Mark Bentley
Jan 05 2018

Decision time for Erdoğan after U.S. guilty verdict in Iran sanctions case

A guilty verdict handed down by a U.S. court against a senior Turkish banker presents President Recep Tayyip Erdoğan with the biggest political challenge he has faced since an attempted military coup in Turkey 18 months ago.

The verdict against Mehmet Hakan Atilla, deputy chief executive of state-run Halkbank, on counts of fraud and a conspiracy to evade U.S. sanctions on Iran, threatens to put Erdoğan in direct confrontation with U.S. regulators, including the U.S. Treasury, who are now considering whether to levy fines against Halkbank that could run into billions of dollars.

The stakes could not be higher - how Erdoğan handles proceedings from now on could have serious consequences for both Turkey’s banks and the economy as a whole.

Erdoğan, who habitually uses political brinkmanship, victimhood and populist outbursts to solidify his power base, would be well advised to step back and cooperate with U.S. authorities, including the Treasury, as they ascertain how Halkbank may have been complicit in the scheme.

The Turkish president has thus far characterised the case against Atilla as a direct attack on his government and the nation itself. On Thursday, his spokesman, Ibrahim Kalın, described the jury’s verdict as “a scandalous decision of a scandalous case”. The Turkish Foreign Ministry issued a statement saying the trial amounted to interference in Turkey’s internal affairs.

Bekir Bozdağ, Turkey’s justice minister, went a step further, accusing the CIA and FBI of complicity with the Fethullahist Terrorist Organization, a government designation for the Fethullah Gülen movement, which Erdoğan blames for masterminding a failed coup in 2016. The U.S. prosecution has brought witnesses and evidence in the trial from a probe of government corruption in 2013 that Erdoğan says was carried out on Gülen’s instructions.

As well as fines, U.S. regulators have a variety of sanctions at their disposal. Historically, and especially in cases of sanctions busting, penalties have been high, as has a requirement of admittance of guilt on behalf of transgressors. BNP Paribas was forced to pay $8.9 billion in May 2015 by a U.S. judge for violating sanctions against Iran, Cuba and Sudan. It accepted full responsibility and agreed to enhance its compliance procedures.

Failure to comply can result in the banishment of a bank from the U.S. financial system and, in extreme cases, the blacklisting of individuals and financial institutions in a country from which the crimes occurred.

Evidence in the case not only alleges that Atilla and other bankers helped Iran funnel billions of dollars through the U.S. banking system. Iranian-Turkish gold trader Reza Zarrab - defendant turned state’s witness at the trial - said that Erdoğan and his ministers were fully aware the scheme.

Zarrab
Iranian-Turkish businessman Reza Zarrab after his U.S. arrest

So Erdoğan’s continued condemnation of the case is not only a direct challenge to U.S. authorities considering the level of possible sanctions against Halkbank, but could conceivably encourage them to widen the scope of their enquiries, potentially ensnaring other more senior Turkish officials in financial crime.

But a climb-down might be difficult for Erdoğan to stomach. Behind the Turkish leader’s vociferous rhetoric is not only the desire for domestic popularity and power. Erdoğan has very real ambitions to be the prime spokesman and advocate for Muslims throughout the Middle East. Anti-Western language is a key element of his strategy to lift his status.

Therefore further confrontation with the United States, even with the resultant economic and political repercussions for Turkey, could be difficult to avoid.

In a perhaps ill advised move this week, Erdoğan and Iranian President Hassan Rouhani, agreed to deepen economic cooperation and, more specifically, in the banking sector. Such moves could also anger U.S. President Donald Trump, who sees Iran as a foe the U.S. must deal with.

On Friday, Erdoğan again lambasted the court ruling saying “if this is America’s understanding of justice, then the world is in trouble.”

In a statement to the Istanbul Stock Exchange, Halkbank said it had complied with international banking regulations and was not a party to the charges aired in the U.S. trial.

But Joon Kim, the prosecuting U.S. attorney in the case, issued a blunt warning at the trial’s conclusion: “Foreign banks and bankers have a choice: You can choose wilfully to help Iran and other sanctioned nations evade U.S. law, or you can choose to be part of the international banking community transacting in U.S. dollars.”

Kim’s statement suggests that a swift response may be forthcoming from the U.S. Treasury Department’s Office of Foreign Assets Control, which is empowered to enforce the nation’s sanctions laws.