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Bling for Minister Mastermind Greased Secret Turkey Gold Trade

By Mehul Srivastava and Isobel Finkel
June 25, 2014 5:00 PM EDT 113 Comments
Riza Sarraf, center, is surrounded by journalists as he arrives at a police station in Istanbul on December 17, 2013.
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.

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.

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 Turkish trade 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 to parliament 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 export business 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 at msrivastava6@bloomberg.net; Isobel Finkel in Istanbul at ifinkel1@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net Anne Swardson, Ben Holland

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