The SWIFT switch

The US and EU, and others, have indicated that they intend to “remove certain Russian banks from the SWIFT messaging system”. But what is SWIFT and how might the US and EU seek to flip the SWIFT switch, turning off Russian access to it?

What is SWIFT?

SWIFT (formerly the Society for Worldwide Interbank Financial Telecommunications) is not a clearing institution; it does not hold or transfer funds itself. Rather, it is the provider of the principle messaging systems used by financial institutions all over the world to communicate with each other securely. Businesses all over the world will be familiar with the concept of “the swift” – the message from a bank that confirms that a payment has been sent / received. SWIFT’s services are therefore critical to the functioning of the international financial system and it facilitates millions of secure financial transactions every day that underpin modern international trade. SWIFT claims that so far in 2022 it has been responsible 1,261 million secure messages between financial institutions. 

SWIFT is a cooperative that is owned by its member financial institutions, including US financial institutions. It is based in Belgium. 

How could the sanctions work?

The short answer is that this will depend upon the specific legislation introduced. However, there is a historical precedent for sanctions that seek to prevent certain financial institutions using SWIFT which goes back to 2012 when the EU and US acted in concert to cut off Iranian banks from SWIFT. 

Being an EU domiciled entity, SWIFT was subject to the EU’s Iran sanctions regulations. The sanctions that the EU introduced to cut off Iran from SWIFT were to prohibit the provision of services: Regulation 267/2012 did not specifically refer to SWIFT but prohibited the supply of “specialised financial messaging services, which are used to exchange financial data” to Iranian financial institutions identified specifically in the regulation – which were most of Iran’s major banks. The inability of those Iranian banks to access the critical communication system used by the rest of the world’s financial institutions ultimately prevented them from servicing any international trade. This had far reaching extra-territorial application because by targeting the services provided by SWIFT to its users around the world it in theory shut Iranian banks off from mainstream banking services all over the globe. 

Despite being domiciled in Belgium, the US had its own long arm sanctions that in theory could have affected SWIFT’s operations if the EU had not also legislated as it did. The US passed legislation that targeted the provision of specialised financial messaging services to certain Iranian financial instructions, irrespective of whether the provider of the messaging services was a US person or not. Although these so called “secondary sanctions” would not have technically exposed non-US persons to fines or criminal penalties, they would still have exposed them to the risk of “denial of access” style penalties – in extremis, the risk of being denied access to the US financial system and the dollar economy.

Was targeting SWIFT critical to sanctions against Iran?

But the EU and US restrictions on the provision of financial messaging services were only part of a broader array of sanctions against Iran’s financial system. These included EU sanctions preventing the transfer of funds to any Iranian person without prior authorisation, and designations of key Iranian financial institutions for asset freezes. Those EU asset freeze obligations alone would have restricted the provision of services generally (including financial messaging services) to the targeted Iranian banks without any further legislation. It would also have prevented EU banks from dealing with the designated Iranian banks, even if they had been able to communicate with them through SWIFT. 

For its part, the US also designated key Iranian financial institutions as SDNs which brought with it secondary sanctions consequences non-US persons dealing with Iranian banks including the Iranian central bank. And perhaps the most far reaching consequences of the sanctions were the de-risking exercise carried out by many financial institutions in all parts of the world who sought to limit their exposure to Iranian business by imposing onerous restrictions on customers’ accounts or, in extremis, “sacking” customers with exposures to Iranian business. This was driven by a mixture of concerns about the cost and difficulty of ongoing compliance as well as pressure from US correspondent banks who threatened the withdrawal of dollar clearing services to overseas banks with higher risk customers. It is notable that even in the brief interregnum of the JCPOA (pre-Trump withdrawal), when both EU sanctions and US sanctions offered simultaneous relief to Iranian banks and access to SWIFT, few European banks actually supported fund transfers to and from Iran. 

For the moment, it will be necessary to see how the legislation threatened by the EU, UK and others works in practice. There is speculation that there may be carve outs to allow SWIFT to be used for certain trades / transactions (perhaps energy related). It is also important to remember that sanctions which restrict some Russian banks’ access to SWIFT will not prevent banks in the EU or elsewhere servicing non sanctioned Russian companies generally. Absent any other relevant restrictions, such transfers of funds would be lawful. But the Iranian experience suggests that ultimately the risk appetite of financial institutions may play as much of a role as any specific sanctions targeting SWIFT.