Court documents related to a recent U.S. case detail the blockbuster testimony of a gold trader at the center of a multifaceted scheme involving NATO ally Turkey helping Iran evade nuclear sanctions at a critical moment when its economy teetered.
On Jan. 3, a jury convicted the deputy general manager for international banking at Turkish state bank Halkbank of bank fraud as well as conspiracies to violate the Iran sanctions, defraud the U.S., commit bank fraud, and money-laundering.
Key testimony against the banker, Mehmet Hakan Atilla, came from 34-year-old gold trader Reza Zarrab, an Iranian with Turkish nationality who pleaded guilty to being at the center of the largest sanctions evasion scheme in modern history and who became the prosecution’s star witness.
“Zarrab gets up [on the stand] and really takes on the persona of a Harvard business professor,” Jonathan Schanzer, a former U.S. Treasury Department official who is now the vice president of research the Foundation for the Defense of Democracies (FDD), said at a recent event about the case. “And with dry-erase boards, starts to just sketch out the entire scheme — all the different banks, the companies, the individuals.
“He’s got a flow chart. He’s got dotted lines. He’s got arrows. It’s really like the movie ‘Beautiful Mind.’ You really see this guy laying it all out there.”
The U.S. Attorney’s Office for the Southern District of New York declined to comment. Atilla’s sentencing is scheduled for April 11; the bank fraud conviction alone carries a sentence of up to 30 years in prison.
Gas for gold and the ‘golden loophole’
Starting in 2012, Turkey helped Iran evade biting U.S. sanctions by providing billions of dollars worth of gold in exchange for Iranian natural gas and oil. Iran would then exchange the gold for foreign cash. Halkbank processed the transactions. FDD, which helped the prosecution, estimated that the massive scheme — which also involved gold also being sent through the UAE — provided Iran with about $13 billion between March 2012 and July 2013.
And the surreptitious sanctions relief came at a crucial time: The interim nuclear deal, which decreased debilitating economic sanctions on Iran and set the framework for further negotiations, was not signed in November 2013.
“At the height of the sanctions pain that the Iranians were feeling, their available cash reserves holdings were roughly $20 billion,” Schanzer, who followed the scheme closely over the last five years, told Yahoo Finance. “So when one looks at the numbers for gas for gold, you’re looking at potentially two-thirds of Iran’s total foreign exchange holdings at the time.”
Turkey and Iran were using what is known as the “golden loophole” in the U.S. sanctions regime. The loophole meant that gold could be sent to Iran as long as it wasn’t sent to the Iranian government entities — though Schanzer asserted, “I don’t believe for a second that the gold we were looking at went to individual gold traders.” Prosecutors alleged that the gold purchases “were made by or on behalf of the government of Iran,” despite assertions made by Atilla and others.
In January 2013, Congress passed legislation to close the loophole. However, at the behest of the Obama administration, the legislation did not take effect until July 2013.
“When you look at what happened — the imposition of sanctions and then leaving the loophole open — this was during the time that the Obama administration was negotiating [the nuclear deal] with Iran,” Schanzer said. “And so, from my perspective, this looks like a deal sweetener without acknowledging it as such. And I think there is more to be learned about why this loophole was left open deliberately for that half year and what was the discussion during that time between Tehran and Washington.”
During that window, according to Schanzer, “We see the Turks basically scrambling to export as much [gold] as possible while the loophole remained open.” During that period, as well as the period that followed, the dual-citizen Zarrab enthusiastically communicated with various stakeholders involved in the sanctions-busting operation.
According to an undated letter submitted as evidence, Zarrab told the general manager of an Iranian bank that the trader’s family considered it their “national and moral duty to declare” their “willingness to participate in any kind of cooperation in order to implement monetary and foreign exchange anti-sanction policies.”
‘Paperwork that identifies humanitarian shipments’
After the loophole of closed in July 2013 and the interim nuclear deal took effect in January 2014, Turkey and Iran began creating fictitious transactions — under the guise of humanitarian shipments — to unlock money from an Iranian oil escrow account held by Halkbank. Schanzer said that “according to some estimates, that could have been another $100 billion euros” for Iran that would have otherwise stayed frozen.
“What [the Turks] were basically doing was unlocking the cash that was held in those [Iranian] escrow accounts,” Schanzer said. “And they were doing that by way of paperwork that identifies humanitarian shipments.”
In return for Turkey’s cooperation, according to Zarrab’s testimony, members of Turkish President Recep Tayyip Erdogan’s inner circle received millions of dollars in bribes, while Erdogan benefitted from a boost to his economic pedigree before the country’s presidential elections in August 2014. (Zarrab says he personally made as much as $150 million from the scheme.)
Schanzer explained that “from Turkey’s perspective, the gold exports were identified as exports, so it helped their bottom line economic numbers — and billions of dollars is not insignificant when looking at GDP — so this was part of the scheme along with … a personal bottom line that some of these figures apparently were able to supplement significantly through the scheme.”
American prosecutors cited telephone wiretaps from 2013 that had prompted Turkish investigations into a suspected corruption scheme involving top officials in Erdogan’s government. Three top ministers resigned in the wake of the scandal, while Zarrab and Suleyman Aslan — then chief executive of a state-owned Turkish bank — were arrested. In response, Erdogan’s government shut down the investigation, released Zarrab and Aslan, and ousted many of the police officers and prosecutors involved in the investigations.
“My reading of the [wiretap] transcripts, as someone who has been covering Turkish politics for 27 years, leads me to say that Erdogan fully understood what was going on,” Atilla Yesilada, an Istanbul-based consultant, told the New York Times. Zarrab said in court that Erdogan was indeed aware of the scheme and had personally discussed two Turkish banks participating it.
An Istanbul prosecutor’s report leaked in 2014 further detailed what authorities knew about the gas-for-gold transactions involving Zarrab, Turkish officials, and other actors in various countries.
“That’s when you really begin to see the full extent of that Zarrab network,” Schanzer said. “All the different individuals and companies and gold traders in Turkey. It’s all laid bare.”
Zarrab also testified that Turkey returned to the exporting gold to Iran before he was arrested in Miami in March 2016. Zarrab had flown to the U.S. on his private jet with his wife, daughter and four others, and about $102,000 in cash to go to Disney World. He was immediately indicted, along with one of his employees and a senior officer at a unit of Bank Mellat in Iran.
In September 2017, federal prosecutors in New York also charged former Turkish Economy Minister Mehmet Zafer Caglayan (who was of the officials who resigned in 2013), Aslan, and two others in connection with the sanctions-busting effort. Atilla, who was arrested in New York in March 2017, is the only one to have been tried in court; the others remain at large.
Schanzer said it’s puzzling that Zarrab would expose himself to the threat of arrest by American authorities.
“It still doesn’t entirely add up that if you are a global sanctions buster involved in illicit financial activity at the highest level, are you really that much of a dolt to book tickets to the United States?” Schanzer said. “This just doesn’t make much sense, from my perspective. And so the question is: Was he fleeing? Did he know eventually that it was going to lead to this? Or was it really just poor judgment?”
Schanzer continued: “Here you have a guy that for the last five years was able to continue to conduct this illicit financial scheme, incredibly complex, working with dodgy figures from around the world. He hadn’t been caught, and he decides to go to Disney World? It was just a very odd story.”
‘The independence of the judiciary par excellence’
Key questions remain about how the Obama administration’s policy regarding the scheme factored into nuclear negotiations with Iran, and what other actions may be taken by the Justice Department under Trump’s administration. In any case, Schanzer asserted that the situation exemplified “the independence of the judiciary par excellence” as the U.S. Department of Justice (DOJ) seems to be pursuing the case independent of American foreign policy.
“The Obama administration certainly didn’t want to see this come out during the push for the nuclear deal and then it’s implementation, so the arrest of Zarrab in 2016 was decidedly inconvenient for the Obama White House and yet we’re seeing the push for this anyway,” Schanzer said. “We also similarly saw a push from people close to the Trump White House trying to cut a deal or arrange for perhaps a softer landing with the Zarrab crisis, and yet that did not happen either. Instead, we actually saw the arrest of the banker Atilla and the continuation of the trial despite attempts to derail it.”
Two members of Zarrab’s legal team, former New York Mayor (and Trump ally) Rudolph Giuliani and former U.S. Attorney General Michael Mukasey visited Turkey in February 2017 to discuss the case with Erdogan. And while Turkish officials acknowledge that there is an ongoing discussion between Washington and Ankara related to gas-for-gold implications, the next moves may be up to U.S. prosecutors.
“We reviewed thousands of documents related to this case, and from what I can tell there is a significant number of other actors who were not drawn into this court case,” Schanzer of FDD said. “The question is: Are there other sealed indictments? Are there other companies, whether they be Iranian, Turkish, or from other jurisdictions, that were included in sanctions-busting as part of this network of others that could now come under the crosshairs of the DOJ?”
Follow Michael B. Kelley on Twitter @MichaelBKelley.