Halkbank, a public lender majority-owned by the Turkish government, pleaded not guilty at a Manhattan court on March 31 to criminal charges that it helped Iran illicitly transfer tens of billions of dollars in one of the biggest sanctions-evasion schemes in history. The case is a potent reminder of the Islamic Republic’s track record of abusing the humanitarian trade exceptions built into all U.S. sanctions, which Tehran has exploited to enrich its ruling elite and their foreign enablers, including senior Turkish officials.
Prosecutors from the Southern District of New York charged Halkbank last October, accusing Turkey’s second-largest public lender of “fraud, money laundering and sanctions offenses,” alleging Halkbank and its executives aided Iranian-Turkish gold trader Reza Zarrab in a “multi-billion dollar scheme to circumvent U.S. sanctions on Iran.” When Halkbank refused to respond in court, claiming that the criminal charges are beyond the U.S. court’s jurisdiction, prosecutors proposed escalating contempt fines, which could have totaled $1.8 billion after eight weeks. The possibility of a massive fine finally persuaded the bank to agree to U.S. arraignment on February 25.
The origins of the Halkbank case go back to a “gas-for-gold” sanctions-busting scheme in which Turkish officials pretended the gold headed not to Iranian government entities but entirely to Iran’s “private sector.” The scheme ultimately yielded the Iranian regime some $13 billion in Turkish gold between 2012 and 2013. Once the U.S. Congress introduced legislation to close the “golden loophole” in 2013, Iran used Turkish front companies to issue invoices for fake transactions of food and medicine that fall under the humanitarian exception to U.S. sanctions. In one infamous case of over-invoicing, a Turkey-based luxury yacht company used Halkbank to sell nearly 5.2 tons of brown sugar to Iran’s Bank Pasargad at the price of approximately $240 per pound.
By purging all the relevant police investigators, prosecutors, and judges, Turkey’s then-Prime Minister Recep Tayyip Erdogan was able to stymie the December 2013 graft probe that implicated him, his ministers, and other senior officials – including Halkbank managers – in the Iranian scheme. Yet the corruption scandal resurfaced in March 2016 upon Iranian-Turkish ringleader Reza Zarrab’s arrest in Miami. The following March, U.S. authorities arrested Halkbank Deputy CEO Mehmet Hakan Atilla upon his arrival in New York. The case against Atilla heated up when Zarrab pleaded guilty and turned state’s witness, confessing to having bribed senior Turkish ministers and top Halkbank executives. Zarrab even implicated Erdogan, saying that the then-prime minister had approved the sanctions-busting efforts.
Halkbank’s Atilla received a 32-month prison sentence in May 2018, a significantly shorter one than prosecutors had originally sought, as the judge declared that the former banker was simply “a cog in the wheel.” After Atilla’s return to Turkey, Erdogan rewarded the convicted sanctions buster by appointing him CEO of the Istanbul stock exchange, following the president’s established pattern of rewarding other senior accomplices of Zarrab with cushy appointments.
Seeking to avoid another federal trial that could embarrass Erdogan and his inner circle, Ankara made numerous attempts to reach out to senior members of the Trump administration, beseeching it to block and interfere with the Halkbank case. This approach succeeded in stalling the prosecution for almost two years, but ultimately failed when the U.S. Attorney’s Office for the Southern District of New York went forward with the charges last October.
Beyond its potential to expose the corrupt involvement of senior Turkish leaders in Iran’s sanctions-evasion schemes, the Halkbank case also offers an important reminder about the Islamic Republic’s systematic abuse of humanitarian sanctions exceptions to enrich the regime and fund its nuclear weapons program, proxy wars, and sponsorship of terrorism.
Aykan Erdemir is a former member of the Turkish parliament and senior director of the Turkey Program at the Foundation for Defense of Democracies (FDD), where Philip Kowalski is a research associate. They both contribute to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Aykan, Philip, and CEFP, please subscribe HERE. Follow Aykan and Philip on Twitter @aykan_erdemir and @philip_kowalski. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.