Turkish state bank Halkbank has been at the forefront of an effort by Turkish government officials to circumvent US sanctions against Iran. Photo Credit: Flickr
On October 15, 2019, the Southern District of New York indicted Turkish-state owned bank Halkbank for violating US sanctions against Iran. The indictment was the culmination of years of investigation into a web of corruption and signaled an American commitment to anti-money laundering and counter terrorist financing (AML/CFT) in the Middle East. However, the prosecution faced various hurdles from the Trump Administration as senior American officials repeatedly intervened on behalf of Turkey. The trial was finally set to begin in March 2021 under the Biden Administration, but has been delayed with little information available to the public. Given the wide scope of the sanctions evasion committed by Halkbank, allowing the case to settle or disappear would be a massive setback for the US AML/CFT regime and a signal to other states that sanctions are really more of a suggestion than a hard line. While the Biden administration’s interest in renegotiating a nuclear deal with Iran complicates the politics of prosecution, there must be accountability to ensure the credibility of sanctions and American foreign policy writ-large.
The Halkbank scheme first entered the public radar in 2014 in the midst of President Recep Tayyip Erdogan’s reelection campaign in Turkey when a prosecutor’s report consisting of over 300 pages of allegations of corruption against his government leaked to the media. The report provided evidence of a massive money laundering scheme that used front companies and money service businesses in Turkey and the UAE to help Iran evade US sanctions and access billions of dollars in oil revenue. According to the prosecutor’s report, senior bank and government officials colluded to launder Iranian oil revenue through various illicit transactions, such as cash for gold sales and phony goods invoices, that were then processed through state-owned Halkbank. The funds were then laundered through the UAE and released to Iran as cash payments, violating the US prohibition on hard currency for Iranian oil. Under the current sanctions regime, Iran is only allowed to exchange oil for goods exempted by a humanitarian clause, such as food and medical supplies.
At the time of his reelection, President Erdogan claimed the payments to Iran complied with legal exemptions under US sanctions and that Turkey was simply utilizing a loophole that allowed gold-for-energy payments. However, President Obama issued several Executive Orders to close precious metal sanctions loopholes in 2013. Erdogan pressured prosecutors in Turkey to drop the corruption investigation, blaming his political rival Fetullah Gülen for operating a campaign to undermine Edrogan’s legitimacy. The case remained relatively quiet until March 2016, when the Southern District of New York (SDNY) announced charges against three individuals for defrauding the United States. At the center of the oil for gold for cash scheme was Reza Zarrab, a young and exorbitantly wealthy Turkish-Iranian businessman who had expanded his family’s money service business into a criminal enterprise with ties to the Turkish government and Iranian regime. According to the prosecution, Zarrab facilitated his money laundering scheme through extensive cooperation with the Turkish government. Documents from the SDNY noted that Zarrab paid cabinet-level government officials and high-level bank officers tens of millions of dollars to facilitate the transactions for Iran. To underscore the importance of this finding, Zarrab’s scheme did not just involve the cooperation of a few wayward insiders, but also relied on active participation from high level officials, who represent the government of an American NATO ally.
The US stance on the case shifted with the Trump administration. In March 2017, three months into his first term as president, Donald Trump fired the prosecutor for the SDNY Preet Bharara. President Trump asked then-Secretary of State Rex Tillerson to persuade the DOJ to drop the charges against Zarrab, a client of Rudy Giulliani’s. Secretary Tillerson refused, and the SDNY announced charges against additional executives at Halkbank in September 2017. By October, Zarrab pleaded guilty and agreed to cooperate with the prosecution. Acting as a witness in the trial against Atilla, Zarrab testified that President Erdogan had given the orders for Halkbank to start performing the illegal transactions on behalf of Iran in 2012. Erdogan has adamantly denied these allegations, and repeatedly appealed to President Trump to intervene in the DOJ’s Halkbank investigation. At the conclusion of the trial, Atilla was sentenced to 32 months in jail. A spokesperson for President Erdogan called the verdict “a plot to intervene in Turkey’s domestic affairs.”
According to former national security advisor John Bolton, President Trump assured Erdogan over a December 2018 phone call that the US would “take care of [the Halkbank case].” In other words, the President agreed to interfere in the work of the Justice Department on behalf of a foreign government. The Trump administration’s willingness to overlook sanctions evasion in Turkey became increasingly dubitable when on October 15 2019, a Grand Jury indicted Halkbank for violating and evading US national security controls against the government of Iran by using money service businesses and front companies to violate and evade US prohibitions against Iran’s access to the US financial system, restrictions on the use of proceeds of Iranian gas and oil proceeds, and restrictions on the supply of gold to the government of Iran. The indictment further charges that Halkbank knowingly facilitated the scheme, participated in the design of fraudulent transactions intended to deceive US regulators and foreign banks, and lied to US regulators about Halkbank’s direct involvement in the scheme. The indictment also notes that high-ranking government officials in both Turkey and Iran knowingly protected and participated in the fraud.
President Erdogan has continued to deny any wrongdoing by Halkbank or Turkish officials, and has taken significant steps to challenge the DOJ’s characterization of involved parties. Upon completing his prison sentence in the US, Mehmet Hakan Atilla returned to Turkey where he was appointed Director General of the Istanbul Stock Exchange. President Trump, fulfilling his promises to Erdogan, tasked Attorney General William Barr to pressure US Attorney General for the SDNY Geoffrey Berman to drop the charges. When Berman refused, Barr had him fired in June 2020. Despite substantial intervention from the White House, the case did move forward. In October 2020, US District Judge Richard Berman rejected Halkbank’s claim that the Foreign Sovereign Immunities Act protected it from prosecution, and the trial was set to begin in March 2021. Following the motion in October, news on Halkbank has gone relatively quiet. The primary case appears to be delayed, and on February 16, 2021 U.S. District Judge Denise Cote agreed to dismiss a parallel case against Halkbank brought forth by the victims of terrorist attacks linked to Iranian funding. The lack of action begs the question: will the Biden administration allow this case to flounder or push for prosecution?
The Biden administration is toeing a delicate line in the Middle East, and undoubtedly there is pressure to placate Iran as Washington seeks to renegotiate the Iran Deal. However, there are significant costs to ignoring Turkey’s transgressions. A failure to prosecute the Halkbank case would damage US interests by discrediting all sanctions regimes; if sanctions evasion is not backed by any credible retaliatory action, there is no reason to abide by US sanctions. Other states will see only the benefits of money laundering and none of the costs. Such an admission of the futility of sanctions would bring an entire pillar of American foreign policy into question. The Biden administration must then ask themselves whether they are willing to admit sanctions don’t work to the international community.
Failure to address deficiencies in the regulation of Turkish financial institutions also threatens global financial markets by exposing unsuspecting banks to transactions linked to terrorist financing. Turkey has made it clear there will be no additional regulation or reform of financial practices. With funds continuing to move through global markets and into Iran, these transactions may be linked to terrorist attacks, harming the credibility of exposed banks or making them vulnerable to civil litigation by the victims of terrorist attacks. Due to this threat, banks may block transactions through Turkey. While banks carry some responsibility for policing transactions within global financial markets, the Treasury Department should be leading the regulation of Turkey’s markets rather than undermining its own credibility in AML/CFT.
Finally, we must assume that Turkey will continue to push the limits ever farther as our NATO ally. If Washington is willing to let the largest sanctions evasion scheme go unpunished, what else will follow? Turkey has already hosted Specially Designated Terrorists, violated CAATSA sanctions through Russian arms purchases, and destabilized the situation in Syria through military offensive actions. Despite these transgressions, the Trump administration repeatedly signaled a willingness to bend our interests to Turkey. The Biden administration must push back on that precedent or face the consequences in the future. The Justice Department clearly wants to move forward with prosecution; the Biden administration should fully support them in that endeavor.
 Jonathan Schanzer and Emanuelle Ottolenghi, “Turkey’s Teflon Don,” Foreign Policy, March 31, 2014. https://foreignpolicy.com/2014/03/31/turkeys-teflon-don/
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 ٍRyan Goodman and Danielle Schulkin, “Timeline: Trump, Barr, and the Halkbank Case on Iran Sanctions-Busting.” Just Security. July 27, 2020. https://www.justsecurity.org/71694/trump-barr-and-the-halkbank-case-timeline/
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 United States vs. Halkbank, S6 15 Cr. 867 (2019). https://www.justice.gov/opa/press-release/file/1210396/download
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 “US Court dismisses case against Turkey’s Halkbank by victims of Iran Linked Attacks,” Reuters, 17 Feb. 2021 https://www.reuters.com/article/us-turkey-us-halkbank/u-s-court-dismisses-case-against-turkeys-halkbank-by-victims-of-iran-linked-attacks-idUSKBN2AH0FG