Consideration of sanctions banning Russia from access to SWIFT
One potentially far-reaching sanction reportedly under discussion is banning Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) communications platform. SWIFT is a global provider of secure financial messages used by banks, brokerages and other financial institutions to send and receive information for transferring money across jurisdictions or settling securities trades.
Cutting off access to SWIFT would have both direct consequences for Russia and collateral consequences for other countries and businesses that operate internationally. As the situation evolves, now is the time to take steps to prepare for any sanctions that may be imposed: Companies with commercial ties to Russian companies should plan for how they will carry out business operations if Russia is banned from using SWIFT and banks and other financial institutions should take steps to help ensure integration of any new sanctions measures into their sanctions compliance programs.
Below, Reed Smith provides answers to frequently asked questions to help companies with commercial ties to Russian companies, as well as banks and other financial institutions, prepare for and respond to the economic and financial consequences of possible sanctions against Russia prohibiting access to SWIFT.
Frequently asked questions and answers
1. What is SWIFT and who owns it?
SWIFT is a global network used by financial institutions worldwide to wire money to each other quickly, accurately and securely. SWIFT is a cooperative company owned by its more than 2,000 members with oversight by the European Central Bank and the G-10 central banks in Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, the UK, the U.S., Sweden, and Switzerland. The National Bank of Belgium has the lead oversight role. The Bank of Russia participates in the SWIFT Oversight Forum, through which the G-10 central banks share information on SWIFT oversight activities with a broader group of central banks. The 25-member board of directors of SWIFT currently includes one Russian national.
2. What does SWIFT do?
SWIFT provides a messaging infrastructure that banks around the world use to quickly, accurately, and securely send and receive financial messages. SWIFT messages are used predominantly for cross-border transfers of money. In 2021, SWIFT launched a new service for small businesses and consumers to make cross-border payments from their bank accounts.
3. Is SWIFT required to follow all countries’ sanctions that may bar it from providing services to Russian banks?
No, SWIFT is incorporated under Belgian law and must comply with related EU regulation, as confirmed by the Belgian government. SWIFT must follow any Belgian law or EU regulation that may bar SWIFT from providing financial messaging services to EU-sanctioned Russian banks. Although SWIFT is not subject to U.S. law, the U.S. may exert influence in other ways since by some estimates, more than 40 percent of 2021 payment communication flows were in U.S. dollars.
4. Is SWIFT responsible for ensuring that banks and other financial institutions that use SWIFT services comply with applicable sanctions laws?
No, individual banks and financial institutions are responsible for ensuring that they comply with applicable sanctions laws. SWIFT is a messaging service provider only and has no involvement in or control over the underlying financial transactions. SWIFT hosts sanctions tools that banks use to screen transactions for compliance with sanctions and other financial crime laws.
5. Why does it matter if Russia loses access to SWIFT?
SWIFT provides a vital service to banks and other financial institutions by facilitating sending and receiving secure cross-border payments. In addition to bank funds transfers, SWIFT is used to transmit foreign exchange confirmations, debit and credit entry confirmations, and documentary credits. About 11,000 banks and other financial institutions in more than 200 countries use SWIFT.
Losing access to SWIFT would likely have significant impacts on cross-border payments that could negatively impact the Russian economy for some period of time. Russia’s domestic System for Transfer of Financial Messages, created as an alternative to SWIFT, may help alleviate some economic damage if it could be expanded internationally, but with only 400 users, it may have insufficient capacity and capability. From 2012 to 2016, SWIFT was prohibited by EU regulation from providing financial messaging services to Iranian banks. By some accounts, Iran lost 30 percent of its foreign trade and nearly half of its oil export revenue during this time. The impacts of any bar on Russia’s access to SWIFT present similar and different complexities from the prior situation with Iran.
If Russia loses access to SWIFT, there may also be collateral consequences to countries that rely on Russia’s exports of oil, natural gas, and metals. Senior Russian officials have reportedly indicated that shipments of oil, gas and metals to Europe would cease if Russia were expelled from SWIFT. Additionally, U.S. and German banks communicate with Russian banks through SWIFT most frequently and would be significantly affected by banning Russia from accessing SWIFT.
6. What can companies do right now to prepare for possible sanctions barring Russia from access to SWIFT?
While the situation is fluid and the terms and conditions of any sanctions that may be imposed are the subject of ongoing discussion, companies should carefully monitor developments surrounding Russia’s potential invasion of Ukraine and the sanctions that may be imposed. Ongoing monitoring to stay abreast of developments helps with planning for business continuity and contingencies. Even though there is uncertainty as to the terms and scope of the sanctions that may be imposed, companies should consider taking the following steps, among others. This advance planning should help companies react quickly and accurately to the ultimate form of sanctions:
i. Identify Russian counterparties using SWIFT communications: Companies should identify Russian counterparties with which they engage in transactions where a SWIFT message is used in connection with payments.
ii. Evaluate contracts: Companies that have contractual relationships with a Russian counterparty should diligence their contractual positions to fully understand their:
- exposure and remedies if the Russian counterparty is prevented from performing its obligations under sanctions; and
- liability if the sanctions prevent performance of the obligations owed to the Russian counterparty.
We would expect that any measures taken to prevent Russia or Russian companies from using SWIFT would include measures intended to shield their counterparties from contractual liability arising by virtue of the sanctions preventing them from performing their contractual obligations. Whether those measures are effective in a particular case will be influenced by the terms of the contact as well as by the jurisdictions involved. For example, a U.S. sanctions clause might not always protect a company from liability under a contract that is not governed by U.S. law.
Very often in practice, companies are protected from liability by specific sanctions clauses, force majeure or illegality provisions included in their contracts rather than by statutory shielding regulations. The scope of those provisions, the governing law of the contract, the jurisdiction(s) in which disputes may be heard, the terms and currency of any payment, and the place where any relevant performance is required, as well as any statutory protections, may all influence the liability position under an affected contract.
iii. Create a plan: Companies should identify alternative means of sending and receiving payments involving Russian companies if Russia is banned from using SWIFT. It is extremely important for companies to understand the exact parameters of any sanctions that are imposed, however, as it is entirely possible that sanctions could limit a company’s alternatives and actions with respect to Russian companies more generally.
7. What can banks and other financial institutions do right now to prepare for possible sanctions barring Russia from access to SWIFT?
Banks and other financial institutions should be prepared to integrate any new sanctions, including sanctions barring Russia from access to SWIFT, into their sanctions and anti-money laundering compliance programs. The importance of complying fully with applicable sanctions cannot be overstated. Presently, there is a great deal of uncertainty regarding the ultimate form of sanctions. For example, an alternative to barring Russia from access to SWIFT that has also been raised is imposing sanctions directly on Russian banks. Accordingly, the steps that will be necessary to comply fully cannot be completely tailored at this time.
Supervisors of banks and other financial institutions focus on risk management processes, including risk identification, measurement and monitoring processes, and examine related actions and controls. Banks and other financial institutions that are subject to the Bank Secrecy Act have an obligation to have in place a sound anti-money laundering program and system of internal controls to assure ongoing compliance with applicable anti-money laundering and financial crime laws.
Banks and other financial institutions should carefully monitor developments surrounding Russia’s potential invasion of Ukraine and the sanctions that may be imposed in order to be well positioned to integrate the sanctions into their sanctions and anti-money laundering compliance programs. In addition to monitoring, banks and other financial institutions should consider taking the following steps, among others, and should pay careful attention to the full scope of sanctions imposed, not just to any sanctions barring Russia from access to SWIFT:
i. Evaluate exposure to prohibited transactions: Identify and assess the scope of transactions and relationships with Russian banks and the scope of transactions and relationships the potential sanctions may be likely to affect, such as correspondent banking relationships, customer relationships, collateral valuation, foreign exchange management, and cross-border payments processing.
ii. Document proactive plans and decisions: Document and retain records of management and/or board of directors and board committee actions and plans to prepare for potential sanctions.
iii. Assess contracts with third parties: Assess contractual relationships with third-party service providers, subcontractors and vendors that may need to be reviewed for sanctions and anti-money laundering compliance.
iv. Revise management reporting processes: Revise external and internal reporting processes to ensure that transactions that could potentially violate sanctions are identified, monitored and reported to management.
v. Evaluate the need for changes to policies and procedures: Evaluate whether complying with any sanctions banning Russia from access to SWIFT requires revisions to policies and procedures on sanctions, anti-money laundering, correspondent banking cross-border funds transfers, foreign exchange, customer identification, and more.
vi. Augment training programs: Augment training programs for employees that are responsible for carrying out transactions involving SWIFT, and ensure that third-party service providers, subcontractors and vendors that perform services under contract conduct appropriate training.
vii. Prepare for updated auditing processes: Prepare for internal or external auditing processes that test policies and procedures related to potential sanctions restrictions.
Client Alert 2022-022
