JP Morgan and Kardemir embroiled in Iran sanctions-busting scandal at Halkbank

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Reza Zarrab (L), President Recep Tayyip Erdoğan (C) and Mehmet Hakan Atilla

by Abdullah Bozkurt

A confidential probe into the clandestine activities of the Islamic Revolutionary Guards Corps (IRGC) and its affiliates by Turkish prosecutors and police investigators reveals a variety of schemes to circumvent US sanctions that risked exposing Turkish banks to the wrath of the US Treasury.

Abdullah Bozkurt

The investigation that was later hushed up by Turkish President Recep Tayyip Erdoğan to safeguard his patronage system obviously did not focus on violating US law but rather on the infringement of Turkish law, from taking bribes, abuse of power and document forgery to espionage and terrorism that was instigated by Quds Force operatives in Turkey.

Nevertheless, the investigation uncovered several methods employed by Iran in Turkey to avoid sanctions with the full cooperation and protection of the Erdoğan government.

According to dozens of court-authorized wiretaps in investigation file No.2011/762 Turkish banker Levent Balkan, a suspect in the IRGC Quds Force’s Turkish affiliate the Tevhid Selam terror network, was the man who set up the scheme for busting financial sanctions at state-lender Halkbank while working there as the chief officer responsible for international financial transactions. Even after he left the bank, he played a key role in pushing Halkbank and other banks into bed with the IRGC and others, the secret conversations reveal.

Giant Turkish steel manufacturer Kardemir, a publicly traded company, appears to have received questionable wire transfers from a third country via JP Morgan financial services that should have raised red flags but somehow fell through the cracks. Kardemir made a deal in 2013 with Iranian energy firm Tavana to sell steel products, but the funds were not transferred from Iran; rather they were rerouted from Iraq, a third country, in the amount of $10 million. It was part of what was promised to be a €150 million business deal that would benefit Kardemir in the Iranian market against rivals from China, India and Russia. Although filtering mechanisms for questionable transfers that actually named the Iranian company on the transfer order failed to detect an anomaly, a branch manager at Halkbank triggered a heated discussion at the senior level when asked about the source of the money. Balkan, an avid fan of Khomeini, stepped in to reverse the Halkbank decision to stop the payment.

In a wiretap dated Sept. 4, 2013 at 21:38, Balkan tries to convince Seyit Ahmet Taymaz, a senior bank official who worked in international financial operations at Halkbank, on how to conceal the funds transfer from the scrutiny of US Treasury investigators. The topic of the discussion was money received by Kardemir from Iraq, which initially prompted Halkbank to reject the payment. Balkan says he talked to the general manager of Kardemir as well as Iranians who were involved in the transaction and that he is in a position to sort out the problem without alerting US officials.

Balkan says the payment was a part of a project that he had been working on for the last two years and involved the sale of steel rails to Iran valued at as much as €150 million. The transaction appears not to be in violation of US law, but the way the funds were transferred through Iraq, which cloaked the real buyers, posed a challenge. He says he had already talked to Hakan Atilla, the head of the department that manages international financial transactions at Halkbank, who gave a go-ahead for the payment to be finalized. Like Balkan, Atilla was also indicted by US attorneys in New York and is currently jailed in the US pending trial.

Taymaz sounded surprised about Atilla’s decision when informed about it by Balkan on the phone and said that he and others had discussed what to do with the transaction and reached the definite conclusion that they should return the payment. “We were just at the point of how we should do it,” Taymaz said from resort province Antalya’s Kaş district, where he was vacationing. He further noted that he talked to Kardemir and asked them to get in contact with a buyer in Iraq to void the funds transfer rather than Halkbank refusing the payment in order to not put the bank in a difficult position.

However, Balkan was persistent in approving the wire transfer, saying that what used to be a negative decision had now turned into a positive one and that Atilla, Taymaz’s boss, had already agreed to it. “If Atilla gives an order to that effect, then the transaction will be accepted,” Taymaz said, although he reiterated the bank policy of not accepting Iranian funds through third countries including the United Arab Emirates. He said the bank had rejected many such payments from third countries before. Another major problem with the transaction was that the funds in US dollars were cleared through JP Morgan, which was extra vigilant about running into trouble with US sanctions against Iran. The third problem is that the SWIFT, a bank-to-bank messaging system, identified that the funds were coming from Iranian company Tavana. From whatever angle one looked at it, the money transfer was dubious at best and should have been canceled by Halkbank.

In fact several officials at Halkbank were of the opinion that voiding the money transfer was the best course of action, but eventually all yielded to the pressure and lobbying. Taymaz made clear to Balkan that these three factors forced him to issue an opinion that the money should be returned but acknowledged that if Atilla, the deputy general manager of Halkbank, decided to proceed and overrule his decision, Hakan Aydoğan, the head of the international financial banking department, could not do anything about it.

Balkan and Taymaz also discussed how JP Morgan did not notice that the money transfer was coming from an Iranian company although the name was listed in the Swift order. Filtering mechanisms at both JP Morgan and Halkbank did not raise any red flags because the company was not on the sanctions list. The issue came up for discussion only when the branch manager started asking questions about the source of the money transfers and Kardemir told the branch that they were expecting funds from Iran. Taymaz warned that even though JP Morgan may have missed detecting the questionable transfer, this could come back to haunt them even five years later, subjecting the bank to financial penalties.
Balkan tried to downplay the significance of the transfer by claiming that Halkbank did not play an active role here as it merely provided services as a correspondent bank for JP Morgan, which initially took the payment order from an Iraqi bank. He claimed the penalties are for those who play an active role in violating sanctions. He also argued that there is no continuity in the violations because this was a one-time payment that did not trigger any alarms and would eventually be deposited in the client’s account. According to the transcript of the wiretapped conversation, Balkan claimed that Kardemir’s General Manager Fadıl Demirel talked to US Embassy officials in Ankara and that he got a green light for general business transactions with Iran although he admitted that the clearance was not specific to this particular transaction.

Balkan also raised another argument to convince Halkbank executives by citing the stiff competition from China, India and Russia, which were vying to get a contract for railroad projects in Iran. He said if the money transfer in the amount of $10 million were to be rejected, that would put Kardemir’s business opportunities in Iran at risk and derail the lucrative business venture. He advised Taymaz that the best way to cover up this scandal was to notify JP Morgan verbally that Halkbank identified a problem with the transfer after reviewing the company papers with regard to the transaction but that the payment had already been made in the meantime. Since the notice was to be made orally, JP Morgan would not be able to report it and would keep it to itself, Balkan maintained. He predicted that JP Morgan would likely use the Iraqi bank as a scapegoat. We would be keeping Kardemir as a client while putting JP Morgan on the defensive for not detecting the transfer at the time, Balkan said.

After an almost half-hour phone discussion with Balkan, Taymaz sounded convinced that this was for the good of the country and would benefit the Turkish economy against competition. He promised to go along with it and will explain it to others in the bank from the same perspective.

Before talking to Taymaz, Balkan actually called Aydoğan at 18:04 on Sept. 4, 2013, and the two discussed how to sort out the issue as well. Aydoğan said JP Morgan sent the wire without realizing that it came from an Iranian firm through a third country but as a Halkbank executive, he was now fully aware of the details and would be liable if he did not take any action. Nevertheless, he comes up with a plan not to inform JP Morgan in writing but rather do it verbally to shift the blame and lose the paper trail in the meantime. Since the money was a payment up front for goods that had not yet been delivered, Aydoğan says he would wait three weeks to inform JP Morgan so as to allow Kardemir to complete the sale. He asks whether Kardemir agreed to this plan, and Balkan assured him that he talked to the head of Kardemir and that he was fine with it.

After talking to both Aydoğan and Taymaz, Balkan followed up on the transaction with a woman named Ayşin Gönenç, who worked in Halkbank’s operations department, as to whether or not the transaction had gone through. It appears Balkan knew this woman well and they were discussing family matters among other things, and Gönenç seems very much convinced that the transaction would go through. On Sept. 5, 2013 she sends an SMS message to Balkan stating that she just approved the money transfer. Balkan immediately called Mehdi Semsar, an executive at the Eurasia firm and representative of Kardemir in Iran, to inform him of the good news. Mehdi verified that the funds were posted to the account and that production would begin within two weeks.

On Sept. 11, 2013 Balkan called Kardemir General Manager Fadıl and bragged about how he was instrumental in resolving the problem of the funds transfer and says he is ready to assist to the company in any way he can. Fadıl thanks him for his services and says he will have to find a way to make this profitable for him in some way. He promises to meet Balkan face-to-face in Istanbul to discuss the framework of that relationship. The implication in the conversation was that he wanted to put Balkan on the payroll but did not want to talk about the details on the phone.

The evidence in the case file suggests that financial and business dealings that circumvented Iran sanctions were done with the support and approval of Turkish President Erdoğan, who has been the kingpin of this sanction-busting scheme in exchange for kickbacks and bribes. By doing so, the Erdoğan government undermined the integrity of the finance and banking industry in Turkey and exposed Turkish banks to US wrath over violations. I suspect the federal case in the New York district court is just the beginning of what is more to come in this saga.

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