Cracking Down on Iran through Turkey

On March 27, 2017, Mehmet Hakan Atilla, the Vice General Manager of Halkbank, Turkey’s largest state-owned bank, was arrested in New York upon his arrival to the airport. Turkish officials immediately condemned the arrest, with Turkish Deputy Prime Minister Mehmet Sahin offering full state support to Atilla and asserted that the bank had not violated international norms. One day prior to a meeting with U.S Secretary of State Rex Tillerson, Minister of Foreign Affairs Mevlut Cavusoglu pointed out that the bill of indictment which led to Atilla’s arrest had been prepared by U.S. Attorney Preet Bharara, and implied a connection between Bharara and the Gulentist movement. The Turkish judiciary has recently opened an investigation of 17 people accused of fomenting last year’s failed coup—Bharara is one of many American officials implicated in this case.[1]

Since the failed coup attempt in Turkey, U.S. reluctance to extradite Fethullah Gulen has been a point of tension between the two countries. This has also led to increasing suspicion within Turkish public opinion that the United States was somehow involved in the failed coup attempt of July 2016. The Turkish government has capitalized on this public opinion, along with Atilla’s arrest, in their effort to consolidate their voting base in the presidential and constitutional referendum. It has assisted in the overall strategy of the Justice and Development Party (AKP) to cultivate the image that the West is attempting to stifle the rising power of Turkey under President Recep Tayyip Erdogan’s leadership. This strategy was similarly employed over the last month in regards to diplomatic tensions with the Netherlands, Belgium and Germany.[2] This strategy of the AKP proved effective­—the “yes” vote among Turkish citizens abroad won 71% in the Netherlands, 75% in Belgium, and 63% in Germany.

Despite the Gulenist allegations, the US Department of Justice issued a statement regarding Atilla’s arrest, stating that the defendant is arrested due to allegations that he used his position at the Turkish Bank to facilitate Iran’s access to the U.S. financial system and to conceal international financial transactions for Iranian entities in violation of U.S. Sanctions.[3] Moreover, the U.S. Attorney’s Office for the Southern District of New York combined Atilla’s case with that of Reza Zarrab, the Iranian Turkish businessman who was arrested in 2016 in the U.S. and charged with money laundering and banking fraud to evade sanctions on Iran. In fact, in 2013 Zarrab was arrested in Turkey under a high-profile graft investigation in which the chief executive of Halkbank, Suleyman Aslan, was also interrogated on charges of taking bribes from Zarrab to disguise gold sales to Iran. In the course of the investigation, police seized $ 4.5 million USD in cash hidden in shoe boxes in Mr. Aslan’s home, which was later returned upon his acquittal.[4] The corruption investigation was led by Turkish prosecutor Zekeriya Oz, who was later accused of being linked to the Gulenist movement. Days before the Turkish judiciary issued a warrant for his arrest on charges of attempting to overthrow the government, he fled to Germany.[5]

After combining Atilla’s and Zarrab’s cases, a second indictment was prepared in New York in which defendants were accused of involvement in transactions with Mahan Air, the Iranian airline sanctioned due to allegations of its financial, material, and technological support of the Revolutionary Guards and Quds Forces. In fact, long before the arrest of Atilla, the activities of Halkbank had been under scrutiny of U.S. Treasury officials, and prompted a 2013 visit to Istanbul to warn Turkish banks about doing business with sanctioned Iranian entities. As a senior Halkbank official told Reuters, "Halkbank's Iran-related foreign trade activities with Iran have been carried out since 2004”,[6] which coincided with the period that the newly elected Justice and Development Party government moved to bolster its economic power within the region under a policy of so-called “Neo-Ottomanism”. During the same period, Iran was seeking ways to resuscitate its economy under the sanctions. Since the 1990s, Iran had shown dexterity in its ability to counteract international sanctions by changing the geographical location of their international economic activities and diversifying their trading partners. When U.S. sanctions were unilateral, Iran found European partners. After the involvement of EU into the sanctioning regime in 2000s, Iran turned toward its neighbors and Asian countries, at which point the relationship between Iran and Turkey appeared mutually beneficial. During this time, Turkey became one of the top five countries from which Iran imported goods. Another indicator of this intensification of economic relations was the establishment of the Maku Free Trade zone in 2013 situated in Iran near its Turkish border.

These economic relations grew complicated in the second term of Ahmadinejad’s Presidency, as his expansion of the Iran Nuclear program resulted in further tightening of the sanctions regime by the US, UN and EU. At this time, Turkey and Brazil, the 7^th biggest exporting partner to Iran, tried to mediate between the UN and Iran to decrease the tensions. Not only did the mediation fail but new international financial sanctions were imposed in 2012—creating new obstacles for Iran in receiving payments for oil sales due to its exclusion from the SWIFT system. Again, Iranian policy makers were forced to develop alternative mechanisms to bypass the financial sanctions through gray schemes. The testimonies of Babak Zanjani, who was arrested shortly after the election of President Hassan Rouhani and sentenced to death over a number of charges including money laundering and disrupting the country’s economy, revealed how these gray mechanisms functioned.[7]

According to testimonies, Zanjani and others such as Zarrab, who had close connections with the Ahmadinejad administration, established new international companies including transportation firms.  Zanjani stated that these transportation networks were used to carry money converted to gold which had been purchased using Iranian oil export revenue. During the same period, Iran started selling its natural gas to Turkey in return for Turkish lira kept in local bank accounts, which is also used to buy gold bullions. Zanjani stated that in Turkey the gold is registered to different names to ensure passage through customs into Dubai.  In fact, the trade of gold was not subjected to international sanctions, and since under UAE custom rules, individuals can legally import up to 50 kilos of gold in to the country in a single visit, gold transferred easily and legally from Turkey to UAE. Once in Dubai, the gold bar was transformed into jewelry and sent to Iran. Zanjani said he was distributing 20-25% of the money earned through the gold trade as commission to other countries or officials to secure this process. Turkish exports to the UAE exploded from $7 million to $1.9 billion from July to August 2012 and the gold Turkey shipped to the UAE in August comprised over 82% of Turkish total gold exports that month.[8] Even though the pressure coming from U.S. depressed Turkey’s involvement in the gold transfer, in May 2016, India's ambassador to Tehran Saurabh Kumar said that “the Indian government is seeking to pay the $6.5 billion, which it owes for its crude oil imports, through Turkey’s Halkbank.”[9]

The case of Halkbank reveals a short-term disjointed relationship between Turkey and Iran. The Turkish government cites Halkbank’s economic success as evidence of a rising Turkey. Regarding the transfer of 51% of the bank’s share to the newly established Turkish Sovereign Wealth Fund in February 2017,[10] the bank occupies a central role in the domestic and international policies of the Turkish state. For Iran, on the other hand, this relationship was a part of the ongoing strategy of creating alternative mechanisms to bypass the impact of sanctions. Therefore, there was a mutual economic interest for both countries, with Halkbank acting as a facilitator of this exchange. And while economic interest was at the core of the relationship, this cooperation established between Iran and Turkey spilled over into the political sphere in a limited manner. The political relations between Turkey and Iran have continued to fluctuate, stifling any possibility of a meaningful long-term political alliance. A number of recent regional and domestic developments have set further constrains on the emergence of a Turkey-Iran partnership.

Firstly, with the election of Hassan Rouhani, Iran has implemented a more liberal economic vision than in the previous term. The Rouhani administration’s emphasis on transparency has meant that the “gray schemes” that developed during the period of international sanctions would no longer be acceptable. The trial of Zanjani in the first years of Rouhani administration was symbolic of this transformation. This meant that the new economic strategies were not to be based on personal ties, as established in the case of Halkbank.

Secondly, with the agreement on the Iranian Nuclear Program between the P5+1, EU and Iran on July 14, 2015, under a Joint Comprehensive Plan of Action (JCPOA), the sanctions on Iran are to be gradually removed. This is intended to give Iran more space in formulating its economic and political strategies as it decreases its dependence not only on these gray schemes, but also on its neighbors in conducting international economic activities.

Thirdly, the intensification of Turkey’s relations with the GCC countries in the last decade created new tensions between Iran and Turkey. Under AKP leadership, the Turkish Central Bank data shows GCC investment in Turkey rose from 228 million USD in 2002 to 12.5 billion USD in 2014— this surge in investment from countries such as Qatar and Saudi Arabia created concerns among Iranians regarding the possible political implications of a sectarian policy.

Lastly, the rival regional visions embraced by Iran and Turkey prevented a deeper cooperation as these visions produced significant political differences. This was especially true in the early years of the Syrian civil war during which the priority of Turkey was regime change and Iran supported the continuation of the Assad regime in Syria. Nonetheless, tensions between Turkey and Iran surrounding the Syrian issue appeased once the Turkish policy shifted from focusing on regime change to a policy aimed at deterring the formation of any Kurdish political structure on its border. Once this shift occurred, Turkey increased its activity in Syria, collaborating more with Russia and Iran. Despite of these developments, after the U.S. bombardment following the chemical attacks in Syria, Iran condemned the U.S. involvement while Turkey praised the initiative of the U.S.—revealing that Turkish collaboration with Iran was superficial.

These developments affirm that the arrest of Atilla is neither a U.S. strategy of stifling Turkey nor an initiative to prevent the strategic alliance between the two countries, which seemingly never existed. Instead, the case was a just another manifestation of the U.S. policy of cracking down on Iran’s attempts to bypass sanctions, this time with Turkey and Halkbank being accessories to the process.

Engin Sune is a visiting fellow at Harvard University's Center for Middle Eastern Studies, a PhD candidate in International Relations at the Middle East Technical University, and research assistant in international relations at Hacettepe University. He received his BA and MSc degrees from the Middle East Technical University, department of International Relations. He is writing his PhD thesis on the integration of Iran into the Global Economy and is one of the co-authors of Political Economy of Turkish Foreign Policy (Ankara, Imge Publishing, 2015). He has three book chapters on the state structure of Iran, transformation of Libya, and international law. He published articles on the rentier state, secularism, and Iran.

[1] https://www.nytimes.com/2017/04/15/world/europe/turkey-failed-coup-investigation-americans.html

[2] http://www.bbc.com/news/world-europe-39254130

[3] https://www.justice.gov/usao-sdny/pr/turkish-banker-arrested-conspiring-evade-us-sanctions-against-iran-and-other-offenses

[4] http://www.hurriyetdailynews.com/cash-found-in-shoeboxes-at-halkbank-ex-managers-home-not-banks-money-turkish-pm.aspx?pageID=238&nID=62314&NewsCatID=338

[5] http://uk.reuters.com/article/uk-turkey-prosecutors-idUKKCN0QG1KV20150811

[6] http://www.reuters.com/article/us-india-iran-payment-idUSKCN0XX0P5

[7] http://www.reuters.com/article/us-iran-billionaire-sentence-idUSKBN13S09P

[8] Early, Bryan. Busted Sanctions: Explaining Why Economic Sanctions Fail, Stanford University Press, 2015.

[9] http://www.reuters.com/article/india-iran-oil-halkbank-idUSL5N18B0GZ

[10] http://www.reuters.com/article/turkey-economy-fund-idUSI7N1FG008