SWIFT exclusion as ultima ratio – What are the consequences of exclusion from the payment network?

SWIFT exclusion as ultima ratio - What are the consequences of exclusion from the payment network? | Sanctions Russia | Dennis Lange from Annerton for PayTechLaw | Cover picture: Creativa Images

What is SWIFT?

The exclusion from the SWIFT payment network is currently on everyone’s lips as a possible sanction against Russia. But what exactly is behind SWIFT and how does it work? This article aims to get to the bottom of these questions and show possible consequences of an exclusion from the SWIFT network and alternatives to it.

The SWIFT payment network is used in over 200 countries and by far more than 11,000 institutions. The term SWIFT stands for the name of the network and is also an abbreviation for the company behind it, the Society for Worldwide Interbank Financial Telecommunication based in La Hulpe near Brussels.

Financial institutions connected to the SWIFT network can use the system to exchange data quickly and securely, for example to initiate payment orders in foreign trade.


How does SWIFT work?

SWIFT itself does not process payments and is not directly involved in the booking of a transfer. The network only serves to transmit messages such as payment orders between accounts of financial institutions that are connected to the SWIFT network. SWIFT thus provides the technical infrastructure and the communication network needed for electronic data transmission.

The data transmitted via SWIFT are standardised in order to avoid misunderstandings and errors. Each financial institution is identified by its own SWIFT address, which enables the financial institution to be identified quickly and unambiguously. This is called the Bank Identifier Code (BIC), which is made up of individual identifiers for the financial institution, the country of origin and the branch location.


SWIFT security and monitoring

Since the SWIFT network plays a prominent role in the financial system due to its wide distribution in more than 200 countries, a failure can lead to serious consequences, especially for the economy.

Due to its systemic relevance, the central banks of the G10 countries have placed SWIFT under cooperative central bank oversight. This is led by the Belgian national bank NBB as lead supervisor.

Within the framework of cooperative central bank oversight, standards have been defined together with SWIFT to ensure efficient risk management, a high level of information security and the reliability of the systems, including emergency precautions. The standards are laid down in the so-called “High level expectations for the oversight of SWIFT” (HLEs) and are audited annually by external auditors on the basis of the ISAE 3000 standard.


What does exclusion from SWIFT mean?

Exclusion from the SWIFT network would primarily affect the economy of the sanctioned state. Especially in international trade, payments in USD, which make up a large part of all transactions processed via SWIFT, are common. Transactions between trading partners could no longer be paid for without considerable financial and organisational effort, as the companies concerned would not be able to verify the transactions.

Already in 2012, the massive economic consequences of a SWIFT exclusion by Regulation (EU) 267/2012 became apparent in Iran. Most recently, an exclusion from the payment network affected Afghan financial institutions after the Taliban took power.

Even without the EU’s involvement, de facto exclusion from the SWIFT network could be imminent. Even though formally the US has no possibility to bring about an exclusion from the network, a de facto exclusion could take place. Already in the case of the Iran sanctions in 2012, the US exerted pressure and threatened sanctions against SWIFT boards if transactions with Iranian financial institutions were facilitated. Moreover, the most important data centres are located in the US anyway.


Expansion of alternative payment systems

Should Russia be sanctioned with an exclusion from the SWIFT network, the question arises as to how sustainable and effective such a sanction will be. This is all the more true since Russia has low public debt and has built up high reserves, not least in the wake of the Crimea sanctions.


System for Transfer of Financial Messages – SPFS

Quite a few also fear that Russia’s exclusion from the SWIFT network could lead to a massive acceleration in the development of its own and independent Russian payment network. Already today, the Russian SPFS network comprises more than 400 financial institutions and transmits one fifth of domestic payment orders.

The project also enjoys support among the BRICS countries (Brazil, Russia, India, China, South Africa), which want to reduce their dependence on the USD. For example, the Chinese payment system Cips is connected to the SPFS network, which should make rapid international dissemination and recognition and thus independence from the SWIFT network possible.


European Payments Initiative – EPI

Not least because of politically motivated interventions by the US, the consideration of working on own payment systems has also matured in Europe. Both the creation of an independent European payment network and the introduction of a payment scheme for the holistic processing of transactions are planned.

Recently, however, there have been repeated disagreements about decision-making processes and about which institutions will participate in the 1.5 billion euro investment. It remains to be seen whether the recent discussions about Russia’s exclusion from the SWIFT network will lead to an acceleration.


Find further topic related in our Payment category.

Cover picture: Copyright © Adobe Stock / Creativa Images



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