest as a bait” to draw savers in, it stated.

The secret report was completed on July 27 last year, but its full findings have not been disclosed until now.

The detailed revelation of alleged mismanagement at Proton Bank comes just as cash-strapped Greek banks are seeking fresh support from the European Central Bank and the Greek central bank to maintain their liquidity.

The allegations against Lavrentiadis would be astonishing in normal times. But Proton’s alleged largesse occurred at a time when Greece’s financial system was supposed to be under Europe’s microscope.

Greek officials believe the bank issued more than 664 million euros of new loans to companies related to Lavrentiadis in 2010. At the time, the country’s banks were beginning to grapple with a debt crisis that was to threaten the very existence of the euro zone. Heavily loaded with Greek government bonds and shaken by a deepening recession, they have scrambled for cash, sold subsidiaries or merged in a desperate bid to ride out the tsunami sweeping the Greek economy.

“You can think of this country as a large murky lake,” said Tasos Telloglou, a TV presenter and senior journalist for the Greek newspaper Kathimerini. “In there are buried lots of old cars and junk and even some bodies. Now the water is receding, you can see what’s been hidden for so long.”

Despite its detailed audit, the Bank of Greece and stock market regulators have come under fire from analysts who say the authorities should have acted earlier, taken a closer look at Lavrentiadis’s 2009 takeover of Proton and followed the subsequent loan flows more rigorously.

But the Bank of Greece denies inaction, saying it “took the appropriate actions to deal with these problems” and the “matter is now under investigation by the Greek judicial authorities.”

Panagiotis Nikoloudis, vice prosecutor general of the Greek Supreme Court and chairman of the Finance Intelligence Unit, a watchdog responsible for investigating financial crimes, says the alleged fraud was exposed when he and his team stepped in last July. Nikoloudis would not say what prompted their inquiry. But if his team had not acted, it would have had “consequences beyond my wildest fears,” he told Reuters in his first public comment on the case.

Another senior investigator said the scale of the fraud would if proven be the “biggest case in 20 years” in Greece.

Lavrentiadis repaid 51 million euros to Proton last September after his assets in Greece were frozen and a criminal probe launched. He became the first person to invoke a 2011 Greek law that gives immunity from prosecution to suspected criminals who return the proceeds of crime. In a letter to prosecutors he admitted no guilt, saying he paid the money because of a “dire need to protect my business activities abroad, and my moral obligation to disengage my honest and valuable associates from negative consequences” of a legal dispute.

He adamantly denies wrongdoing. “Never did I or my companies move any sums of money whose provenance is either dubitable or not absolutely transparent,” he said in statements to prosecutors.

Contacted by Reuters, he said he could not comment in detail but that he totally rejected “all and every one of these false accusations against me. I will take every step possible to defend my reputation and the reputation of those who have worked with me.”

A FAR-REACHING EMPIRE

In a meteoric career, Lavrentiadis used family wealth and his own ambition to build one of Greece’s fastest-growing business empires. He took over his father’s company Neochimiki, a supplier of raw chemicals across southeast Europe, when he was just 18, and expanded the firm aggressively with a spate of acquisitions. In 2003 he floated it on the Athens stock exchange.

Ernst and Young named Lavrentiadis Greek Entrepreneur of the year in 2007. That year he founded a new pharmaceutical company, Alapis SA, which grew so quickly that within months it was one of the 20 biggest on the Athens stock exchange, measured by capitalization.

Lavrentiadis has invested in Greek media firms and the country’s most famous football club, Olympiacos. He also founded a private equity fund, Lamda Partners, based in London and Guernsey, and in 2009 endowed a research chair at the influential Washington think tank the Center for Strategic and International Studies.

The FIU’s Nikoloudis described him as man whose reputation was a “paradigm of entrepreneurship … not just in Greece but internationally.”

Lavrentiadis moved into banking in December 2009 when he took a controlling 31 percent share in Proton Bank, enough to become chairman and appoint key executives. In the same month, he also registered a new bank in Liechtenstein, the Lamda Private Bank.

Despite Greece’s growing debt crisis, he was bullish in his new venture. He told newspaper Ethnos in April 2010: “It is very important, especially during these difficult times, to have an investment bank in Greece, to be able to deal with the part of problematic businesses and help them stand on their feet again. We have great expertise in this field, because we have effected more than 100 acquisitions and we have excellent relations with international markets.”

Asked about the secret of his success, he said: “I never chased after the money, but success itself, because it was a personal bet of mine.”

But the Bank of Greece, in an emailed statement to Reuters, said it had “spotted incipient problems in Proton in 2010″ and had early that year put the bank under “enhanced supervision,” which included on-the-spot inspections, talks with external auditors, a veto of proposed directors, and fines.

The central bank says the “sharp increase of new loans” in June 2010 triggered concern, and it “immediately undertook an on-site inspection.” This led to Proton having to find more capital and pay an unspecified fine. The bank was also told that from September 2010 it needed to “reduce its reliance” on cheap liquidity financing that had been provided in response to the crisis by the European Central Bank (ECB) and national central banks in Greece and Ireland.

“Since early 2010 an increasing part of the bank’s funding came from the ECB,” said the statement. “According to the framework of the Eurosystem, any eligible counterparty can obtain refinancing through the monetary policy operations of the Eurosystem against adequate eligible collateral.”

By July 2011, the Bank of Greece said it had determined that companies that had borrowed money and were connected to Lavrentiadis “may have been engaged in questionable transactions which also involved the bank, possibly with the aim of money-laundering.”

A report was filed with the FIU on July 6, 2011 whose own conclusions, delivered 21 days later, proved to be a mortal blow to Proton.

Signed by Nikoloudis, the FIU report lays out grounds for ordering the seizure of assets belonging to Lavrentiadis and seven associates, accusing them of appropriating 51 million euros either through fraud or embezzlement. They were, it said, “acting with common intention and taking advantage of their position in Proton Bank” with the aim of committing “more felony offences” against Proton and, essentially, against the rest of the shareholders and depositors.

The report focused on a series of loans, including to companies that were in liquidation and effectively dormant. The money those firms received from Proton Bank was transferred to accounts at another Greek bank, the Piraeus Bank, and then withdrawn in cash by an employee of Lavrentiadis’s pharmaceutical firm Alapis, between June and November 2010. The FIU says the employee, Dionysis Bitharis, is not under investigation. Bitharis declined to comment.

“In my expert report I said that this person (Lavrentiadis) has appropriated 51 million euros of bank assets,” Nikoloudis said in an interview with Reuters in his office overlooking Athens. “At the bank a specific person named in my report got the money in bags. He was an errand boy.”

Nikoloudis believes the loans were made because after becoming Proton chairman, Lavrentiadis put his “own people in the bank and decided what was going on. He made a decision to give loans to companies with no collateral. Sometimes this money went to offshore companies, sometimes to his own interests.”

Nikoloudis said that because Lavrentiadis had returned the 51 million euros, further investigations were halted and “there can no longer be a prosecution and, as far as this 50 million is concerned, there is no longer a crime.”

“UNUSUAL TRANSACTIONS”

Even if that’s true – some prosecutors believe there may still be a case over the 51 million euros – Lavrentiadis faces other problems. Another investigation is now focusing on allegations in the Bank of Greece audit that was completed last August. That report describes much larger sums of money being mishandled. “If this case was closed then he wouldn’t be appearing before prosecutors and facing the consequences,” said the senior government investigator. “The 51 million euros is just a tiny part of it.”

The most serious accusations relate to what central bank auditors describe as a “big number of unusual transactions” of which “no reports about suspicious or unusual dealing was given to bank directors or competent authority.”

The report adds: “The frequent transfer of shares of offshore companies or companies with anonymous shares which can lead to inability to locate the true beneficiary is an activity that may denote money laundering.”

Among the loans queried in the Bank of Greece report are:

* A 54 million euro loan on September 20, 2010 to a newly founded company, Fineglino Trading Ltd, in order to buy shares in a separate company majority-owned by Lavrentiadis, the proceeds of which were then transferred to his private bank account and on to a private bank in Zurich. This was illegal, say the auditors, because Lavrentiadis was “the main shareholder, both of the bank and of the borrowers being approved.” Fineglino could not be reached for comment.

* Multiple loans issued to offshore companies before Proton had determined who they were owned by – in some cases within days of a company’s formation – and without any attempt to obtain proof of why the companies needed the money, for example by obtaining receipts or contracts.

But the auditors’ biggest concern is over loans issued to the pharma firm Alapis, in which Lavrentiadis in 2010 had a 21 percent stake. The report says Proton not only loaned cash to Alapis directly but also poured more than 500 million euros into a project to create subsidiaries and sell these spin-offs back to Lavrentiadis’s friends and associates.

The audit report says those associates, which it describes as a “group of connected clients,” were loaned cash by Proton to buy the subsidiaries despite the fact the borrowers offered little by way of collateral. Most of the loans took place over three days in June 2010; many were issued to shell companies that had been set up a few days earlier. Interest on the loans was paid by Alapis or by Lavrentiadis himself, the audit report said, supporting the auditors’ conclusion that the companies “are still under the control of Lavrentis Lavrientadis.”

In all, after taking over Proton in December 2009, loans to companies that the audit report claims were linked to Lavrentiadis rose by 598 million euros to reach 854 million by March 31, 2011. This represented more than 43 percent of the bank’s 1.9 billion euro commercial loan book. Against these loans, just 54 million euros was obtained in collateral. The total provision for bad debt was zero, allege the auditors.

The senior government investigator said: “Because he exhausted the ceiling of loans he could get for Alapis, he conceived a plan to get loans for Alapis by circumventing regulations of the Bank of Greece.

“How did he do this? He recruited people to which he transferred activities of Alapis, a large majority of which were not making a profit. He sold these off to people; they bought them with loans from his bank. He circumvented regulations … by breaking companies into smaller ones. The regulation is there so that one creditor cannot bring down the bank.”

Trifonas Kolintzas, who was appointed as chief executive officer of Proton under Lavrentiadis, denied issuing any improper loans. While the Bank of Greece says Proton’s credit expansion was “mainly financed” by increased deposits, Kolintzas said it was not.

In a statement to prosecutors, he said: “The most important thing is that the money was not withdrawn from the Bank’s reserves, i.e. from individual deposits but on the contrary, almost entirely, it was obtained from the European Central Bank and indeed with the low interest of 1 percent.”

After his alleged loans spree, Lavrentiadis apparently began moving his interests abroad. According to the Bank of Greece report, from December 2010 Lavrentiadis “seems to have effected a liquidation and de-investment of the quasi-total of his interior business activities.”

In February last year, Lavrentiadis also began selling his shares in Proton, cutting his stake to 15 percent from 31 percent by the end of March, according to public filings. In February, the company announced that the former U.S. ambassador to Greece, Daniel Speckhard, would take over as chairman. Neither Speckhard nor Alapis, whose market capitalization has tumbled from 4.2 billion euros in 2007 to 1.3 million euros, responded to requests for comment.

STRONG DENIALS

Lavrentiadis and his lawyers have consistently refused to comment in detail on the allegations against him.

But in a response filed with prosecutors and reviewed by Reuters, Lavrentiadis says the FIU’s order to freeze his bank accounts was illegal and inaccurate. Of the 51 million euros allegedly embezzled, “only a small part” came from loans from Proton, while the rest came from loans from other banks, he said. It was unclear, he added, how the “alleged embezzled sums” could add up to 51 million euros. Lavrentiadis says the transactions the FIU and the Bank of Greece identified were part of normal business and were all loans that carried an obligation of repayment, so there was no question of money being embezzled or diverted.

He rejects the claims by the Bank of Greece that he was connected to many of the “linked companies” that received loans from Proton and argues that he was not even involved with Proton’s detailed decision-making. Although he chaired the bank’s board of directors and held 31 percent of shares, his function was as a “non-executive,” he wrote. And although he held 21 percent of Alapis in 2010, he said he “was not a controlling shareholder of this company nor did I control nor did I participate in its daily commercial and transactional activities.” Of the nearly 700 million euros of new loans issued to companies allegedly connected to him, all of the money went either to re-finance other loans or to pay outstanding costs, he also argues.

All of his dealings mentioned in the FIU audit were “absolutely valid, legal, real and can be proved by contracts and documentation,” he said.

ARTHRITIS AND NATIONALISATION

Proton Bank was nationalized last October and renamed the New Proton Bank after some details of the suspect loans emerged in Athens newspapers.

While depositors were protected, investors in the original bank were left with nothing, according to Michael Markoulakos, who represents some of Proton’s other former shareholders.

“In one year Lavrentiadis robbed the whole bank because he didn’t have cash flow in his own business,” Markoulakos said. The New Proton Bank declined to comment on the investigations. Administrators of a separate “bad bank,” handling the former bank’s bad debts, also did not return messages requesting comment.

Lavrentiadis, who is suing the Bank of Greece for nationalizing Proton, has long battled rheumatoid arthritis. The illness has left his hands partially paralyzed and Lavrentiadis a believer in faith healing. He has given generously to the Greek Orthodox Church and charitable causes, especially the arts.

“If you ask me, one day I’d like to be able to reduce the time I spend at work and take up creating art,” he told Ethnos newspaper. “I believe it is like ‘oxygen’, particularly to those who are engaged in business.”

(With reporting by Dina Kyriakidou and Lefteris Papadimas in Athens, Mark Hosenball in Washington, Martin de Sa’Pinto in Zurich and Paul Carrel in Frankfurt; editing by Simon Robinson and Sara Ledwith)

Well, it looks like after years and years of working as an independent freelance, I’m off to join Reuters as a special correspondent, which is a roving role within Europe and the Middle East as part of a wider global enterprise team. It’s an exciting time to join the organisation as they’ve decided to give a real boost to long-form explanatory and investigative work. Serious journlism, in other words, of the sort that is often in short supply. Details announced today in Press Gazette. I’ll start there in December.

While getting rather bored in London, I glanced through some old emails of mine and found this to friends of a trip to Karachi, in Pakistan, dated 16 May 2000. So i publish it here for the sake of amusement> it shows even when you discover almost nothing, the act of searching can be quite interesting.

It was the machine gun that rather betrayed his profession.  It was hanging from his shoulder down to his knees and he strode into my room at the Sheraton. Quite disconcertingly, he was also carrying a bouquet of roses and lilies. The note attached said: “With best wishes from Mr Shakeel”.

For those not familiar with Asian criminals, Chota Shakeel is the brother of what Indian papers like to call the “dreaded” or “notorious” gangster Dawood Ibrahim: the arch criminal master said to be in league with Pakistan intelligence in spreading all kinds of dastardly terror across the sub-continent, including hijacking a jet from Nepal and blowing up the Bombay stock exchange a few years ago and killing a large number of people.

Shakeel too has his own reputation. He is an “arch gangster and henchman”: blamed for almost every big explosion and murder in his hometown of Bombay.

Last week, I tracked down Shakeel’s people in Karachi with the help of a mobile phone number provided by the Delhi Police’s phone-tapping department. The same crew of line listeners, by following other Shakeel cronies, had exposed the involvement of Hansie Cronje, the South African cricket captain, in match-fixing. Dawood Ibrahim and Shakeel were supposed to be the Mr Bigs in the affair.

If Mr Shakeel is a gangster, then he is at least is a very friendly one. So friendly that it was difficult, once he was contacted, to refuse his generosity. His pressman, ambassador, or whoever it was that answered the phone introduced himself as “Osman”. And Osman announced: “You are our guests in Karachi. Whatever you want, we will provide. DO NOT be shy!”

As it was I was extremely shy. Osman had arrived bearing gifts: not just the flowers but two boxes, which when  opened later, contained what appeared to be gold jewellery and an expensive, if grossly tacky, watch. I tried desperately to hand these gifts back.

“No, no. Mr Shakeel would be very offended if you gave those back,” insisted Mr Osman. That was before he started offering to move me into a guest house, offered me women (“They can arrive here at our table  in minutes”), something to drink (alcohol is banned in Pakistan), or something to smoke (what could he have meant, I do not know).

Later, as my translater was trying to argue to hand back his presents. Osman told him, rather ominously, in Urdu: “Look, we have our way of showing our respect to people. And we have our way of taking up that respect.” Osman and his companion, a Gujerati who spoke little English, started laughing.

My aim had been to arrange a chat on the phone with Ibrahim Dawood. From where-ever he might be hiding. That proved difficult. But at least I could get to find out what gangsters were like.

-  “Are we the sort of Dons you expected? We are not ordinary gangsters, are we?” said Osman, a 45-year-old balding man dressed in a white shalwah-kameez and black slippers, and with rather penetrating black eyes.

One of the tallest Indians I’ve met. I protest I have not been out with that many gangsters. “I’m not sure what the average gangster is actually like,”I said.

As we sat in the Sheraton bar, sipping lime and soda,  Osman became very frank about his gang. Yes they had killed some people in Bombay recently in retaliation to Muslims that were killed by the police in ‘encounters’. “We take things very personally. You know, when they do things to our people, we have to retaliate.”

- What about the bombing of the Bombay stock exchange. Did you do that?

- Well our community was under attack in riots: our women were being raped and menfolk taken and hanged. So we did this bomb. We had to do something.

We are not terrorists, so it gave us no pleasure.

- So you regret it?

- Whatever we did, we did for the Muslims of India.

Osman stood up and took us to his car, a Saab. We were off on an air-conditioned gangsta’ tour of Karachi, a troubled city of 12 million people which also has its share of home-grown talent in this department.

On the way we passed the white fortress, complete with high wall, block houses and machine gun slits, that passes for the Karachi home of the ousted premier Benazir Bhutto. Then on to the long tree-lined avenue where police lay in wait and gunned down her brother in what is known locally as an ‘encounter’, a cross between an execution and a police identity check.

Bhutto’s husband, Asif Zardari, has been languishing in jail for some time accused of being behind the brother’s murder by the police. Osman explained that the origin of the alleged execution was a  marital tiff between Benazir and Asif. The brother, who came to the rescue, was the unfortunate victim.

Finally, we went to one of Karachi’s biggest architectural highlights, the Masjid-e-Tooba, the Tooba mosque, which is a 90 metre diametre perfect dome with a mirror ceiling. The place was closed, so the faithful were praying outside. But Osman had little problem opening the place up and ushering us inside.. The  acoustics are incredible,  turning the tiniest whisper into an echo. It probably helped that we were the only ones inside.

Driving back, we stopped at a barbeque and I was handed a chicken tikka roll. It seemed the wrong time to discuss vegetarianism. Well, in fact, I had brought it up earlier. But the comments were ignored. “Chicket tikka is the best speciality of Karachi,” said Osman. I said it was actually the national dish of Great Britain, but he was not convinced.

Osman and his companion, were beginning to reminisce about Bombay. When we first me, Osman had denied coming from India at all. Now, he admitted to fleeing at the same times as Ibrahim and Shakeel in the late 80s, when they faced imminent arrest.

He started protesting about the climate.  “You know there is no real weather here in Karachi. It is always the same, just a bit hot and humid.

Any weather they  do have is just second hand.”. Later he added: “We do miss our cities you know, our Bombay. There it rains for four months on end. That’s real weather.”

Osman says that he,, like Shakeel and Ibrahim, would love to return if only the Indian government would cut some kind of deal on the charges they would face. “It is our home, you know, our motherland.”

The poor things are such a long way from home. A gangters’ lot is, not always, a happy one.

FIRST PUBLISHED ON THE BBC WEBSITE – SEPTEMBER 20th 2011

By Stephen Grey File on 4, BBC Radio 4

Technology was used to monitor the conversations of pro-democracy activists, evidence suggests

A UK firm offered to supply “cyber-spy” software used by Egypt to target activists, the BBC has learned.

Documents found in the headquarters of the country’s security service suggest it was used for a five-month trial period at the end of last year.

Hampshire-based Gamma International UK denies actually supplying the program, which infects computers with a virus that bugs online voice calls and email.

The foreign secretary says he will “critically” examine export controls.

William Hague, who speaks for the government on computer security issues, said: “Any export of goods that could be used for internal repression is something we would want to stop.”

He also admitted the law governing software exports was a grey area.

Egyptians searched through secret police files after storming the building

The documents seen by the BBC were found at the looted headquarters of the Egyptian state security building earlier this year.

They describe an offer by Gamma International UK Ltd to supply a software programme called Finfisher.

Finfisher is described as a toolkit “used by many global security and intelligence services” for secretly gaining access to people’s computers.

The files from the Egyptian secret police’s Electronic Penetration Division described Gamma’s product as “the only security system in the world” capable of bugging Skype phone conversations on the internet.

They detail a five-month trial by the Egyptian secret police which found the product had “proved to be an efficient electronic system for penetrating secure systems [which] accesses email boxes of Hotmail, Yahoo and Gmail networks”.

Another document discovered by German public television network MDR is thought to reveal the first-known victims of the Finfisher program.

The document describes how, during the period of the software trial, the secret police successfully broke into and recorded encrypted Skype calls.

Sherif Mansour, from the US democracy group Freedom House, was in Egypt last year to help monitor parliamentary elections.

‘Outsourcing repression’

Named in the document as a victim of the bugging, he blamed the Finfisher software and urged the British government to take action.

“We democracy and human rights activists already face a lot of troubles and get a lot of threats. I expect that from government but not from software companies.

“We have never looked to them to [be] enabling repression, to outsourcing repression.”

According to the Department for Business Innovation and Skills, Finfisher does not require an export licence because it does not use encryption.

Mr Hague told File on 4 that the UK had a strong export licence system.

He said a number of licences had been withdrawn from companies exporting items of concern to Libya, Tunisia and Bahrain – but he conceded software was a difficult product to legislate for.

“This will be a greyer area because there can be many many uses for a given piece of software.

“But nevertheless, we will look at that critically and if any evidence is supplied to the government – or we come across any evidence of British technology used for internal repression in other countries – then we will take the same very tough line on that as we do on other items.”

Gamma International UK Ltd is owned by a 49-year-old Briton, Louthean Nelson, who is listed as having addresses in Salisbury, Hamburg and Beirut.

The BBC wanted to ask Mr Nelson about the contradiction between Gamma’s claim it did not supply the software, and the information contained in the Egyptian documents. He did not reply.

‘Abuse of technology’

But although Gamma has refused to comment publicly, a company representative called Martin Muench is due to speak next week at a conference in Berlin on cyber warfare.

Gamma is listed as a “sponsor and exhibitor” with a speaker due to address the conference on “applied hacking techniques used by governmental agencies”.

Also speaking at the conference are colonels from the British, US and German armies, and the director of intelligence at US Cybercommand.

Continue reading the main story 

Find out more

File on 4 is on BBC Radio 4 on 20 September at 20:00 BST and Sunday 25 September at 17:00 BST

• Listen via the Radio 4 website
• Download the podcast

Elsewhere in the Middle East, reports emerged this month of claims that French and South African firms helped monitor phones and the internet for Libya’s Col Muammar Gaddafi.

In Bahrain – where the regime has so far survived the protests – human rights activist Abdul Ghani al-Khanjar says he only learned the extent of surveillance in his country after being arrested.

He had just returned from London where he spoke at a meeting in the House of Lords.

“Within two days, masked civilians and riot police raided my house and arrested me and I have been tortured about my many activities,” he told the BBC.

“It was amazing when they showed me some text messages from my phone and told me about my calls.”

He added: “This is a bad abuse of technology.”

The Bahraini government says it has launched an inquiry into torture allegations. But Siemens and Nokia have both been implicated in the bad publicity surrounding the case.

In the past Siemens sold Bahrain a “monitoring centre”, which is thought to have allowed the regime to secretly track and bug its citizens’ phones. The company is said to have sold the same system to 60 countries worldwide.

But Ben Roome, a spokesman for Nokia Siemens Networks – a joint venture between the two companies, says it has now pulled out of making interception tools, precisely because of concerns that they can be abused.

“If you provide technology you cannot be blind to how potentially it can be used,” he said.

File on 4 is on BBC Radio 4 on Tuesday 20 September at 20:00 BST and Sunday 25 September at 17:00 BST. Listen again via the Radio 4 website or download the podcast.

As the Space Shuttle carries out it’s final mission, here is a look at the result of decades of space flight – the debris of missions and the clutter of so many satellites.
This view – from 8700km – is a visualisation in Google Earth with data from the Union of Concerned Scientists satellite database and the US Space Track record catalog, pulled together here.  (Click on the picture to enlarge)

Enjoyed joining a discussion last night at the Frontline Club. If you missed it, you can watch it here.

UPDATED: 29/9/11 – Despite a UN report released today reporting higher violence than ever in Afghanistan – the latest figures show fatalities trending massively down for US and UK troops in Afghanistan. The number of US servicemen and women killed is significantly down despite the unusual loss of so many SEALS in a helicopter crash. Details see amended graphs here:

At NATO’s HQ in Kabul it was confidently predicted that 2011 would be the most violent yet of the war in Afghanistan. But one thing missing from the debate over Obama’s drawdown – as far as I’ve noticed – is the fact that casualties seem to be levelling off for foreign troops, at least. As the charts below (compiled from data from the http://icasualties.org/oef/ website) show, UK deaths in Afghanistan have dropped sharply as UK troops have ceded the most dangerous territory of the upper Sangin valley, Musa Qala and Now Zad to the Marines in Helmand. But even for US troops, despite taking on more dangerous areas, the number killed appears to be levelling off, even as the surge reaches its highest intensity of operations. Is this a sign of progress or a result of no major offensives and more consolidation in the last six months?

US DEATHS IN OPERATING ENDURING FREEDOM (AFGHAN WAR)

UK DEATHS IN AFGHANISTAN

A shorter version of this article appeared in the Sunday Times on June 5, 2011.
BY STEPHEN GREY:

BY the light of a full moon, a team of America’s most elite Special Forces fast-roped from helicopters into the mountains of eastern Afghanistan.

Creeping through the pine nut groves of Qalandar district, Khost province, they approached a hide-out of bunkers, tents and make-shift buildings that was now used as a training camp for suicide bombers.

Their target, tracked to this location from Pakistan, was a senior leader of the Haqqani Network – a ruthless branch of the Taliban.

In the fire fight that ensued, the special force operators faced counter-fire from machine guns and RPG rockets, and even a suicide bomber that attempted to creep up on them. But at the end, they had killed both their target and 18 of his fighters.

Michael Waltz, a reserve officer with US special forces, was deployed to the region. And he recalled the attack won support from local people: “The elders were thrilled, even though we had destroyed some of their crop. There was an actual procession that came down from the mountains, down to our base to thank us.”

The raid that night was the work of Joint Special Operations Command (JSOC), the same force that last month killed Osama bin Laden and includes some America’s most feared operatives like the Navy Seals or Delta Force.

In Afghanistan, I’ve learned, they are now leading an extraordinary blitz of what the military calls its “Kill Capture” mission.

After killing more than 3000 enemy leaders and fighters in the last 12 months, and capturing over 8000 — in raids mounted both by JSOC and by Britain’s own SAS and Special Boat Squadron, and also by wider teams from NATO conventional and special forces, – the military believes the Taliban is now, almost ten years into the war, finally on the back foot.

But there is a downside. A relentless pace of these operations can risk killing or injuring or simply angering Afghan civilians, particularly if they believe that innocent have been wrongly targeted.

When I travelled un-embedded to Khost to investigate the attack in the pine nut forest, a local elder, Khan Afzal, confirmed he supported the raid. “Yes, that was a Taliban training centre. After the Americans wiped them out, things got better for us. We felt safe. We felt secure.”

And yet almost in the same breath he condemned other operations, including air strikes and the manhunt missions that raid Afghan homes under cover of darkness – so-called “night raids”.

Last week, after 12 children and two women were said to be killed in air strike in Helmand, Afghan president Hamid Karzai reacted furiously. Issuing what he called his “final warning”, he ordered that night raids come under Afghan control – and banned airstrikes on Afghan homes.

If his warning was ignored, he threatened, then foreign troops would become “an occupying force. And in that case, Afghan history is witness to how the Afghans deal with occupying forces.”

For all the protests, is this Kill-Capture strategy working? Can it be decisive in helping end the war?

OVER the last six months, I’ve had significant access to the US and NATO command in Afghanistan now led by General David Petraeus — and to those involved in the closed and ultra secret world of special forces.

Researching a television documentary for the PBS series Frontline and the UK’s Channel 4, I learned of some of the dazzling intelligence techniques now being used not just to hunt down the world’s most wanted terrorists like Osama bin Laden but also employed in the bigger war against the Taliban.

It is the nerve centre of JSOC’s forward headquarters at Bagram, the former Soviet airbase north of Kabul, where everything comes together: CIA intelligence, “debriefs” from Taliban prisoners, video feeds from pilotless drone aircraft or spy satellites, intercepts from mobile phones and radios used by the Taliban, analysts who piece it together, lawyers who authorise mission, and finally the “direct-action” teams of soldiers who get to pull the trigger.

This “fusion” approach was invented by a former JSOC commander, General Stan McChrystal, who declared in the Iraq war “it takes a network to fight a network.”  When McChrystal became commander in Afghanistan, he asked for JSOC to move its effort across from Iraq.

And, since replacing McChrystal last July, Petraeus has doubled the pace of  “Kill-Capture” missions from all military units – an astonishing shift in a campaign sold publicly as a “counter-insurgency” aimed at protecting the Afghan population, not at wiping out the enemy.

John Nagl, a Pentagon adviser and a historian of counter-insurgency, said the combination of JSOC’s accuracy and ruthlessness had created something without parallel in the history of warfare. “JSOC is  this extraordinary machine, an almost industrial scale counter terrorism killing machine.”

Nagl said that many misunderstood counter-insurgency. “The doctrine believes in killing people.  It just believes in killing the right people.”

Most of JSOC’s attacks take place at night. It provides surprise and helps reduce casualties on all sides. And despite the vehement protest of many Afghans, who say a night raid violates local culture, its soldiers are conducting night-raids at the rate of 200 a month, we can reveal — more than six times more than two years ago.

The aim usually is to ‘capture’ not kill, and often their targets, known as ‘jackpots’, will surrender without a shot. “We are not Team America – we don’t want to obliterate everything in our path to get to some guy.” said one senior US special forces officer.

But plenty do get killed.

One source formally attached to JSOC explained there was little hope of defeating the Taliban but the raids could keep it suppressed. “It’s like hitting a boxer with body blows; its’ not a knockout but you stop them from breathing; you’re keeping them off-balance.”

I investigated these raids by speaking to all sides – the US military, to the Afghan government and to villagers in many parts of the country, and to the Taliban.

Few disagree these “targeted raids” are mostly on target. They are removing hundreds of Taliban fighters. But how the JSOC methods sometimes go wrong – and cause political harm – was illustrated by an airstrike in a remote part of Takhar province, Northern Afghanistan.

Early one morning last September, a convoy of six vehicles drove across a mountain range and was beginning its descent to a fertile plateau. As the vehicles entered a gorge, an American F16 jet roared overhead and dropped two bombs. Helicopters swooped down with machine guns firing. When a silence returned to the valley, ten men lay dead.

After the strike, in which ten people died, the military said they had killed a senior Taliban commander and his fighters. But survivors, local Afghan officials and the government in Kabul said the dead were all innocent. The attack had struck a convoy of campaign workers in the national elections, they said.

Three months later, we visited the scene of the strike together with several survivors and local officials. Among them was schoolteacher, Ihsanullah, who was in the convoy but survived. “That day was like a party,” he recalled. “We were campaigning for the elections. Altogether there were six vehicles. Our vehicle was at the end. Then there was a huge bang.”

The first explosion overturned one of the cars – but didn’t kill anyone. Ihsanullah got out of his car. “As soon as I took a few steps . . . the second bomb hit. I hurled myself to the ground. I heard helicopters. I thought the government was coming to help us. I thought the helicopters were coming to help the wounded.”

In fact, the helicopters had been sent to finish the job. “They only left when body parts and blood were all over the ground,” said Ihsanullah.

After doubts were raised over who had been killed, JSOC conducted a review of the evidence. Petraeus challenges the account of witnesses like Ihsanullah and insists the military struck the right target.

He told me: “This was a very significant figure, a very precisely targeted operation, and those who were killed, were bad guys.” He said the target had been tracked for days. “So again, there is not a question about this one.”

The US military named the man they killed as Mohamed Amin, the deputy Taliban “shadow governor” of the province and also a member of the Islamic Movement of Uzbekistan, which works with Al Qaeda.

However, our research revealed a different story. The most prominent man actually killed was called Zabet Amanullah, a former Taliban commander who had reconciled and now supported the Government. Known as “The Ant” for his distinctive small stature, he had been living in Kabul and had travelled to his former home province, after a gap of more than a decade, to campaign publicly and support the US-backed election. When we visited the scene, local police showed us the charred remains of election posters near his wrecked car.

Kate Clark, a former BBC Kabul correspondent, has investigated the case independently for months and knew Amanullah before he was killed.

Briefed on the case by US Special Forces, Clark said she got the impression the US military were so dazzled by their own high-tech intelligence. They appeared un-interested in common sense details from the real world. “Somehow they mixed up this man. If they just had just turned on the television or listened to the radio they would have realized they were killing a public figure, someone who everyone knew. It’s like they are in a parallel world.”

And then it emerged that Mohamed Amin, the man JSOC supposedly killed, was also alive and well. A former EU diplomat and expert on the Taliban, Michael Semple, tracked him down in Pakistan. “Mohammad Amin is alive,” said Semple. “He’s flesh and blood, he’s real, he’s got an identity that can be checked out and that we have checked out and he’s still alive”

Asked about his  apparent resurrection, senior US officials insisted this man must be an imposter, and that very specific secret intelligence confirmed “beyond all doubt” they had struck the correct target and that he was dead. They said the name “Zabet Amanullah” was just “an alias used by the Mohamed Amin.”

For all the military’s self-belief, all our evidence suggests that, in this case, JSOC killed the wrong man. Interviews with Afghan pro-NATO and pro-Government officials all suggested these were two different men from two different places with two different families.

US military sources, for instance, disclosed that Mohamed Amin had a nephew called Abdul Rahman whose arrest in January last year had helped to locate Amin. And in Amin’s home district, Kalafghan, a former Mujehedin fighter against the Russians, Haji Khair Mohammad, confirmed he knew the family and its connections to the Taliban. He said he knew that Abdul Rahman had been arrested and knew his uncle “is now in Pakistan and is the deputy [shadow] governor for Takhar province.”

The family that Mohamed described was a completely different family from that of Zabet Amanullah, the man targeted in the JSOC air strike.  “What’s disturbing about this case is not that special forces made a mistake,” said Clark. “It’s that they won’t admit a mistake and learn the lessons.”

General Daud Daud, a former commander with Mujahidin leader, Ahmad Shah Masood, and now police commander for all northern Afghanistan, praised US special forces for its Kill-Capture campaign and urged them to be even more ruthless.

But Daud was also adamant they got it wrong in Takhar. He blamed political rivals for feeding the Americans with bogus intelligence. “All of those killed that day including Zabet Amanullah were innocent,” he insisted.

A once relatively peaceful part of the country, anger has grown in Takhar against NATO.  Earlier this month, riots in which 11 protestors died were triggered by a US night raid which left four people dead, allegedly including two women. The military said the four were armed insurgents.

Last Saturday, two weeks after I last spoke to him, General Daud was on a visit to the provincial governor in Takhar when a suicide bomber walked in and blew himself up , killing Daud. He was the third Afghan official we interviewed in our research who has died since.

Daud’s killing was a reminder that the Taliban have their own campaign just as ruthless, to assassinate their opponents. And – whatever the rights and wrongs of controversial raids – it raised the wider question of whether, for either side, do they bring peace any closer?

SITTING at the edge of an irrigated field, a Taliban commander showed us a pictures on a mobile phone that explain how the relentless campaign of targeted Kill-Capture raids is shaping NATO’s enemy.

Talking to an Afghan colleague, who filmed the encounter, Khalid Amin and the images he showed of his two dead predecessors, are proof of the effect the US military campaign is having on the Taliban.

“This is Juma Khan. One of our distinguished commanders,” he says of the first casualty. “This is Maulvi Jabar, our district chief,” he says of the second.  “He was killed with 30 others in a night raid.

With its leadership in flux, the enemy that American and British troops are fighting this year is being transformed. But is the Darwinian “Survival of the Fittiest” going to make things worse or better?

Amin, for one, is bullish. “When Khan died,” he said, “the enemy said the Taliban was finished here. But three months later our Islamic Emirate is still strong. We have many more fighters than back then.

But is the Taliban really so resilient?  Last week, Britain’s former ambassador to Afghanistan, Sir Sherard Cowper-Coles argued they were.. He accused General Petraeus of trying too hard to kill the Taliban – and not hard enough on securing a political settlement to bring peace. “There is no doubt that Petraeus has hammered the Taliban extremely hard,” he said. “I am sure that some of them are more willing to parlay. But, equally, for every dead Pashtun warrior, there will be 10 pledged to revenge.”

And, even if their ranks think, will the new Taloban be more or less dangerous? One great concern is that experienced Taliban leaders will simply be replaced with a generation that is more extreme, less willing to make peace. “Every time a Taliban leader is killed,” questions Andrew Mackay, the retired major general and former British commander in Afghanistan, “my concern are we potentially killing a future Jerry Adams or Martin McGuineess?”

Those close to General Petraeus and JSOC recognize these risks. But, most argue, without Kill Capture operations, the Taliban would be able to impose its will with impunity – and attempts to establish security and restore the legitimate Afghan government would simply flounder.

“On targeting, we’re sort of damned if we do and damned if we don’t”, said one senior officer.

Petraeus told me: “The Taliban had the momentum and when you’re faced with a serious deteriorating situation, you have to do something about it. And the best way to do something about it is to use every tool available to you, and that includes everything from the very soft end of things … all the way to the hardest of the hard end, which is of course, targeted raids.”

Petraeus believes that Kill-Capture and other parts of his campaign are making a difference. “Our assessment is that we have halted, the momentum of the Taliban in much of the country – not all – and that we have reversed the momentum in some important areas,” he told me.

But even those close to Petraeus argue that, without even a mildly effective Afghan government in place, all the efforts of both special forces and conventional troops may still just be temporary. “It’s like spear-fishing.,” said one former JSOC officer. “You’re striking a series of points but you can only expect to have as limited impact on transforming conditions in the pond.”

The former JSOC officer added: “We’re trying to build the 20^th floor of the skyscraper while you’re still digging the foundations.”

Whatever its longterm consequences, with President Obama pledged to start “bringing home” troops from next month (July), most in the military feel boxed in with few options.

“A lot of what’s driving what we’re trying to do is the ridiculously truncated timeline,” added David Kilcullen, a retired Australian army officer and a former senior adviser to Petraeus on counter-insurgency. “In a perfect world, given enough time, we might be choosing different approaches, but we don’t have that option.”

All agree that 2011 will be the most violent year in the campaign so far. Petraeus hopes his relentless campaign has wounded the Taliban badly. But if the Taliban are starting to lose they haven’t realized yet.

In an isolated Afghan village– driven far from his own turf to escape JSOC’s clutches – we found Mullah Yunus, one of those new young Taliban commanders that the Kill-Capture campaign has put in power. Special Forces killed his predecessor as shadow governor of Baghlan province in an operation last year.

Rocking back and forth as he fingered his AK47, Yunus boasted: “This war has become  like delicious food for us. When a day passes without fighting, we get restless.”

In his eyes, peace talks will never be possible while the Americans remain in Afghanistan. “We will only talk when they compensate us for all our losses. Otherwise we will attack Americans in foreign countries”

Additional reporting: Shoaib Sharifi.