18/09/2018

Could Iranian sanctions evasion schemes bring down the Turkish banking system?

Among the factors behind the recent exacerbation in US-Turkish tensions is the allegation that Turkish banks conspired to evade sanctions imposed on Iran and laundered an estimated $13 billion dollars via a complex “gold-for-oil” scheme, described by one source as “among the largest sanctions evasion episodes in modern history”…

Following the money: This is my Middle East-focused blog series focusing on my areas of specialisation: Money laundering, financial crime, sanctions evasion and funding for terrorist and militant groups. Barry Marston, Senior Consultant, Aperio Intelligence

2 September 2018

 

The US Treasury and Department of Justice have yet to decide on the level of fines imposed against state-owned Halkbank and other major Turkish banks caught up in this scandal. However, these fines could conceivably run to billions of dollars, if the US Administration decided on a punitive approach in line with fines for comparable violations levelled against Western banks (e.g.; the 2015 BNP Paribas fine of $8.9bn). It is easy to envisage how this could have a catastrophic effect on an already-reeling Turkish economy where the lira continues to plunge. On 20 August, the Trump Administration rejected suggestions that detained US pastor Andrew Brunson could be released in Turkey, in exchange for an end to the Halkbank investigation and fines being kept to a minimum. Meanwhile, these claims were furiously denounced by President Erdogan as a “plot” against Turkey.

In May this year, detained Turkish banker Hakan Atilla, was given a relatively light (2 years, 8 months) sentence after a US court decided that he had engaged in illegal practices under orders from his superior, Halkbank bank CEO, Suleyman Aslan. US District Judge Richard Berman ruled that “Mr Atilla was something of a cog in the wheel and, I would add, at times a reluctant one at that.” Turkey’s former economy minister, Zafer Caglayan was charged in absentia with conspiring to use the US financial system to conduct hundreds of millions of dollars’ worth of transactions on behalf of Iran.

According to prosecutors, the Turkish banking system was used between 2012 and 2014 to launder around $13bn of frozen funds held in banks back to Iran. Dual Iranian-Turkish national Reza Zarrab, as part of a plea bargain, explained in elaborate detail to the US court earlier this year how the transfers were enacted, which were so large that they temporarily caused a substantial spike in Turkey’s gold exports and reportedly buoyed national export statistics at a crucial moment for Erdogan’s reelection.

According to Zarrab’s testimony, around 2012 he was given explicit instructions by the Iranian government to engage in these transactions, for which Zarrab himself personally benefitted by around $150 million. Economy Minister Caglayan also allegedly took $50 million in bribes for facilitating the scheme, along with others within Erdogan’s personal circle who also benefitted. The scheme allowed billion dollars of frozen Iranian funds held in escrow accounts, including those held by Halkbank, to be converted into gold and laundered back to Tehran.

As early as October 2017, the Haberturk newspaper filed a report based on warnings by senior banking officials, that six Turkish banks could face fines in excess of $5 billion. At the time, the BDDK banking regulator responded that: “It has been brought to the public’s attention that stories, that are rumours in nature, about our banks are not based on documents or facts, and should not be heeded.”

Unfortunately for the Turkish general public, they may now be forced to bear cripplingly heavy macroeconomic consequences for a money-laundering scheme carried out on behalf of the Islamic Republic of Iran.

Iran’s sanctions evasion through the global financial system

The decade prior to 2015 saw a game of cat and mouse played out across international financial institutions, as the US and its allies tried to shut Iran out of the global banking system, while Tehran resorted to a variety of tactics allowing it to continue moving funds via financial channels.

Several dozen major global banks throughout this period faced huge fines for, often inadvertently, violating sanctions against Iran, including: HSBC ($1.9bn), Commerzbank AG ($1.45bn), Standard Chartered ($667m), RBS ($600m), Lloyds TSB ($350m), Credit Suisse ($536m), Barclays ($298m) and JP Morgan ($88.3m).

In by far one of the worst cases, BNP Paribas in 2015, was fined $8.9bn for violating sanctions regimes imposed against Iran, Sudan and Cuba. Prosecutors claimed that BNP had evaded sanctions against entities in Iran, in part by stripping information from wire transfers so they could pass through the US system without raising red flags.

The same period saw a notable amelioration in Iran’s relations with various Latin American states in the context of President Ahmedinejad’s diplomatic attempts to outflank Western pressure. This was accompanied by a rise in levels of (legal and illegal) economic activities by Iranian-linked entities, which were then faced with the challenge of evading sanctions regimes so as to repatriate these funds.

For example, an Iranian company called Iranian International Housing Corporation entered into a $476 million deal in 2006 with a Venezuelan state-owned energy company to build 7,000 housing units. Businessman Mohammed Sadr Hasheminejad (Stratus Holding Group), who oversaw this Venezuela project then sought to launder these proceeds through the US banking system. In order to circumvent international sanctions, around $115 million in payments from this Venezuelan scheme were transferred to Iran via a geographically-dispersed range of financial intermediaries, in order to conceal their Iranian connections.

Mohammed’s son, Ali Sadr Hasheminejad was arrested and put on trial when he visited the US in 2018. According to the indictment, Mohammed and Ali Hasheminejad, set up a complex international network of shell companies, including Clarity Trade and Finance in Switzerland and Stratus International Contracting in Turkey.  Between 2011 and 2013, payments totalling approximately $115 million were channelled from Venezuela to the Iranian International Housing Corporation, through banks and institutions in the US.

Ali Sadr was the chairman of Pilatus Bank, headquartered in Malta. Allegations of Pilatus Bank’s involvement in money laundering in April 2017 gained the attention of Maltese investigative journalist Daphne Caruana Galizia – partly in consequence of a whistle-blower working at the bank. Just a few months later, Galizia was assassinated by a bomb in her car.

Money laundering through banks in the Arab world

Iran benefitted from a relative détente in its relationships with GCC states during the 2000s to set up a variety of financial institutions in locations like Manama, the UAE and Kuwait. Several of these were later found to have been involved in laundering billions of dollars of illicit funds.

For example, Future Bank was set up in Bahrain in 2004 as part of a joint venture involving two prominent Iranian banks, Bank Melli and Bank Saderat. The bank was later blacklisted by US and British officials, before being shut down definitively by the Bahraini authorities in 2015, accusing it of being a “trojan horse” for terrorism funding. The bank was found to have concealed at least $7 billion of transactions between 2004 and 2015. Documents to submitted to an international arbitration court in the Netherlands, claim that those clandestine funds identified so far are the “tip of the iceberg”.

In a comparable UAE-based scheme, Iran’s Central Bank was found by the US Treasury to have been complicit in money-laundering activities, having “abused” its relationships with Emirati business partners and the authorities. According to the Treasury, these laundered funds were used to “fund and arm” IRGC Quds Force-backed militias and terrorist groups.

In May 2018, the major Iraqi institution Al-Bilad Islamic Bank, and its CEO Aras Habib Karim, were designated by the US Treasury. According to the Treasury, this bank had facilitated the movement of funds to the Iranian Revolutionary Guard and Hezbollah. Aras Karim is a prominent political figure as the successor to Ahmed al-Chalabi as leader of the Iraqi National Congress, while being an MP representing Prime Minister Haidar al-Abadi’s “Victory” elections coalition.

Iran is furthermore believed to make extensive use of the Iraqi, Syrian and Lebanese financial systems, where it enjoys strong relations with powerful political factions. For example, the Lebanese-Canadian Bank (SAL) was designated by the US Treasury in 2011 for money laundering on behalf of Hezbollah, including benefiting from funds for the narcotics trade. Other financiers and front companies have been similarly targeted as part of efforts against the movement of millions of dollars of funds by entities affiliated with Iran.

 

About Barry Marston

At Aperio, Barry specialises in Iran, Saudi Arabia, the wider Gulf region; capitalising on 20 years of experience in working across the Middle East. His portfolio includes corporate intelligence, money laundering, financial crime, sanctions evasion and funding for militant and terrorist groups.

Barry spent six years working as the British Government’s Arabic and Persian Spokesman. He also held responsibility for the UK Foreign Office’s communications policy for the Middle East and Islamic world, specialising in counter-extremism, sanctions, international law and trade issues.

Between 2011 and 2018, Barry was based in the GCC region, working for Weber Shandwick and Fortune Promoseven as a media consultant and project director. His portfolios included work for some of the largest privately-held and state-owned organisations in the Middle East region. Barry also conducted political and economic forecasting and analysis for commercial clients. He is a fluent Arabic and Persian speaker and has operational capability in Hebrew, Russian and French.