SWIFT and Sanctions: How Banking System Impacts International Relations

The Society for Worldwide Interbank Financial Telecommunication, commonly known as SWIFT, is an organization that provides tools to facilitate secure, efficient communication among financial institutions around the world. Although SWIFT doesn’t process transactions or hold assets, its billions of messages among institutions allow for the safe, quick processing of a variety of kinds of banking processes.

In nearly 50 years of existence, SWIFT has grown to encompass some 11,000 institutions in more than 200 countries and territories. It is a central part of the global financial landscape.

Because of the prominence of SWIFT in the international financial community, there are strong incentives for member organizations and countries to remain in good standing with the system, lest they be cut off from the leading global platform used to facilitate transactions. For this reason, the threat of sanction and removal from SWIFT can be a powerful tool in international relations.

SWIFT’s Organizational Structure and Sanctions

SWIFT is a neutral cooperative organization working for the benefit of all its members. As such, it does not adopt particular international geopolitical positions. Still, the organization is overseen by the central banks of the Group of Ten (G10) nations, and it operates under Belgian—and thus European Union (EU)—law.

Sanctions against nations or individuals can be imposed by a variety of jurisdictions around the world, and SWIFT can’t arbitrarily choose which jurisdiction’s sanctions to follow. However, the structure of SWIFT’s governance does mean that it must abide by EU regulations; if the EU enacts sanctions, SWIFT is compelled to follow those guidelines.

How SWIFT Sanctions Work

In 2012, the EU enacted sanctions prohibiting SWIFT from providing financial messaging services to certain Iranian banks. Many of these banks were delisted by the EU and then reconnected to SWIFT in early 2016.

In this example, banks removed from SWIFT would be forced to use another, significantly less prominent alternative means of communication with other financial institutions around the globe. In the case of Iran, the SWIFT sanctions significantly hindered international trade, as potential customers seeking to buy Iranian goods from outside the country had a very difficult time facilitating payments.

This example illustrates the power of SWIFT sanctions as an incentive or deterrent in geopolitics. Iranian banks—and, by extension, Iranian businesses and individuals—were significantly cut off from global trade as a result of a lack of capacity to complete financial transactions.

Risks of SWIFT Sanctions

The example of Iran also points to potential risks or downsides to using a SWIFT cutoff as an international relations tool. While Iran was cut off from many aspects of global commerce, the impact of these sanctions also extends to the nation’s trading and business partners elsewhere in the world. The extent to which a country is tied to the global financial network will determine the range of this impact; the more connected the sanctioned nation is to other nations, the greater the ripple effect.

In 2014, following Russia’s annexation of Ukraine’s Crimea Peninsula, some global leaders called for the nation to be cut off from SWIFT. In early 2022, these calls resumed following Russia’s invasion of Ukraine. A key difference between these examples and Iran above is that Russia is a significantly larger economy that is much more globally connected than Iran. Because of the fact that Russia’s leading exports are oil and gas, both critical to Europe’s livelihood, the impact of SWIFT sanctions on other nations would be significant. Thus, there is decreased incentive to use SWIFT sanctions in a case like this.

Alternatives to SWIFT Sanctions

Detractors of the use of SWIFT sanctions argue that cutting institutions or even an entire country off from the communications platform doesn’t prohibit bad actors from engaging in international transactions. It simply makes the process more difficult. There are alternatives to SWIFT, although they are less effective. Russia reportedly developed its own SWIFT alternative following the 2014 events above, potentially further limiting the usefulness of a SWIFT blockade.

Instead of cutting institutions off from SWIFT, some analysts argue that bank sanctions could be more impactful. Targeting financial institutions that act as agents for governments and wealthy individuals could have a more direct and devastating impact, the thinking goes.