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What is SWIFT in International Banking?

Presentation · January 2022

DOI: 10.13140/RG.2.2.23667.60961

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 What is SWIFT in International Banking?
S. M. Ikhtiar Alam, Ph.D.
Professor of Business & Economics, Institute of Business
Administration, Jahangirnagar University, Bangladesh
Corresponding Author: [email protected]

Abstract
Nowadays, transferring money overseas is not so difficult. Today, it is easy to
walk into a bank and transfer money anywhere around the globe, but how
does this happen? Behind most international money and security transfers is
the SWIFT system. SWIFT (Society for Worldwide Interbank Financial
Telecommunications) is a vast messaging network used by banks and other
financial institutions to quickly, accurately, and securely send and receive
information, such as money transfer instructions. More than 11,000 SWIFT
member institutions sent over 35 million transactions per day through the
network in 2020. The organization recorded an average of 42.5 million
messages per day on a year-to-date (YTD) basis in March 2021. Traffic grew
by 9.8% compared to the same period of the previous year. This paper
discusses various issues relating to SWIFT and explains how the USA uses this
SWIFT to make USD stronger and imposes financial embargo against other
countries (such as against Iran). Of course, financial embargo is imposed
against a target country, that country does not remain the member of SWIFT
anymore. But there are alternatives to continue international transactions.

Keywords: Embargo, Sanctions, International Transaction, Electronic

Transfer, Fees, Alternatives.
 Page 2 of 14

I. Introduction

As mentioned earlier, SWIFT (Society for Worldwide Interbank Financial

Telecommunications) is a vast messaging network used by banks and other
financial institutions to quickly, accurately, and securely send and receive
information, such as money transfer instructions. It is important for
commercial bankers, central bank authority, as well as the government to
have clear ideas about SWIFT. Different aspects relating to SWIFT have been
discussed below.

THREE IMPORTANT DIMENSIONS OF SWIFT ARE:

1. Society for Worldwide Interbank Financial Telecommunications (SWIFT)

is a member-owned cooperative that provides safe and secure
financial transactions for its members.

2. This payment network allows individuals and businesses to take

electronic or card payments even if the customer or vendor uses a different
bank than the payee.

3. SWIFT works by assigning each member institution a unique ID code that

identifies not only the bank name but country, city, and branch.

Inside a SWIFT Transaction

SWIFT is a messaging network that financial institutions use to securely

transmit information and instructions through a standardized system of
codes.
 Page 3 of 14

SWIFT assigns each financial organization a unique code that has either eight
characters or 11 characters. The code is interchangeably called the bank
identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code. To
understand how the code is assigned, let’s look at Italian bank UniCredit
Banca, headquartered in Milan. It has the 8-character SWIFT code UNCRITMM.

 First four characters: the institute code (UNCR for UniCredit Banca)
 Next two characters: the country code (IT for the country Italy)
 Next two characters: the location/city code (MM for Milan)
 Last three characters: optional, but organizations use it to assign codes
to individual branches.

Let's assume a Bank of America (BAC) branch customer in New York wants to
send money to their friend who banks at the UniCredit Banca branch in Venice.
The New York customer can walk into their Bank of America branch with their
friend’s account number and UniCredit Banca’s unique SWIFT code for its
Venice branch.
Bank of America will send a payment transfer SWIFT message to the UniCredit
Banca branch over the secure SWIFT network. Once Unicredit Banca receives
the SWIFT message about the incoming payment, it will clear and credit the
money to the Italian friend’s account.

As powerful as SWIFT is, keep in mind that it is only a messaging system.

SWIFT does not hold any funds or securities, nor does it manage client
accounts.

II. The World before SWIFT

Prior to SWIFT, Telex was the only available means of message confirmation
for international funds transfer. Telex was hampered by low speed, security
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concerns, and a free message format. In other words, Telex did not have a
unified system of codes like SWIFT to name banks and describe transactions.
Telex senders had to describe every transaction in sentences that were then
interpreted and executed by the receiver. This led to many human errors.

To circumvent these problems, the SWIFT system was formed in 1973. Six
major international banks formed a cooperative society to operate a global
network that would transfer financial messages in a secure and timely manner.

IV. Why Is SWIFT Dominant?

According to the London School of Economics, "support for a shared

network...began to achieve institutional form...in the late 1960s, when the
Société Financière Européenne (SFE, a consortium of six major banks based
in Luxembourg and Paris, initiated a ‘message-switching’ project.

SWIFT was then founded in 1973 with 239 banks in 15 countries. By 1977, it
expanded to 518 institutions in 22 countries.

Although there are other message services like Fedwire, Ripple, and Clearing
House Interbank Payments System (CHIPS), SWIFT continues to retain its
dominant position in the market. Its success is attributed to how it continually
adds new message codes to transmit different financial transactions.

While SWIFT primarily started for simple payment instructions, it now sends
messages for a wide variety of actions, including security transactions,
treasury transactions, trade transactions, and system transactions. Nearly
50% of SWIFT traffic is still for payment-based messages, 47% is for security
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transactions, and the remaining traffic flows to Treasury, trade, and system
transactions.

V. Who Uses SWIFT?

In the beginning, SWIFT founders designed the network to facilitate

communication about Treasury and correspondent transactions only. The
robustness of the message format design allowed huge scalability through
which SWIFT gradually expanded to provide services to the following:
 Banks
 Brokerage Institutes and Trading Houses
 Securities Dealers
 Asset Management Companies
 Clearing Houses
 Depositories
 Exchanges
 Corporate Business Houses
 Treasury Market Participants and Service Providers
 Foreign Exchange and Money Brokers

VI. Services Offered by SWIFT

The SWIFT system offers many services that assist businesses and individuals
to complete seamless and accurate business transactions. Some of the
services offered are listed below.

1. SWIFT connections enable access to a variety of applications, which include

real-time instruction matching for treasury and forex transactions, banking
market infrastructure for processing payment instructions between banks, and
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securities market infrastructure for processing clearing and settlement

instructions for payments, securities, forex, and derivatives transactions.
Business Intelligence

2. SWIFT has recently introduced dashboards and reporting utilities which

enable the clients to get a dynamic, real-time view of monitoring the
messages, activity, trade flow, and reporting. 5 The reports enable filtering
based on region, country, message types, and related parameters.
Compliance Services

3. Aimed at services around financial crime compliance, SWIFT offers

reporting and utilities like Know Your Customer (KYC), Sanctions, and Anti-
Money Laundering (AML).

4.Messaging, Connectivity, and Software Solutions

5. The core of the SWIFT business resides in providing a secure, reliable, and
scalable network for the smooth movement of messages. Through its various
messaging hubs, software, and network connections, SWIFT offers multiple
products and services which enable its end clients to send and receive
transactional messages.

6. SWIFT has become the industry standard for syntax in financial messages.
Messages formatted to SWIFT standards can be read and processed by many
well-known financial processing systems, whether or not the message traveled
over the SWIFT network. SWIFT cooperates with international organizations
for defining standards for message format and content. SWIFT is
also Registration authority (RA) for the following ISO standards:
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 ISO 9362: 1994 Banking – Banking telecommunication messages – Bank

identifier codes
 ISO 10383: 2003 Securities and related financial instruments – Codes for
exchanges and market identification (MIC)
 ISO 13616: 2003 IBAN Registry
 ISO 15022: 1999 Securities – Scheme for messages (Data Field Dictionary)
(replaces ISO 7775)
 ISO 20022-1: 2004 and ISO 20022-2:2007 Financial services – Universal
Financial Industry message scheme

Services of SWIFT in Brief

There are four key areas that SWIFT services fall under in the financial
marketplace: securities, treasury & derivatives, trade service; and
payments-and-cash management.

Securities Treasury and Cash management Trade services

derivatives

 SWIFTNet FIX  Accord for  SWIFTNet Bulk  SWIFTNet Trade

(obsolete) Treasury (end of Payments Services Utility
 SWIFTNet Data life October  SWIFTNet Cash
Distribution 2017)[17] Reporting
 SWIFTNet Funds  SWIFTNet  SWIFTNet
 SWIFTNet Accord for Affirmations Exceptions and
Securities (end of life  SWIFTNet CLS Investigations
October 2017)[17] Third Party Service

But Remember:
 Page 8 of 14

1. SWIFT does not facilitate funds transfer: rather, it sends payment orders,
which must be settled by correspondent accounts that the institutions have
with each other. Each financial institution, to exchange banking transactions,
must have a banking relationship by either being a bank or affiliating itself
with one (or more) so as to enjoy those particular business features.

2. SWIFT transports financial messages in a highly secure way but does not
hold accounts for its members and does not perform any form
of clearing or settlement.

VII. How Does SWIFT Make Money?

SWIFT is a cooperative society owned by its members. Members are

categorized into classes based on share ownership.1 7 All members pay a one-
time joining fee plus annual support charges which vary by member classes.
SWIFT also charges users for each message based on message type and
length. These charges also vary depending upon the bank’s usage volume;
different charge tiers exist for banks that generate different volumes of
messages.

In addition, SWIFT has launched additional services. These are backed by the
long history of data maintained by SWIFT. These include business intelligence,
reference data, and compliance services and offer other income streams for
SWIFT.

VIII. Challenges for SWIFT

The majority of SWIFT clients have huge transactional volumes for which
manual entry of instructions is not practical. The need for automation for
 Page 9 of 14

SWIFT message creation, processing, and transmission is growing. However,

this comes at a cost and increased operational overhead.

Although SWIFT has been successful in providing software for automation,

that too comes at a cost. SWIFT may need to tap into these problem areas for
the majority of its client base. Automated solutions within this space may
bring in a new stream of income for SWIFT and keep clients engaged in the
long run.

IX. Sanctions against Iran

In January 2012, the advocacy group United Against Nuclear Iran (UANI)
implemented a campaign calling on SWIFT to end all relations with Iran's
banking system, including the Central Bank of Iran. UANI asserted that Iran's
membership in SWIFT violated U.S. and EU financial sanctions against Iran as
well as SWIFT's own corporate rules.

Consequently, in February 2012, the U.S. Senate Banking

Committee unanimously approved sanctions against SWIFT aimed at
pressuring the Belgian financial telecommunications network to terminate its
ties with blacklisted Iranian banks. Expelling Iranian banks from SWIFT would
potentially deny Iran access to billions of dollars in revenue and spending
using SWIFT but not from using IVTS. Mark Wallace, president of UANI,
praised the Senate Banking Committee.

Initially SWIFT denied that it was acting illegally, but now says that "it is
working with U.S. and European governments to address their concerns that
its financial services are being used by Iran to avoid sanctions and conduct
illicit business". Targeted banks would be—amongst others—Saderat Bank of
 Page 10 of 14

Iran, Bank Mellat, Post Bank of Iran and Sepah Bank. On 17 March 2012,
following agreement two days earlier between all 27 member states of
the Council of the European Union and the Council's subsequent ruling, SWIFT
disconnected all Iranian banks that had been identified as institutions in
breach of current EU sanctions from its international network and warned that
even more Iranian financial institutions could be disconnected from the
network.

In February 2016, most Iranian banks reconnected to the network following

lift of sanctions on Joint Comprehensive Plan of Action.

X. U.S. control over transactions within the EU

On 26 February 2012 the Danish newspaper Berlingske reported that US

authorities have sufficient control over SWIFT to seize money being
transferred between two European Union (EU) countries (Denmark and
Germany), since they succeeded in seizing around US$26,000 that was being
transferred from a Danish businessman to a German bank. The transaction
was automatically routed through the US, possibly because of the USD
currency used in the transaction, which is how the United States was able to
seize the funds. The money was a payment for a batch of Cuban
cigars previously imported to Germany by a German supplier. As justification
for the seizure, the U.S. Treasury stated that the Danish businessman had
violated the United States embargo against Cuba.

XI. Monitoring by the NSA

 Page 11 of 14

The National Security Agency (NSA) widely monitors banking transactions via
SWIFT, as well as credit card transactions. The NSA intercepted and retained
data from the SWIFT network used by thousands of banks to securely send
transaction information. SWIFT was named as a "target", according to
documents leaked by Edward Snowden. The documents revealed that the NSA
spied on SWIFT using a variety of methods, including reading "SWIFT printer
traffic from numerous banks". In April 2017, a group known as the Shadow
Brokers released files allegedly from the NSA which indicate that the agency
monitored financial transactions made through SWIFT.

XII. Use in Sanctions

As mentioned above, SWIFT had disconnected all Iranian banks from its
international network as a sanction against Iran. However, as of 2016, Iranian
banks that are no longer on international sanctions lists were reconnected to
SWIFT. Even though this enables movement of money from and to these
Iranian banks, foreign banks remain wary of doing business with the country.
Due to primary sanctions, transactions of U.S. banks with Iran or transactions
in U.S. dollars with Iran both remained prohibited.

Similarly, in August 2014 the UK planned to press the EU to block Russian use
of SWIFT as a sanction due to Russian military intervention in
Ukraine. However, SWIFT refused to do so. SPFS, a Russia-based SWIFT
equivalent, was created by the Central Bank of Russia as a backup measure.[41]
In 2014, SWIFT rejected calls from pro-Palestinian activists to revoke Israeli
banks' access to its network.

XIII. U.S. Government Involvement in Swift: Terrorist Finance

Tracking Program
 Page 12 of 14

A series of articles published on 23 June 2006 in The New York Times, The
Wall Street Journal, and the Los Angeles Times revealed a program, named
the Terrorist Finance Tracking Program, which the US Treasury
Department, Central Intelligence Agency (CIA), and other United States
governmental agencies initiated after the 11 September attacks to gain
access to the SWIFT transaction database.

After the publication of these articles, SWIFT quickly came under pressure for
compromising the data privacy of its customers by allowing governments to
gain access to sensitive personal information. In September 2006, the Belgian
government declared that these SWIFT dealings with American governmental
authorities were a breach of Belgian and European privacy laws.

In response, and to satisfy members' concerns about privacy, SWIFT began a

process of improving its architecture by implementing a distributed
architecture with a two-zone model for storing messages (see Operations
centers).

Concurrently, the European Union negotiated an agreement with the United

States government to permit the transfer of intra-EU SWIFT transaction
information to the United States under certain circumstances. Because of
concerns about its potential contents, the European Parliament adopted a
position statement in September 2009, demanding to see the full text of the
agreement and asking that it be fully compliant with EU privacy legislation,
with oversight mechanisms emplaced to ensure that all data requests were
handled appropriately. An interim agreement was signed without European
Parliamentary approval by the European Council on 30 November 2009,[23] the
day before the Lisbon Treaty—which would have prohibited such an
 Page 13 of 14

agreement from being signed under the terms of the Co-decision procedure—
formally came into effect. While the interim agreement was scheduled to come
into effect on 1 January 2010, the text of the agreement was classified as "EU
Restricted" until translations could be provided in all EU languages and
published on 25 January 2010.

On 11 February 2010, the European Parliament decided to reject the interim

agreement between the EU and the US by 378 to 196 votes. One week earlier,
the parliament's civil liberties committee had already rejected the deal, citing
legal reservations.

In March 2011, it was reported that two mechanisms of data protection had
failed: EUROPOL released a report complaining that the USA's requests for
information had been too vague (making it impossible to make judgments on
validity) and that the guaranteed right for European citizens to know whether
their information had been accessed by USA authorities had not been put into
practice.

XIV. Competitors of SWIFT

Alternatives to the SWIFT system include:

1. INSTEX – sponsored by the EU
2. CIPS – sponsored by China
3. SPFS – sponsored by Russia
4. Ripple (payment protocol) - sponsored by Ripple Labs Inc.
5. Stellar (payment network) - sponsored by Stellar Development
Foundation.

XV. Conclusion

SWIFT has retained its dominant position in the global processing of

transactional messages. It has recently forayed into other areas, such as
 Page 14 of 14

offering reporting utilities and data for business intelligence, which indicates
its willingness to remain innovative. In the short-term to mid-term, SWIFT
seems poised to continue dominating the market.

However, it has to be kept in mine that USD is the official reserve currency
and SWIFT can be used be the USA to punish other countries. In such cases,
other countries, in particular China and Russia can easily retaliate by using
Russian Ruble as the reserve currency and transaction can be carried out
through SPFS – sponsored by Russia; Stellar (payment network) - sponsored
by Stellar Development Foundation; or CIPS – sponsored by China. In
such cases, economic embargo imposed by the USA will be serious boomerang
for the USA and the European Countries.

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