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Halkbank Indictment Turbocharges U.S.-Turkey Tensions

After a long, mysterious delay, the Trump administration finally targets the Turkish bank for helping Iran to evade U.S. sanctions. Don’t expect Ankara to cooperate.

By Keith Johnson and Elias Groll

October 16, 2019, 3:40 PM

Tensions between the United States and Turkey, already at a fever pitch over the Turkish invasion of northern Syria and slaughter of formerly U.S.-backed Kurdish fighters, ramped up significantly late Tuesday after federal prosecutors in New York unsealed the indictment of a state-owned Turkish bank, Halkbank, for helping Iran evade U.S. sanctions. That follows earlier federal trials against a high-profile gold trader and some bank executives for their role in the sanctions-evasion scheme.

What do prosecutors allege?

The indictment alleges that Halkbank, backed by and even encouraged by Turkish government officials including then-Prime Minister, now President Recep Tayyip Erdogan, engaged in a yearslong scheme to help Iran evade U.S. sanctions between 2012 and 2016 and funnel about $20 billion illicitly out of Turkey and back into Iranian hands.

According to the indictment, a Turkish Iranian businessman, Reza Zarrab, bribed a Turkish government minister to the tune of tens of millions of dollars to get the bank to agree to his plans. The basis of the plot is that revenues from oil and gas that Iran sold to Turkey were parked in accounts at Halkbank. But under U.S. sanctions, Iran couldn’t access most of the money it made from selling oil and gas.

So Zarrab, Iranians, and bank officials allegedly cooked up a scheme to use his companies as middlemen to buy gold in Turkey with Iranian money in Halkbank, and then ship it to the United Arab Emirates, where Iran could turn it into hard currency and use it however it wished. Later, after the United States clamped down on Iran’s transactions in gold, Zarrab altered the scheme so that the money would be spent on fictitious shipments of food, which gets a humanitarian exemption under U.S. law.

It didn’t always go smoothly: Zarrab was under so much pressure from Turkish ministers to move out such large quantities of Iranian money that he had a hard time convincingly faking the paperwork for the nonexistent food shipments, and the bank told him to clean up his paperwork lest U.S. regulators get suspicious. “Mr. minister [then-Economy Minister Mehmet Zafer Caglayan] told me to step on the gas and I think I over did it,” Zarrab answered to the bank’s chief executive.

Why is the indictment so explosive for Turkey?

Halkbank’s role in helping Iran has been well known for years and was highlighted at the trial of Zarrab and bank executives in late 2017 and early 2018. But the indictment underscores the apparent degree of direct, high-level Turkish government support for the scheme.

After Zarrab was arrested by Turkish authorities in late 2013, he bribed his way to freedom—and then persuaded the bank to start the scheme up again, the indictment alleges. Importantly, the indictment says, bank officials were leery of doing so right after Zarrab’s arrest. But Zarrab had a powerful patron: “At Zarrab’s request, however, the then-Prime Minister of Turkey and his associates, including a relative of the then-Prime Minister who later held multiple Turkish cabinet positions, instructed HALKBANK to resume the scheme, and HALKBANK agreed.”

Prosecutors’ decision to release the indictment came just after U.S. President Donald Trump threatened to “destroy” Turkey’s economy and announced some modest sanctions, while Congress is weighing sanctions packages of its own. But the charges against Halkbank are potentially bigger than anything on the table so far.

“You do get a sense of the involvement of the Erdogan government in the indictment, one does get a sense that the United States is dialing up the pressure on the government itself,” said Jonathan Schanzer, a former U.S. Treasury Department terrorism finance expert now at the Foundation for Defense of Democracies.

Erdogan has strenuously objected to the investigation of Zarrab and Halkbank, in no small part because it threatens to expose corruption in the Turkish leader’s inner circle. To curry favor with the regime, Zarrab had donated millions of dollars to a charity run by Erdogan’s wife, and the Turkish president saw the U.S. investigation as a potential political liability for himself.

On Wednesday, ahead of the arrival of U.S. Vice President Mike Pence in Ankara, Erdogan obliquely fired back at U.S. financial reprisals that put his family in the crosshairs.

And beyond the prospect of a staggeringly large fine—France’s BNP Paribas was fined about $9 billion for much smaller Iran sanctions evasions—the allegations against Turkey’s second-biggest lender, and a state-owned one, could send ripples through Turkey’s economy.

“Of all the weapons in the arsenal, this has the potential to do the greatest damage,” Schanzer said.

Why now?

The indictment was presumably ready and waiting but hadn’t been presented until now, when U.S. anger at Turkey for invading Syria and killing Kurds (despite Trump giving it a greenlight to do precisely that) pushed the troubled bilateral relationship over the edge.

“The executive had a hold on this action, but the Syria offensive has basically made it impossible for the U.S. government to hold back,” Schanzer said.

There are other puzzling aspects to the whole affair. Erdogan has been lobbying the Trump administration for years to drop the prosecution of Zarrab, whose legal team included Rudy Giuliani, Trump’s personal lawyer. Trump reportedly pressed then-Secretary of State Rex Tillerson to make a diplomatic deal with Turkey in exchange for dropping the case; Tillerson refused. (Foreign Policy reported in 2017 on reports that the Trump administration was considering using Zarrab as part of a diplomatic deal.)

The long-delayed bank indictment is just the latest in a series of unexplained connections between the Trump administration and Turkey. Trump’s first national security advisor, Michael Flynn, was lobbying for Turkey while in the administration, but he didn’t register as a foreign agent. Flynn and Giuliani both also reportedly pressed Trump to extradite the Turkish cleric Fethullah Gulen, Erdogan’s political nemesis, who lives in Pennsylvania. Trump also refused to apply congressionally mandated sanctions on Turkey after it purchased Russian air defense missiles.

For Zarrab, the hiring of Giuliani, along with former Attorney General Michael Mukasey, was an easy way to buy political clout. While representing Zarrab, Giuliani traveled to Turkey and met with Erdogan in an attempt to broker an agreement for the release of his client. Zarrab ended up pleading guilty, but not before Giuliani mounted an international campaign to get the U.S. government to intervene on behalf of his client.

Trump himself has significant business interests in Turkey, and it is unclear whether his real estate projects there could be influencing his decision to greenlight Turkey’s invasion of northern Syria. The centerpiece of that portfolio is a pair buildings in Istanbul called Trump Towers.

On Wednesday, Trump appeared to reverse his earlier about-face, criticized the Kurdish troops who helped the United States defeat the Islamic State (while repeating Erdogan’s talking points about domestic Kurdish terrorists), and said the Turkish invasion was not a problem for the United States.

“The links with the Trump administration are many, and unexplained,” Schanzer said. “Flynn, serving as national security advisor while acting on behalf of Turkey, that’s not explained. Giuliani’s role, not explained. Trump’s refusal to indict until now, not explained. His refusal to impose [Countering America’s Adversaries Through Sanctions Act] sanctions, not explained. There are a lot of questions that should probably be answered.”

So what happens next?

Since it’s unusual for the United States to indict a bank for sanctions evasion—normally the Treasury Department would label an offending bank as such and negotiate a painful financial settlement—it’s hard to say how this will play out. It’s not clear if Turkey will even show up in court or if it will now seek to reach a settlement with the Department of Justice.

“Right now, we are in uncharted waters. We have never seen an indictment of a bank in this way,” Schanzer said. “What they are doing is inviting the Turkish government to defend Halkbank and its actions. It’s not clear if they will show up. We’ve never had this before.”