What is SWIFT, and Why is it a Big Deal?
by Kristina Drye, on Mar 31, 2022 12:11:30 PM
After Russia invaded Ukraine in February 2022, the financial and government sectors partnered to respond with unprecedented levels of sanctions. One of those actions was the suspension of Russian-designated banks from SWIFT, the global financial messaging system. But what is SWIFT, and why is this such a big deal? In this blog post, we will explore SWIFT, its history, why the Russian suspension is so monumental, and what it means for your compliance and sanctions practice.
What is SWIFT?
SWIFT stands for “the Society for Worldwide Interbank Financial Telecommunication, and it is a Belgian cooperative society that serves as the main messaging network through which international payments and financial transactions occur. Before SWIFT’s foundation in 1973, international financial transactions were routed through a paper-and-pen system called Telex. Looking to increase security, diversify holdings, and speed the process in a rapidly modernizing world, its creators envisioned what was to become SWIFT. At its founding on May 3, 1973, SWIFT encompassed 239 banks representing 15 countries, and it was officially in operation in 1977.
While SWIFT does not handle all payments around the world, it handles a large majority of them. This is in part because the digital standard of SWIFT’s syntax - messages sent through SWIFT standards can be processed by most financial processing systems. As of 2018, about 50% of all high-value cross-border transactions were routed through the SWIFT messaging system. In 2015, SWIFT had an average of 32 million messages a day, and it is estimated that now that number has risen to 42 million.
SWIFT and Sanctions
SWIFT is famously apolitical. Headquartered in Belgium, a neutral country, SWIFT has high standards and practices of protecting transaction data and a non-participatory status in global sanctions. These standards are understood and accepted by SWIFT’s users and Board. However, sanction supporters argue, SWIFT could have a large impact on international sanctions effects if incorporated into a sanctions regime. SWIFT has mostly withstood these requests, involving itself only twice in sanctions actions. The first was Iran in 2012, when SWIFT disconnected all Iranian banks associated with breaches of current international sanctions (most of these accounts were reconnected in 2016).
The second time was Russia. Though sanctioning countries requested that SWIFT disconnect Russian-offending financial institutions as early as 2014, Russian banks were only removed in 2022, following Russia’s invasion of Ukraine. Even then, SWIFT has only removed select banks, leaving some room for maneuver.
SWIFT has also participated in the United States’ Terrorist Finance Tracking Program, but is notoriously careful of its data protection and operates its participation in this program with high requirements.
As might be expected, some countries have experimented with alternatives to SWIFT. Founded in an age of European and American financial dominance, much has changed since the 1970s. First, anticipating SWIFT action, Russia’s Central Bank created the SPFS (System for Transfer of Financial Messages), a Russia-based SWIFT replacement. As of 2018, over 400 institutions were connected to SPFS, and by the end of 2020, 23 foreign banks were connected.
Other alternatives include CIPS, a Chinese-sponsored replacement that has 1280 connected financial institutions in 103 countries, with processing of 80 trillion yuan (12.68 trillion USD equivalent); SFMS, an Indian-sponsored replacement; and INSTEX, an EU-sponsored replacement that is largely defunct.
What Does This Mean for the Average Banker?
For most financial institutions, which operate their own compliance systems, SWIFT is a mechanism for international transactions but not an operable data tool or source for compliance practice. What bankers and national security professionals should watch for from SWIFT is how it continues to respond to global crises, and how its competitors develop. As power concentrations shift and evolve, we should keep an eye on both CIPS and SPFS, as well as their interactions with alternative currencies and transaction methods.