Turkish-Iranian gold trader Reza Zarrab on November 29 related to a New York court how he ran a $1bn and complex international money laundering scheme designed to help Iran dodge US sanctions and involving more than $50mn of bribes paid to then Turkish economy minister Mehmet Zafer Caglayan.
Zarrab has pleaded guilty and is cooperating with US prosecutors in the criminal trial of a Turkish Halkbank deputy chief executive officer, Mehmet Hakan Atilla, who has entered a not guilty plea at the federal court in Manhattan. Zarrab said he helped Iran use funds deposited in state-owned Halkbank to buy gold. That was then smuggled to Dubai and sold for cash.
Prosecutors have charged nine people in the case, but only Zarrab, 34, and Atilla, 47, have been arrested by US authorities. Turkish President Recep Tayyip Erdogan has unsuccessfully tried to get both the Obama and Trump administrations to have the case dropped, arguing it has been fabricated by Gulenist movement which he blames for the July 2016 attempted coup. Zarrab, who lived in Istanbul with pop star wife Ebru Gundes, is said to have connections to Erdogan’s family, although the Turkish president has not been accused of any crime.
Zarrab, dressed in prison garb, explained to the jury how he falsified customs documents to make it appear that gold purchased with the proceeds from Iranian oil and gas sales to Turkey was bound for Iran, rather than Dubai, news agencies reported.
He said Atilla was “the most knowledgeable person about the sanction rules” at Halkbank, and that he helped develop the scheme. “[Atilla] made contributions to make our scheme look like it’s complying with the American sanctions," Zarrab said, according to Bloomberg. He added that Atilla and Halkbank’s then-general manager, Suleyman Aslan, instructed him how to carry the process out. “He made sure that the system and method worked,” Zarrab added of Atilla.
Zarrab, who is in the custody of the FBI, agreed to cooperate with prosecutors in return for leniency. He told the court that he began working with Halkbank on the scheme in 2012, after bribing Caglayan, then Turkey’s economy minister, to broker a deal with Aslan.
Caglayan and Aslan have also both been charged in the case. Caglayan remains at large but has denied any involvement in the laundering.
As well as the scheme involving disguised gold purchases, there was another scheme in which Iran was given access to hard currency through the faking of invoices for food and medicine purchases, which were exempt from the US sanctions.
Zarrab testified that before working with Halkbank, he handled Iranian transactions through Turkey’s Aktif Bank. He said the bank first refused to let him open an account, but relented after he asked Egemen Bagis, then Turkey’s minister of European Union affairs, for help. However, Aktif Bank, at the time owned by a group led by Erdogan's son-in-law, shut down the account after receiving a warning from the US, Zarrab said.
Bloomberg quoted Zarrab as saying that he used a third Turkish bank, DenizBank, to process some transactions.
Halkbank has maintained that its operations and transactions fully comply with national and international regulations.
Zarrab, born in Iran but holding Turkish citizenship, is expected to return to the witness stand on November 30.
Threat of US fines
The immediate question is whether those Turkish banks Zarrab mentioned in his testimony or other Turkish financial institutions could face US fines.
Earlier this month, Deputy PM Mehmet Simsek refuted claims that US officials were probing several Turkish banks for violating American sanctions applied to Iran.
“There are no probes into any Turkish lender. A number of questions have been raised about only one Turkish bank right now. Other than this, there is no process regarding the Turkish banking system,” he said on November 17.
On November 29, Simsek said that Turkey would do whatever was necessary if its banking sector was affected by the trial.
On a related note, the Banks Association of Turkey Chairman Huseyin Aydin told Reuters on November 29 that Turkish banks would continue to secure foreign financing with loans and bonds and that the association does not see low appetite for Turkish risk.
Shares in Turkish banks rose 1.3% d/d while the main stock exchange index, the BIST-100, was up 0.3% on November 29. Shares in Halkbank rose 1.73%. The lira gained 0.1% to 3.9617 per dollar on November 29. Turkish markets closed before the trial began in the US against the dollar last week
The lira was trading at 3.9440/USD as of around 1230 local time on November 30. The currency has depreciated against the greenback by 11% year-to-date, the most among major markets.