Biggest Sanctions-Evasion Regime in Recent History
By Jonathan Schanzer
January 4, 2018
Yesterday, Turkish banker Mehmet Hakan Atilla was found
guilty in a Manhattan courtroom for a range of financial crimes. His dramatic
trial revealed that tens of billions in dollars and gold moved from Turkey to
Iran through a complex network of businesses, banks, and front companies.
The trial was a long time coming. In late October of 2016,
Justice Department officials paid a visit to the Foundation for Defense of
Democracies, the Washington-based think tank where I serve as senior vice
president. They wanted to talk about Reza Zarrab. A dual Iranian-Turkish
national, Zarrab was the swashbuckling gold trader who had helped Iran evade
sanctions with the help of Turkish banks in 2013 and 2014, yielding Iran an estimated
$13 billion at the height of the efforts to thwart Tehran’s nuclear
ambitions. A leaked report by
prosecutors in Istanbul in March 2014 suggested that Zarrab spearheaded a second
sanctions-busting scheme involving fake invoices for billions more in fictitious
humanitarian shipments to Iran that were processed through Turkish banks.
At FDD, we’d spent considerable time digging into
Zarrab’s activities. Our think tank already had an established track record of
identifying and exposing Iran’s malign activities. We had also just launched a
new program to explore Turkey’s recent drift into Islamist authoritarianism.
The more we investigated, the more we realized that Zarrab’s schemes, which
could have helped Iran pocket more than $100 billion, rank among the largest
sanctions evasion episode in modern history.
Despite the headlines generated by the gold trade and
leaked report, the Turkish government insisted that everything was above board.
The Obama administration seemed to echo this sentiment, saying that the gold
trade had slipped through a legal
loophole (a loophole the White House inexplicably left open for an
additional six months, even after the problem was flagged). We soon learned
Ankara’s political motivations: The gold trade helped boost Turkey’s
flagging export numbers at a moment when those numbers might have hurt President
Recep Tayyip Erdogan’s chances for reelection. Zarrab, who became fabulously
wealthy by taking a percentage from every transaction (he later estimated his
take at $150 million), even received a reward for his efforts from a Turkish
trade association in 2015, with Erdogan applauding from the audience.
But it all came to an abrupt halt last March, when Zarrab
inexplicably brought his family to America for a vacation at Disney World. With
the 2015 nuclear deal in effect, he may have believed that the sanctions laws he
violated before the deal were no longer in force. Some
suggest that Zarrab was trying to flee Iranian justice, particularly as
the regime came to grasp just how much he skimmed off the top. Either way, when
he arrived in Florida, U.S. authorities arrested him for engaging in
conspiracies to violate sanctions, commit bank fraud, and launder money.
It was about time. For three years, my colleagues and I had
been briefing the Treasury Department, the State Department, and Congressional
offices. We had tracked the export data (which, remarkably, Turkey did not
hide), showing an astronomical spike in Turkish gold exports. We identified the
companies and players, with the help of the 2014 prosecutor’s report. It was
painstaking work, but it was all out there in open sources for a think tank like
ours to document.
Yet, it was an inconvenient moment to reveal unsavory
truths about Iran, amid the push for the nuclear agreement. Nor did anyone,
Democrat or Republican, want to touch the third rail of relations with Turkey, a
NATO ally that had recently begun backing terrorist
groups like Hamas (which still maintains a disturbing presence in
Turkey) and a range of Sunni jihadi groups fighting the Assad regime in Syria
(including al-Qaeda’s affiliate, according to senior U.S. government officials
we interviewed). Stable allies in the Muslim world were scarce, and
decision-makers seemed reluctant to take any chances with Ankara.
It may also have been difficult for officials to hear that
the sanctions tools we have in place to prevent bad actors from moving money are
just that—tools. Without intense vigilance and enforcement, there is ample
opportunity for Iran and other sanctioned countries to find workarounds. But if
we’re going to follow the money, we’d better be prepared to follow it to the
most inconvenient places.
That’s why it was a pleasant surprise when the Justice
Department came knocking on FDD’s door. It had never dawned on us that they
might be interested in our work. But they were. They wanted to see what we
already knew of the complex web of companies, networks, and schemes, that Zarrab
employed to move money out of Turkey and into Iran. After all, even with the
vast evidence they had collected, our research predated their investigation.
In the weeks and months that followed, one visit begat
another. Both I and Mark Dubowitz, FDD’s CEO, were asked by the assistant U.S.
attorney to serve as an expert witness for the prosecution. We pored over
invoices tracking the transactions that turned gold into Iranian cash. We
analyzed spreadsheets detailing the dizzying trail of sales and purchases
designed to obfuscate the illicit nature of the transactions. There were also
photos, including one of Zarrab himself standing next to a six-foot high tower
of plastic-wrapped bricks of $100 bills. The documents were privileged at the
time, but will soon be made public now that the trial is over. The documents are
damning, with textbook examples of money-laundering techniques like
over-invoicing (charging significantly more for a given product to yield more
margin) and circular invoicing (making multiple transactions involving the same
funds or goods to hide a money trail or even benefit from arbitrage). The
figures themselves were astounding: hundreds of millions of dollars in
transactions in every stack of papers we viewed.
The case took a wild turn on March 28, when, Justice
Department officials from the Southern District of New York arrested Atilla,
the deputy CEO and general manager at Turkey’s state-owned Halkbank. They
accused him of conspiring with Zarrab to launder hundreds of millions of dollars
through the U.S. financial system on behalf of Iran. It was Halkbank that held
one of the oil escrow accounts for Iran. The escrow accounts constituted a
creative method of withholding petrodollars from Iran, as mandated by the Iran
Threat Reduction and Syria Human Rights Act (ITRA)
of 2012. In brazen defiance of U.S. sanctions, Halkbank released those funds to
buy gold, which was then shipped off to Iran. Halkbank was also accused of
helping to process Zarrab’s aforementioned fictitious invoices, the ones first
exposed in the 2014 prosecutor’s report.
Halkbank was in clearly trouble. In September, it hired Ballard
Partners, a U.S. lobbying firm that already represented the Turkish government,
for a whopping $1.5 million. Separately, Zarrab hired former
New York Mayor Rudy Giuliani and former Attorney General Michael Mukasey in an
attempt to derail the proceedings. But the real drama came in late November when
Zarrab pled out, making him a witness for the prosecution. Atilla would stand
That’s when the Turkish government got angry. They took
their anger out on me and Mark Dubowitz, who testified on the first day of
Atila’s trial about the Iran sanctions architecture. The state media called us
terrorists, alleging we were affiliated with Turkish cleric Fethullah Gulen’s
network, the group Erdogan blamed for the attempted coup in July of last year.
Ankara also issued an arrest
warrant for my colleague Aykan Erdemir, a former Turkish
parliamentarian. Turkish authorities froze his assets and even seized the
apartment that his grandfather had bequeathed to the family. They said he
“destroyed paperwork relating to state security” and “stole documents with
the intention of using them abroad.” They also falsely identified him as being
on the witness list.
But Ankara could not stop Zarrab from delivering seven days
of sensational testimony. On day one, he appeared in court wearing a beige
prison jumpsuit; for the remainder, he was allowed to wear a blazer. He was a
natural in front of the jury, using diagrams to coolly explain how he
orchestrated the scheme. He looked like a business school professor teaching a
class on corruption.
Here’s what Zarrab testified: The scheme began in 2010,
when Iran began to feel the squeeze from U.S. sanctions for its nuclear drive.
Zarrab said that in around 2012 the Iranian government gave him explicit
directions to conduct these illegal transactions. Turkish officials were also on
the take, Zarrab said, with its economy minister allegedly taking $50
million in bribes to help facilitate the scheme. He said other Turkish
officials were on the take, too—many of whom were in Erdogan’s inner circle.
According to Zarrab, other Turkish banks may have been involved at the
government’s behest. All this might explain why the Turkish government, even
after the prosecutor’s report was leaked in 2014, killed all inquiry into the
Testimony from David Cohen and Adam Szubin, two former
Treasury Department undersecretaries would also reveal that Halkbank officials
repeatedly reassured them their gold-trader clients, including Zarrab, were in
compliance with U.S. sanctions against Iran. (Zarrab testified that he continued
his operations up until his arrest in March 2016, which meant that Halkbank
would have been lying to U.S. officials.)
In the end, the trial ran long. With the judge calling for
the prosecution to wrap things up quickly, I managed to avoid taking the stand.
Atilla testified in a last-ditch self-defense, and the jury began its
deliberations on December 20.
Yesterday, after spending 11 days away for Christmas and
New Years, the jury returned to deliberate again, and after only a few hours
delivered their verdict: guilty on five out of six counts. Atilla’s rap sheep
now includes four conspiracy counts, including conspiracy to defraud the United
States, plus one count of bank fraud. (He was acquitted for money laundering.)
All eyes are now on the United States government and
whether it issues a fine against Halkbank, particularly now that it has proven
in a court of law that the bank engaged in a massive, illegal financial scheme.
French Bank BNP
Paribas was fined $8.9 billion for far lesser transgressions in 2015,
for its violations of sanctions against Sudan, Cuba, and Iran.
Fine or no fine, it’s hard to envision tranquil
U.S.-Turkish relations going forward. Erdogan, who now rivals Russia’s
Vladimir Putin in autocratic style, has already instructed his
spokesman to decry the trial as a “plot” against Turkey, while
slamming “the scandalous verdict of a scandalous case.”
Then there is the question of Iran. In all likelihood,
Tehran probably gave little thought to the Atilla verdict, given its ongoing
domestic turmoil. The people are calling for better economic conditions, and a foreign
policy that doesn’t squander Iran’s wealth on adventurism outside
the country’s borders. One can only guess that would include complex sanctions
busting schemes to enable an illicit nuclear program.
And now that Zarrab has finally clarified a few things about the Iranian role in his scheme, one troubling question lingers: Why did the U.S. government continue to negotiate the nuclear deal with Iran in 2013 and 2014 while Treasury was warning Halkbank about enormous sanctions violations? We may never know. Then again, from the documents I viewed, I wouldn’t be surprised to see other sanctions busters come in the DOJ crosshairs—creating new and uncomfortable challenges for our existing alliances and diplomatic agreements. Perhaps other future indictments will tell us more.