Fate of Turkey's Halkbank uncertain ahead of critical hearing in sanctions-busting case

On Nov. 5, the Southern District of New York in Manhattan will see a second hearing for Turkey’s majority state-owned Halkbank, which has been indicted for a multibillion dollar scheme that violated U.S sanctions against Iran. The case has proven to be another thorn in U.S-Turkey relations amid other serious disagreements between the two NATO allies.

Halkbank, one of Turkey’s largest lenders, was previously issued a summons by U.S prosecutors to appear in court on Oct. 22. but failed to appear. This absence prompted prosecutors to declare the bank a “fugitive”.

“Should Halkbank fail for a second time to appear pursuant to the Second Summons, the Court will consider any appropriate sanctions for knowing and willful noncompliance,” U.S. District Judge Richard Berman said in a court filing that day.

The choice to avoid appearing for it’s first hearing reflects the bank’s abstinence towards accepting responsibility for violating any U.S laws. Halkbank has based this assertion of innocence on claims that it’s lack of any physical presence in the United States renders the charges baseless.

There is reason to believe that Halkbank is being encouraged by Ankara to remain obstinate in resisting the charges. Turkish President Recep Tayyip Erdoğan has derided the case against Halkbank as part of what he called an “international coup attempt”.

Erdoğan is also believed to have raised the case with his U.S. counterpart Donald Trump in a meeting and was revealed to have met with Trump’s personal lawyer Rudolph Giuliani in 2017. In that encounter, a deal was discussed to exchange Pastor Andrew Brunson, who was detained in Turkey at the time, for Reza Zarrab, the Turkish-Iranian gold trader who was arrested in March 2016 and later became a witness for the U.S government against Hakan Attila, a Halkbank manager arrested for his part in the scheme. 

The stakes remain high for Halkbank ahead of the Nov. 16th hearing.

Previous international financial institutions discovered to have violated U.S sanctions have been slapped with billions in fines for their actions. The largest fine to this point has been an $8.9 billion penalty against France’s BNP Paribas for a scheme that moved an equivalent amount of money from Iran and other sanctioned entities through the American financial system.

Prosecutors in their indictment accused Halkbank of a scheme far larger - over $20 billion worth of illicit funds transferred to Iranian entities. John C. Demers, the Assistant Attorney General for National Security, underlined the gravity in the press release announcing charges against Halkbank on Oct. 15.

“This is one of the most serious Iran sanctions violations we have seen, and no business should profit from evading our laws or risking our national security,” Demers said at the time.

On top of the alleged crimes Halkbank can be fined for, it’s continued refusal to appear in U.S court could include an additional fine separate from any levied if the bank is found guilty.

For Halkbank, a fine similar to any of those imposed on European institutions that went awry of U.S law would be devastating.

In the last quarter recorded in 2019, Halkbank had a net income of about $54 million, according to S&P Global Intelligence. Even a fine akin to the previously largest one levied against BNP Paribas could have rippling affects across the Turkish banking sector.

The prospect of a large fine represents a dangerous blow to a still struggling Turkish economy, which has proved sensitive conflicts in Turkey’s relationship with the U.S.

Even before the indictment came on Oct.15, Halkbank’s board dismissed five officials and brought on former Istanbul mayor from the ruling Justice and Development Party (AKP), while a former interior minister was brought onto the board of another state-owned bank, possibly as a means to exert control in the event of financial turmoil. The day after the Halkbank indictment Turkish regulators imposed limitations on traders’ ability to sell bank shares in a bid to protect the country’s largest banks.

Outside of the courtroom, there exists the possibility of other penalties for violating U.S. sanctions.

“The death penalty of sorts is by designating a foreign financial institution as a specially designated national (SDN), which means that they are completely barred from the US financial system. Not only that, no other foreign FI will want to have a relationship with an SDN because of the risk of violating sanctions themselves.” said George Voloshin, a sanctions expert and the head of the Paris office at Aperio Intelligence, a London-headquartered corporate intelligence and financial crime consultancy.

Another milder form of punishment that could still create difficulties for Halkbank is being barred from holding correspondent accounts at U.S institutions. This would complicate many transactions in U.S dollars and deter other banks from wanting to serve as intermediaries for the institution.

These penalties all come from the U.S Department of Treasury, which has yet to take action related to the Halkbank case. Voloshin, the sanctions expert, stated that the possibility of Treasury enacting it’s own penalties against Halkbank pending the result of a court trial remained.

“If the bank is convicted, it will likely be ordered pay a huge fine and may fall victim to any of these punishments including losing access to the U.S market for good,” he said.

The measures available from Treasury in this case include the designation under Section 311 of the USA PATRIOT Act or possibly the removal of Halkbank’s access to SWIFT if it became subject to American secondary sanctions. Of these two, Aperio Intelligence’s Voloshin believes that the latter is less likely to be applied if a conviction follows in this case. 

“[SWIFT’s] mandate does not consist of enforcing any given country’s economic sanctions against another country or countries.” Voloshin said, citing SWIFT’s status as a Belgian legal entity that does not require it to act directly in accordance to U.S sanctions regimes.

“For Halkbank, conviction might well result in a Section 311 designation and restrictions on it’s correspondent banking is more likely,” Voloshin said.