The US sanctions policy on Iran has run into an obstacle at the center of the global financial system. The SWIFT payment system is caught in the geopolitical crosshairs as the EU aims to continue trade with Tehran.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is connected to over 10,000 banks and every second major cross-border transfer goes through its messages. It carries an average of approximately 26 million financial messages each day.
Based in Belgium, SWIFT claims political neutrality, but has bowed to US influence in the past, blocking transactions to Cuba and Iran. In the wake of the terrorist attacks of September 11, 2001, the US Treasury Department used SWIFT data to gain insight into terrorist financing and protect its citizens and their data.
As the Trump administration reimposes sanctions on Iran, Western companies and banks face a choice: if they do business with Iran, they could lose access to the US market. The next wave of US sanctions targets financial messaging, so SWIFT is under pressure from Washington to disconnect from Iran.
US Secretary of State, Mike Pompeo announced that only eight jurisdictions would be spared from the sanctions, allowing them to keep importing oil from Iran and paying for the shipment through the SWIFT system. The European Union and its 28 member states were not among them, Pompeo said in a conference call.
US Treasury Secretary Steve Mnuchin said that the Trump administration would make clear to SWIFT officials that they were expected to disconnect all Iranian financial institutions that would be blacklisted by the US as sanctions take effect on Monday. He declined to name the targeted institutions.
Meanwhile, the European Union is moving ahead with an alternative “special purpose vehicle” to facilitate transactions with Iran for the bloc’s businesses. The EU announced that it would be “symbolically” ready when US oil sanctions take effect on November 4, but its system will not be operational until next year.
How did SWIFT come about?
The SWIFT is a global member-owned cooperative. It was founded in 1973 by a group of 239 banks from 15 countries which formed a co-operative utility to develop a secure electronic messaging service and common standards to facilitate cross-border payments. Its board is made up of 25 of the world’s largest banks, including representatives from two US banks — Citigroup’s Yawar Shah and J.P Morgan’s Emma Loftus.
Prior to SWIFT, Telex was the only available means of message confirmation for international funds transfer. Telex was hampered by low speed, security 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.
Although there are other message services like Fedwire, Ripple, and 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.