ISTANBUL (Reuters) - U.S. prosecutors have charged a former Turkish economy minister and the ex-head of a state-owned bank with conspiring to violate Iran sanctions by illegally moving hundreds of millions of dollars through the U.S. financial system on Tehran’s behalf.

FILE PHOTO: Turkey's Prime Minister Recep Tayyip Erdogan (L) arrives for a news conference as he is flanked by Economy Minister Zafer Caglayan and officials before his flight to Denmark for an official visit at Esenboga Airport in Ankara March 19, 2013. REUTERS/Umit Bektas/File Photo

The indictment marks the first time an ex-government member with close ties to President Tayyip Erdogan has been charged in an investigation that has strained ties between Washington and Ankara. Ex-minister Zafer Caglayan was also charged with taking bribes in cash and jewelry worth tens of millions of dollars.

The charges stem from the case against Reza Zarrab, a wealthy Turkish-Iranian gold trader who was arrested in the United States over sanctions evasion last year. Erdogan has said U.S. authorities had “ulterior motives” in charging Zarrab, who has pleaded not guilty.

Prosecutors have now charged Caglayan and former Halkbank general manager Suleyman Aslan and two others, according to the U.S. Attorney’s Office for the Southern District of New York.

They were charged with “conspiring to use the U.S. financial system to conduct hundreds of millions of dollars’ worth of transactions on behalf of the government of Iran and other Iranian entities, which were barred by United States sanctions,” U.S. prosecutors said in a statement dated Wednesday.

They were also accused of lying to U.S. government officials about the transactions, laundering funds and defrauding several financial institutions by concealing the true nature of the transactions, prosecutors said.

Reuters was not immediately able to reach Caglayan or Aslan for comment. Halkbank said all of its transactions have always fully complied with national and international regulations, adding that news regarding the U.S. case “misleads” the public and investors.

Relations between Washington and NATO ally Turkey, an important partner in tackling the Syrian conflict, were strained after a failed coup against Erdogan in July last year and the president’s subsequent crackdown on opposition.

Ankara is seeking, so far without success, extradition of a U.S.-based Muslim cleric it accuses of backing the coup attempt. The cleric, Fethullah Gulen, denies the allegation.

‘NO CONCERN TO TURKEY’

Economy Minister Nihat Zeybekci defended his predecessor and said U.S. prosecutors had yet to prove their accusations.

“Caglayan did not do anything against Turkey’s interests,” Zeybekci told reporters. “It is no concern to Turkey if Caglayan acted against interests of other countries.”

Both Caglayan and Aslan are also accused of taking bribes, according to the indictment.

“Caglayan, who was serving as Minister of the Economy... received tens of millions of dollars’ worth of bribes in cash and jewelry from the proceeds of the scheme to provide services to the government of Iran and conceal those services from U.S. government officials,” prosecutors said.

U.S. prosecutors have said that between 2010 and 2015 Zarrab and others worked to conceal his ability to supply currency and gold to Iran through the Turkish bank, avoiding U.S. sanctions.

As part of that scheme, Zarrab and others used front companies and fake invoices to trick U.S. banks into processing transactions disguised to appear as though they involved food, and thus were exempt from the sanctions, prosecutors have said.

The U.S. indictment echoes charges in a leaked 2014 Turkish police document, reported by Reuters, which detailed allegations that a “crime organization” had helped Iran exploit a loophole in Western sanctions that allowed it to purchase gold with oil and gas revenues.

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When the West prohibited the gold trade in 2013 as a sanctions violation, the police report alleged the network concocted records of shipments of food at preposterous volumes and prices to continue giving Iran access to foreign currency.

Iran emerged from years of economic isolation in January 2016, when world powers lifted the crippling sanctions in return for Tehran complying with a deal to curb its nuclear ambitions.

The sanctions had cut off the country of 80 million people from the global financial system, slashed its exports and imposed severe economic hardship on Iranians.

‘DIPLOMATIC SOLUTION’

Caglayan, Aslan and others indicted in the case on Wednesday remain at large, prosecutors said.

Zarrab and a Halkbank deputy general manager, Mehmet Hakan Atilla, were arrested while in the United States. Zarrab was detained in March 2016 and Atilla a year later. Both are scheduled to appear for trial in October.

Zarrab has hired former New York City Mayor Rudolph Giuliani and former U.S. Attorney General Michael Mukasey to defend him against the charges.

Giuliani has said that both U.S. and Turkish officials remained “receptive” to a diplomatic solution due to the nature of the charges against Zarrab and the importance of Turkey as an ally.

A decree issued two weeks ago gave Erdogan authority to approve the exchange of foreigners detained or convicted in Turkey with people held in other countries “in situations required by national security or national interests”.

Shares of Halkbank were down 3.4 percent at 13.81 lira as of 1337 GMT, underperforming the benchmark BIST 100 index, which was flat.