In somewhat of a worst-case scenario, Turkish-Iranian gold trader Reza Zarrab just confirmed that Turkish President Erdogan approved the “secret Iran gold” trade that enabled Iran to evade US sanctions.

The immediate reaction is clear.

Citi’s FX desk explains why Turkish markets are watching the US trial of a banker so closely.

The basics: The US government has accused Turkish banker Mehmet Hakan Atilla of helping Iran evade US sanctions.

Turkey’s former economy minister, Zafer Caglayan, and two other banking executives, have been charged in absentia but Atilla is the only one on trial.

Why it matters: It’s about the implications this has for US/Turkey diplomatic relations. Bloomberg has a good explainer here: ‘The focus will be on whether [Zarrab] implicates Turkey’s banking system or the highest levels of its government.’ The worst case scenario would hypothetically be where the trial results in diplomatic penalties to Turkey and its banks.

An October 30 document submitted to the court by federal prosecutors in New York said that the US “anticipates that the evidence introduced at trial will show that Turkish government and banking officials were integral to the sanctions evasion scheme.” Still, it’s too early to tell, and we watch the wires closely for the latest developments.

And throwing Erdogan under the bus is likely as serious as it gets.

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By way of background, we previously detailed… While long forgotten for some, in the summer of 2014, we reported in detail on what appeared to be the biggest, most bizarre money-laundering scheme ever, involving Turkey trading “200 tons of secret gold” with Iran…

The topic of Turkey’s Oil-for-Gold ‘deals’ has not been far from our thoughts over the last few years (here, here, and here) but as Bloomberg reports, after accessing a report leaked on March 14 of a network that spanned Turkey, China, Dubai and Iran, the plot reveals “one of the most complex illicit finance schemes [prosecutors] have seen.” It included the classic money-laundering techniques of over-invoicing and false invoicing (exactly as in the case of the Chinese commodity financing scandal underway) but the secret government plan to juice Turkey’s exports goes much deeper; and if you think that the exposure of this scheme is slowing Turkey’s manipulation, think again. Turkey’s trade balance continues to fluctuate unpredictably as gold stocks flow out of the country in bursts.  “Turkey’s going to continue it,” the Turkish economy minister said. “If those casting aspersions on the gold trade are searching for immorality, they should take a look in the mirror.”

here But in 2013, with a plunging currency, surging inflation, slowing growth, and specter of rapid QE-driven hot money outflows leaving his nation desperate; Zafer Caglayan, the minister in charge of Turkey’s $800 billion economy decided that the only way to ensure success in the looming election… was to cheat…

in the summer of 2014, we reported in detail