U.S. funds exposed to Halkbank scandal

Leading U.S. investment funds including Vanguard Group and Blackrock Inc. are holding on to shares in Turkey’s state-run Halkbank even though the company could be found complicit in a Turkish-Iranian money laundering scam to bypass U.S. sanctions on Iran.

Shares of Halkbank slumped last month as investors worried that U.S. authorities would widen an investigation into company executives and impose financial penalties. The trial of Mehmet Atilla, a deputy chief executive officer of the bank accused of laundering the money, and Reza Zarrab, an Iranian businessman charged with running the scheme, is scheduled to begin in New York on Nov. 27.

Vanguard sold just 5.84 million liras ($1.5 million) of Halkbank shares in the fourth quarter, keeping its stake at $82 million, or 2.5 percent of total stock, according to latest filings seen by Ahval on Nov. 9. Blackrock, with 1.6 percent, has increased its stake marginally while Dimensional Fund Advisors LP kept its investment at 1.2 percent.

Atilla is accused of conspiring with Zarrab to launder hundreds of millions of dollars through the U.S. financial system on behalf of Iran to help it avoid sanctions limitations. Turkish President Recep Tayyip Erdoğan has labelled Halkbank “my bank” and consistently intervened in a case that has ramped up political tensions between Ankara and Washington. Zarrab is also a Turkish citizen.

Halkbank risks civil fines and penalties by U.S. government agencies for its involvement in the scandal, Kenneth Rijock a financial crime consultant based in Miami, Florida, told Ahval in an interview last week. Other Turkish banks could also be sanctioned, he said.

Shares of Halkbank, in which Turkey’s wealth fund owns a 51 percent stake, fell a record 14 percent on March 29, when Atilla was arrested and charged. They have dropped 33 percent since August. The Istanbul Stock Exchange has meanwhile rose 0.6 percent in the period. 

Halkbank shares
Halkbank 1-year price graph (Google Finance)

Atilla is being held in a Manhattan cell, while Zarrab was arrested last year after arriving on a family vacation to Disney World in Florida. Both men deny any wrongdoing.

Zarrab has essentially not participated in the case since September, according to Atilla’s lawyers, raising speculation he will enter a guilty plea and cooperate with prosecutors. He had previously hired politically connected lawyers - former New York Mayor Rudy Giuliani and ex-U.S. Attorney General Michael Mukasey - to help represent him.

“Vanguard does not comment on individual holdings,” Becca Gil, a public relations executive at the Pennsylvania-based company, said in emailed response to questions. Vanguard is led by John C. Bogle and has more than $4.4 trillion of assets under management, including Inland Revenue Service-approved 401 (k) retirement plans. Blackrock, the largest fund manager in the world, and Dimensional did not respond to emailed requests for comment.

The State of California and Massachusetts Mutual Life Insurance also hold small stakes, the filings showed.

Rijock said regulators could cut Halkbank out of the U.S. banking system, effectively driving it out of business, but such sanctions are very rare. A substantial fine is far more likely, he said.

U.S. prosecutors say Atilla and his accomplices helped Zarrab “double-deal by facilitating transactions involving billions of dollars-worth of Iranian oil proceeds on behalf of the government of Iran and related entities, while still maintaining Halkbank’s relationship with the U.S. banks."

The scheme involved “fraudulent transactions papered over with false documents, front companies, and lies to U.S. regulators,” along with “the bribery of senior Turkish government ministers,” prosecutors said in an Oct. 16 filing.

Erdoğan’s involvement in the case has been intense. He demanded Zarrab’s release and the firing of then U.S. Attorney Preet Bharara, who brought the case, in a private meeting with then-Vice President Joe Biden on Sept. 21, 2016. U.S. officials said half the 90-minute conversation was devoted to Zarrab. He also appealed personally to U.S. President Barack Obama in two phone calls in December and January, according to the Washington Post. 

President Donald Trump fired Bharara in March, but his deputy has taken up the case.

Last month, Erdoğan referred to the trial when defending the arrest of a second U.S. consular employee.

“You will arrest my bank’s deputy general manager for no reason, and will try another citizen of mine for two years, and want to use him as an informant,” Erdoğan said in a speech on Oct. 12.

Reza Zarrab after his detention

The detention of the consular official prompted the U.S. to suspend visa services in Turkey, intensifying political tensions between the countries and leading to losses for the Turkish lira.

The lira fell to its lowest level since January on Nov. 4 after a U.S. prosecutor said Zarrab spoke with Erdoğan at a wedding on April 12, 2013 before meeting former Economy Minister Zafer Cağlayan on his private jet. After the meeting, Zarrab called his assistant Abdullah Happani, telling him to “hit” (send money) through Halkbank with “no limit” and devised a way to help Turkey increase exports of gold to help narrow its current account deficit, according to the prosecutor.

The Zarrab scandal first broke in December 2013. Turkish police and prosecutors made scores of high profile arrests, accusing Zarrab and members of Erdoğan’s inner circle of exporting tens of billions of dollars of gold in return for Iranian oil and gas. Süleyman Arslan, then-chief executive of Halkbank was among the arrested after police found $4.5 million stuffed in shoeboxes at his house. Three cabinet ministers, including Cağlayan, resigned after their sons were implicated.

Erdoğan quickly slammed the investigation as an attempt by Islamic cleric Fethullah Gülen to overthrow his government. He ordered a massive purge of police, prosecutors and judges. Charges against Zarrab and people linked to the government were dropped. Erdoğan later described the businessman as a “philanthropist” whose work had “contributed to the country”.