Turkey’s Teflon Don

Turkish Prime Minister Recep Tayyip Erdogan triumphantly addressed thousands of supporters last night from the balcony of his party's headquarters in the capital of Ankara. He thanked his supporters for “protect[ing] the ideal of a great Turkey,” and promised to deal decisively with his enemies. Despite a litany of leaks that raised questions of corruption within the top ranks of his government, Erdogan's ruling Justice and Development Party (AKP) secured a comfortable victory in the country's municipal elections, which were largely viewed as a referendum on Erdogan himself.

With a grueling campaign behind him, Erdogan is riding high. But even if he increasingly looks bulletproof among Turkey's electorate, he still should be worried about how the most recent corruption allegations will damage Turkey's sagging standing in the West. Two weeks ago, a Turkish prosecutor's report that included 300 pages of corruption allegations against his government leaked to local media. The leak was undoubtedly an attempt by Erdogan's enemies to weaken him before the elections — the top suspect is presumably followers of Pennsylvania-based cleric Fetullah Gulen, who have been accused of leaking damning recordings of top Turkish officials discussing everything from how to hide millions of dollars to whether to provoke a war with Syria.

The prosecutor's report sheds further light on Turkish involvement in a money-laundering scheme that helped Iran evade international sanctions. It has already been revealed that Turkey helped Iran profit from some $12 billion in illicit gold sales between 2012 and 2013 — but the scope of the money laundering is now alleged to be even greater. The prosecutor's report charges that a raft of front companies and intermediaries across Turkey – with help from entities in Dubai and China — helped launder Iranian oil and gas revenues.

Due to U.S. sanctions, Iran's foreign currency was locked up in escrow accounts overseas that the regime could only use in local currency to buy local products. Turkey now appears to have been Iran's country of choice to circumvent these strictures. The bulk of this illicit activity appears to have been between 2012 and 2013; it's unclear whether it is still ongoing.

As the report explains, Turkish front companies issued invoices for fake transactions for goods such as food and medicine that were permissible for Iran under international sanctions. For example, the report cites one May 2013 invoice detailing a luxury yacht company selling nearly 5.2 tons of brown sugar to Iran's Pasargad Bank, with delivery to Dubai, using Turkey's state-owned Halkbank at the whopping price of 1,170 Turkish Lira per kilo — the equivalent of approximately $240 per pound. This is a classic example of a money laundering technique called over-invoicing, which “allows illegal organizations the opportunity to earn, move, and store proceeds disguised as legitimate trade.”

In this way, at the height of the sanctions regime designed to deprive Iran of cash, Iranian banks accumulated untold sums in hard currency from Halkbank, where Iranian funds from oil and gas sales to Turkey were held in escrow, only to be transferred as approved transactions. Indeed, the bank transactions receipts in the prosecutor's report include assurances that the “goods and services are not related to EUR Reg 423/2007 and 428/2009” — the European legislation restricting authorized exports to Iran.

The Turkish network bypassed past sanctions offenders, which had already been cut off from the financial system, and instead moved funds through companies in Turkey and money exchange houses in Dubai (which may well have converted the Turkish lira to more universally-accepted currencies, like dollars or euros). The funds eventually made their way to the handful of Iranian banks — including Karafarin, Pasargad, Parsian, Saman, and others — that were not cut off in 2012 from the SWIFT electronic transfer settlement platform.

The Iranian money also passed through China. The prosecutor's report, along with a leaked document believed to have been issued by Turkey's National Intelligence Organization (MIT), further asserts that Turkey was working with Chinese banks to process transactions that helped Iran circumvent sanctions. It is unclear whether the banks were aware of this. Nor is it clear whether the five China-based international trading firms were cognizant of their role in the complex financial scheme — but the prosecutor's report specifically demonstrates that there were millions of dollars moved to Iran in bank transactions involving several of these entities. The proof comes in the form of actual SWIFT receipts.

The prosecutor's report further alleges that several Dubai-based entities played an integral role in Turkey's illicit scheme with Iran. Al-Nafees Exchange and Al-Massoumi General Trading, based on phone transcripts, are alleged to have issued forged invoices to other companies involved in the scheme.

The prosecutor's report also confirms countless stories out of Turkey that identify Reza Zarrab, an Iranian with Turkish nationality, as the lynchpin of this scheme. Barely 29 years old at the time of his arrest, Zarrab rose quickly from obscurity to celebrity gossip status by amassing a fortune and splashing it around. He boasted a pop-star wife, yachts, private jets, a $72-million villa, and a racehorse (registered in his wife's name) aptly named “Duty Free.” Zarrab apparently financed his lavish lifestyle by leveraging a complex web of companies — sometimes officially owned by close associates — to rake in healthy commissions on Iranian transactions.

The report identifies Zarrab's parent company as Royal Holding, which Zarrab established in 2010. The report cites intelligence gathered by the Financial Crimes Investigation Board (MASAK), noting that, “Royal Holding's subsidiaries Durak Döviz, Tural Ltd. Sti. and P?rlanta Ltd. Sti have been exporting gold bars to Iran and Dubai … with their export revenues buying more gold bars from banks and … mediating the flow of money from Iran-related trade activities in and out of Turkey.”

This was apparently a family business: The report also singles out Zarrab's brother and father as figures who allegedly profited from these financial dealings. Another individual mentioned was Taha Ahmet Alacaci, who was reportedly once a partner of Zarrab, but after a falling out with the Iranian gold trader has apparently gone on to become a competitor, with a network of companies across Turkey.

From all indications, many of the companies listed in the report are still active today in Turkey. Almost all of them are based in Istanbul. Of the approximately two-dozen Turkish companies mentioned in the report, 11 hail from the Istanbul neighborhood of Fatih, an Islamist stronghold. In fact, six are on the same street in that neighborhood.

It is areas like Fatih that gave the AKP an edge in Sunday's election for Istanbul's mayoralty. With the win, Erdogan will undoubtedly view the elections as an indication that he does not have to answer for the financial crimes alleged against his government.

But this is not entirely true. Washington recently identified Turkey as posing a risk to the international financial system. And that was merely a response to Ankara's insufficient technical and legislative capabilities to counter terrorism finance. As the prosecutor's report winds its way through Washington and other Western capitals, uncomfortable questions about Turkey's illicit finances continue to cast doubt on the country's value as a reliable and trustworthy ally. As the leaks continue — through Twitter, YouTube, or other media — these questions will only continue.

Jonathan Schanzer is vice president for research at the Foundation for Defense of Democracies, where Emanuele Ottolenghi is a senior fellow.