Mark Bentley
Jan 19 2018

Tens of billions of dollars is likely U.S. gambit in talks over Halkbank

A demand for as much as $37.5 billion could be the opening move for U.S. authorities seeking to punish Turkey’s state-run Halkbank for breaking sanctions on Iran.

The U.S. Treasury may have already presented its initial request to Turkish negotiators as talks begin on a possible deal. That would explain why officials such as Deputy Prime Minister Mehmet Şimşek  stated this week that Turkey will not pay up should the government consider the final figure unreasonable and politically-motivated.

Alleged transgressions by Halkbank officials, which also include fraud, have been a major bone of contention between the two countries ever since Reza Zarrab, an Iranian-Turkish businessman, was arrested in Miami in March 2016.

After turning state’s witness, Zarrab’s testimony at a trial in New York last month, and the guilty verdict against Halkbank deputy CEO Mehmet Hakan Atilla, has bought U.S.-Turkish relations to breaking point, adding to the animosity already felt by Ankara toward U.S. policy in Syria and its support for Kurdish militants there.

In the clearest indication of the size of the transgressions, Zarrab told the Manhattan jury that he made $100-$150 million from the scheme to funnel Iranian cash through the international banking system. He said he earned the money by charging commission rates of 0.4-0.5 percent of the total cash volume.

If Zarrab made $100 million by charging 0.5 percent commission, then the total amount that he handled and passed through the financial system would be $20 billion. If he made $150 million by charging 0.4 percent, then that would mean the total value was $37.5 billion.

“Probably the negotiations will be starting from around these levels,” said one analyst with knowledge of the U.S. Treasury’s methods, who asked not to be unidentified. “It’s a big range obviously. We may never hear such numbers. Behind the scenes negotiations may lower the amount to much smaller levels before we hear any figures.”

U.S. authorities have habitually made use of similar calculations to set the level of fines for banks in the past. Examples include BNP Paribas and Standard Chartered. In a decision made in May 2015, a U.S. court imposed a penalty of $8.9 billion against BNP, including $8.8 billion that it said was equal to the amount of transactions identified as criminal. The agreement with BNP was conditional on it accepting full responsibility for the crime and convincing U.S. authorities that it would set mechanisms in place to ensure full compliance with the sanctions regime in the future.

So it follows that the Treasury will probably use the same guidelines when setting penalties for Halkbank, the analyst said.

U.S. Treasury
U.S. Treasury building in Washington DC

But the case of Halkbank is far more complicated than those of BNP or Standard Chartered. It was not just banks that were involved in the scheme, but other institutions as well, according to court witnesses. Turkish former Economy Minister Zafer Caglayan was complicit and Erdoğan  was at least aware, Zarrab said.

And, rather than cooperate with U.S. authorities – the state owns 51 percent of the company – Erdoğan  has slammed the jury’s decision, saying the U.S. justice system is “a danger to the world”.

“The public commentary is already undermining U.S. sanctions … I think that (the fine) needs to be a bit more serious than the BNP and the Standard Chartered ones,” said another analyst, who asked not to be unidentified. “They (the Treasury) will throw the bucket at them to start with and I think the final amount has got to be something that Hallkbank itself can’t pay.”

“If it was Indonesia or Malaysia, I think those countries would have already gone out of their way to comply.”

Turkey’s problems have been compounded by Erdoğan ’s increasing authoritarianism, which has included locking up intellectuals, journalists and public servants for their alleged involvement in a failed coup in July 2016. The detainees also include a U.S. pastor and consular official.

Turkey, therefore, has few friends in Washington.

And President Donald Trump, who the Turks sought to court via former national security adviser Michael Flynn, may also have his hands tied should he wish to help soften the financial blow as an investigation into alleged collusion between the Trump campaign team and the Russians continues.

Still, Erdoğan may go some way to placating Washington by dropping plans to purchase S-400 missiles from Russia and buying Patriots instead – a deal that is potentially worth tens of billions of dollars to the U.S. arms industry.

“Trump could take that one,” one of the analysts said. “Then, of course, Turkey would have to come back into the U.S. fold. That would be the prize.”