Exclusion from SWIFT: what it entails

February 28, 2022

Syllabus: General Studies Paper 2

Context

Russian participation in the Society for Worldwide Interbank Financial Telecommunication (SWIFT), an international network for banks that facilitates seamless money transactions throughout the world, is being considered by the United States, Europe, and many other western countries.
Because it has the ability to prevent Russia from obtaining foreign payments, this might be the most severe economic penalty imposed on the country in response to its military actions in Ukraine.

About SWIFT

SWIFT is a messaging network that is used by banks and financial institutions all over the world to send information relevant to financial transactions in a timely and error-free manner.
The SWIFT network, which is based in Belgium, connects more than 11,000 banking and securities organisations in more than 200 nations and jurisdictions.
Each participant on the platform is issued a unique eight-digit SWIFT number or a bank identity code, which is different from the other participants (BIC).
If a person in New York with a Citibank account wants to send money to someone in London with an HSBC account, the payee would have to submit to his bank the account number of the London-based beneficiary as well as the eight-digit SWIFT code of the latter’s bank in order for the transaction to be processed.
After then, Citi would send a SWIFT communication to HSBC. Once that has been received and authorised, the funds will be sent to the appropriate account. SWIFT is only a messaging platform that does not retain any securities or money; it is not a financial institution. It allows for standardised and dependable communication, which makes the transaction easier to complete.

What happens if one is excluded from SWIFT?

When countries are denied access to the most participatory financial enabling platform, their external financing suffers, and they are forced to rely primarily on local investors in order to satisfy their financial responsibilities.
This is particularly troublesome when institutional investors are always on the hunt for new places in which to invest, which is the case in many emerging nations. Construction of a replacement system would be time-consuming, and integration with an already complicated system would be even more difficult than it is now.
According to the SWIFT website, the organization’s first usage of the system was in 1973, and it became operational in 1977 with 518 institutions from 22 different countries. It was SWIFT that had supplanted the far slower and less dynamic Telex system in the first place.

Are there any nations that are barred from using SWIFT?

The removal of several Iranian institutions from the financial system occurred in 2018, amid opposition from numerous European governments. “While disappointing, this move was made in the interest of the stability and integrity of the larger global financial system, and was based on an evaluation of the economic circumstances,” according to a statement on the SWIFT website.

What is the structure of the organization’s governance?

SWIFT asserts that it is neutral. The business’s shareholders, which are made up of 3,500 companies from across the world, elect the 25-member board of directors, which is responsible for the overall governance and operation of the organisation.
With the European Central Bank, it is governed by the G-10 countries’ central banks (Belgium; Canada; France; Germany; Italy; Japan; the Netherlands; the United Kingdom; the United States; Switzerland; and Sweden); and the European Central Bank.
The National Bank of Belgium is the organization’s primary supervisor. 2012 marked the first anniversary of the establishment of the SWIFT monitoring forum. The central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China were among the G-10 participants, as were the central banks of the United States, Canada, and the United Kingdom.
According to data on the SWIFT website, the financial messaging platform logged an average of 42 million FIN messages every day in 2021, representing an increase over the previous year. On a year-over-year basis, the total figure increased by 11.4 percent for the entire year. Europe, West Asia, and Africa transmitted a total of around 4.66 billion communications to one another.
The Americas and the United Kingdom came in second and third, respectively, with 4.42 billion contacts, with the Asia Pacific region coming in third with over 1.50 billion interactions.

The Hindu link

Question- Write a short note on SWIFT international network. What are implications of economic sanctions through SWIFT on a country?