A U.S. appeals court ruled on October 22 that Halkbank, a public lender majority-owned by Turkey’s sovereign wealth fund, cannot claim sovereign immunity under U.S. law to scuttle a federal criminal case for the bank’s alleged role in helping Iran evade U.S. sanctions. This landmark decision, which sets an important legal precedent, will build American deterrence against foreign financial institutions that facilitate Tehran’s evasion of U.S. sanctions.
In a six-count indictment in October 2019, U.S. attorneys for the Southern District of New York charged Halkbank with fraud, money laundering, and sanctions offenses related to the bank’s alleged participation “in a multibillion-dollar scheme to evade U.S. sanctions on Iran.” The prosecutors accused the Turkish public lender of helping Tehran transfer $20 billion worth of restricted funds, with at least $1 billion laundered through the U.S. financial system.
The previous year, Halkbank’s deputy general manager, Mehmet Hakan Atilla, was sentenced to 32 months in prison when a federal jury found him guilty on five counts related to that scheme, including sanctions evasion, bank fraud, and obstructing the actions of the U.S. Treasury Department. In the run-up to Atilla’s conviction, Reza Zarrab, the ringleader of Tehran’s Turkey-based sanctions-evasion schemes, pleaded guilty and turned state’s witness, confessing to having bribed senior Turkish ministers and top Halkbank executives. Zarrab even implicated Recep Tayyip Erdogan, saying that the then-prime minister had approved the sanctions-busting efforts.
Since October 2019, Halkbank has taken numerous actions to scuttle the case and delay a jury trial. At first, Halkbank and its lawyers refused to acknowledge the indictment or a legal summons to appear in court. After U.S. prosecutors in January 2020 asked U.S. District Judge Richard Berman to impose escalating fines that could total up to $1.8 billion after eight weeks if the bank failed to respond to criminal charges, Halkbank reversed course and pleaded not guilty two months later. The bank’s stalling tactics also included a June 2020 bid pressing Berman to recuse himself, which he refused in August 2020.
Halkbank then claimed that the Foreign Sovereign Immunities Act (FSIA) shielded the public lender from prosecution in the United States. In response, federal prosecutors warned that granting Halkbank immunity under FSIA would constitute an extension of sovereign immunity from civil to criminal cases. In a 16-page opinion issued in October 2020, Berman stated, “The court clearly has personal jurisdiction over Halkbank.” He ruled that FSIA “does not appear to grant immunity in criminal proceedings.” Halkbank immediately appealed the ruling.
Last week, a three-judge panel from the U.S. Court of Appeals for the Second Circuit stated in its ruling that even if the court were to assume that FSIA confers immunity in the criminal context, the offense with which Halkbank is charged “would fall under the commercial activity exception to FSIA.” The court also rejected Halkbank’s “contention that it was entitled to immunity from prosecution under the common law.”
Following that ruling, Halkbank issued a statement to the Istanbul stock exchange, saying that the bank will use all its legal rights to appeal the court’s decision. This is a sign that the Turkish public lender will continue its stalling tactics to delay a potentially embarrassing jury trial, which could further expose Erdogan’s and his close aides’ complicity in Iran’s sanctions-evasion schemes.
Since Zarrab and Atilla were arrested in 2016 and 2017, respectively, Erdogan has employed devious tactics to derail the U.S. prosecution of Turkey-linked sanctions-evasion schemes. The Turkish leader held U.S. Pastor Andrew Brunson hostage for two years, hoping to exchange him for Zarrab and Atilla. In 2017, Erdogan also asked former New York City Mayor Rudolph Giuliani, who was one of President Donald Trump’s surrogates during the 2016 presidential campaign, to press the Trump White House for a Brunson-Zarrab swap. Ankara’s interference in the Halkbank prosecution became the subject of a probe launched by Senator Ron Wyden (D-OR). Giuliani, as Bloomberg reported in June, has since become “the subject of a Justice Department inquiry into possible foreign lobbying for Turkish interests.”
Erdogan not only has attempted to cover up the Halkbank scandal but has also rewarded individuals who facilitated Tehran’s sanctions-evasion schemes, by offering them cushy appointments. In 2019, three months after Atilla’s return to Turkey after serving his U.S. prison sentence, and only a few days after U.S. federal prosecutors indicted Halkbank, then-Turkish Finance and Treasury Minister Berat Albayrak, who is also Erdogan’s son-in-law, named Atilla as CEO of the Istanbul stock exchange. Nine days later, the European Bank for Reconstruction and Development, which had opposed Atilla’s appointment, announced that it would sell its 10 percent stake in the Istanbul stock exchange, a transaction the international bank finalized later that year.
Erdogan also appointed former Minister for European Union Affairs Egemen Bagis as Turkey’s ambassador to Prague. Bagis had resigned from the ministry after a 2013 corruption scandal implicated him in accepting bribes related to the scheme run through Halkbank.
The Erdogan government’s attempts to evade justice have been disastrous for Halkbank and, by extension, for the Turkish economy. Since the December 2013 graft probe that exposed the public lender’s role in Iran’s sanctions-evasion schemes, the bank’s shares have lost over 95 percent of their value in U.S. dollars, falling from an all-time high of $10.63 per share in 2013 to $0.45 as of October 25, 2021.
Halkbank also faces a civil lawsuit in the Southern District of New York. Eight hundred and seventy-six victims of Iran-sponsored terrorism, to whom Iran collectively owes $10 billion, took the bank to court, claiming the Turkish public lender helped Tehran avoid the financial consequences of its support for terrorist attacks. The court ruled in February 2021 that the plaintiffs, who are U.S. citizens or foreign employees of the U.S. government targeted during their service to the United States, should pursue their case before a Turkish court instead. In doing so, the court ignored substantial evidence that the plaintiffs cannot receive a fair hearing before a Turkish court, because Ankara is covering up the bank’s complicity in Iranian sanctions-busting schemes. The plaintiffs have appealed the court’s dismissal.
A ruling by a U.S. court of appeals that FSIA does not grant public lenders or other instrumentalities of foreign sovereigns any immunity from U.S. prosecution will strengthen Washington’s deterrence against sanctions evasion by Iran and other rogue regimes. This will also discourage banks from pursuing costly delaying tactics and incentivize deferred prosecution and/or non-prosecution agreements with U.S. authorities. Last year, for example, the Industrial Bank of Korea, a state-owned bank, settled U.S. and New York state criminal and civil charges for allowing an illegal transfer of more than $1 billion to Iran in violation of U.S. sanctions. U.S. courts’ denial of impunity to accomplices of Tehran would also serve as a wakeup call for international financial institutions. The American justice system’s commitment to prosecute sanctions busters and money launderers to the full extent of the law would prompt banks to improve their anti-money laundering controls, while also deterring them from colluding with Iran or other state sponsors of terrorism.
Aykan Erdemir is a former member of the Turkish parliament and senior director of the Turkey Program at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Aykan, the Turkey Program, and CEFP, please subscribe HERE. Follow Aykan on Twitter @aykan_erdemir. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.