US court accuses Turkey's Halkbank of bypassing Iran sanctions

U.S. prosecutors on Oct. 15 charged Turkey's majority state-owned Halkbank with partaking in a multibillion-dollar scheme to circumvent U.S. sanctions against Iran - an indictment that may stir up tension between NATO allies Washington and Ankara.

The indictment, which was slammed by President Recep Tayyip Erdoğan as an "unlawful, ugly step," alleges Turkey's second-largest state bank conducted fraud, money laundering, and other sanctions offences.

The charges disclosed in a federal court in Manhattan mirror those against one of Halkbank's former executives, Mehmet Hakan Atilla, who was found guilty and sentenced to prison after a trial in the same court last year.

"Halkbank was charged today in a six-count Indictment with fraud, money laundering, and sanctions offenses related to the bank’s participation in a multibillion-dollar scheme to evade U.S. sanctions on Iran," read a statement released by U.S. Attorney's Office Southern District of New York, adding that the case is assigned to U.S. District Judge Richard M. Berman.

Tense relations between Ankara, Washington

The indictment comes amid tense relations between Washington and Ankara over the former's decision to impose sanctions due to the latter's military offensive in northeastern Syria.

Turkey's offensive has tested its ties with the U.S. and could imperil its economy's recovery from last year's currency crisis. It was launched following President Donald Trump's abrupt decision to withdraw U.S. troops from the area.

Washington on Oct. 13 announced sanctions on Turkish officials, hiked tariffs and halted trade talks in an effort to persuade Ankara to end its offensive against the People's Protection Units (YPG) militia in northeastern Syria.

U.S. Vice President Mike Pence is set to meet with Erdoğan in Ankara on Oct. 17 to urge a ceasefire and emphasize the Trump administration's commitment to sanctions until a resolution is reached, the White House said.

Halkbank is charged with conspiracy to defraud the U.S., conspiracy to violate the International Emergency Economic Powers Act (IEEPA), bank fraud, conspiracy to commit bank fraud, money laundering and conspiracy to commit money laundering.

"High-ranking government officials in Iran and Turkey participated in and protected this scheme.  Some officials received bribes worth tens of millions of dollars paid from the proceeds of the scheme so that they would promote the scheme, protect the participants, and help to shield the scheme from the scrutiny of U.S. regulators," the indictment read.

Speaking to reporters in the capital Ankara, Erdoğan said that the Halkbank issue was "supposedly closed."

"But now they have taken an unlawful, ugly step with the southern New York prosecutors opening it again," he said on Oct. 16.

"We will see the decision they will take, and we will [respond] accordingly," the president added.

The indictment is the latest development in a U.S. criminal case that first became public in 2016 with the arrest in Miami of Reza Zarrab, a shady Turkish-Iranian gold trader accused of playing a central role in the sanctions evasion scheme.

Atilla, a Halkbank deputy general manager, was arrested in New York the following year.

Zarrab pleaded guilty and testified for U.S. prosecutors at Atilla's trial. Zarrab said that Iran, with the help of Halkbank and Turkish government officials including Erdoğan, used a complex web of shell companies and sham transactions in gold, food and medicine to dodge U.S. sanctions.

Turkey depicted that case as a political plot against Erdoğan's government and said it was an extension of a 2013 domestic corruption investigation, which Ankara says was launched by the network of Fethullah Gülen, a U.S.-based Islamic preacher believed to have been behind the July 2016 botched coup.

U.S. prosecutors said some officials took bribes as part of the scheme.

The prosecutors are seeking to compel Halkbank to forfeit money and property, though they did not give a specific amount.

Zarrab, before pleading guilty, hired Rudy Giuliani, a longtime associate of Trump, to try to negotiate a deal between the U.S. and Turkish governments to secure his release.

Giuliani attempted to broker a diplomatic deal with Turkey to withdraw Zarrab from U.S. custody, trying to swap him for an American pastor, Andrew Brunson, who was in Turkish custody.

Then, at Giuliani’s urging, Trump asked then-Secretary of State Rex Tillerson in the second half of 2017 to press the Justice Department to drop its case against Zarrab, Bloomberg News reported last week.

In an interview last week, he said he talked to the State Department about his role as Zarrab’s lawyer and had behaved ethically and legally. He would have been a hero had he arranged the swap with Brunson, he said.

Giuliani has more recently attracted attention as Trump's personal lawyer. Federal prosecutors are examining Giuliani's interactions with two men he worked with in Ukraine who were arrested last week on campaign finance charges.

Giuliani also said on Oct. 15 that he would not cooperate with the Democratic-led U.S. House of Representatives impeachment inquiry into Republican Trump's efforts to pressure Ukraine to investigate Democratic political rival Joe Biden.

At the time, Atilla was sentenced to 32 months in prison following his conviction. He was released and returned to Turkey earlier this year, with Finance Minister Berat Albayrak welcoming him at the airport.

At the time of Atilla's conviction, Erdoğan condemned the case as a political attack on his government.

Halkbank dismisses accusations

Similarly, Halbank on Oct. 16 slammed the indictment, claiming the charges were made as part of sanctions Washington slapped on Ankara, adding they appeared to be largely a repetition of allegations made in a similar previous trial.

"These were filed as part of the sanctions introduced against our country by the U.S. government in response to Operation Peace Spring, heroically launched by the Turkish army to secure our borders and establish peace in the region," Halkbank said, referring to Turkey's military offensive that entered its eighth day.

"Therefore the decision to indict is an unprecedented legal overreach," it added.

The bank also said it did not engage in sanctions violations as alleged and falls outside of the U.S. Justice Department's jurisdiction since it has no branches or employees in the U.S.

Commenting on the subject, an official at Turkey's embassy told Reuters the indictment does not contribute positively to ties between Washington and Ankara.

'Millions of dollars in bribes'

Speaking about the charges, U.S. Attorney Geoffrey S. Berman said "the bank’s audacious conduct was supported and protected by high-ranking Turkish government officials."

"As alleged in today’s indictment, Halkbank’s systemic participation in the illicit movement of billions of dollars’ worth of Iranian oil revenue was designed and executed by senior bank officials," said Berman.

"The bank’s audacious conduct was supported and protected by high-ranking Turkish government officials, some of whom received millions of dollars in bribes to promote and protect the scheme,” he added.

Assistant Attorney General for National Security John C. Demers said branded the case as "one of the most serious Iran sanctions violations we have seen."

"No business should profit from evading our laws or risking our national security," he also said.

Another name to comment on the indictment was FBI Assistant Director-in-Charge William F. Sweeney Jr., who vowed that the FBI " will aggressively pursue those who intentionally violate U.S. sanctions laws and attempt to undercut our national security."

"Halkbank illegally facilitated the illicit transfer of billions of dollars to benefit Iran, and for far too long the bank and its leaders willfully deceived the United States to shield their actions from scrutiny.  That deception ends today," he said.

Ban on short-selling

Before Turkish markets opened, authorities had banned short-telling on seven large Turkish bank stocks including Halkbank. Selling shares in the banks only to buy them later in the session was also banned, authorities maintained.

The Turkish stocks covered by the short-selling ban were: Akbank, Garanti Bank, Halkbank, İş Bank , TSKB, VAKIFBANK and Yapı Kredi Bank.

Despite the ban on short-selling, Halkbank's shares plunged as much as 7%.

State banks - which have sold dollars to defend the lira since the Syria offensive began last week - were on Oct. 16 squeezing funding in an offshore FX swaps market to cushion the blow from the Halkbank indictment, Reuters cited a bond trader as saying.

Halkbank stock nonetheless fell as much as 7.2% at the open and was down 4.8% at 0939 GMT.

The main banking index, which has fallen more than 16% this month on fears of U.S. repercussions, was down 2.4% while Turkey's broader stock index was off 1.3%.

The U.S. sanctions and increased tariffs risk slowing Turkey's recovery from recession after last year's crisis chopped nearly 30% off the value of the lira. The crisis was set off by concerns over deteriorating U.S.-Turkey ties and political interference in monetary policy.

Turkey's lira has declined some 10% against the dollar this year, due largely to worries that Washington would sanction Ankara over its purchase of Russian S-400 missile defense systems.

State banks stepped in to sell dollars in March when the lira briefly tumbled, and traders said they intervened again in the last two weeks.

The currency has firmed this week since the U.S. sanctions were announced and deemed lighter than expected. After the Halkbank indictment, the lira was up 0.3% at 5.9015 against the dollar.

Halkbank shares have slumped 23% this year in Istanbul, heading for its second year of declines. That compares with an 11% gain for the 13-member banking index.