Turkish President Erdoğan’s cronies defrauded Czech bank of over 400 million euros

Abdullah Bozkurt/Stockholm

In a sophisticated “pillaging and plundering” scheme that involved blatant abuse of power in the upper echelon of the Turkish government, associates of the corrupt President Recep Tayyip Erdoğan defrauded the Czech Export Bank and its insurer EGAP of more than 400 million euros.

The scheme, part of a secret plan to enrich Erdoğan and his cronies in a series of unlawful seizures with the manipulation of regulatory bodies and the criminal justice system, was put into motion when Turkish conglomerate Naksan Holding, valued at $3.6 billion and comprising 51 companies, was forcibly taken over from its owners in July 2016, with new management installed to run it.

The seizure came a year after Erdoğan reportedly threatened the owners of Naksan in a private meeting at his residence in Istanbul during which he demanded $250 million in bribes to let the holding continue to operate. The owners of Naksan, members of the Nakıboğlu family, who are held in the highest regard in their community and who have owned and operated various businesses for six decades in Gaziantep province, refused to pay the bribe. In turn, a furious Erdoğan unleashed the wrath of the government on the owners to punish them for not coming up with the money.

The decision to take over the management of the holding and issue arrest warrants for the owners was rendered by one of a group of special projects courts called Sulh Ceza Hakimliği (Penal Courts of Peace, SCH), which were established by the Erdoğan government in 2014 to punish government critics, opponents and dissidents. The benches of the courts are staffed by partisans and loyalists who act in line with Erdoğan’s wishes. Over 1,000 companies including media outlets have so far been seized by the Erdoğan government, many of which were ultimately sold to cronies at bargain prices.

The goal is not just to send a chilling message across the business community in Turkey, but to also redistribute wealth and enrich businesspeople who sustain Erdoğan’s regime, fund its elections campaigns and help finance clandestine operations abroad to promote a firebrand political Islamist ideology in foreign countries.

As a result bogus charges of financing terrorism were brought against Naksan to create a pretext and to justify the unlawful takeover of the companies and the wrongful arrest of its owners, just like thousands of criminal cases in Turkey where the government often invoked counterterrorism laws to punish and imprison critics, dissidents and opponents who have unfavorable views of Erdoğan’s ruling Justice and Development Party (AKP).

A single judge from a special court created by the Erdoğan government issued an order turning over all 51 companies in the Naksan group to the TMSF: 

In their pillaging crusade, Erdoğan and his people set their sights on Naksan Plastik, one of the most lucrative companies in the holding that was established by the family in 1980, with a current market value of 12 billion Turkish lira. First, the government caretakers who were running the company did a poor job in managing it. Naksan Plastik generated 1.2 billion lira in revenue in 2015 but dropped to 664 million lira the year after the takeover. While the firm posted TL 70.1 million in profits in 2015, it recorded a loss of TL 82.3 million in 2018.

That was not the only damage Erdoğan’s associates inflicted on the company. They drew up a reprehensible plan to ensure its transfer to their cronies even while the legal challenges were still pending in court. The company was not profitable after major losses following the takeover but was still worth well over a billion lira with sizable assets, brand recognition, factories, machinery and properties. The plan was put into motion when the government-controlled Savings Deposit Insurance Fund (TMSF), a regulatory body that was managing Naksan after its takeover, announced a tender for the sale of Naksan Plastik on December 22, 2021.

The tender appeared to be nothing but a formality since the winner of the tender — ABY Plastik Ambalaj ve Enerji Sanayi Ticaret A.Ş. — had already been decided by the Erdoğan government long before the TMSF opened the bidding process. However, there was a small glitch in the plan. It turned out that Erdoğan’s associates were late in finalizing the paperwork for the establishment of ABY Plastik, which was formally announced to be in business in the official trade registry on December 30, 2021.

To compensate for the delay, the TMSF postponed the deadline for the sale until January 4, 2022 without offering any explanation. In other words, a company just established five days before the tender was allowed to enter the bidding for the purchase of Naksan Plastik. The trade records registered by the company show that ABY Plastik was established with capital of only 1 million Turkish lira by a single owner named Lütfi Atakan Abay, an industrialist close to the government.

The TMSF decision to award the sale of Naksan Plastik to ABY Plastik on April 13, 2022:

The fact that a newly set up company with capital of only a million lira and absolutely no experience or past business activity in the plastics industry suddenly submitted a bid of 1.245 billion Turkish lira to purchase Naksan Plastik and made a deposit of 125 million lira suggests that it was nothing but a front company specially established to make this transfer. Abay has a number of companies operating in various industries but did not name any of them in the bidding process. Instead, the newly established firm was listed as bidder most likely because Abay wanted to protect himself from future litigation and avoid criminal charges in the event the rule of law makes a comeback in Turkey one day.

In the bidding on January 4, 2022, Yapıen Elektrik Üretim Sanayi ve Ticaret A.Ş., a company owned by Zafer Yıldırım, a close family friend of President Erdoğan, offered 1.245 billion lira, followed by ABY Plastik. The TMSF later announced it would further negotiate the sale price with these two companies and held another bidding session on January 14. This time, ABY offered 1.251 billion lira, while Yapıen increased its original offer by only 4 million, allowing ABY to become the front runner.

Yapıen and ABY Plastick were listed as the two firms with which the TMSF decided to negotiate for the sale of Naksan Plastik: 

In hindsight, it appears Yapıen’s entry into the bidding was nothing but a formality to make the sale appear legitimate when in fact the winner was decided long before. Erdoğan and his associates did not trust any other bidder to disrupt their plans and wanted to make sure the plot would work smoothly by having Yapıen, a company they controlled, enter the bidding process to clear the path for ABY.

In fact, no owners from Yapıen showed up for the bidding, which is quite unusual in such high value sales in Turkey. Instead an accountant with a power of attorney followed the procedures on behalf of the company. In contrast, Akbay personally appeared for the auction.

Another red flag in the bidding process was the fact TMSF officials denied Naksan’s representatives and lawyers from attending or monitoring the bidding process, which cast more suspicion of foul play. Although they applied days in advance to be present at the tender and there was no rule blocking their attendance, TMSF officials refused to let them into the room while the bidding was underway.

As expected, Erdoğan’s associates lined up all the pieces for a smooth sale. The Competition Authority (Rekabet Kurumu) approved the transfer on April 7, 2022, and the TMSF formally awarded the sale to ABY on April 13 with a payment plan of 36 months. As a result, the government simply handed over a highly profitable company for one cent on the dollar to a businessman who has links to the Erdoğan government.

There were multiple irregularities before the tender. For one, the TMSF used the audit report prepared in January 2019 by KPMG Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş., a global audit, accounting and consulting firm which, according to people who have intimate knowledge of the process, downplayed the value of Naksan Plastik. In order to avoid liability and future legal entanglements, KPMG put a disclaimer in its report saying that they had made the assessment based solely on the data provided to them by the government trustees who had taken over the management of Naksan.

KPMG’s disclaimer on Naksan Plastik: 

In a preface for the report, KPMG partner Ümit Bilirgen noted that his company would not guarantee the accuracy or completeness of the information in the assessment and declined to warrant that the report followed international accounting standards unless explicitly specified. A similar disclaimer was also used by Mazar Denge, an accounting and auditing firm, which issued an expert report on the finances and assets of Naksan on June 30, 2019.

According to experts who spoke to Nordic Monitor, a review of the data used in these reports reveals why KPMG and Mazar Denge wanted to emphasize their disclaimers in the reports. These experts believe the auditing firms wanted to avoid any liability in the future by disowning the data provided by company managers under the control of the TMSF. Updated versions of the reports by and large followed the initial assessment reports.

For example, the TMSF claimed the value of land owned by Naksan Plastik was 750 lira per square meter, when in fact the market value in the same neighborhood was 1,500 to 2,000 lira. Again the same distortion was made for the value of the buildings. According to the TMSF, Naksan Plastik’s buildings were valued at 1,450 lira per square meter although the market rate was 7,500 lira. The value of the buildings and land alone owned by Naksan Plastik is worth $120 million.

What is more, the Turkish lira has lost much of its value since 2019, when the assessment was made, and the TMSF used outdated figures in the January 2022 sale even though the plastics industry is primarily based on imported petroleum products and chemicals that are traded in dollars and euros, not lira. In just 2021 alone, the lira shed 44 percent of its value against the dollar. The loss was much higher when compared to 2019, when Mazars and KPMG made their original assessment.

Trade registry data for ABY Plastik: 

In other words, the assessment of the value of the company and its assets made with deeply discounted figures in 2019 was some $200 million (1.3 million lira). That low-ball figure amounted to some $90 million in 2022 when the sale was made.

The sale of Naksan Plastik was further sweetened by the TMSF which, in an unusual move, decided to assume all the debts and liabilities the company had before transferring it to ABY Plastik. That means Turkish taxpayers would have to shoulder the company’s obligations while ABY Plastik enjoyed all the profits and assets of the company. In fact, by some calculations, it will have recouped the sales price with the revenue Naksan Plastik will generate in the next two years.

But that is not the whole story of this twisted wealth seizure in Turkey. It turns out that Naksan Plastik was named as collateral for six loans Naksan Holding obtained from the Czech Export Bank (Česká exportní banka, a.s., or CEB), owned by the Czech state, between 2010 and 2014 for a total of 433 million euros without interest or fees. The loan, originally approved in 2009 for 486 million euros, was for the construction of the Yunus Emre lignite power plant that was to be built in Eskişehir province by Adularya Enerji Elektrik Üretimi ve Madencilik A.Ş., an energy company owned by Naksan Holding.

Repayment of the loan was supposed to begin when the power plant was brought online and started generating electricity. But the Erdoğan government seized the holding before that happened and did not  allow the construction of the plant to be completed. The repayment never began after the government takeover, and the loan was deliberately allowed to default.

Erdoğan’s associates, who had already made huge profits from the cheap sale of Naksan Plastik to a shell company, came up with another plan to make additional money out of the defaulted loan as well. They decided to use a mining company named Doruk Madencilik Sanayi Ticaret A.Ş. to take over the 433-million-euro debt for collection. According to the CEB’s public statement, the total amount was 553 million euros with interest and fees as of September 1, 2020.

Adularya power plant presentation: 

It was highly peculiar for any company to assume a debt that had not been repaid at all and in a case where the original borrowers had either been in prison or abroad since the government takeover, and it made no sense for any company to put itself in an entanglement with the government. There is no guarantee of success in debt collection, even if the original loan agreement is governed by English law, and it would take years before they would see a cent of that debt to be paid.

However, Erdoğan’s associates had already made sure they would get their money back plus a huge markup. Sources familiar with the scheme told Nordic Monitor that everything was decided in backroom politics that insured a desirable outcome in the debt collection stemming from the tragic circumstances Naksan found itself in.

In other words, Doruk and its owner, Sebahattin Yıldız, also CEO of Yıldızlar SSS Holding, were assured a good profit for this before taking on the huge debt from the Czech bank. The secret plan worked smoothly. When the transfer of the debt to the new company was approved by TMSF deputy president Nevzat Avunç and TMSF official Arzu Yaman on May 4, 2021, suspicions that the deal was prearranged were confirmed.

While they were arranging everything on the TMSF end, Doruk mining company officials started talks with Czech bank officials in April 2021, brokered by Turkish Ambassador in Prague Egemen Bağış, a political appointee and former minister who was incriminated in an Iran sanctions busting scheme in 2013 and removed from the government for taking bribes in the millions of dollars from an Iranian operative. With the help of Bağış, the company managed to convince bank officials to sell the loan to Doruk for collection.

A source who has intimate details of the talks told Nordic Monitor that the Czech bank sold the loan to Doruk for 70 million euros, with 20 million euros paid up front and the balance to be paid in monthly million-euro installments. The total debt transferred to the ownership of Doruk was 485 million euros, which means the bank gave up 416 million euros.

The Turks told the bank they had little to no chance of recouping their money in full because of the legal complications in Turkey and highlighted that Naksan Holding and its owners are facing terrorism charges. The issue also became an intergovernmental matter between Turkey and Czechia but was left unresolved. What the bank did not know was that the entire scheme was in fact orchestrated by Erdoğan and his associates and that they were bent on defrauding the bank with the blatant abuse of their positions in Turkey.

The transfer of the debt from the Czech bank to Doruk was finalized on September 1, 2021, and the bank informed the TMSF that it had turned over the debt to Doruk, whose owners were certain that they would collect more money from the TMSF at the expense of Turkish taxpayers.

Although it had lost money, the CEB nevertheless appeared pleased in the end with the removal of a non-performing loan from its balance sheet. In his foreword to the 2021 auditor’s report, bank CEO Daniel Krumpolc said “CEB managed to achieve a 90 percent reduction in high-risk receivables in 2021 compared to 2015. The successful sale of the receivable from Adularya Enerji Elektrik A.S. in the beginning of 2022 finally closed the case of an unfinished project of a lignite power plant in Turkey, reducing the share of the Bank’s high-risk receivables below 5 percent.”

It is not clear how much the bank or government credit insurer EGAP (Exportní garanční a pojišťovací společnost, a. s.), which insured the credit for Turkey, lost in this scheme. The full details of the debt transfer were never made public in Czechia. Why the bank and its insurer did not opt to launch a case in the UK against the TMSF and the Turkish government, which were in control of debt guarantor Naksan Plastik, and collect the unpaid debt directly is another question that remains unanswered.

After taking over the debt from the Czech bank, Doruk immediately started the collection procedure in Turkey, on December 16, 2021, filing petitions with the Court of Claims in Ankara and asking the court to enforce the repayment of the debt from Naksan Plastik and Adularya Energy. They knew that the TMSF would shoulder the debt and be willing to pay the amount in full plus interest. As a result Erdoğan and his associates are set to make at least an additional 416 million euros by setting up this scheme. The losers are Turkish and Czech taxpayers as well as Naksan family members.

Bağış, who had worked closely with Erdoğan for years and was involved in a bribery scheme with an Iranian sanctions buster, played a pivotal role in defrauding the Czech bank and the Czech insurer, facilitating the debt transfer using his diplomatic clout in Prague. He had hosted Doruk’s owner Yıldız at the embassy residence and publicly promoted him.

The TMSF is now gearing up to sell Adularya as well and plans to hold an auction on July 5, 2022 at an opening price of 1.7 billion Turkish lira. The company had already spent 700 million euros to build the lignite-fired power plant, spending not only the funds obtained from the CEB but also its own money. The power plant, which consists of two units with generating capacity of 145 MW each, was already in the testing phase of its first unit and near completion of the second when the Erdoğan government seized it.

It is also worth noting that the bank appears to have dropped the ball on this debt sale and did not do due diligence. According to the tender conditions announced by the bank, it is supposed to ensure that the funds obtained to purchase the debt “shall not be generated by activities considered criminal.” According to sources Nordic Monitor talked to, the entire scheme is part of a larger criminal conspiracy cooked up by powerful people in Turkey with connections to the president’s office for the purpose of defrauding Turkish and Czech taxpayers.

The conditions also required the bank to make sure anti-money laundering qualification criteria and compliance with EU, OFAC and Financial Action Task Force (FATF) rules are followed. Turkish Ambassador Bağış, who was intimately involved in the negotiations between Turkish businessman Yıldız and the Czech bank and its insurer, was implicated in a US federal case involving Iranian sanctions buster Reza Zarrab, who was arrested and indicted for violating US law. Zarrab later turned government witness and testified about Bağış and others in the money laundering scheme on behalf of sanctioned Iranian entities. He admitted he had handed over millions of euros in bribes to Bağış for the minister’s role of facilitating the scheme that ran afoul of US and Turkish laws.

While the negotiations on the debt sale were still ongoing, in October 2021 Turkey was placed under surveillance by global money-laundering watchdog FATF for shortcomings in combatting money laundering and terrorism financing. FATF’s listing of Turkey on its grey list of countries means the Erdoğan government has strategic deficiencies in combatting money laundering and terrorist financing. Yet, the bank moved forward with the talks and signed the transfer on February 23, 2022.

Czech Export Bank’s statement on the rules of the tender for the debt sale: