Looming Halkbank sanctions threaten borrowing for Turkish wealth fund

Possible fines running into billions of dollars against Turkey’s state-run Halkbank are threatening to scupper any chance of the nation’s wealth fund securing borrowing on international markets.

Halkbank, 51 percent controlled by Turkiye Wealth Fund Management Co., is being investigated by U.S. authorities after its former Chief Executive Officer, Süleyman Aslan, and several Turkish ministers were found complicit by a Turkish police investigation into sanctions-busting on behalf of Iran back in 2003. Mehmet Hakan Atilla, Aslan’s deputy, is currently on trial in a New York court for his alleged role in the conspiracy, which purportedly included laundering hundreds of millions of dollars through the U.S. banking system.

Turkish President Recep Tayyip Erdoğan has heralded the wealth fund, created in 2016, as a centerpiece of funding for future economic growth. But, at the same time, businesses found to have broken U.S. sanctions against regimes such as Iran have, in the past, faced fines of as much as $8.9 billion.

“If they were to go down the route of trying to raise money in the western markets this would be a significant issue for investors, because one of the fund’s major assets would be contaminated by this court case,” said Inan Demir, an emerging markets economist at Nomura in London.

David Cohen, former U.S. Treasury Undersecretary for terrorism and financial intelligence, speaking as a witness for the prosecution in court on Friday, said that the U.S. had warned Aslan and other Halkbank officials several times about both compliance with Washington’s sanctions regime and the activities of Halkbank client Reza Zarrab, an Iranian-Turkish businessman who has turned the state’s primary witness in the court case.

David Cohen
Former U.S. Treasury and CIA official, David Cohen

Shares in Halkbank form about 5 percent of about $40 billion in assets controlled by Turkiye Wealth Fund Management. The institution, unlike funds in countries such as Norway, Qatar and the United Arab Emirates, has no income aside from revenue from the firms in its portfolio, which also comprises stakes in more than a dozen state-controlled enterprises such as Turkish Airlines and the Istanbul Stock Exchange.

A fine of the magnitude of the $8.9 billion levied against BNP Paribas in 2015, a record for such penalties, would be more than double the value of the combined stakes the fund holds in Halkbank and Turkish Airlines, the most-valuable listed companies it owns.

Zarrab, speaking in court last week, claimed that Ziraat Bank, an agricultural lender and Turkey’s largest bank, which is also owned by the wealth fund, was also ordered by the government to break the U.S. sanctions regime. The claims make it likely that U.S. regulators will be investigating Ziraat’s activities as well.

The reputation of Halkbank, and the wealth fund itself, is also being complicated by the approach of the Turkish leadership toward the proceedings in New York.  Erdoğan, in his usual combative style, has said the trial is being conducted by a “fake court” and is a plot to undermine his country politically and economically.

U.S. regulators have, in the past, taken a dim view of such an approach, demanding full admission and culpability should a financial institution break the U.S. sanctions regime. If found guilty, and in the absence of any admission of guilt by Halkbank and the Turkish authorities, bodies such as the U.S. Treasury would have the power to impose further sanctions on the lender and, ultimately, on Turkish institutions and the government itself, including placing the country on a financial blacklist.

Two bankers, who asked to remain anonymous, said officials believe Halkbank could pay a fine without its owners admitting responsibility.

Meanwhile, Erdoğan and other senior Turkish politicians are trumpeting the wealth fund as a cure-all for the Turkish economy. They say that it will be used to finance infrastructure projects and “deepen financial markets” through investments in the lira, stocks, bonds and other assets.

However, its critics, including former Finance Minister Abdullatif Şener, say the fund has been created to seemingly take assets away from public oversight, rather than solve structural problems in the economy. Others, including the main opposition Republican People’s Party, say the government will use the fund to enrich well-connected companies.

One of the only initiatives that the fund has announced publicly is a tentative accord with Singapore’s leading urban-planner, Surbana Jurong, to build an industrial hub in southeastern Turkey, an impoverished region dominated by the Kurdish minority.

Some 2.3 million square meters of Treasury land, mostly in tourism areas, is also being transferred to the fund and the finance ministry is currently assessing the its value ahead of possible sales.

Turkiye Wealth Fund Management Co. is currently headed by Himmet Karadağ, a former tax inspector and the chief of the Istanbul Stock Exchange. Another of the fund’s four directors is Yiğit Bulut, chief economic adviser to Erdoğan. Bulut also sits on the board of three of the organization’s four sub funds, which are focused on financial stability, small and medium-sized enterprises, licenses and the mining sector. The funds are overseen by Ziraat Bank.

Yigit Bulut
Yiğit Bulut, Turkiye Wealth Fund board member and presidential adviser

Bulut, a fiery former TV journalist, is perhaps best known for his claim that enemies of Turkey have attempted to assassinate Erdoğan via the powers of telekinesis.

“I can’t imagine Yiğit Bulut getting in front of institutional investors in London and New York and tell them a story credibly about the wealth fund and raise money, especially during such sensitive times,” one banker, who asked to remain anonymous, told Ahval.

At least three bankers who were approached about taking management positions at the wealth fund have rejected the offer, Bloomberg reported in September, citing three people with knowledge of the overtures. 

The fund, however, could approach non-western lenders, either through bilateral loans or a syndication of non-western banks, analysts say.

The fund has held talks with China’s ICBC bank for a $5 billion loan over 10 years, Bloomberg reported.

In the absence of western lenders, the fund would likely need to approach government-run institutions for bilateral borrowing or a “syndication of friendly” banks, Demir said.