Turkey’s Halkbank losing support as U.S. sanctions loom

Turkey’s Halkbank is struggling to find funding following its indictment by U.S. federal prosecutors last month, since international banks are wary of lending to the majority state-owned Turkish bank as it may be hit by U.S. sanctions, an S&P Global report said.

The report said that Halkbank had not put any funds aside for the potentially large U.S. fines.

"The bank thinks the case is politically motivated and there isn't any wrongdoing in its banking operations, and so hasn't taken provisions," S&P Global quoted Recep Demir, an analyst at Istanbul's Garanti Securities, as saying.

Halkbank was unable to carry out a semi-annual rollover of syndicated foreign-currency loan facilities in September, the report quoted analysts as saying.

"International banks don't want to lend through international syndications for fear of there being potential problems," said Demir.

This affects Halbank’s profitability and is bad news for the Turkish government, which is pushing its state-owned banks to lend more in an effort to boost the struggling economy.

“These are uncharted waters,” said Jonathan Schanzer, the senior vice president for research at the Foundation for Defense of Democracies. “No bank has ever frustrated the bureaucracy to the point that the U.S. would issue an indictment of this magnitude against the bank of an allied nation.”

Turkey also faces a range of other U.S. sanctions under existing and potential U.S. laws. Senior Republican U.S. Senator Lindsey Graham and Democrat Senator Chris Van Hollen called on Monday for the imposition of measures against Turkey for its purchase of Russian S-400 missile systems under the Countering America’s Adversaries Through Sanctions Act (CAATSA).

The White House has dragged its feet on CAATSA measures against Ankara and U.S. corporations with interests in Turkey are also concerned with the potential for U.S. sanctions on Turkey. Recent Lobbying Disclosure Act (LDA) filings show Texas oil and gas firm TransAtlantic Petroleum Ltd. hired Akin Gump on Oct. 19 to lobby against several sanctions bills in Congress including the Countering Turkish Aggression Act introduced by Senators Graham and Van Hollen on Oct. 17.

Turkey and Halkbank have spent millions of dollars on U.S. lobbyists and lawyers in recent years in an effort to prevent U.S. legal actions against the bank for its alleged role in facilitating a multibillion-dollar scheme to evade U.S. sanctions on Iran over its nuclear programme.

Following the Oct. 15 indictment, Halkbank’s U.S. lobbying firm, Ballard Partners, terminated its multimillion-dollar contract with the bank. Turkey and Halkbank had sought to leverage the firm’s close connections to President Donald Trump to prevent U.S. legal action against the bank.

Foreign Agents Registration Act (FARA) filings submitted by Ballard Partners last week suggest the firm may have scaled back its work for Halkbank as far back as August, when its fee earned from the bank was slashed to two $40,000 payments over the final three months of their relationship.

The firm first signed a $125,000 per month contract with Halkbank in August 2017, in the months leading up to the trial of Halkbank’s deputy general manager Mehmet Hakan Atilla for his part in the scheme to circumvent U.S. sanctions imposed on Iran.

Atilla was convicted in 2018 for bank fraud and sentenced to 32-months in prison, but Ballard Partners retained its monthly fee from Halkbank until August of this year. By then, Atilla had returned to Turkey after being released at the end of July on time served.

All told, the lobbying firm, run by Trump’s key Florida fundraiser Brian Ballard, earned more than $3.5 million from Halkbank and nearly an additional $1.9 million from the Turkish government on a separate contract over the same period.

At the firm, Robert Wexler, a former Democratic congressman from Florida who co-founded the Congressional Turkey Caucus, was a leading figure in the campaign on behalf of its Turkish clients. FARA filings show Wexler emailed his former colleagues and their staff extensively, disseminating positive news coverage of his clients.

Also on the Turkish accounts was Jamie Rubin, a former assistant secretary of state during the Clinton administration. Last week’s FARA filings show Rubin last met acting Assistant Secretary of State for European and Eurasian affairs Philip Reeker regarding Halkbank on June 18.

Several Ballard Partners lobbyists have moved in and out of the Trump administration. Most notably, Pam Bondi, a former Florida attorney general, is temporarily working for the White House as an impeachment adviser.

She is due to return to her work at Ballard Partners, where she is a registered agent of Turkey, despite an executive order signed by the president that all employees of the executive branch must agree not to “engage in any activity on behalf of any foreign government” after working for the U.S. government.

Ballard Partners is not the only Halkbank-connected firm to maintain a revolving door with the administration. Trump picked his FBI director from the ranks of the prominent law firm King & Spalding LLP and the firm has made five senior hires from the Trump administration this year including the former director of national intelligence, Dan Coats.

In late 2017, Turkey hired King & Spalding, reportedly an adviser of the Trump family real estate empire, “to prepare and present a proposal to the Department of Justice … regarding the handling of a U.S. legal matter.” The timing matched the case against Atilla that put Halkbank in legal jeopardy.

When U.S. prosecutors indicted the bank in October, King & Spalding initially appeared to distance itself from Halkbank, telling the U.S. judge it did not have authorisation to accept service on behalf of the bank it had previously represented.

Halkbank has maintained that the indictment is politically motivated and a case of judicial overreach, because the bank has no physical operations in the United States.

But ignoring the proceedings led U.S. Federal Judge Richard Berman to declare the bank a “fugitive” when it did not send legal representatives to an arraignment in October.

Since then, King & Spalding says it has signed on to represent Halkbank for the “limited and special purpose” of challenging the bank’s indictment. Law firms are exempt under FARA from publicly disclosing the fees they charge foreign clients for legal services.

On Nov. 5, Judge Berman rejected King & Spalding partner Andrew Hruska’s initial request to make a special appearance for the bank, but allowed it to further make its argument by brief. On Monday, King & Spalding filed a brief with the court doing so and arguing that corporations cannot be fugitives for failing to enter a plea against charges.

The law firm may not be successful in its attempts to challenge the court’s jurisdiction in the case without having to acknowledge the charges themselves, but the attempt is delaying any potential sanctions the judge could stipulate for the bank’s failure to respond to a summons.

Schanzer said he thought the case would proceed without Halkbank’s direct participation. This would make it easier to prosecute, he said, but it “would be highly irregular and the process will be disputed by the Turks, citing a lack of due process”.

If convicted, Halkbank could face heavy fines and be banned from the U.S. financial system. S&P Global reports the bank has not set aside any money to compensate for its U.S. legal troubles.

The $5.4 million Turkey and Halkbank paid Ballard Partners and the undisclosed legal fees paid to King & Spalding failed to ultimately prevent the bank’s indictment. The early signs reported by S&P Global suggest Turkey was right to fear the crippling effect legal jeopardy and U.S. sanctions could have on the bank at a critical time for Turkey’s economy.