What it Takes to Kick a Country out of SWIFT

and who can it happen to?

Contents

    The SWIFT system, otherwise known as the Society for Worldwide Interbank Financial Telecommunication, is an international organization that facilitates the transfer of funds between banks and other financial institutions.

    It is by far the most popular method of making interbank transactions, and so when an entire country gets kicked off the SWIFT system, you can see how it can cause major problems for that country.

    However, to truly understand why a ban from SWIFT is so devastating, it's crucial to understand how SWIFT works exactly.

    The SWIFT financial system includes two main components:

    • The first is that SWIFT acts as a messaging service that enables member banks and their customers to send messages containing information about transactions or instructions related to those transactions.

    • The second is that SWIFT plays the role of an interbank payment message format that allows members to exchange transaction details electronically.

    To put it simply, SWIFT's job is not to transfer funds across the globe, but to transfer the data that goes along with each transaction.

    Founded in 1973 in Belgium, the SWIFT network has since then grown into a global network of more than 11,000 financial institutions in over 200 countries and territories worldwide. The organization is governed by 3500 institutions that act as shareholders in SWIFT, and it is subject to EU laws and regulations.

    How does a country get banned on SWIFT?

    So, How exactly does a country get banned from using SWIFT?

    In fact, local governments in member countries of SWIFT can ban other members from using SWIFT with their financial institutions specifically.

    This does not ban the other country from SWIFT entirely, but it goes to show that SWIFT is an often changing chessboard of members dealing with other members' SWIFT status in their own jurisdictions.

    For example, as of March 1st, 2022, Russia's invasion of Ukraine has led many members of the SWIFT network to halt SWIFT transactions to their own countries from Russia through sanctions.

    However, as no legislature had yet been written to ban Russia by the EU, it still remained a SWIFT member despite numerous international sanctions.

    There has only ever been one unanimous ban of a country from the entire SWIFT system, which happened to Iran in 2012 until it was re-introduced as a SWIFT member again in 2016.

    The SWIFT organization itself, while located and governed in the EU, is a politically neutral organization whose only legal governance comes from the EU.

    International pressure through the use of sanctions is the primary way to influence the EU legislature, which can be written to instruct SWIFT to ban any member country.

    Why does a SWIFT ban matter?

    A SWIFT ban can have serious consequences for businesses and individuals who rely on the SWIFT financial system.

    For example, if a country were to be banned from SWIFT access, it would cause problems for companies that do business in that country because they may not be able to communicate with their banking partners. As well, the local Banks might also face difficulties sending payments abroad.

    In addition, people living in the affected region would lose access to foreign currency and would be unable to conduct international trade or make international payments.

    Specifically, the country is not banned from making payments to other countries, but because most countries operate on the SWIFT method of payment messaging, a country that has been banned from SWIFT will need to find a new way to organize its own payment messaging.

    A country that's been banned can attempt to make payments to other banks just fine, but when the recipient bank receives the payment information, it's unlikely that the bank will accept it, as the bank would likely have SWIFT be a mandatory payment messaging method.

    However, none of this truly matters, as very likely the reason a country has been banned from SWIFT, was due to international sanctions, which makes it illegal to transact with most countries anyways.

    It is only through multilateral negotiations with the EU that can lead to appealing the ban, and in the case of Iran in 2016, shows that previously banned members can be reintroduced to the SWIFT network.

    Are you interested in making SWIFT transactions with your business payment partners?

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