Will U.S. trial expose new details of sanctions busting by major Turkish bank?

After months of objections, second largest state-run Turkish bank Halkbank accepted the jurisdiction of the New York South District court, and formally agreed to be a party to the case in the hearing held on February 25th.

Halkbank was accused of involvement in a complex scheme to circumvent sanctions on Iran between 2011 and 2016. The indictment states that Turkish-Iranian millionaire businessman Reza Zarrab bribed high-ranking Turkish officials, including ministers, to facilitate the oil-for-gold scheme in which Halkbank’s management was accused of intentionally aiding and managing. According to the indictments both in Zarrab and Halkbank cases, Halkbank played a central role in the scheme to sometime ‘launder’ the money and other times let money flow out in gold to the Gulf then to Iran via Zarrab’s companies. Zarrab was arrested in Miami as he arrived with his family in 2016, and later on flipped and pled guilty for sanction-busting schemes in 2017, explaining the details of the scheme at the same courtroom in front of a big white board with his own drawings. 

On Oct. 15, 2019, the Southern District of New York indicted Halkbank with fraud, money laundering, and sanctions offences related to the bank’s participation in the same multibillion-dollar scheme to evade U.S.sanctions on Iran. Accusations were cited in the indictment stemming from the earlier Zarrab case. Ahval’s Ian J. Lynce wrote early December that Halkbank is grappling to find funding following the indictment, since international banks are wary of lending to the majority state-owned Turkish bank as it may be hit by U.S.sanctions, S&P Global reported.

Halkbank was previously called by U.S prosecutors to appear in court but repeatedly failed to appear. After this absence prosecutors called  the bank a “fugitive”. Halkbank as an excuse said U.S. courts have no jurisdiction over it as the bank does not have any branches or physical operations in the United States. The bank also called for Judge Richard Berman to be recused, saying the judge had lost his neutrality. The court denied Halkbank’s request for a “special and limited appearance” as well as of recusal.

Had Halkbank failed to appear again, it would have suffered a penalty of $1 million per day, which would have doubled every week and turned into $1.8 billion over the course of eight weeks.  

After months long saga, the law firm King & Spalding representing Halkbank on Feb. 25, said that the bank had changed its mind and decided to defend itself in the courtroom. The federal judge Richard Berman did not accept this oral mandate and asked for a written authorization from the law firm. According to Nick Morgan who followed the hearing at the courtroom for Ahval, Berman expressed his pleasure with the “change of direction” of the bank. 

With the arrival of this authorization, the bank will be notified of the indictments and accusations officially announced before its legal representatives and will begin to prepare its own defense with the arraignment phase. 

The U.S. media reported earlier this month President Trump ordered Attorney General William Barr to drop charges against Halkbank. One of the most outspoken U.S. lawmakers Ron Wyden, tweeting about the same reports, said his office, as the Senate Finance Committee’s ranking member, has been “investigating Trump’s interference in the investigation into Turkish-owned Halkbank, and my suspicions were just confirmed. Attorney General Barr — at Trump’s request — was trying to orchestrate a sweetheart deal to please President Erdogan.”

Zarrab iIn his testimony in late 2017 explained how the sanctions imposed upon Iran were busted through Halkbank. This resulted in the conviction of Mehmet Hakan Atilla, one of the former senior officials of Halkbank who was the only defendant after Zarrab had pled guilty. Atilla served a 32-month jail sentence in New York then returned Turkey and was appointed to be the head of Istanbul Stock Market.

Prosecutors from the southern district of New York argued that in total about $20 billion should have remained in the bank's vault due to the embargo between 2011-2016. Turkey could have also sold humanitarian goods or medical needs to Iran in exchange of the money at Halkbank. Instead, Zarrab testified and U.S. prosecutors claimed in the indictment that the Turkish officials directed Halkbank to engineer the complex scheme to get the money out of Turkey’s one of largest lenders to Iran. In the process, indictments said, hundreds of millions of dollars were distributed as bribes and commissions to AKP government officials and other Turkish bureaucrats.  

In the Halkbank indictment, U.S. prosecutors wrote that after Zarrab’s brief detention at the end of 2013 and early 2014 in Istanbul, then-Prime Minister of Turkey, Recep Tayyip Erdogan and his son-in-law Treasury Minister Berat Albayrak, “instructed Halkbank to resume the scheme, and Halkbank agreed.” 

In 2018 and 2019, Halkbank had hoped to halt the impending indictment by paying off lobbyist Brian Ballard who is closely linked to U.S. president Donald Trump. Within only two years, Halkbank paid some $2.6 million to the same group of lobbyists. After the indictment dropped on Oct. 15, Halkbank terminated their agreement with the Ballard Partners.

It remains to be seen whether there will be new details of the sanctions busting scheme revealed at the courtroom that were not already revealed by the same federal district court about two years ago. On Monday, Turkey’s main opposition Republican People’s Party (CHP) leader Kemal Kılıçdaroğlu’s lawyer delivered evidence to a Turkish court of what he called proof of the authenticity of audio recordings leaked during the 2013 corruption probe, from which the accusations of Halkbank stemmed from. 

It appears that the continuation of the rejection of the SDNY’s authority was going to cost the bank dearly. How the current course of the bank to battle against the U.S. at the courtroom will manifest results for the bank will have to be watched closely.