Halkbank Prosecution Charts New Ground in Sovereign Immunity and Sanctions Evasion

The unfolding prosecution of Halkbank has charted an extraordinary course through diplomacy, defiance, and allegations of money laundering, locking Washington and Ankara into a protracted legal standoff.

When U.S. prosecutors moved to indict the Turkish state-owned bank for sanctions evasion and money laundering, the central question immediately arose: could a financial institution majority-owned by a foreign government claim sovereign immunity? Halkbank argued that it was shielded both by the Foreign Sovereign Immunities Act (FSIA) of 1976 and by common law principles of immunity. But the U.S. Supreme Court ultimately ruled that FSIA protections do not extend to criminal prosecutions, remanding for consideration of whether common law immunity might still apply. The Second Circuit later rejected that argument, holding that state-owned entities engaged in commercial activity are not entitled to immunity in U.S. criminal law, and that courts must defer to executive branch decisions when immunity is denied. The result is the emergence of a novel criminal sovereign immunity doctrine, one that narrows the safe harbor available to government-backed institutions.

The allegations date back to October 2019, when the U.S. Department of Justice indicted Halkbank and several individuals for their role in a multi-year conspiracy designed to evade American sanctions on Iran. Prosecutors accused the bank of conspiring between 2012 and 2016 with front companies in Turkey, Iran, and the UAE to funnel an estimated US$20 billion in restricted Iranian oil revenues into the global financial system. The scheme allegedly involved converting oil proceeds into gold, cash, or other assets to obscure their origin, with the aid of falsified documentation such as fictitious food shipments.

Individual prosecutions had already laid the groundwork. Turkish-Iranian gold trader Reza Zarrab was arrested in 2016 and later cooperated with authorities, offering testimony against others. Mehmet Hakan Atilla, a senior executive at Halkbank, was convicted and imprisoned for his part in similar sanctions-evasion operations. Their cases helped build the evidentiary foundation for the indictment of the institution itself.

When Halkbank contested the indictment, the district court dismissed its immunity claims, finding the conduct squarely within the FSIA’s commercial activity exception. In 2021, the Second Circuit upheld that ruling, confirming FSIA’s limits. The matter reached the Supreme Court, which in 2023 clarified that FSIA applies strictly to civil, not criminal, cases. On remand, the Second Circuit in October 2024 denied Halkbank’s assertion of common law immunity, reasoning that its actions were commercial in nature and therefore not shielded. The court also emphasized that deference is owed to the Executive Branch, which had initiated the prosecution. After the Supreme Court declined to review Halkbank’s further appeal in 2025, the case is now poised to move forward in the regular judicial process.

Diplomatic maneuvers have accompanied the courtroom battle. Turkish officials have reportedly floated settlement proposals, including an offer made at the White House to resolve the matter for around US$100 million, contingent on Halkbank not admitting guilt. Whether such an arrangement will be acceptable to U.S. authorities remains uncertain, especially given that European banks penalized for sanctions breaches have previously paid multibillion-dollar fines.

At the center of the money laundering allegations lie classic techniques adapted to sanctions evasion. Halkbank is accused of using correspondent accounts and proxy entities to mask transfers of Iranian oil revenues. Some funds were allegedly converted into gold, smuggled, and resold to erase traceability. False trade documentation was used to legitimize transactions, with fictitious commodity shipments providing cover. According to DOJ filings, at least US$1 billion of the laundered funds passed through the U.S. financial system, bringing the conspiracy under American jurisdiction and triggering scrutiny under U.S. anti-money laundering and sanctions laws. These acts, prosecutors say, violated the Bank Secrecy Act, 18 U.S.C. § 1956, and sanctions provisions under the International Emergency Economic Powers Act.

The case illustrates how state-owned entities may attempt to leverage sovereign backing to facilitate illicit financial flows. By layering trade misinvoicing, front companies, gold transactions, and falsified documentation, the scheme reflects the sophistication of financial crime networks and the vulnerabilities in global enforcement systems.

Geopolitically, the Halkbank matter has become a pressure point in U.S.-Turkey relations. Ankara has sought to minimize reputational harm while shielding the bank from admissions of wrongdoing. For Washington, the case represents a test of legal precedent and an assertion that foreign government entities operating commercially through the U.S. financial system can face criminal liability. As the legal process unfolds, diplomacy, deterrence, and strategic signaling are all in play.

The implications extend far beyond the courtroom. Should Halkbank ultimately plead guilty or be convicted, the precedent would pave the way for aggressive cross-border enforcement against state-owned financial institutions implicated in sanctions or money laundering schemes. It would send a clear signal that sovereign ownership does not provide a shield against accountability in U.S. criminal law.

The Halkbank saga, therefore, marks a turning point in anti-money laundering enforcement. Courts have chipped away at doctrines that once insulated sovereign entities from prosecution, demonstrating that commercial misconduct cannot be cloaked in immunity. For compliance professionals and policymakers alike, the case underscores the need for robust controls and vigilance in monitoring complex trade-based laundering structures. And for sovereign-linked institutions worldwide, it recalibrates the risk calculus: state ownership no longer guarantees protection from liability in American courts.

By fLEXI tEAM