HALKBANK AFFAIR: US judge orders Turkey’s “fugitive” state lender to attend Iran sanctions evasion hearing

HALKBANK AFFAIR: US judge orders Turkey’s “fugitive” state lender to attend Iran sanctions evasion hearing
By Akin Nazli in Belgrade October 24, 2019

US District Judge Richard Berman on October 23 ordered Halkbank, Turkey’s second largest government-run lender, to send representation to the November 5 second hearing of ‘The US vs Halkbank’ Iran sanctions evasion case, Reuters reported. The bank failed to send anyone to the first hearing and was deemed to be a “fugitive” by prosecutors.

“Should Halkbank fail for a second time to appear pursuant to the Second Summons, the Court will consider any appropriate sanctions for knowing and wilful noncompliance,” Berman said in a court filing.

Such sanctions would only amount to a penalty for failing to appear in court; they would not reflect a finding that the bank was guilty of the charges against it.

Halkbank declined to comment on the order, according to the news service.

Federal prosecutors in Manhattan claim that Halkbank participated in the illicit movement of around $20bn in Iranian oil revenue through the US financial system between 2012 and 2016.

Major developments in Halkbank affair
2010-2011 Barack Obama toughens sanctions on Iran
2012-2013 Booming gold trade in Turkey's foreign trade accounts sparks growing attention
Mar/2013 Reza Zarrab receives plaquet from now-First Lady of Turkey Emine Erdogan for his donations to an association
Dec/2013 Corruption scandal in Turkey: Gulenist prosecutor abruptly one morning orders the detention of dozens of people, including then Halkbank general manager Suleyman Aslan and Zarrab, along with the sons of some ministers in the cabinet of then-PM Recep Tayyip Erdogan
Dec/2013 Erdogan takes the investigation as a direct threat to himself and his family after tapes of his phone calls with some family members are leaked day by day in something of a soap opera
Dec/2013 Erdogan manages to repel the investigation
2014-2017 Erdogan enters into a public war against his ally-turned-enemy, preacher Fethullah Gulen, and he wins, particularly by using the failed so-called Gulenist coup attempt in July 2016 as leverage
2014-2016 Erdogan, his media and officials praise Zarrab as a hero for covering Turkey's current account deficit
Jun/2015 Zarrab receives the Turkish Export Award jointly from the hands of Deputy PM Numan Kurtulmus, Economy Minister Nihat Zeybekci, and President of the Turkish Exporters Council Mehmet Buyukeksi, in a ceremony attended by Erdogan
Mar/2016 Zarrab arrested in Miami; he says he went there for a vacation
Mar/2016 "It is not a case that interests Turkey," Erdogan says in comments on the arrest of Zarrab
Sep/2016 US media suggest Erdogan and his wife have asked then-US VP Joe Biden and his wife to have Zarrab released and then-US prosecutor Preet Bharara dismissed
Nov/2016 Donald Trump elected as US president
Feb/2017 US media suggest Erdogan has held a secreet meeting with Zarrab's lawyers Rudolph Giuliani and Marc Mukasey
Mar/2017 Halkbank deputy GM Mehmet Hakan Atilla arrested in US during Halkbank roadshow
Sep/2017 US charges Aslan and then-Economy Minister Zafer Caglayan. Caglayan is still in Turkey but Aslan can't be found
Nov/2017 US media suggest Erdogan tried to swap detained American Pastor Andrew Brunson for Zarrab
Nov/2017 Zarrab turns state's evidence. He becomes a star witness in ‘The US vs Atilla’ case
Dec/2017 Zarrab tells the court that he was told in 2012 by Caglayan that then-PM Erdogan had instructed Turkish banks to participate in the multi-billion dollar scheme. Judge Berman, however, does not dig into the Erdogan issue
Dec/2017 A day after Zarrab testifies in court, Erdogan seizes his assets and those of his family in Turkey
Dec/2017 Zarrab explains the sanctions evasion scheme in detail during the court hearings
Jul/2019 Atilla returns to Turkey after serving his US prison sentence
10/6/2019 In a phone call Trump informs Erdogan that US troops will not stand in the way of a Turkish attack on Syrian Kurds who were a big US ally in the fight against Islamic State
10/6-18/2019 There is bipartisan fury in the US establishment directed at Trump for letting Erdogan attack the Kurds in Syria
10/9/2019 Bloomberg reports that Trump in 2017 urged his then-Secretary of State Rex Tillerson to persuade the Department of Justice to drop its case against Zarrab. Tillerson said it would be inappropriate
10/14/2019 Trump imposes 'fake sanctions' (light sanctions that amount to almost nothing consequential) on Turkey to quell the bipartisan fury
10/16/2019 Out of the blue, US prosecutors of the Southern District of New York (SDNY) file the 'The US vs Halkbank' indictment that many observers thought would never see the light of day
10/16/2019 The indictment includes a reference to the participation of a “relative of the then-Prime Minister [Erdogan] who held multiple Turkish cabinet positions”. It's obviously a reference to then-energy minister Berat Albayrak, Erdogan's son-in-law who is presently finance minister.
10/18/2019 Moody's places Halkbank on review for a downgrade (B3)
10/21/2019 Halkbank’s US lawyer says in a court filing that he is not authorised to accept a summons or to appear in court on behalf of the bank
10/21/2019 Albayrak announces Atilla has been made director general of Borsa Istanbul
10/21/2019 Fitch moves Halkbank to Rating Watch Negative (B+)
10/22/2019 The EBRD, which owns 10% of Borsa Istanbul, complains about the appointment of Atilla
10/22/2019 First hearing of 'The US vs Halkbank': Halkbank's lawyer does not attend, prosecutors describe Halkbank as "fugitive", Berman gives the bank two weeks to arrange to turn up. “I suppose that’s one way of integrating back into society someone who has been convicted of financial wrongdoing,” he wryly observes after hearing about the appointment of Atilla as CEO of the Istanbul stock exchange.
11/5/2019 Second Hearing of 'The US vs Halkbank' to be held

“Despite the fact that the Bank's ongoing discussions with the US Department of Justice to resolve this matter without indictment have not yet come to a conclusion, this [indictment] was filed as part of the sanctions introduced against our country by the US government in response to Operation Peace Spring, heroically launched by the Turkish Army to secure our borders and establish peace in the region,” Halkbank said on October 16 in a stock exchange filing after news it was being prosecuted in the US broke.

Given that the indictment seemed to arrive out of nowhere amid the bipartisan displeasure at Turkey’s military offensive in Syria, as well as Donald Trump’s “betrayal” of the US-allied Kurds that cleared the way for the incursion, the court case is widely viewed as politically motivated. However, it is not known whether Trump was informed prior to the filing of the indictment.

Also open to speculation is whether Trump might try stalling any moves that could result in fines or sanctions against Halkbank. Most Turks assume that the judicial process will be shaped by the domestic political struggles in the US and also the direction of US-Turkey relations including the personal relations between Turkish President Recep Tayyip Erdogan and Trump.

Trump and his lawyer Rudy Giuliani have not faced any inquiries over their interventions in the Halkbank case as yet, but they are currently in trouble with Trump’s Ukraine scandal.

However, some US senators wrote an October 22 letter to the executive vice president and chief compliance counsel of The Trump Organization to request certain information on Trump’s financial income from Trump Towers in Istanbul no later than November 12. And late on October 22, news agencies reported that Oregon Senator Ron Wyden, a Democrat and the ranking member on the Senate Finance Committee, has written to US Treasury Secretary Steven Mnuchin asking if Trump or anyone acting on the president’s behalf had asked him to “handle, intervene, or otherwise engage with Turkish concerns related to Halkbank, or with Halkbank generally?” Wyden, who requested an answer by November 20, said he was launching an investigation to examine the relationship between Halkbank and Trump administration officials. His letter cited an October 16 Bloomberg report that Trump told Erdogan in April that Mnuchin and US Attorney General William Barr would handle the Halkbank issue.

Moody’s Rating Services released on October 24 a Halkbank ‘Update following review for downgrade’ in which it highlights a “weak operating environment, lack of market access, and historic governance issues at senior management level”.

Halkbank’s net profit declined by 72% y/y to TRY310mn ($54mn) in Q2. Trade losses jumped to a record TRY1.41bn in the quarter from TRY30mn a year ago, mainly due to a 24% q/q rise in swap losses to TRY1bn.

The market consensus forecast for the Q2 net profit was TRY316mn. A TRY385mn cut in provisions limited loss of profitability in the quarter.

Loans grew by 18% year-to-date to TRY287bn while the non-performing loans (NPLs) ratio rose to 4% due to a TRY1.5bn energy sector loan. Total assets amounted to TRY429bn and deposits stood at TRY267bn at end-June. Net profit declined by 68% y/y to TRY615mn in H1.

Meanwhile, Halkbank, along with state-run peers Ziraat and Vakifbank, have been launching consecutive packages to boost loan growth as part of the government’s plans to open the credit taps to reboot Turkey’s humbled and ailed economy in the wake of the 2018 balance of payments crisis.

At a press conference on October 21, held to announce the latest loan package, Hasan Tuncay, a deputy general manager of Halkbank, and Muhammet Lutfu Celebi, a deputy general manager of Vakifbank, said they have put profitability aside this year to support the economic recovery.

In response to the latest Halkbank indictment, the Borsa Istanbul temporarily prohibited short selling in banking shares within the BIST-30 Index, effective from October 16, within the scope of a decision taken by its chief executive. It said the shares affected were those of Halkbank, Akbank, Garanti Bank, Halkbank, Is Bank TSKB, Vakifbank and Yapi Kredi Bank.

The stock exchange also introduced a depositary restriction. The move restricted investors to only selling their holdings in the seven banks in question on receiving the shares two days after their purchase. It also introduced a requirement that shares in the banks only be sold via the brokerage houses holding the shares.

On October 21, the Borsa Istanbul administration removed the depositary and brokerage restrictions but the short-sales ban remained effective as of October 24.

Amid the market tensions, the growing number of irregular measures are hurting the efficiency of Turkey’s financial markets. Analysts widely complain of incompetent fiscal and monetary policies pursued by the Erdogan administration, while the on-off threat of US sanctions and Halkbank indictment mean that the Istanbul exchange stays in a roller-coaster mood, with liquidity still dry. CEO Atilla has his work cut out.