Turkey’s options in the Zarrab case

After a week of intrigue and speculation, Iranian-Turkish gold trader Reza Zarrab has finally pleaded guilty to charges of evading U.S. sanctions on Iran, agreeing to testify against his co-defendant, former Halkbank Deputy Manager Hakan Atilla. Thus the trial that we knew as the “Zarrab case” has actually become the “U.S. vs. Mehmet Hakan Atilla” case.

It is a matter of concern that Zarrab’s confessions, which have started to drop like bombshells, could pave the way for new indictments against President Recep Tayyip Erdoğan’s close circle, exposing Turkey to further economic and political damage. In this respect, the following weeks will be critical in terms of determining the future of Turkish-U.S. ties, which are already hanging by a thread.

Ankara has portrayed the Zarrab trial as another international conspiracy aimed at toppling Erdoğan. It is true that Turkey’s relations with the West have become considerably strained over the last few years. Undoubtedly, Ankara’s recent rapprochement with Russia and Iran should make Washington uncomfortable, to say the least. In any case, maintaining such a narrow approach is problematic in many ways.

First, the confidentiality surrounding the Zarrab case hinders any in-depth discussion of the allegations by intimidating those whose perspectives differ and increasing polarization in society.

Second, framing the legal process as a U.S. plot fuels hostility toward Washington while overlooking the reality of judicial independence in American politics.

Last but not least, it ignores the fact that the Zarrab case is perfectly consistent with the Donald Trump administration’s hardline policies on Iran.

Indeed, Iran has been a national security issue for Washington since the Islamic Revolution in 1979. Various administrations have used economic sanctions to pressure Iran to comply with international norms and regulations.

Following the 9/11 terrorist attacks in 2001, George W. Bush’s government instituted comprehensive procedures to track money trafficking and arms transfers to “rogue states” such as Iran, Iraq and North Korea. International pressure on Tehran particularly began to increase after Iran’s nuclear program was revealed in 2002.

The Barack Obama administration passed the Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA) in 2010, strengthening existing U.S. sanctions against Iran on energy exports, human rights abuses and Iran’s access to the international financial system. In 2011, the sanctions were expanded to include tighter regulations on the oil trade and financial transactions.

The restrictions imposed on Iran’s financial, transport and energy sectors were only partially lifted after the signing of the nuclear deal between Iran and the P5+1 in 2015.

Against this background, international banks such as HSBC (2012), Standard Chartered (2012), Royal Bank of Scotland (2013), BNP Paribas (2014) and Crédit Agricole (2015) faced similar allegations in the past about money laundering and evading U.S. sanctions. They eventually agreed to a settlement with the U.S. Treasury.

Among these cases, BNP Paribas is noteworthy in that it was the first international bank to plead guilty to violating U.S. economic sanctions, resulting in a record fine of $8.9 billion.

So Halkbank is just one in a string of banks charged with violating U.S. sanctions against Iran. But Halkbank’s case is much more complicated as it is a public lender. Given the domestic pressure of Turkey’s upcoming presidential elections, agreeing to a settlement or pleading guilty is out of the question since it would also implicate the government.

Ankara is duly expected to deny all the accusations, even if the court eventually fines Halkbank. In that case, however, Turkey’s banking sector may face heavy penalties, as the U.S. Treasury could withdraw a license to clear dollar transactions. Congress could also impose further economic and political sanctions.

More than ever, the coming weeks will present a true stress test not only for Turkish-U.S. relations, but also for the Turkish economy.