IAI COMMENTARIES 18 | 06 - JANUARY 2018 ISSN 22532-6570 © 2018 IAI 1 ecfr.eu/article/commentary_the_zarrab_affair. Commentaries and isan intern with theIstituto Affari Internazionali (IAI). Dilek Ulutaş holds aBachelor in International Relations from Kadir Has University in 1 defendant, Reza Zarrab,awealthy During thetrial inNew York, the programme. context of negotiations over its nuclear sanctions imposed on Tehran in the authorities toevadeinternational and assisting Iranian national intheUS,accusedof fraud, of awell-connected Turkish-Iranian stems from thearrest,inMarch 2016, significant dimension of thesetensions A further,less publicized but highly failed coup attempt inJuly 2016. particularly pronounced sincethe in democratic norms andfreedoms, and Turkey’s sustainedbacksliding Kurdish Democratic Union Party (PYD) , USandWestern support for the these revolve around theconflict in the US-Turkish relationship. Much of to tensions andrecriminations in The newyear hasalready given rise by Dilek Ulutaş and US-Turkey Relations The Reza ZarrabCase Conspiracy toSpy Novel:

ECFR in ECFR Affair”, Zarrab “The Aydıntaşbaş, Aslı , 24 November 2017, November , 24 http://www. 1 on theTurkish bank. may now move toinflict heavy penalties Turkish-US relations astheUSTreasury the stagefor afurthershowdown in conspiracy todefraud theUS,setting five counts of conspiracy, including convicted by the New York court on of , Mehmet HakanAtilla, was On 4January 2018,thedeputy manager through USfinancial institutions. with some of thefundsbeingmoved export its oil andgasreserves for gold, that allowed Iran toskirtsanctions and owned Turkish Halkbank inascheme deputy general manager of the state- Development Party (AKP) and the affiliated with the ruling Justice and implicated high-level Turkish ministers become astate witness. His testimony with deeplinksinTurkey, agreedto and well connected businessman 2 news/articles/2018-01-04/turkey-s-halkbank- https://www.bloomberg.com/ 2018, January Conviction”, Bloomberg in U.S. Banker’s Ex-from Suffer Could “Turkey’s Halkbank

Greg Farrell and Christian Berthelsen, Berthelsen, Christian and Farrell Greg 2 , 4 Conspiracy to Spy Novel: The Reza Zarrab Case and US-Turkey Relations

Following the arrest in 2016, the Turkish buried and Zarrab walked free after a government repeatedly called on the US short stay in prison, with the Turkish to free Zarrab. The arrest was initially government denouncing what it described as a politicized witch-hunt described as a Gülen-linked plot to in Turkey, with Zarrab depicted as a undermine the AKP.7 This decision “hostage” of worsening US-Turkish is likely to come back and haunt the relations.3 Last November, when Turkish government as the New York news emerged that Zarrab had begun court case is shining a new light on

© 2018 IAI collaborating with the prosecution, the 2013 probe, including the possible Turkish authorities began denouncing involvement of government ministers Zarrab as part of an alleged plot to in the dealings with Iran. undermine Turkey’s AKP government.4 By December 2017, Turkey moved to Today, there is not only a risk of fines seize Zarrab’s assets in the country, with and even sanctions on Turkish banks. Turkey’s Prime Minister Binali Yıldırım There is also the possibility of new being quoted in the media as stating prosecutions and arrests, as a result of that he hoped Zarrab would “turn back the explosive revelations made public ISSN 2532-6570 from his mistake” and end cooperation during the trial. Coming at a time when with the US prosecution.5 US-Turkey relations are already strained and tense, such revelations are adding This is not the first time that Reza further fuel to the fire and causing Zarrab faces scrutiny on charges of considerable political headaches in and money laundering. both Ankara and Washington. Back in 2013, Turkish authorities arrested Zarrab during a corruption Over the years, the US has fined many and bribery investigation involving banks and financial institutions illegal gold transfers and fake exports to accused of money laundering and Iran.6 At the time, four AKP government evading US or international sanctions. ministers and some of their family Most of these cases involved European members were also implicated in the banks, such as Deutsche Bank, ING investigation. Yet, the case was quickly Direct, BNP Paribas, Crédit Agricole and HSBC.8 A number of US banks and could-suffer-from-ex-banker-s-u-s-conviction. institutions have also been charged. In 3 “Bekir Bozdağ: Reza Zarrab Being Held these cases, however, banks agreed to Hostage in the USA”, in , 20 a settlement and payed a hefty fine in November 2017, http://www.cumhuriyet.com. tr/haber/english/870096. order to avoid further public scrutiny 4 “Zarrab Being Forced to Sign ‘Slanders against Turkey’: Deputy PM”, in Hurriyet Daily News, 27 7 Tim Arango, “Raids and Graft Inquiry in November 2017, http://www.hurriyetdailynews. Turkey Are Seen by Some as Muslim Cleric’s com/zarrab-being-forced-to-sign-slanders- Plot”, in , 18 December 2013, against-turkey-deputy-pm-123108. https://nyti.ms/2Gl1cbG. 5 “Reza Zarrab Case: Turkey Seizes Assets of Trader 8 “BNP Paribas to Pay $9bn to Settle Sanctions in US Trial”, in BBC News, 1 December 2017, http:// Violations”, in BBC News, 1 July 2014, http://www. www.bbc.com/news/world-europe-42203274. bbc.com/news/business-28099694; Jill Treanor, 6 Fehim Taştekin, “Iranian Gold Stars in “Standard Chartered to Pay $670m to Settle Turkish Corruption Scandal”, in Al-Monitor, 20 Iran Sanctions Allegation”, in The Guardian, 6 December 2013, http://almon.co/1xck. December 2012, https://gu.com/p/3cb6c. IAI COMMENTARIES 18 | 06 - JANUARY 2018 18 | 06 - JANUARY IAI COMMENTARIES

2 Conspiracy to Spy Novel: The Reza Zarrab Case and US-Turkey Relations

and not run the risk of sanctions or Security Advisor, and Rudolph Giuliani, being excluded from key financial hubs. an influential lawyer and former The present case involving Halkbank is mayor of New York, allegedly worked more problematic, involving a complex with Turkish officials and Donald and murky scheme that allegedly saw Trump’s presidential campaign to free the involvement of high-level bank Zarrab while seeking to bury the court managers and former ministers linked investigation.11 to the current AKP government.

© 2018 IAI Given the complexity of the During the trial, Zarrab testified that he investigation and the high political and had bribed Turkey’s former Minister economic stakes involved, it is likely of Economic Affairs, Zafer Çağlayan, that the full truth will never be revealed. and also implicated Egemen Bağıs, Indeed, the fact that the trial has slowly former Minister for EU affairs, in become politicized, with it gradually helping Zarrab set up a bank account becoming a source of domestic debate with another Turkish bank, Aktif Bank, in the highly polarized domestic through which some of the dealings political battles currently underway in ISSN 2532-6570 were allegedly made.9 Resulting from the US and Turkey, as well as within these revelations, and notwithstanding broader West-Turkey tensions, will some concern over the reliability likely result in a joint effort to limit the of Zarrab’s testimony,10 the current high-level political damage that could investigation has mushroomed into flow from the case. a complex case that could serve as the script of a geopolitical thriller, That said, there are some real economic complete with murky dealings between implications. The Turkish economy high level politicians, ministers and is already suffering from numerous wealthy private citizens spanning three internal and external challenges and continents. the possibility of fines and sanctions on a major Turkish bank could have To make matters even more complex, serious repercussions on Turkey’s a further set of uncorroborated economic outlook. Notwithstanding revelations have emerged in which high GDP growth in 2017, the annual senior US citizens and politicians, inflation rate grew to 12.98 percent including , who briefly last November, the highest it has been served as ’s National

11 Melik Kaylan,“The Zarrab Court Case: What It 9 Christian Berthelsen and Bob Van Voris, “Zarrab Means for Flynn, Trump, Erdogan, Even Putin”, Takes Jury on Trip through a Sanctions-Evasion in Forbes, 5 December 2017, https://www.forbes. Plot”, in Bloomberg, 29 November 2017, https:// com/sites/melikkaylan/2017/12/05/the-zarrab- www.bloomberg.com/news/articles/2017-11-29/ court-case-what-it-means-for-flynn-trump- gold-trader-zarrab-points-finger-at-atilla-at- erdogan-even-putin; Melik Kaylan, “The Zarrab sanctions-trial. Trial In New York Gives Up Its Secrets About 10 Benjamin Weiser, “Reza Zarrab, Taped in Flynn, Giuliani, Erdogan: Part Two”, in Forbes, Jail, Said Lying Was Ticket to Freedom”, in The 8 December 2017, https://www.forbes.com/ New York Times, 4 December 2017, https://www. sites/melikkaylan/2017/12/08/the-zarrab-trial- nytimes.com/2017/12/04/world/europe/zarrab- in-new-york-gives-up-its-secrets-about-flynn- turkey-iran.html. giuliani-erdogan-part-two. IAI COMMENTARIES 18 | 06 - JANUARY 2018 18 | 06 - JANUARY IAI COMMENTARIES

3 Conspiracy to Spy Novel: The Reza Zarrab Case and US-Turkey Relations

in 14 years.12 Turkey’s current account geopolitical challenges for Turkey, the deficit has also increased, from 33.7 US-Turkey and West-Turkey relations. billion dollars at the end of 2016 to 41.9 billion dollars in early 2018.13 The In light of these developments, US and value of Turkish lira compared to the Turkish authorities would do well to US dollar fell drastically in 2016, losing redouble their efforts and quickly find 17 percent.14 This decline has a direct an agreeable solution to the crisis. The impact on the inflation rate and its debt risk is that tensions stemming from

© 2018 IAI repayment capacity. With municipal, other developments seep over into the national and presidential elections current investigation, politicizing its scheduled for 2019, the economy is outcome and closing down room for likely to stand out as a major campaign potential compromise. issue. If Turkish banks are fined by the US Treasury, the AKP party may suffer Halkbank will likely face a heavy fine at the polls, a dynamic that is sure to be and other senior members of the bank keeping Turkish leaders awake at night. may join its deputy manager Atilla in facing US convictions. Ultimately, ISSN 2532-6570 But there may be more. Indeed, however, it is in the interests of both there are some worrying indications the US and Turkey to limit the political that US authorities may expand the and economic fallout from the case. investigative net, also involving other Turkish banks and institutions. Threats While marred in significant tensions, range from individual fines and the US-Turkey relationship, like the sanctions to the potential that banks broader West-Turkey alliance in NATO, or financial institutions have their is too valuable (and fragile) to risk licence suspended, preventing them expanding the court case into high from operating in the US market or level political indictments of Turkish in US currency. Given that Zarrab has officials. Such an eventuality would testified that different Turkish banks effectively push Turkey closer to the were involved in the transactions with Russian-Iranian axis and further Iran, there is a possibility that more complicate US and European interests Turkish banks become implicated in in the economic, security and political the probe. Such eventuality would pose domain, where important drivers of economic but also political and even structural interdependence remain of significant benefit to both sides in the

12 “Turkey’s Core Inflation Hits Highest Since 2004”, relationship. in Hurriyet Daily News, 3 January 2018, http:// www.hurriyetdailynews.com/turkeys-inflation- 25 January 2018 hits-11-92-percent-in-december-2017-125146. 13 “Turkey’s Economy Is One of the World’s Fastest- Growing”, in The Economist, 4 January 2018, https:// www.economist.com/news/europe/21734010- how-long-turkeys-economy-one-worlds-fastest- growing. 14 Roger Blitz, “Turkish lira falls to record low as higher inflation spurs selling”, in Financial Times, 3 January 2017. IAI COMMENTARIES 18 | 06 - JANUARY 2018 18 | 06 - JANUARY IAI COMMENTARIES

4 Conspiracy to Spy Novel: The Reza Zarrab Case and US-Turkey Relations

Istituto Affari Internazionali (IAI) Founded by Altiero Spinelli in 1965, IAI does research in the fields of foreign policy, political economy and international security. A non-profit organisation, IAI aims to further and disseminate knowledge through research studies, conferences and publications. To that end, it cooperates with other research institutes, universities and foundations in Italy and abroad and is a member of various international networks. More specifically, the main research sectors are: European institutions and policies; Italian foreign policy; trends in the global economy and internationalisation processes in Italy; the Mediterranean and the Middle © 2018 IAI East; defence economy and policy; and transatlantic relations. IAI publishes an English- language quarterly (The International Spectator), an online webzine (Affarinternazionali), two book series (Quaderni IAI and IAI Research Studies) and some papers’ series related to IAI research projects (Documenti IAI, IAI Papers, etc.).

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