SWIFT and Sanctions: How Banking System Impacts International Relations
The Society for Worldwide Interbank Financial Telecommunications, commonly known as SWIFT, is an organization providing tools to facilitate secure, efficient communication between financial institutions all around the world. Although SWIFT doesn’t process transactions or hold assets, its billions of messages between institutions allow for the safe, quick processing of a variety of kinds of banking processes. In nearly 50 years of existence, SWIFT has grown to encompass some 11,000 institutions in over 200 countries and territories. It is a central part of the global financial landscape.
Because of the prominence of SWIFT in the international financial community, there are strong incentives for member organizations and countries to remain in good standing with the system, lest they be cut off from the leading global platform used to facilitate transactions. For this reason, the threat of sanction and removal from SWIFT can be a powerful tool in international relations.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is the leading organization facilitating secure, global communication between financial institutions.
Banks, corporations, and governments rely on the SWIFT communication platform to ensure efficient and safe transactions around the world.
The threat of removal from the SWIFT platform—enacted via EU regulation—is a powerful sanction and deterrent.
Sanctioning a nation by eliminating its access to SWIFT can have negative impacts for trade partners and others around the world as well.
Some argue that banking and other sanctions can be more effective deterrents.
SWIFT’s Organizational Structure and Sanctions
SWIFT is a neutral cooperative organization working for the benefit of all its members. As such, it does not adopt particular international geopolitical positions. Still, the organization is overseen by the central banks of the Group of Ten (G10) nations, and it operates under Belgian, and thus European Union (EU), law.
Sanctions against nations or
individuals can be imposed by a variety of jurisdictions around the world, and SWIFT can’t arbitrarily choose which jurisdiction’s sanctions to follow. However, the structure of SWIFT’s governance does mean that it must abide by EU regulations; if the EU enacts sanctions, SWIFT is compelled to follow those guidelines.
How SWIFT Sanctions Work
In 2012, the EU enacted sanctions prohibiting SWIFT from providing financial messaging services to certain Iranian banks. Many of these banks were delisted by the EU and then reconnected to SWIFT in early 2016. In this example, banks removed from SWIFT would be forced to use another, significantly less prominent alternative means of communication with other financial institutions around the globe. In the case of Iran, the SWIFT sanctions significantly hindered international trade, as potential customers seeking to buy Iranian goods from outside the country had a very difficult time facilitating payments.
This example illustrates the power of SWIFT sanctions as an incentive or deterrent in geopolitics. Iranian banks—and, by extension, Iranian businesses and individuals—were significantly cut off from global trade as a result of a lack of capacity to complete financial transactions.
SWIFT sanctions could have a devastating impact on a nation’s economy, the strength of its currency, and on the capacity of individuals and businesses to conduct their normal operations.
Risks of SWIFT Sanctions
The example of Iran above also points to potential risks or downsides to using a SWIFT cutoff as an international relations tool. While Iran was cut off from many aspects of global commerce, the impact of these sanctions also extends to the nation’s trading and business partners elsewhere in the world. The extent to which a country is tied in to the global financial network will determine the range of this impact; the more connected the sanctioned nation is to other nations, the greater the ripple effect.
In 2014, following Russia’s annexation of Ukraine’s Crimea Peninsula, some global leaders called for the nation to be cut off from SWIFT. In early 2022, these calls resumed following Russia’s invasion of Ukraine. A key difference between these examples and Iran above is that Russia is a significantly larger
economy that is much more globally connected than Iran. Because of the fact that Russia’s leading exports are oil and gas, both critical to Europe’s livelihood, the impact of SWIFT sanctions on other nations would be significant. Thus, there is a decreased incentive to use SWIFT sanctions in a case like this.
Alternatives to SWIFT Sanctions
Detractors of the use of SWIFT sanctions argue that cutting institutions or even an entire country off from the communications platform doesn’t prohibit bad actors from engaging in international transactions. It simply makes the process more difficult. There are alternatives to SWIFT, although they are less effective. Russia reportedly developed its own SWIFT alternative following the 2014 events above, potentially further limiting the usefulness of a SWIFT blockade.
Instead of cutting institutions off from SWIFT, some analysts argue that bank sanctions could be more impactful. Targeting financial institutions that act as agents for governments and wealthy individuals could have a more direct and devastating impact, the thinking goes.
How Do SWIFT Sanctions Work?
SWIFT can prohibit financial institutions from using its messaging service. This forces those institutions to use an alternative, which is likely slower, less secure, and less connected. SWIFT sanctions do not prohibit institutions from facilitating transactions; however, the lack of access to the SWIFT platform can be a major hindrance.
Who Controls SWIFT Sanctions?
SWIFT is a neutral cooperative working with thousands of financial institutions in all parts of the world. It operates under Belgian (and therefore European Union) law, meaning that it adopts EU sanctions.
What Are the Downsides to SWIFT Sanctions?
One downside to SWIFT sanctions is their effectiveness. As mentioned above, SWIFT can’t bar countries or financial institutions from conducting transactions. Institutions may be able to find workarounds, particularly in recent years as cryptocurrencies increasingly allow for cross-border transactions. Additionally, SWIFT sanctions can be difficult to limit to a particular country or set of institutions. Due to the global nature of the financial world, sanctioning one country negatively impacts others as well.