U.S. Prosecutors Call Them 'Victim Banks.' Are They?

On May 3, a state-owned Turkish bank will go on trial in New York, accused of facilitating an estimated $20 billion scheme to violate economic sanctions against Iran.

The U.S. prosecution of Halkbank is just the latest move in a legal, political, and diplomatic battle that began in 2016 with the arrest of Reza Zarrab, a Turkish-Iranian gold trader who illegally moved money for Iran. Halkbank is accused of fraud and money laundering as it worked with Zarrab in creating a pool of Iranian oil funds held in the names of front companies, with some of the money flowing through U.S. banks.

But Halkbank wasn’t the only financial institution entangled with Zarrab, who is expected to testify when the trial begins in the U.S. District Court for the Southern District of New York.

Eight of the world’s biggest and most sophisticated financial institutions –– Deutsche Bank, Bank of America, JP Morgan Chase, Citibank, HSBC, Standard Chartered, UBS, and Wells Fargo –– processed at least $6.5 billion in transactions for Zarrab-linked companies between 2007 and 2015, of which OCCRP was able to analyze about $1.5 billion.

Each of those giant banks has been previously penalized for lax oversight –– and in some cases for facilitating money laundering –– but they won’t be held to account this time. Prosecutors style them “victim banks,” duped by Zarrab and by Halkbank, a relative lightweight in the world of international finance.

“The government’s position is that these banks are victims of the defendant’s alleged criminal conduct,” prosecutors wrote in a letter to U.S. District Judge Richard Berman in 2017. “As victims, these banks may be entitled to rights traditionally afforded to victims of a fraud,” such as monetary restitution and the opportunity to testify about any harm incurred.

Experts in money laundering and bank compliance say prosecutors are going easy on the big banks.

“‘Victim banks’ casts them in a more sympathetic light than I might be prepared to,” said Graham Barrow, an internationally known authority on banking and financial crime based in the United Kingdom.

Basic tricks Zarrab used to obscure illicit transactions should have been spotted by bank compliance officers and flagged to authorities for further investigation, Barrow said.

In some cases,the banks did just that.

However, transaction records obtained by OCCRP, leaked Suspicious Activity Reports (SARs) filed by the banks, and an exclusive interview with Zarrab’s former deputy, Adem Karahan, suggest that some of the banks either knew who they were dealing with but failed to act, or ignored obvious suspicious activity.

Corruption in the international banking system was recently laid bare by the FinCEN Files, an in-depth investigation that relied on SARs submitted to the U.S. Treasury Department’s Financial Crimes Investigation Network and leaked by a whistleblower. The 2020 investigation, led by BuzzFeed News and the International Consortium of Investigative Journalists, found that big international banks moved trillions of dollars of suspicious transactions despite their own compliance officers’ warnings that they might be related to crimes. Banks profit from all the transactions they process, including illicit activities, by collecting transfer fees.

Correspondent Banking ‘Ripe for Abuse’

The global banking system may appear seamless, moving trillions of dollars around the world in billions of electronic transactions every day.

But not all banks have equal access to that system, which relies on the U.S. Federal Reserve’s ability to facilitate international trade by converting different currencies into U.S. dollars, the world’s most popular reserve currency.

Local and regional banks outside the U.S. process dollar transactions through correspondent banks –– large global institutions that have Federal Reserve accounts.

This movement of money through multiple institutions, including the eight so-called “victim banks,” is taken advantage of by criminals such as Reza Zarrab to obscure illicit activities and hide dirty money.

In 2017, Zarrab pleaded guilty in U.S. federal court to seven charges, including conspiracy to violate sanctions against Iran, bank fraud, and money laundering. He later became the government's star witness in the trial of a Halkbank executive.

Zarrab helped Iran circumvent international financial sanctions by making transactions through multiple corporate entities, forging documents, and purposely obscuring wire payment instructions.

The U.S. Senate Finance Committee is probing the role of the “victim banks” in the Zarrab case. In an October 2019 statement announcing the investigation, the committee’s current chairman, Democrat Ron Wyden of Oregon, noted that the complexity of the international finance system makes it ripe for abuse.

“At least $1 billion in funds from Iranian oil proceeds were transferred through correspondent banking services at U.S. financial institutions,” Wyden noted in a letter to the attorney general in March, in which he described Halkbank’s work with Zarrab as the “largest ever scheme utilizing correspondent bank accounts to aid Iran in circumventing U.S. sanctions.”

Information related to three of the eight so-called “victim banks” analyzed by OCCRP — HSBC, Standard Chartered, and Deutsche Bank — raises questions about their role in processing hundreds of millions of dollars in suspicious transactions.

HSBC: Zarrab’s favorite bank?

Adem Karahan, a Turkish citizen who smuggled gold and cash across borders for Zarrab for five years, said HSBC was his boss’s bank of choice for his own accounts.

“I sent money to Reza Zarrab with HSBC,” Karahan said in an interview from Turkey. “Not only one time. Several times.”

Karahan at one time was listed as legal owner or manager of seven shell companies he says were actually controlled by Zarrab. He provided bank statements for these companies, which sent millions of dollars in wire transfers to other companies Zarrab used in helping Iran evade sanctions. Asked if any had real commercial activity, he replied: “No, absolutely not.”

“He also had a credit card,” Karahan said, referring to Zarrab. “HSBC bank has a branch in Beyazit, Istanbul. We were doing a trade there,” referring to money transfers.

As described in “Too Big to Jail,” a 2016 report by Republican members of the Senate Finance Committee, HSBC has long been used to move dirty money and to evade sanctions. In 2012, the British bank had to forfeit nearly $1.26 billion for allegedly funneling money to several sanctioned countries, as well as moving millions for drug cartels in Mexico and Colombia.

Court records in the Eastern District of New York suggest HSBC brazenly thumbed its nose at U.S. authorities between 2006 and 2010.

"HSBC Group followed instructions from sanctioned entities such as Iran, Cuba, Sudan, Libya and Burma to omit their names from U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States," U.S. officials said in announcing a deferred prosecution agreement in 2012.

“HSBC is being held accountable for stunning failures of oversight – and worse,” Assistant Attorney General Lanny A. Breuer said at the time. “The record of dysfunction that prevailed at HSBC for many years was astonishing.”

Yet in the Zarrab case, prosecutors declared HSBC an unwitting victim, despite a wealth of data showing that the bank handled his transactions and was used by at least one other network that operated on Iran’s behalf.

That data, compiled by the Justice Department for the Zarrab investigation, shows that HSBC processed transactions for H M E A CO., LIMITED, a Hong Kong company run by a Swedish citizen.

Last year OCCRP and Sweden’s SVT revealed that HMEA moved at least $450 million on behalf of Iran between 2012 and 2014. Some of this money was for Iranian oil shipped to China, apparently concealed to avoid scrutiny for evasion of U.S. sanctions. The company used seven banks, but HSBC alone handled nearly $100 million linked to the secretive oil trading. HMEA also banked with Hang Seng Bank, a Hong Kong-based lender in the HSBC Group.

Despite having those records in hand, U.S. prosecutors have not pursued a case against HMEA or other companies in its network. Nor have they faulted HSBC for doing business with HMEA or Zarrab. The Justice Department declined comment.

When contacted by OCCRP, the bank said it is unable to comment on a particular customer relationship but is “determined to prevent criminals from accessing the financial system.”

“This is inherently challenging because those who seek to launder money are often extremely sophisticated, hiding behind legitimate companies, layers of front companies, connected parties and individuals that have controlling interests in the subject companies,” Gillian James, the bank’s senior corporate media relations manager, said in an email. “HSBC will not conduct business with individuals or entities it believes are engaged in illicit conduct.“

Yet Zarrab’s criminal activity became public in December 2013, when he was arrested in Turkey as part of a widely publicized probe of corruption, gold smuggling and money laundering. He was released after the investigation was quashed, but a detailed law enforcement investigative report, leaked to Turkish media in 2014, spelled out his work for Iran.

Despite the report’s findings, HSBC continued to handle Zarrab’s money, allowing it to flow through its correspondent accounts. In some instances the bank may not have known who was behind a particular shell company, but the Turkish report included enough information to alert compliance officers to potential sanctions evasion.

For example, HSBC continued to process transactions worth $1.2 million for Hanedan General Trading LLC, a Dubai-based company owned and operated by Zarrab’s brother, Mohammad.

Mohammad Zarrab’s role in his brother’s sanctions-busting was also revealed in the leaked Turkish police report, which described his payment of bribes to Muammer Guler, Turkey’s Interior Minister, as well as his role in preparing fake invoices submitted to Halkbank.

Mohmmad Zarrab was indicted by the U.S. along with his brother, though he remains at large. The indictment outlined Hanedan General Trading’s role in making payments benefiting Mahan Air, a sanctioned Iranian airline.

Barrow, the banking and financial crime expert, noted that a correspondent bank such as HSBC may have limited information about transactions that pass through its correspondent accounts, but can still question whether the banks it does business with take effective precautions against money laundering.

“Good banks will say ‘show us evidence that this is effective, don’t just show us your policy,’” Barrow said.

Standard Chartered: What the Bank Knew But Ignored

No stranger to prosecution for sanctions violations, London-based Standard Chartered agreed to pay more than $1 billion in fines, forfeitures, and penalties in 2019, after former employees were found to have conspired to use the U.S. financial system to benefit blacklisted Iranian individuals and entities.

The bank admitted to processing transactions worth around $240 million between 2007 and 2011 for an Iranian customer of its Dubai branch.

But the bank’s work on behalf of Zarrab involved far more money.

An OCCRP analysis of banking data collected by U.S. prosecutors shows that a Dubai-based company owned by Zarrab, Bella Investments Co LLC, processed more than $1 billion in suspicious wire payments from Russian and offshore shell companies during the same period.

Some of that money passed through a Bella Investment account at Standard Chartered’s troubled Dubai branch, including millions of dollars sent by four Turkish firms registered to Karahan but controlled by Zarrab.

Money also came from shell firms in Belize, the British Virgin Islands and the Seychelles, identified as payment for a wide range of goods and services. One Russian company started sending money just two months after it was created, with only vague reference to payments “for goods.”

Ross Delston, a U.S. anti-money laundering expert, said Bella Investments’ activity exhibited obvious “indicators of possible criminal activity” the bank should have seen as suspicious:

• Bella was newly formed but was receiving huge payments;

• It dealt with goods atypical for an investment company;

• Money was coming from “higher-risk offshore financial centers.”

U.S. prosecutors also found evidence of a relationship that appears to have gone unquestioned by the bank: some 1,575 Standard Chartered transactions, totaling more than $338.7 million, with Al Nafees Exchange, a UAE-based money services business owned in part by Reza Zarrab’s father, Iranian businessman Hossein Zarrab.

U.S. authorities had slapped Al Nafees Exchange with a multi-million-dollar million fine in early 2013 for violating Iran sanctions. The company was also named in Zarrab’s 2015 indictment.

When he testified in a U.S. money laundering case against Halkbank manager Hakan Atilla in 2018, Zarrab said that another Dubai-based money transfer business, Al Rostamani International Exchange, also sent Iranian money through its U.S. Standard Chartered accounts.

Banking data collected by the FBI prior to 2016 shows that Al Rostamani wired millions of dollars for Centrica General Trading, a Zarrab shell company, in 2014 and 2015.

Al Rostamani told OCCRP it couldn’t comment on third-party testimony and that it complies with UAE anti-money laundering laws and regulations.

Standard Chartered continued to do business with at least one Zarrab network company that was used to conceal Iran transactions, even after detecting unusual and suspicious activity.

In 2012 the bank filed a SAR flagging $142 million in “quite unusual and suspicious” transactions involving Gunes General Trading LLC. Gunes declined to explain the transactions but said it would close the account, the bank reported to the UAE’s financial intelligence unit, as described in the SAR.

While the UAE regulator told Standard Chartered "the case has been passed on to law enforcement authorities" and “the accounts were closed in September 2011,” the bank responded that the suspicious activity “appears to have continued utilizing various accounts that the [company] maintains with other banks." It’s unclear why the regulators and the bank disagreed on the status of the account.

Financial data collected by U.S. authorities show that Gunes General Trading’s Standard Chartered account was still active in 2013, and continued to engage in transactions that were obviously suspect.

Though it claimed to be a wholesaler of household goods, the Dubai company made two wire transfers totaling almost $1.5 million to Türkmengaz Döwlet, Turkmenistan’s state-owned gas company, in January 2013.. According to Zarrab’s U.S. indictment, the transactions were related to an oil deal between Iran and Turkmenistan. It’s unclear why the bank, which declined to comment on specific transactions, didn’t question large gas transactions handled by a housewares dealer.

In 2014 and 2015, Standard Chartered’s New York branch filed other SARs on entities and individuals tied to Zarrab or Iran that exhibited irregular business patterns and unusual flows of funds; involved possible shell companies with inconsistent addresses; or appeared to show attempts to circumvent Iran sanctions.

Months after Zarrab’s high-profile Miami arrest in March 2016, Standard Chartered filed several more SARs, reporting thousands of transactions totalling more than $5.8 billion between January 2007 and September 2016.

Banks routinely file SARs long after a transaction, especially in response to criminal charges filed against a customer or headlines about an investigation.

One of those after-the-fact SARs shows that the bank knew as early as July 2014 that Zarrab had been accused of bribery and sanctions-busting the previous year, but did nothing to block his transactions.

Other bank records show that it continued to process transactions for entities allegedly involved in Zarrab’s scheme, including Rona Döviz Ve Kiymetli Maden, a Turkish precious metals trader named in the 2013 Turkish investigative report.

In Turkey, Zarrab bought gold from Rona Döviz. Karahan has said he and other couriers hauled 200 tons of gold in suitcases from Turkey to Dubai, where a Rona Döviz branch bought it back for euros or dollars used to benefit Iran.

Standard Chartered handled about $82.6 million on behalf of Rona Döviz prior to the filing its after-the-fact SAR on the suspect transactions in September 2016.

The bank declined comment on specific transactions, citing client confidentiality requirements or discussions with regulators, but issued a general statement to OCCRP’s FinCEN Files partner, BuzzFeed News.

“We take our responsibility to fight financial crime extremely seriously and have invested substantially in our compliance programmes,” the bank wrote. “The reality of the global financial system is that there will always be attempts to launder money and evade sanctions; the responsibility of banks is to build effective screening and monitoring systems and we work closely with regulators and law enforcement to bring perpetrators to justice.”

In a written response, Rona Döviz told OCCRP that it conducts thorough due diligence on its trading partners; that neither Zarrab nor his companies had been blacklisted at the time of the trades; and that all transactions were reported to both the U.S. Office of Foreign Assets Control and Turkey’s Financial Crimes Investigation Board. The company said it was not investigated and no additional documentation was requested.

Deutsche Bank’s Erdoğan Connection

Few international banks have drawn as much scrutiny as Deutsche Bank, whose offices were raided by Frankfurt police in late 2018 as part of a money laundering investigation in connection with the Panama Papers leak.

The German bank was the subject of a three-year U.S. deferred criminal prosecution agreement in 2015, and has over the years paid tens of billions of dollars to settle allegations of sanction violations, money laundering, fraud, price fixing, and interest rate manipulation made by the United States and European Union.

Yet Deutsche is styled as a “victim bank” in its business dealings with Zarrab-linked entities, including multiple banks Turkish President Recep Tayyip Erdoğan is said to have ordered to participate in Zarrab’s scheme.

Erdoğan intensely lobbied both the Obama and Trump administrations to terminate the prosecution of Zarrab, stop the Halkbank investigation, and fire Preet Bharara, the Southern District of New York prosecutor leading the case. He was rebuffed, though former President Donald Trump did fire Bharara in March 2017 after a meeting with Erdoğan’s representatives.

The reason for Erdoğan’s interest became clear when Zarrab testified in November 2017 that the Turkish leader had approved the Iran sanction-busting trades.

“What I’m saying is that the prime minister at that time period, Recep Tayyip Erdoğan, and the Minister of the Treasury at that time, Ali Babacan, had given instructions, had given orders for them [the banks] to start doing this trade,” Zarrab told the court.

Records show that banks referenced by Zarrab, including Turkey’s state-run Ziraat and VakifBank, sent at least $252 million through U.S. banks since January 2013.

Large portions of that money were handled by Deutsche Bank, though its relationship with those Turkish banks was only briefly raised in the trial of Atilla, the Halkbank manager.

Atilla’s defense lawyers hammered on a theme: Deutsche’s compliance monitors were better funded and more sophisticated than Atilla, yet they either failed to detect the dodgy transactions or chose to ignore them.

Banking records show that Deutsche Bank processed at least $3.8 million in Ziraat Bank wire transfers in 2014 and 2015. Ziraat transactions through Deutsche Bank and others continued at least through September 2016, six months after Zarrab’s high-profile arrest in Miami.

It’s unclear how many Ziraat wire transfers violated Iran sanctions, but they include $202 million that a Zarrab shell company, Centrica, sent to its own accounts in Dubai.

Zarrab testified that he transferred money between company accounts in different countries as a way of avoiding attention. Barrow, the anti-financial crime banking expert, told OCCRP that Zarrab’s trick should have done the opposite – banks should have scrutinized them as “something that is not in the normal course of events.”

Because Deutsche was cast as a victim, rather than a participant, the bank’s apparent failure to question the money movement was never explored. Nor were jurors told about Deutsche’s troubled past because those cases didn’t involve Zarrab.

Deutsche Bank declined comment for this article.

Calls for Reform

The U.S. government has argued that by concealing the true beneficiaries of the transactions from banks, “Zarrab and his co-conspirators robbed them of the ability to properly assess the risk from engaging in these transactions.”

But Maíra Martini, a policy expert on corrupt money flows at Transparency International, said the banks should have known better.

“Saying ‘they used shell companies to disguise’ [is] not a good excuse, because that's exactly what everyone knows –– that a shell company is the most used way to try to disguise or hide or distance a person from a transaction,’’ Martini told OCCRP.

At least 20 percent of the 2,100 SARs scrutinized in the FinCEN Files investigation involved bank clients with addresses in offshore financial havens such as the British Virgin Islands that are infamous for allowing anonymous corporate registration. The investigation shows just how blind banks are to suspicious transactions, finding that “in half of the reports banks didn’t have information about one or more entities behind the transactions” and often received no response when they requested more information.

Transparency activists have for years pushed for reforms that would require companies to declare their true owners.

Chris Taggart, CEO and Co-founder of OpenCorporates, the world’s largest open database of companies, told OCCRP that efforts to make company ownership publicly accessible have been mixed, with Canada, the United Kingdom and the European Union making positive efforts in recent years.

The European Union in 2019 adopted the Open Data Directive requiring company ownership transparency in member companies but compliance has been uneven, with notable pushback from Germany and the Netherlands, Taggart said.

In the U.S., multiple states allow anonymous corporate registration. Reforms, including public disclosure of ownership, have been introduced in Congress since 2008, only to be blocked by groups that argue disclosure would overburden small businesses and state governments. The recently approved Corporate Transparency Act requires disclosure of beneficial ownership – but only to law enforcement agencies.

Taggart said correspondent banks like the “victims” of Halkbank should also have access to information about the directors and shareholders of the clients of the banks they do business with.

“There's no good reason for that to be opaque,” he said, adding that until there are open company registers, “banks will find it very, very difficult to identify financial crime and to stop that happening.”

Still, Martini points out, banks have several options when confronted with incomplete information, including rejecting transactions, reporting the activity to authorities, and closing the client or corresponding account.

Experts have noted that until the costs of allowing illicit financial flows outweigh the costs of losing a suspicious client, banks have little incentive to take drastic measures.

Proponents of corporate accountability in the U.S. have called for curtailing the use of deferred prosecution agreements, which allow banks to avoid criminal convictions and major sanctions.

U.S. Senator Elizabeth Warren renewed her long-standing call for deferred prosecution reform in late 2020, saying the approach has “allowed these bankers to walk away with drop in the bucket settlements and slaps on the wrist.”

Warren is the sponsor of the Ending Too Big to Jail Act, which would give judges more authority over the agreements and would hold individual bankers criminally liable when their actions lead to violations of the law. The bill has yet to advance in the Senate.

Transparency International also says occasional fines and deferred prosecution are ineffective, and has called for stiffer penalties.

“Without proper supervision and accountability for banks and their employees, they have little incentive to cut off suspicious clients,’’ Martini said of the banks. “It is not enough to submit poor quality or delayed Suspicious Activity Reports and continue processing payments.”