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The Case of Reza Zarrab

Corruption has become an instrument of policy and rule in the hands of Turkish President Recep Tayyip Erdoğan and his Justice and Development Party (AKP), undermining decades of U.S.-Turkish cooperation in the realms of international law enforcement and counter-terrorism. Against this backdrop, the Bipartisan Policy Center has begun a new series examining the causes and consequences of corruption in Turkey and the impact on U.S. interests in the Middle East and the world. 

The case of Reza Zarrab, a Turkish-Iranian businessman charged in the Southern District of New York with evading international financial sanctions on Iran, has the potential for a broader impact on shaky U.S.-Turkish relations.

The allegations against Zarrab, which were first raised in Turkey in 2013 and then eventually dropped by the ruling government of Turkish President Recep Tayyip Erdoğan, demonstrate the extent of corruption in the Turkish regime and Turkey’s role in subverting U.S. Middle East policy.

Who is Reza Zarrab and why is he in the news?

Zarrab is a Turkish-Iranian businessman who, prior to his involvement in an international corruption and sanctions-busting scandal, was of some renown in Turkey due to his wealth and marriage to a Turkish pop star.

He was arrested at the Miami airport in March 2016 on charges of bank fraud, money laundering, and helping the Iranian government evade U.S. sanctions. If convicted, he could spend decades in a U.S. prison. A spokesman for the Turkish government has decried the case as “a clear plot against Turkey” and “lacking any legal basis.”

Zarrab was arrested in March 2016 on charges of bank fraud, money laundering, and helping the Iranian government evade U.S. sanctions.

Beyond the implications for U.S.-Turkey relations, there are additional curiosities making headlines: The circumstances of his arrest—he supposedly entered the country on the way to Disney World with his family—led to speculation that he had reached a deal with U.S. prosecutors, and many observers continue to wonder who he might have implicated in return for a plea deal. Indeed, this possibility seems to have the Turkish government worried: President Trump’s ally Rudy Giuliani was hired as part of Zarrab’s defense team, and questions have been raised over whether the Turkish government may have initially tried to use its influence with Michael Flynn, who worked as a lobbyist for Turkey during the presidential campaign and served as Trump’s first, short-lived national security advisor, to secure Zarrab’s release.

What exactly is Zarrab accused of?

International sanctions placed on Iran isolated the country’s government from the global financial system, preventing Iran from receiving payment for its oil and natural gas exports in dollars or euros. Under the sanctions, Iran was only able to receive payment for its energy exports to Turkey in Turkish lira, which were then stored in Iranian accounts in Turkish banks where they were, by design, of little use to the Iranian government. While Iran was allowed to use those funds to purchase Turkish goods, the Iranian regime realized that a loophole existed which would allow Iran to convert them into gold—which would be considerably more useful.

Zarrab became a prime player in this scheme. In 2011, Zarrab offered his services in a letter sent to Iranian President Mahmoud Ahmadinejad, saying “since the wise leader of the Islamic Revolution of Iran has announced this to be the year of Economic Jihad, the Zarrab family, which has had half a century of experience in foreign exchange, while establishing branches in Turkey, United Arab Emirates, Russia, and Azerbaijan, considers it to be our national and moral duty to declare our willingness to participate in any kind of cooperation in order to implement monetary and foreign exchange anti-sanction policies.”

But Iran’s gold scheme did not just involve turning payments for its natural gas into gold. To accrue even more gold to bolster its foreign exchange reserves, Zarrab and his Iranian partner Babak Zanjani set up a series of shell companies in Iran and Turkey and even in China. Through these companies, the duo issued invoices and drew up ledgers for a triangle of fictitious trades between Iran, Turkey, and China. Using these documents, Zanjani transferred funds from Iranian banks to his Chinese shell companies’ accounts in Chinese banks. This money was then wired to Turkish banks, mostly Süleyman Aslan’s Halkbank, as payment for the Turkish shell companies’ (fictitious) trades with the Chinese banks.

The money was then used to purchase gold, primarily using money exchanges in Turkey owned by Zarrab. The gold was then taken to Tehran by Zarrab’s couriers operating out of Ataturk Airport, either directly or after making a layover in Dubai to be circulated through money exchanges owned by Zarrab there.

Through these interactions, Tehran was able to conduct its foreign trade—particularly its energy trade—despite the international sanctions designed to lock it out of the global financial system. Once the money was in Tehran, Zanjani took his commission (Zarrab got his cut when the money circulated in Turkey) and then transferred the remaining funds to the intended recipients in the Iranian government. 

At the peak of the scheme, in June and July 2012, Iran was receiving $1.6 billion in gold per month. And Zarrab, through bribes and backdoor dealings with Turkish officials and banks, was able to control the majority of this trade.

How did Zarrab’s alleged scheme first come to light?

The extent of Zarrab’s activities first became known to Turkish investigators in January 2013, when a cargo plane rented by Zanjani from Accra, Ghana, was diverted to Istanbul. When searched, the plane was found to contain 1.5 tons of gold without paperwork. The cargo was held up for days, but ultimately released, and a wiretapped conversation between Zarrab and Economy Minister Zafer Cağlayan’s office allegedly showed that Cağlayan intervened to prevent customs officers from seizing the shipment. Further investigation revealed an even larger network, with connections to more government officials than just Cağlayan.

On the morning of December 17, 2013, two prosecutors, Celal Kara and Mehmet Yüzgeç, got the sign-off from Istanbul’s chief prosecutor Zekeriya Öz for arrest warrants for Zarrab and 88 other suspects involved in multiple corruption investigations that reached the highest levels of Turkey’s government. These arrests, now often referred to collectively as the December 17-25 Investigation, included, along with Zarrab, the sons of three cabinet ministers—Housing Minister Erdoğan Bayraktar, Interior Minister Muammer Güler, and Economy Minister Cağlayan—as well as Süleyman Aslan, the chief executive of state-owned Halkbank.

What are Zarrab’s alleged connections to the Turkish government?

To keep this operation running smoothly and to prevent others from encroaching on his territory, Zarrab needed Turkish officials to look the other way, and had a number of Turkish cabinet ministers on his payroll.

To keep this operation running smoothly, Zarrab needed Turkish officials to look the other way and had a number of Turkish cabinet ministers on his payroll.

  • Interior Minister Güler supposedly received over $10 million to grant Turkish citizenship for Zarrab’s father, brother, and three associates. He also allegedly:
    • leaked information to Zarrab on investigation by Turkey’s financial crime unit (MASAK) into his finances, and fired the police chief that initiated it;
    • assigned Zarrab a protection detail;
    • reached out to officials in China to vouch for Zarrab when his operations in the country aroused the suspicion of Chinese banks.
  • Economy Minister Cağlayan, in addition to intervening to stop the seizure of the Ghanaian gold, was accused of accepting over $50 million to turn a blind eye to Zarrab’s operation, including a quarter-million dollar watch that he often wore in public.
  • Minister for European Union Affairs Egemen Bağış, along with Güler, allegedly pressured a journalist to kill a story on money from Zarrab’s business dealings totaling $4.5 million stashed into shoeboxes found in the home of Halkbank Executive Süleyman Aslan.

Why were charges against him dropped in Turkey?

Within Turkey, the corruption investigation dramatically intensified a simmering conflict between then Prime Minister Erdogan and his then ally, the cleric Fetullah Gülen. When secret wiretaps were leaked that seemed to show Erdogan instructing his son to dispose of large amounts of money hidden at a family house, the stakes of the corruption case became even higher, threatening not just Erdogan’s government but Erdogan and his family with criminal charges. In response, Erdogan dismissed the entire investigation into his family and political allies as a plot against him led by prosecutors affiliated with the Gülen movement. And Erdogan struck back hard at his new political enemies.

While the indicted ministers were forced to resign, the prosecutors who indicted them were also stripped of their positions as the first step in a larger shake-up of the judiciary. If the prosecutors who led the December corruption investigation thought the resulting scandal would bring down Erdogan, they badly miscalculated the Turkish public’s response. Erdogan succeeded in rallying his supporters, who came to see the entire incident as evidence of Gülenist perfidy rather than government corruption. For Zarrab himself, this political fallout helped ensure that, in Turkey at least, he would not be held accountable for his crimes

What are implications of the Zarrab case for U.S. policy?

Zarrab’s activities are of interest to U.S. prosecutors because they allegedly ran afoul of U.S. sanctions on Iran. But the policy implications of this case stem from the seeming involvement of high-level Turkish officials in Zarrab’s scheme. This suggests both the complicity of Turkey, a treaty ally of the United States, in undermining key U.S. objectives, but also an endemic corruption problem within the Erdogan regime.

The policy implications of this case stem from the seeming involvement of high-level Turkish officials in Zarrab’s scheme.

The Turkish government’s reaction to the case further complicates its relationship with the United States, as Erdogan and other officials have been eager to portray the case as an anti-Turkish conspiracy orchestrated by the same organization they charge with plotting the 2016 failed coup attempt. To this end, the Turkish foreign minister recently suggested that former Southern District of New York District Attorney Preet Bharara, who initially led the investigation into Zarrab, was under the influence of Gülenist elements. For Washington, by contrast, the Zarrab case has revealed the extent to which the erosion of the rule of law under Erdogan has become a national security concern. 

As explored in Power and Corruption in Erdogan’s Turkey: Context and Consequences the systematic corruption that made it possible for Zarrab to subvert Iran sanctions is indicative of a larger, and more dangerous, trend in Turkish politics under Erdogan.

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