Mark Bentley
Nov 24 2017

Turkey too sanguine as banks face possible billion-dollar fines

Turkey’s government appears too sanguine about potential multi-billion dollar fines against its banking system for contravening U.S. sanctions on Iran.

Instead of warning of the financial and indeed economic impact of the possible penalties, President Recep Tayyip Erdoğan’s ministers are seeking to play down the prospect of the United States sanctioning state-run Halkbank and other lenders for illicitly transferring Iranian money.

Mehmet Hakan Atilla, deputy chief executive of Halkbank, will go on trial in the Southern District of New York on Dec. 4 accused of complicity in laundering hundreds of millions of dollars on through the U.S. financial system. Defendant Reza Zarrab, an Iranian-Turkish businessman with close connections to Erdoğan’s government, is likely to cooperate with the state. Prosecutors have also indicted Atilla’s former boss, Süleyman Arslan, and ex-Economy Minister Zafer Çağlayan.

“If he confesses, what will he say? Halkbank has done nothing illegal,” Economy Minister Nihat Zeybekçi said on Thursday, referring to Zarrab. “There are no probes into any Turkish lender,” Deputy Prime Minister Mehmet Şimşek, a former Merill Lynch economist, said last week. "A number of questions have been raised about only one Turkish bank.”

Recent history shows that the United States, including the court of the Southern District of New York, which is hearing the case against Atilla, takes a very dim view on money laundering, particularly when banks break sanctions against regimes deemed hostile to U.S. interests. Fines have ranged from $235 million to $8.9 billion, filings show.

And, while Erdoğan is seeking to portray the trial as some sort of conspiracy against Turkey in particular, devoid of legal basis, the reality is somewhat different. U.S. banks, as well as lenders from countries such as Pakistan, Italy and Britain, have all been slammed with hefty fines.

Turkish Economy Minister Nihat Zeybekçi (Henning Kaiser, DPA)
Turkish Economy Minister Nihat Zeybekçi (Henning Kaiser, DPA)

In 2014, French bank BNP Paribas agreed to pay $8.9 billion after pleading guilty to concealing billions of dollars in transactions for clients in Sudan, Iran and Cuba, in violation of U.S. sanctions. The deal included a year-long suspension of the bank’s ability to convert foreign currency into dollars through its New York office, a highly damaging punishment for a bank doing business in the United States.

Former U.S. prosecutor Preet Bharara, who Turkey accuses of connections to exiled Islamic cleric Fethullah Gulen, ruled in 2014 that JPMorgan Chase & Co. make a settlement of $1.7 billion with the Southern District of New York on fraud charges. The U.S. bank also accepted separate penalties totalling more than $800 million from the Office of the Comptroller of the Currency and the Treasury Department.

In 2012, HSBC agreed to pay the Justice Department a then-record $1.92 billion in fines for funnelling drug money out of Mexico. In September this year, the New York State Department of Financial Services (DFS) said it was seeking to fine Pakistan’s Habib Bank up to US$630 million for “grave” anti-money laundering and sanctions compliance failures at its only U.S. branch. The bank plans to surrender the branch’s foreign banking license as part of the deal.

As well as Halkbank, as many as five other Turkish banks could be found complicit and be charged by U.S. regulators, according to two financial analysts, who declined to be identified due to the sensitivity of the matter. The banks include another state-owned Turkish lender, a leading listed private bank and a small, publicly traded bank that is foreign owned, they said.

It is likely that U.S. financial crimes investigators are already studying suspicious transactions, and will request that any Turkish banks eventually accused of illegal activities submit their own monetary estimates of the transgressions before any fines are imposed, one of the analysts said. Turkey claims Halkbank's dealings were in line with international laws.

Even though Turkey’s banking index has underperformed the main BIST-100 index in Istanbul, declining 16 percent since the end of August, it would appear that the potential impact of hefty U.S. fines is not fully priced in.

Some signs of stress, however, are already apparent. Halkbank’s shares have slumped 37 percent since the end of August. Denizbank, owned by Sberbank of Russia, has fallen 28 percent.

As well as the direct financial impact on banks’ balance sheets, which may require the government to step in with financial aid, any sanctions would damage their reputation abroad, squeezing access to foreign funds. That, in turn, would impact the wider economy in terms of banks’ ability to lend to businesses and consumers at a time when growth is slowing.

Turkish banking stocks slumped yesterday after Fitch Ratings said it might lower their debt ratings should they be found complicit in the case.

Several Turkish banks face fines totalling billions of dollars, Turkey’s Habertürk newspaper reported last month citing senior banking sources. One bank will be forced to pay more than $5 billion, it said.

Turkey’s banking regulator rejected the report, urging the public to ignore rumours about financial institutions.