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The End for Erdogan and AKP - Financial Fraud and Money Laundering

December 31st, 2013

Michael Collins

Hurriyet Daily News columnist Mustafa Sonmez broke a story that should define the outcome of the Turkish crisis. If he's accurate about the Erdogan government's scheming, the crisis in Turkey is over. It is just a matter of time for the full scope of the fraud and corruption to come to public attention. There is no reason to doubt his story since much of it is public record.

Under Erdogan's AKP government, Turkey has engaged in financial manipulation on a grand scale. The manipulation involves overstating national income and understating the nation's current account deficit. The country could soon lose its current terms for access to the international financial system and credibility with those who regulate that system.

While the focus to date has been on charges of personal enrichment by Erdogan's ministers and associates, the real problem for the current government is financial fraud in reporting its current account deficit and national income. These figures are the basis for access to international financing. Intentional, inaccurate reporting constitutes fraud that understates the risk to lenders and provides a more favorable interest rate for the borrower than is warranted. That bell cannot be un-rung. The reporting of the events in the Sonmez narrative are in the public domain. It is just a matter of time before the dots are connected and the scheme glimmers in the light of public awareness.

As a result of the financial reporting fraud, Erdogan (and likely his party) will have to cede power in order for the economy of Turkey to survive in close to its current form. To allow Turkey continued access to international financing given its behavior would set a precedent for blatantly false financial reporting across the board and endorse government enabled money-laundering schemes.

This may sound intense but it makes perfect sense based on the reporting here:

Gold at center of corruption, money laundering allegations hitting Turkish gov't

Here's the summary. Turkey needed to buy natural gas from Iran. But, U.S. sanctions prohibited that.

"Turkey could not pay for the natural gas it buys from Iran in foreign exchange due to U.S. sanctions on banks. So, how could it return the money [to Iran as payment for the natural gas]? A way to bypass [U.S.] sanctions was found: Iran was going to be paid in Turkish Liras and then the country would use those liras to buy gold in Turkey, which would look like Turkey is exporting gold to Iran. Since there are not billions of dollars’ worth of gold bullion in Turkey, it needed to be imported from Switzerland. " Mustafa Sonmez, Dec 29

Maybe $15 billion in gold-based payments to Iran occurred in 2013. There are at least three problems with this process:

  1. With that much money involved, there's plenty of room for skimming and graft. That's tied to the December charges against the Erdogan ministers, officials, and others.
  2. The regulations that created the gold deposit scheme in Turkey opened the doors for international money laundering. By some estimates, the total money laundered reached €85 billion. International authorities put Turkey in the same category for money laundering as the following countries: Indonesia, Pakistan, Syria, Yemen Ethiopia, Ecuador and Nigeria.
  3. The Erdogan government may have committed reporting fraud. Sonmez sums this up nicely:

"Many argued this payment system’s being recorded as “export,” caused export figures to falsely rise; the country’s current account deficit looks smaller than it actually is and national income is exaggerated. Moreover, some analysts also warned the transfer method may cause headaches for Halkbank [Turkish state owned bank] and others involved in the scheme." Mustafa Sonmez, Dec 29

Distortions like this are intolerable in the international finance system or any financial system, for that matter. These acts are the equivalent of a public corporation deliberately overstating revenues. If you do that and nobody ever finds out, it's one thing. If you do it and the scheme is uncovered, investors can simply move their money elsewhere. Turkey's growth has been fueled by foreign debt. If that borrowing becomes more expensive or dries up, the negative impact on the economy will make the summer demonstrations look tame. Turkey relies in foreign debt and the cooperation of rating agencies. There are risks:

"As an economy, whose short-term external debt is increasing more rapidly than its national income, Turkey has been, once again but now at a much more decisive rate, gripped by speculative fluctuations led by the risk appetite of financial markets. Rating agencies, whose recent decisions have been celebrated by the Turks as a matter of national pride, are undoubtedly familiar with these facts. Yet, one should not be naïve in matters of international political economy and have a clear view that Turkey’s international position is an extension of not only purely economic, but also political preferences. The myths of “economic successes” are now blown up by political players." Erinc Yeldan, Turkey’s Debt-Ridden Growth, Mar 30

Prime Minister Erdogan's faction of the ruling party, the AKP, is fighting off prosecutions for individual acts of graft as though its life depended on it. The reality of the situation is that, based on the financial manipulations that overstated national income and understated debt, there's no way the government can survive, even if everything it argues about the individual prosecutions is true.

The endgame in Turkey is reminiscent of the opening sequence from Gladiator. The Roman Legions are arrayed for battle against the Germanic tribes. The tribesmen taunt the Romans as the battle commander Maximus and his artillery commander Quintus have a brief exchange:

GERMAN BARBARIAN: Ihr seid verfluchte hunde! (You are damned dogs!)
[As the barbarian calls out his cry, his mangy band of barbarians emerge from
the forest, shaking and waving their spears and shields, ready to fight.]
QUINTUS: People should know when they're conquered.
MAXIMUS: Would you, Quintus? Would I?

Apparently, Erdogan and his henchmen fail to realize their defeat.


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