Turkish bank on trial in New York – Bankruptcy of Turkish economy

In Istanbul’s Maslak financial district, in a corner office with a view of the Bosphorus, resides the man whom the US judiciary has accused of playing an important role in one of the largest international criminal cases of recent decades.

After studying economics in Ankara, Mehmet Hakan Atilla, now 50 years old, joined the Turkish state-owned company Halkbank. Within two decades he rose to the position of deputy head of the bank, responsible, among other things, for international finance. Atilla lived in seclusion with his wife and son in Ankara. He’s one of those men who silently keeps the machine running.

His life changed suddenly when he was arrested by FBI officers at New York Airport on March 27, 2017. A video shows how he turns to the police during the questioning: “Do your best. I’m a government official,” he says. “I am sure that the Turkish government will be interested in this case.” Since then, Atilla has been Turkey’s best-known finance manager.

The US judiciary sees it as proven that Atilla helped Iran circumvent sanctions on a large scale. A New York court sentenced him to two years and eight months in prison in 2018. Atilla has now returned to Turkey.

Turkish President Recep Tayyip Erdoğan regards Atilla as a hero because the manager did not incriminate his government in court in New York. Erdoğan made Atilla head of the Istanbul Stock Exchange.

Atilla himself thinks the allegations are politically motivated. “I was innocent,” he says. “I’m just trying to forget the time I wrongly spent in prison.”

For Atilla, the case is closed with his return to Turkey. For Halkbank and the Turkish government is it only really getting started now. The trial is scheduled to begin in New York in the coming weeks. Atilla is no longer on trial, but the entire Halkbank.

According to observers, if convicted, Halkbank could face a fine of up to $ 20 billion in the worst case or expulsion from the international banking system Swift. One of the largest Turkish banks could then no longer participate in international payment transactions. That would probably mean the end for them.

The Turkish economy is already in crisis. A Halkbank bankruptcy could give it the fatal blow. Hundreds of thousands of investors in Turkey would lose their savings. The lira would keep falling. Economists are warning of a collapse in the Turkish financial industry, as in 2001, when hundreds of thousands of people were impoverished practically overnight.

The procedure also has a global dimension. The question of whether Turkish politicians, including President Erdoğan, were involved in the breach of sanctions, as a witness in the Atilla trial alleged, could also be discussed in court in New York.

He evaluated hundreds of pages of court documents for this report and spoke to officials in Turkey and the US. Most of them want to remain anonymous due to the ongoing trial.

The “United States of America vs Halkbank” case is a business crime that spans several continents. It has the potential to destroy political careers and further shatter US-Turkish relations. It starts in Iran around 2010.

How a Turkish-Iranian businessman invents an almost perfect smuggling

In 2010, Mahmoud Ahmadinejad has been Iranian President for five years. He has put down mass protests against the regime. But he has a problem: In order to stop the Iranian nuclear program, the EU and the US are imposing more and more sanctions. Iran is running out of money.

At that moment Reza Zarrab steps in, a gold trader with good connections in Iranian and Turkish politics, then in his late twenties, who promises to solve Ahmadinejad’s problem. He wants to help the regime in Tehran to secretly raise capital through oil and gas deals with Turkey.

Zarrab was born in Tabriz, but has lived in Turkey since the 1980s. He is apparently acting as a middleman for the allegedly illegal business between Iran and Turkey from 2010. This is what the court records show.

Zarrab’s system therefore stipulated that Turkey, which itself had few energy sources of its own, would continue to obtain relatively cheap oil and gas from Iran. The money for this apparently ended up in an account held by the Iranians at Halkbank, but apparently it was never withdrawn directly. Because of the sanctions, Iran should only have used it for humanitarian and civil purposes such as the purchase of medicine or food.

Instead, it apparently came to Zarrab in a series of intermediate steps, who used it to buy gold, among other things. Zarrab used the gold to settle Iranian bills abroad. According to US investigators, Zarrab and Halkbank are said to have laundered around $ 20 billion for the Iranian regime over the years.

Zarrab makes a gigantic fortune within a short time. He lives in Istanbul in a 72 million dollar mansion. He owns half a dozen yachts, a weapons collection, and a private jet. He is married to Ebru Gündeş, a well-known Turkish pop singer. Zarrab goes in and out of the Turkish ministries. He maintains close contact with President Erdoğan.

In order to keep the system running, he apparently smeared several Turkish officials with millions, including allegedly the then Minister of Economic Affairs Zafer Çağlayan and the then Halkbank boss Süleyman Aslan, as Zarrab will later confess to the US investigators. The accused deny the allegations.

The fraud went well for a few years until Erdoğan, who was still prime minister at the time, fell out with the community of Islamist preacher Fethullah Gülen. Erdoğan and Gülen had worked together informally for a long time, Erdoğan occupied key positions in the state with Gülen cadres, in return the community organized votes for him and persecuted critics.

But then Gülen becomes too powerful. The prime minister closes the movement’s schools and tutoring centers in the fall of 2013, whereupon government officials associated with Gülen open corruption investigations against Halkbank boss Aslan and several sons of ministers.

For years, Gülen officers in the police and judiciary systematically tapped politicians’ phones, which apparently also taught them about Zarrab’s system. Now they are going public with their findings. One of the telephone recordings can be heard as Erdoğan instructs his son Bilal to move several million dollars out of the house. In Aslan’s villa, investigators find $ 4.5 million in shoeboxes.

The corruption affair shakes the Erdoğan system. The prime minister is forced to reorganize his cabinet, and Zarrab himself has to be in custody for around two months.

Ultimately, however, Erdoğan succeeds in portraying the investigation as a coup in disguise. Zarrab is being rehabilitated. According to US files, at Erdoğan’s instructions, he is resuming trade with Iran. In 2015 he even received an award as a “top exporter” at the instigation of the premier.

What Erdoğan and Zarrab apparently underestimated at this point is that the US is now also interested in the process. President Barack Obama has made preventing Iran from building an atomic bomb one of his foreign policy priorities. He cannot allow a NATO ally, Turkey, to help the regime in Tehran to evade sanctions.

When Zarrab wanted to visit Disney World with his family in March 2016, he was arrested at Miami airport and transferred to a maximum security prison in New York, where he later gave detailed testimony to FBI investigators. Zarrab also puts a heavy burden on Erdoğan. The then prime minister approved the breach of sanctions right from the start, he says.

A year later, Halkbank Vice President Mehmet Hakan Atilla was arrested while on a trip to the US. The New York court comes to the conclusion that he knew about the system but, unlike bank chief Aslan, did not benefit directly from it. The prison sentence against him is therefore comparatively mild.

Erdoğan will bring up the Halkbank issue in just about every conversation with Trump over the next few months. This is how John Bolton, the former security advisor to the US President, said in several interviews.

According to research by the New York Times, the Turkish government is paying the US lobby company Ballard at least $ 4.6 million to get involved with Halkbank. Trump’s former security advisor Michael Flynn is said to have offered Turkey 15 million dollars in the event that the preacher Fethullah Gülen is extradited from exile in the United States. This is what the report by Special Counsel Robert Mueller says about foreign interference in the 2016 US election campaign. Flynn denies the allegations.

On the sidelines of the G20 summit in Buenos Aires in December 2018, Erdoğan presented his American counterpart with a memo from the law firm King & Spalding, which works for Halkbank. Trump flipped through the pages without actually reading them, says Bolton. Nevertheless, he assured Erdoğan that he believed in Halkbank’s innocence. “I’ll take care of it,” Trump said, according to Bolton.

Trump personally entrusted Justice Secretary William Barr and Treasury Secretary Steven Mnuchin with the matter. “We are very close to a solution,” he is said to have promised Erdoğan on the phone shortly beforehand.

Attorney General Barr put pressure on Geoffrey Berman, Bharara’s successor as prosecutor in New York: He should refrain from bringing charges against Halkbank. This is what people who are familiar with the process tell. Berman apparently refused. Barr was unavailable for comment.

To this day, many people in Trump’s environment are puzzled as to why the former president was so committed to Erdoğan. Some suspect that Trump pursued business interests in Turkey. Former security advisor Bolton believes the reasons for his former boss’ involvement are far more mundane. Trump was fascinated by authoritarian leaders like Erdoğan or Putin. “He wanted to make an impression.”

Erdoğan is alarmed when he learns of the investigation in the United States. A lawsuit against Halkbank, it must be clear to him, would not only put a strain on the Turkish economy. He would also expose himself to the world. His claim that the allegations were propaganda by the Gülen movement could no longer be upheld.

His government and Halkbank are launching a lobbying campaign that cost them nearly five million dollars between 2017 and 2019 – and Erdoğan almost all of his political capital.

Even before Halkbank manager Atilla is arrested in New York, Erdoğan speaks to Obama and his deputy Joe Biden. He wants to get the US authorities to drop the investigation. But his counterparts wave off with reference to the separation of powers in the US.

Erdoğan draws new hope when Donald Trump moves into the White House in January 2017. Just a few weeks after Trump was sworn in, Rudy Giuliani, who was then an advisor to the President, flies to Ankara. He wants to discuss the Halkbank case with Erdoğan. Shortly thereafter, Trump fired the New York prosecutor Preet Bharara, who had led the case until then.

The exchange between the two statesmen ultimately damaged Halkbank, says Bolton. The bank relied so much on Trump to bury the proceedings that it did not compromise with the US authorities.

The consequences

The District Court in southern New York is known for hearing sensitive cases. Trump’s former lawyer Michael Cohen had to answer for false statements, as well as the sex offender Jeffrey Epstein. But hardly any other case could have such far-reaching consequences as the “United States of America vs. Halkbank” case.

Other banks, including Deutsche Bank and BNP Paribas, have breached sanctions in the past. However, to a much lesser extent. Deutsche Bank, for example, managed to reach an agreement with the authorities. In the case of Halkbank, that no longer seems possible. There will be no interference from the Biden government, says someone close to the president.

The trial was originally scheduled for March 1st. However, an appeal court has granted an urgent application from Halkbank. Now it must first be determined whether a New York court has legal authority over a Turkish financial institution at all. The test is considered a formality among experts.

The burden of proof against Halkbank seems overwhelming. Gold dealer Zarrab has made a comprehensive admission. The investigators were also able to fall back on documents that a Turkish police officer secretly brought to the USA in 2017.

The Erdoğan government officially asserts that Halkbank has always complied with the law. She left a request from SPIEGEL unanswered. In confidential talks, however, Turkish officials admit that a penalty against Halkbank can no longer be avoided.

Erdoğan cannot be legally prosecuted in the US because he enjoys immunity as head of state. However, the damage to his reputation that the Halkbank case has already caused to him is considerable.

The affair seems to confirm everything that members of the opposition have accused Erdoğan for years: that he is bending the law, that he is abusing his power to enrich himself. “I have come to the conclusion that Erdoğan shows such an interest in the case mainly because he is afraid that his own entanglements could become public,” said former US Secretary of State Rex Tillerson to “Foreign Policy”.

The investigations by the US authorities have shaken investor confidence in the Turkish financial industry at a time when Turkey is more dependent than ever on foreign capital due to the corona pandemic and the weak lira.

The trial in New York could also be just the beginning of a series of proceedings against Halkbank. “We heard a lot about possible corruption in connection with the Halkbank,” says former security advisor Bolton. “If Halkbank deals with the laws of other countries as it does with our Iran sanctions, it could face further proceedings.”

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