By Mehul Srivastava and Isobel Finkel Jun
25, 2014 10:00 PM GMT
Photographer: Ozan Kose/AFP/Getty Images
Riza Sarraf, center, is surrounded by journalists as
he arrives at a police station in Istanbul on December 17, 2013.
As the minister in charge of Turkey’s $800 billion economy in 2013, Zafer Caglayan was facing a series of
numbers that didn’t bode well for coming elections. Inflation was up, growth was slowing and the lira was weakening.
One key measure of financial health was particularly
worrisome: the country was importing far more goods, services and capital than
it was sending abroad. By October, when he was interviewed by a local CNBC
affiliate, Caglayan described the gap as unsustainable and said the government
would take steps to improve it.
What he didn’t mention was a clandestine
export-boosting operation started up more than a year before that was helping
to solve the trade imbalance.
At the time of the television appearance, it was still
underway. Three weeks before, Caglayan had been secretly taped by
national-police investigators telling his collaborators to find a way to
increase exports by at least $1 billion a month. His orders came from the top
in a two-hour meeting with Prime Minister Recep Tayyip Erdogan, he told an associate.
The operation featured an Iranian-born businessman who
liked fast horses, faster cars and the fastest planes. His unique skill: Getting gold into
sanctions-encircled Iran. Enough gold that for a time he became the government’s
key instrument in improving Turkey’s irksome economic imbalance.
Photographer: Burhan Ozbilici/AP Photo
Former Economy Minister Zafer Caglayan in Ankara,
Turkey on May 5.
How a team that included Turkey’s economy minister
sought to manage the current account deficit, as the gap is called, by juicing exports to Iran is
laid out in a 300-page document prepared by Turkish investigators in 2013.
Caglayan and his collaborators also came away with tens of millions of dollars
in bribes, according to the document, which has been cited in parliament by
opposition lawmakers.
Stalled Investigation
Caglayan’s parliamentary aide, Erdinc Karakilic, asked
for questions to be sent to him and then didn’t respond to e-mailed and mailed
queries. Caglayan, who resigned on Dec. 25 as economy minister after the
investigation became public, is immune from prosecution as a member of
parliament.
The investigation itself, part of a long-running
inquiry into activities including bribery, gold-smuggling and illegal
collusion, stalled in January. That month, Erdogan’s government reassigned
Muammer Akkas, an Istanbul prosecutor who had said authorities were interfering
with the probe, along with hundreds of other prosecutors and police officers.
In the run-up to March municipal elections this year, the
prime minister decried the inquiry as an attempted coup. Erdogan’s press
secretary, Lutfullah Goktas, didn’t respond to questions sent by e-mail and
confirmed-receipt package delivery.
Photographer: Adem Altan/AFP via Getty Images
Zafer Caglayan, who resigned on Dec. 25 as economy
minister when the investigation...
Trade Distortion
What the inquiry found makes life harder for those who
try to read the tea leaves of the Turkish economy. The surge in exports was so
rapid and so extensive -- gold transfers to Iran jumped from $53 million in
2011 to $6.5 billion in 2012 -- that it distorted Turkishtrade
figures,
making the economy appear superficially stronger than it really was, said
Atilla Yesilada, Turkey adviser at New York-based GlobalSource Partners Inc.,
an economic advisory firm.
“I don’t know what Caglayan’s motivations were, but he
was a huge supporter of the gold trade with Iran,” said Yesilada in a phone
interview from Istanbul. “It never made any economic sense. This is not the
kind of export that’s associated with a strong economy. What was the purpose of
the gold trade with Iran? We’ve never gotten an explanation.”
Bloomberg News has been reporting for six months on
the stalled corruption investigation in Turkey, with stories ranging from the
government ties of the Iranian businessman, Riza Sarraf, to leaked documents
showing how Erdogan’s government moved to keep Time Warner Inc. and News Corp. from buying a Turkish newspaper and its television
partner. This article shows how Sarraf wasn’t simply a canny businessman using
his connections and influence to earn millions of dollars but instead operated
as an agent of government policy.
Wiretap Charges
Erdogan says the evidence was prepared by people in
the police and judiciary who follow U.S.-based Islamic cleric Fethullah Gulen
and are trying to overthrow his government. The prime minister also says he,
his family and government officials were wiretapped illegally by Gulen
followers, and that leaked audio recordings were a “montage” of different
conversations spliced together.
The covert efforts that Caglayan and his associates
undertook eventually swelled to a multi-billion dollar enterprise that reached
from Ghana to China,
according to the investigation. Tons of gold flowed from Turkey to Iran, much
of it via Dubai. That freed up Iranian money trapped in Turkish banks, in turn
boosting Turkish exports.
When the gold trade was foiled by tightening American
sanctions starting in July 2013, Sarraf and his collaborators kept exporting.
They sent thousands of tons of overpriced -- and sometimes fictitious -- food
onto ships steaming between Dubai and Iran, according to the document.
Diamond Gifts
Smoothing out the complications of this shadowy and
complex trade were bribes to Turkish government ministers: multimillion-dollar
diamonds, and millions of dollars stuffed into suit bags, chocolate boxes and
even shoe boxes, the investigation document says.
While the gold transfers boosted overall exports by
almost 13 percent in 2012, to $153 billion, from the previous year, they failed
to offset the Turkish appetite for imports, which Caglayan himself once
described as an “addiction.” The country ended 2013 with a $65 billion current
account gap, almost $20 billion more than in 2012.
That was almost 8 percent of gross domestic product, and almost nine times
the number from a decade ago. The issue persisted into this
year, when in February Goldman Sachs Group Inc. said the current account
deficit was “ultimately unsustainable.”
Widening Gap
That number tallies the gap between everything a
country exports -- goods, services, overseas loans -- and everything that it
imports. When it widens, the currency can grow weaker and foreign reserves can
be drained.
“All these ploys to demonstrate ever-higher export
numbers have no relevance for the real economy,” said Sinan Ulgen, the chairman
of the Center for Economic and Foreign Policy Studies in Istanbul. “If you
concentrate too much on absolute numbers and don’t think about what those
exports actually are and what they mean for the Turkish economy, then you tend
to be too complacent about making the right policy choices.”
For Erdogan, the buoyancy and reliability of the
economy goes to the heart of his promise to Turkish voters. As Turkey has grown
richer since he took office in 2003, he has grown more popular. He is now
considering a run for the presidency after exhausting his party’s term limits
as prime minister. In municipal elections in March, Erdogan increased his
Justice and Development Party’s hold with a higher margin than in 2009.
Investigation Summary
The document, released on the Internet by an anonymous
user, is the summary of an investigation into alleged bribes paid to Caglayan
and three other cabinet ministers. Parts of it have been read into the
parliamentary record by opposition leaders. Its conclusions closely match those
of a related inquiry into Sarraf, the Iranian businessman, a copy of which was
obtained by Bloomberg News earlier this year.
Istanbul Deputy Chief Public Prosecutor Orhan Kapici,
who was promoted from a municipal court in the wake of the January purges,
emphasized that the leak of the document was illegal.
“Even if I had time to go through all of this line by
line it wouldn’t be right for me to confirm whether or not this is the original
document,” he said in an interview. “But I can confirm that there is an
investigation against these people and these resemble some of the charges, and
that these people may have mounted defenses against these charges that this
document makes no note of.”
Meeting Notes
The document, prepared by the Turkish National Police,
shows that investigators probed the activities of a cast of characters that was
both powerful and dependent upon each other for favors. Officers followed the
subjects as they met in posh Istanbul hotels such as the Conrad
Hotel Istanbul and
the Swissotel, listening in while they spoke on the phone arranging money
handoffs, and videotaping and photographing them coming and going to the
meetings.
The first target was Sarraf, the Iranian businessman,
who changed his name from Reza Zarrab after he took Turkish citizenship in
2007. He and Erdogan were photographed on stage together at one public function, and
met at a wedding in Ankara. After Sarraf was arrested in December, Erdogan told
reporters that his gold-dealing had “contributed to the country.”
‘Serious Benefit’
In an interview this April with television channel A Haber,
Sarraf estimated he had facilitated the transfer of about $12 billion in gold
-- about 200 tons -- to Iran. That represented “about 15 percent-15.5 percent
of the current account deficit that I closed by myself,” he said. He didn’t say
what period he was referencing.
“There’s a serious benefit to the Turkish economy with
profit that’s gone into state coffers,” he told the interviewer.
Sarraf didn’t respond to requests for an interview
through his lawyer, Seyda Yildirim. She initially agreed to an interview and
then didn’t respond to messages. In a January interview, Yildirim said her
client was innocent of the charges against him, which at the time included
bribery, forging official documents, gold-smuggling and running a criminal
organization.
The second participant was Caglayan, an
engineer-turned-industrialist who won election toparliament in 2007. The investigators said he received at
least $50 million from Sarraf, some of which he then distributed to others,
according to the document. He also received diamonds, a $343,000 watch and a
$37,000 piano, according to the document.
Fake Papers
In exchange, he had his personal secretary run
interference for Sarraf in tasks ranging from arranging visas to setting
appointments. Caglayan himself provided guidance on the Iran trade, smoothed
customs snags, blocked media reports on Sarraf and turned a blind eye to
phantom trade using falsified documents, according to investigators. The
minister also exerted pressure to reduce bank commissions for Sarraf’s
transactions and introduced the gold trader to senior government officials, the
document said.
“It’s because of him that we can go everywhere like
this and make appointments and do this and that,” Sarraf associate Abdullah
Happani is quoted as saying in the document.
Caglayan spoke of gold publicly, telling reporters in September 2012 in response to a
question about gold exports that Turkey would continue sending the metal
abroad.
“Anyone can look for any reason they like behind this
trade, but Turkey’s going to continue it,” he said. “If those casting
aspersions on the gold trade are searching for immorality, they should take a
look in the mirror.”
Bank Executive
According to the document, he was receiving bribes
from Sarraf at the time.
The last member of this group was a man familiar to
foreign investors: Suleyman Aslan, then-chief executive officer of Turkiye Halk
Bankasi AS. Halkbank, as the country’s state-owned bank is known, was where the
Iranian government parked payments for natural gas and oil.
Investigators concluded that Aslan helped Sarraf fake
documents to manage exports to Iran, lowered the commissions for his bank transactions and helped him fend off competition for the exportbusiness by demanding extra paperwork from other
traders, according to the document.
He also served as an intermediary for instructions
from Caglayan to Sarraf, the investigators said. In the Oct. 3 taped
conversation, Caglayan asked Aslan how the “export thing” was going.
“The exports aren’t bad, we’ve done a certain amount,
we got together today and talked about how we can increase it,” Aslan
responded. “There’s a lot of pressure on us.”
Rolling Suitcases
“There will be, there will be, but this is the prime
minister’s order,” Caglayan replied. “Turkey right now needs at least $3
billion-$4 billion of exports.” He went on to say: “Last night we did a
two-hour meeting with the prime minister in Istanbul and I explained to him
that there is this pressure.”
The document says Aslan was to receive $2.7 million in
cash from Sarraf. Dropped off in rolling suitcases and stuffed into backpacks,
the bribes were code-named “visitors” by Aslan and his wife in text messages.
In one exchange intercepted by investigators, Aslan
wrote to his wife that he had “hosted five guests. They looked green, green.”
The money was discovered in Aslan’s house during a
series of coordinated early-morning raids on Dec. 17, 2013, when Turkish
authorities detained dozens of people, including Sarraf and Aslan.
No Innocents
The charges against Aslan, who was released from
custody on Feb. 14, have all been “accounted for” and none of his actions
constituted a crime, said Ersan Sen, Aslan’s lawyer. His duties as the Halkbank CEO didn’t involve
reviewing documents for accuracy, and he never provided Sarraf with unsecured
loans.
“No one is innocent in this situation. In Turkey,
unfortunately, people’s lives have been mortgaged through techniques of
surveillance,” said Sen in an interview in his office this month, referring to
the taping and release of private conversations. “The government was complicit:
It never spoke out against these things, and it let them happen.”
The cash found hidden in shoeboxes in Aslan’s house
was for the construction of a school in Macedonia, and only part of it was from
Sarraf, Sen said, adding: “We defy them to produce evidence linking this money
to bribery.”
China Curbs
To get around restrictions on banking with Iran,
Sarraf looked to China. He and his associates obtained letters of introduction
in Turkey and used four front companies in China, which then used Chinese banks
as intermediaries in money transfers between Iran and Turkey, according to the
document. One, Beijing-based Bank of Kunlun Co. Ltd., was sanctioned by the U.S. Treasury Department in July 2012 for
sending as much as $100 million to blacklisted banks in Iran.
The document also shows an effort to push through as
much gold as possible before July 2013. The U.S. that month added precious
metals to the list of items that couldn’t be sold to Iran as part of an effort
to curtail that country’s nuclear enrichment program.
“The Istanbul prosecutor’s report leaked on March 14
is a damning document that reveals one of the most complex illicit finance
schemes I have seen,” said Jonathan Schanzer, a former terrorism finance
analyst at the Treasury and now research director at Foundation for Defense of
Democracies, a Washington policy institute focused on national security. “The
networks spanned Turkey, China, Dubai and Iran. It included the classic
money-laundering techniques of over-invoicing and false invoicing.”
Bank Payments
Because the sanctions walled Iran off from the
international banking system, the gold trade was a way for Iran to repatriate
the earnings from oil and gas sold to India,
Turkey and other major buyers.
The business was certainly lucrative. Sarraf earned a
1.7 percent commission on the exports, according to a person familiar with his
finances. He spent it on a lavish lifestyle.
Since setting up his gold-trading firm, registered to
an office near the Grand Bazaar in Istanbul, he had married a Turkish pop star
and bought a villa on the Bosphorus. He drove a Range Rover, a
Rolls Royce and a BMW, and flew around the country in a leased Challenger 300 private jet.
He was also well-informed. On March 26, less than two
months before the tightening of the sanctions became public, he walked out of a
meeting and called Happani, his associate.
A Little Food
“In a month and a half, they’re going to stop the
gold,” he said, according to a transcript. “Let’s do a little food. Send it
from Moscow, send it from Azerbaijan, wherever you can get a document from -- start right
away this week.”
Substituting food for gold, and using Dubai as a hub
to ship to Iran, proved an ineffective way to make up for the stalled
high-value gold exports.
On July 2, investigators say they recorded Sarraf
conversing with a deputy general manager at Halkbank.
“Let’s talk about this wheat issue,” said Mehmet Hakan
Atilla, according to the document. “This is a 140,000-ton order. I think it’s a
little difficult for a 5,000-ton thing to carry a 140,000-150,000 ton order.”
Then he pointed out another difficulty.
“The document you sent has the origin of the wheat as
Dubai,” said Atilla. “You know, because it’s impossible for wheat to have the
origin of Dubai.” Dubai is in a desert.
‘Routine Job’
Reached by phone, Atilla, whose responsibilities
include international banking, said Halkbank’s role was legal and in line with
U.S. sanctions.
“Reducing the current account deficit is not part of
our aims,” he said. “We stick to our routine job as a bank. We checked all
documentation of the companies that we were dealing with and found that they
were compliant. The bank itself was also externally audited and everything was
found to be above board.” There are no charges against the bank or Atilla.
Even as the new sanctions were looming, Sarraf didn’t
stop exporting gold. On the morning of May 22, he drove to the Conrad hotel and
met with Aslan, the document said.
A few days later, Sarraf called an associate and
ordered him to ramp up the gold trade. “How are your gold stocks?” he asked,
according to a transcript of the May 28 call. “Pump it up so exports rise. Keep
doing it like that so that exports rise a little. Exports are needed until the
election.”
More Demands
On Sept. 16, Aslan called Sarraf with further orders,
referring to instructions he had received.
“We met last week after I spoke to you,” he said,
according to the document. “That was their request -- last year, they did $11
billion in exports.”
“They say do that again, don’t they?” asked Sarraf.
“Yes,” said Aslan. “Do something, whatever the method
is, but they say, help out, get this job done.”
Sarraf conveyed the instructions to his associates
three days later.
“We need to find $3 billion by year end,” he said.
“$3 billion until the end of the year?” asked Happani.
“We’re in the ninth month! There are three months left. $1 billion a month is a
tough figure.”
No arrests have been made since January. Aslan was
replaced as Halkbank CEO, the bank said on Feb. 7, a week before he was
released from prison. He remained on the board until March 31, then joined the
board of another state-owned bank, TC Ziraat Bankasi AS. Deputy Prime Minister
Ali Babacan called the appointment a result of “the political will.” On May 9,
Aslan resigned.
Parliament Member
Sarraf was released on Feb. 28. His access to $18
million in liquid assets that had been frozen was restored after the prosecutor
said there was no evidence to probe the charge. He still awaits
trial.
Caglayan remains a member of parliament. A commission
established to probe corruption allegations against him and three other
lawmakers stumbled when Erdogan’s party failed to nominate anyone to sit on it.
Turkey’s trade balance continues to fluctuate
unpredictably as gold stocks flow out of the country in bursts. In March,
unidentified exporters sent $1.3 billion of gold to Switzerland, making the country Turkey’s top export destination.
The following month the trade practically disappeared, with exports dropping 96
percent to $52 million.
To contact the reporters on this story: Mehul
Srivastava in London atmsrivastava6@bloomberg.net; Isobel Finkel in Istanbul at ifinkel1@bloomberg.net
To contact the editors responsible for this story:
Andrew J. Barden at barden@bloomberg.netAnne Swardson, Ben Holland
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