04 Mar Blocking SWIFT in Russia
[Richard L. Kilpatrick, Jr. is Assistant Professor of Business Law at the College of Charleston, Charleston, South Carolina (USA).]
A Technical Tool (Re)Emerges in the Sanctions Spotlight
At a time when a violent ground war has mobilized on the European continent, it has been surprising to see a bank messaging system under such intense public debate. Even a month prior to Russia’s invasion of Ukraine, Ukrainian President Volodymyr Zelensky was confronted with the technical question from a Washington Post reporter regarding the prospect of implementing an esoteric economic weapon of deterrence—whether Ukraine and its allies should coordinate to limit Russia’s access to the popular bank messaging clearinghouse facilitated by the Society for Worldwide Interbank Telecommunication known as SWIFT. Without commenting on the possibility of a SWIFT ban itself, he urged the world to be united in introducing sanctions. On February 24, 2022, in the hours after Vladimir Putin announced his plans for a military operation in Ukraine, US President Joe Biden made public remarks and answered questions from reporters about the US response. The Wall Street Journal once again raised the question of whether the international community should prohibit Russia from accessing SWIFT. President Biden took the position that while a SWIFT ban remained an option, the initial sanctions imposed against Russian banks are of “equal consequence—maybe more consequence than SWIFT.”
In the days that followed the invasion, media outlets continued discussing the prospect of SWIFT restrictions, with observers describing the potential of a ban as the “nuclear option” of the sanctions world. Representatives of EU Member States and other governments around the world quickly joined the chorus of moving for SWIFT sanctions, with French finance minister Bruno Le Maire also likening a SWIFT ban to a “financial nuclear weapon.” While some countries such as Germany initially hesitated due to the potential impact on its own economic interests, political pressure quickly mounted as media outlets published images of demonstrators outside of government offices in Berlin with signs reading slogans such as “Declaw the Russian Bear: Stop SWIFT Now.” Then on February 27, 2022, the European Commission, France, Germany, Italy, the UK, the US, and Canada issued a Joint Statement including the commitment “to ensuring that selected Russian banks are removed from the SWIFT messaging system.” Hours later Japan joined as well, bringing this commitment in harmony among all G7 nations. Other major economies have since followed this lead.
These extraordinary events demonstrate the widespread perception that restricting the SWIFT service has the potential to serve as a powerful sanctions tool to isolate the Russian economy. What is lost in this discourse is how SWIFT came to be viewed this way. To help make sense of SWIFT’s moment in the spotlight, this piece provides a background lens by offering a brief history on SWIFT’s evolution from payment systems conduit to law enforcement partner and later to reluctant geopolitical apparatus. It then aims to evaluate the new SWIFT restrictions’ place in the burgeoning Russia sanctions landscape.
SWIFT’s Participation in International Law Enforcement
SWIFT was established in 1973 for the purpose of enhancing cross-border payments by standardizing secure communications between banks around the world. It clears financial transfers by providing the infrastructure to help banks exchange information regarding the origin, destination, and amounts of transfers, along with the identities of the parties involved. This Belgium-based organization is a private entity with a board of directors elected by its shareholders, and is overseen by the central banks of major industrialized economies. Each day SWIFT facilitates millions of messages between more than 11,000 financial institutions in more than 200 counties. And critically, as a trusted and secure service, SWIFT maintains the vast majority of global market share in this space, making it a unique player in the international financial system.
In his book Treasury’s War: The Unleashing of a New Era of Financial Warfare, former US Department of Treasury official, Juan C. Zarate, provides an insider’s view on the recruitment of SWIFT as partner in international law enforcement. In the weeks following the 9/11 attacks, US officials approached SWIFT about their possible cooperation in uncovering Al Qaeda’s illicit terrorism financing networks. SWIFT indicated its intention to remain apolitical as not to disturb its reputation and to protect the privacy of user data. In fact, according to Zarate, during the 1980s, SWIFT had rebuffed US officials who wanted to view its data for law enforcement purposes. But after some convincing, SWIFT agreed to help by responding to limited and periodic subpoenas, which allowed US Treasury to usher in its secret Terrorist Financing Tracking Program. Zarate asserts that the program helped the US catch some of the most wanted Al Qaeda terrorists, including one of the men that organized the 2002 bombings in Bali, Indonesia. Even to this day, US Treasury asserts on its website that its efforts in coordination with SWIFT have “no only disrupted terrorist networks, they have saved lives.”
By 2006 SWIFT’s cooperation with US Treasury had been leaked to the public, and in the years that followed EU-level concerns over data privacy and the negative publicity driven by links to the US “war on terror” threatened to alienate SWIFT and derail its voluntary participation. But in 2010 US and EU officials agreed that data requests from SWIFT would continue as long as they were “tailored as narrowly as possible in order to minimize the amount of data requested.” After this agreement, SWIFT continued providing financial data to US Treasury, along with a European equivalent in the form of the EU Terrorist Finance Tracking System.
Then came the Iran nuclear standoff. In the late 2000’s Iran’s pursuit of nuclear technology and weapons testing led to multilateral sanctions, including Resolutions issued by the UN Security Council prohibiting the provision of certain “financial services” to Iran. By 2012, the EU enacted its own more aggressive sanctions package, including an oil embargo, while the US imposed measures including the threat of secondary sanctions against those willing to do business with Iran. The US and EU urged SWIFT to participate in the sanctions regime by cutting off Iranian banks’ access to its messaging service. But SWIFT’s participation was more than a suggestion this time—if it refused, it would be under the threat of sanctions itself.
This multilateral Iran SWIFT ban lasted from 2012 to 2015, but it was rolled back as part the Joint Comprehensive Plan of Action (JCPOA) agreed between Iran and the P5+1 countries (the permanent five members of the UN Security Council, plus Germany and the EU). The JCPOA was implemented in early 2016, but it was short lived as Donald Trump was elected US President later that year after having campaigned on a platform of criticizing the Obama-era deal with Iran. Less than 18 months after entering office, President Trump withdrew the US from its participation in the JCPOA, reimposing US-level sanctions on Iran by the end of 2018. The other signatories to the JCPOA tried to preserve the deal, but the Trump administration threatened to impose sanctions on any private sector actors that violated the US sanctions. SWIFT was no exception, with then US Treasury Secretary Steven Mnuchin warning, “We have advised SWIFT that it must disconnect any Iranian financial institution that we designate as soon as technologically feasible to avoid sanctions exposure.”
Like other entities involved in international transactions, this placed SWIFT in the uncomfortable position of navigating sanctions compliance during an awkward period of disharmonized objectives among traditional allies. SWIFT ultimately chose to comply with the US sanctions, snapping back the ban applied to Iranian banks, although it issued a statement acknowledging the situation was “regrettable.” The other European parties to the JCPOA attempted to preserve it, and even circumvent the US sanctions through creative financial mechanisms. Some European officials proposed the idea of developing a payment alternative to SWIFT without touching US jurisdiction, but these efforts did not gain commercial traction.
Even today, as a new Iran nuclear deal is potentially in the works with participation of the US Biden administration, SWIFT access presently remains off limits in Iran. Similar restrictions also remain in place in North Korea driven by UN Security Council Resolutions issued in response to its weapons testing. While North Korea is far less integrated into the global economy than Iran, SWIFT’s compliance has still been tedious as indicated by a 2017 UN Panel of Experts report. Nonetheless, in both the Iran and North Korea contexts, SWIFT has honored the bans, but its participation has been compelled by both political and economic pressures from sanctioning authorities.
The New SWIFT Restrictions in Russia
Russia was actually threatened with a SWIFT ban after its annexation of Crimea in 2014, to which then Prime Minister Dmitry Medvedev reportedly suggested such a move by the West would amount to “a declaration of war.” While a SWIFT ban was ultimately not chosen to be part of the Crimea sanctions response, Russia did take the opportunity to explore alternative payment systems to be used in cross-border transfers, including a System for Transfer of Financial Messages (SPFS) reportedly with more than 400 member banks. China has developed a similar system cleared in renminbi, and it has so far expressed no intention of barring Russia from its use. It is also possible that cryptocurrencies could reduce Russia’s reliance on conventional banking infrastructure. But even if such systems perform similar functions as SWIFT, they do not have the same global reputation of security and trust. Nonetheless, these alternatives do point to the prospect of Russia establishing regulatory circumvention techniques, just as other sanctioned actors like North Korea, Iran, and others have done in recent years.
At least in the short term, the SWIFT ban—although narrowly tailored to “selected Russian banks”—is likely to cause complications for financial transactions with a Russia nexus. Former US State Department official Richard Nephew, author of the book The Art of Sanctions: A View From the Field, appears to take this view as he remarked to the Wall Street Journal that while cutting Russian banks off of SWIFT “would cause the Russians a lot of headaches,” he also cautioned, “I think its value has been dramatically overstated.” The scope of the impact remains to be seen, however, with the EU acting quickly to delist seven Russian banks from SWIFT.
Although the SWIFT ban might not be the nuclear option as some have proposed, the willingness of Western allies to act as a coalition on the matter is an important indicator of what is to come. Allies have already blacklisted Russia’s Central Bank, banned Russian flights, restricted its maritime port access, and explicitly placed Vladimir Putin on a Specially Designated Nationals list. Even traditionally neutral Switzerland has agreed to freeze Russian assets. Major private sector entities have also voluntarily divested from lucrative interests, shipping lines have halted or reduced bookings to and from Russian ports, and international sporting organizations have called for a boycott of Russian participation in upcoming events, including 2022 FIFA World Cup qualifying. Belarus, which on March 1, 2022, voted on the side of Russia in the historic UN General Assembly Resolution condemning the invasion, is now possibly also in the crosshairs of a SWIFT ban itself. There are still a range of other tools in the sanctions arsenal, including reducing the purchase of Russian energy, removing Russia’s most-favored-nation WTO status, further limiting access to shipping assets and port infrastructure, and prohibiting access to marine insurance coverage necessary to trade, to name only a few. Some of these additional sweeping approaches are already being assessed for future application.
Each of these sanctions, the SWIFT ban included, are exponentially layering with the potential to substantially disrupt economic conditions in Russia. Authorities are attempting to use targeted measures as not to cause too much damage to the rest of the global economy, but the collective response thus far has been remarkably far-reaching. As the tools used in the recent past re-surface in the debate over what to do next, history, in the sanctions context and beyond, is showing its tendency to recycle. The military and regulatory realities are evolving quickly, but it has already become clear that the comprehensive, multilateral, and shrewd approach needed to counter Russia’s aggression will no doubt benefit from the rapid mobilization of consensus displayed by the agreement to block SWIFT access. In the context of the current crisis, the common values driving that level of solidarity and concerted action are difficult to overstate.