As tensions exacerbate between Washington and Moscow over Ukraine, political commentators say that the United States could, as a last resort, exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
- Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure financial message carrier.
- The SWIFT is a global member-owned cooperative that is headquartered in Brussels, Belgium.
- 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.
- It transports messages from one bank to its intended bank recipient, it carries an average of approximately 26 million financial messages each day.
How does SWIFT work?
- In order to use its messaging services, customers need to connect to the SWIFT environment.
- There are several ways of connecting to it
- Directly through permanent leased lines, the Internet, or SWIFT’s cloud service (Lite2)
- Indirectly through appointed partners
- Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology.
- Its core role is to provide a secure transmission channel so that Bank A knows that its message to Bank B goes to Bank B and no one else.
- Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message en route.
- Banks need to have checks in place before actually sending messages.
How is the organization governed?
- SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
- It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
- Its lead overseer is the National Bank of Belgium.
- The SWIFT oversight forum was established in 2012.
- The G-10 participants were joined by 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.
- Europe, Middle East, and Africa are highest contributors to SWIFT.
What happens if one is excluded from SWIFT?
- US excluding Russia from SWIFT could have serious repercussions on how Russian banks carry out international financial transactions.
- If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
- This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
- An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.
Are any countries excluded from SWIFT?
- Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
- This step, while regrettable, was taken in the interest of the stability and integrity of the wider global financial system, and based on an assessment of the economic situation.
SWIFT and Its importance in India
The SWIFT is a secure financial message carrier which can avoid fraudulent transactions. In other words, it transports messages from one bank to another bank. Its core role is to provide a secure transmission channel so that the message from Bank A reaches Bank B only. Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message in route. Banks, needless to say, should have checked in place before actually sending messages. One of its biggest failures in the PNB case was the missing link between SWIFT and the bank’s backend software. This allowed fraudsters to use letters of understanding or a loan request to another bank through the SWIFT network to transfer funds.
Source: The Hindu