Financial Sanctions, SWIFT,

NO. 1047
JANUARY 2023 and the Architecture of the
International Payments System

Marco Cipriani | Linda S. Goldberg | Gabriele La Spada

Financial Sanctions, SWIFT, and the Architecture of the International Payments System
Marco Cipriani, Linda S. Goldberg, and Gabriele La Spada
Federal Reserve Bank of New York Staff Reports, no. 1047
January 2023
JEL classification: F3, F51, G15, G2

Abstract

Financial sanctions, alongside economic sanctions, are components of the toolkit used by governments as
part of international diplomacy. The use of sanctions, especially financial, has increased over the last
seventy years. Financial sanctions have been particularly important whenever the goals of the sanctioning
countries were related to democracy and human rights. Financial sanctions restrict entities—countries,
businesses, or even individuals—from purchasing or selling financial assets, or from accessing custodial
or other financial services. They can be imposed on a sanctioned entity’s ability to access the
infrastructures that are in place to execute international payments, irrespective of whether such payments
underpin financial or real activity. This article explains how financial sanctions can be designed to limit
access to the international payments system and, in particular, the SWIFT network, and provides some
recent examples.

Key words: sanctions, financial sanctions, cross-border payments, SWIFT, Russia-Ukraine war

_________________

Cipriani: Federal Reserve Bank of New York, CEPR (email: [Link]@[Link]). Goldberg:
Federal Reserve Bank of New York, CEPR, NBER (email: [Link]@[Link]). La Spada:
Federal Reserve Bank of New York (email: [Link]@[Link]). The authors thank Catherine
Huang, Stone Kalisa, and Sergio Olivas for outstanding research assistance. They also thank Richard
Charlton, Heidy Medina, Brett Phillips, and Janine Tramontana for helpful comments.

This paper presents preliminary findings and is being distributed to economists and other interested
readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of
the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the
Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
To view the authors’ disclosure statements, visit
[Link]
 When sanctions involve traded goods, it is relatively easy to understand how
they function. Either certain goods are permitted to cross a national border, or they
are not. In contrast, financial sanctions involve flows of funds, which occur through
networks of banks and financial institutions. Financial sanctions typically restrict the
ability of sanctioned entities countries, businesses, or even individuals to purchase
or sell some financial assets. Sanctions can also be imposed on “custodial services,”
which refers to the ability of entities to store or manage the financial assets of the
sanctioned entity. Other financial services, such as giving financial guidance or wealth
management, can also be included.
Financial sanctions have been widely used for decades. Figure 1 shows the num-
ber of sanctions episodes by 10-year periods, from 1950 through 2019. Counts of
sanctions have increased over time, from 52 sanctions episodes in the 1950s to 257
in the 2010s. The sanction type indicates whether an episode is characterized by
the imposition of only economic, only financial, or jointly economic and financial
sanctions. The share of financial sanctions has increased: the proportion of sanc-
tions episodes with both a financial and a real economy component increased from
of 12% in the 1950s to 42% in the 2010s; in contrast, exclusively economic sanctions
decreased from 73% of the total in the 1950s to 41% in the 2010s. Exclusively fi-
nancial sanctions were most prevalent in the 1980s and 1990s, reaching 32% of the
total in the 1990s. Most sanctions are imposed by North American and European
countries targeting Asian and African countries. Financial sanctions are more likely
to be used than other sanctions when the goals are promoting democracy and human
rights. On average, both financial and nonfinancial sanctions are imposed for shorter
time periods now than in the past (Felbermayr et al., 2020).
In the last few decades a particular type of financial sanction has become more
prominent: restricting access to the infrastructures and institutions that execute
international payments. This type of financial sanction can potentially disrupt ev-

1
Fig. 1. Prevalance of Sanctions – By Type
Source: authors’ calculations using Global Sanctions Database Felbermayr, Kirilakha, Syropoulos,
Yalcin and Yotov (2020). This figure displays the number of sanctions within each decade by
sanction type. Sanctions are only counted in the first decade of implementation. Joint sanctions
have both economic (e.g., import restrictions) and financial (e.g., asset freezes, investment
screens) elements. The black line represents the percentage of sanctions with a financial
component over time (right axis).

ery kind of cross-border economic activity requiring access to the payment system,
including tourism, remittances, foreign exchange trading, and international trade
financing. The vast majority of communications necessary for international pay-
ments is carried over the network maintained by the Society for Worldwide Inter-
bank Financial Telecommunication (SWIFT), which has allowed for seamless flow of
standardized information. Because there are very few alternatives to SWIFT, finan-
cial sanctions that limit access to this network have become particularly costly for
sanctioned entities.

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 This article focuses on financial sanctions, with a particular emphasis on their
relationship with the infrastructure of cross-border payments. We start with some
background on financial sanctions since World War II, providing a number of specific
examples of sanctions episodes along with the historical context for their imposition
and the types of activities included. We then describe the infrastructure of cross-
border payments, before turning to the role of SWIFT in international financial
markets and the use of financial sanctions restricting access to SWIFT. We conclude
by discussing some of the alternative systems some countries have created to limit
the dependency on this single network. While some of these alternative systems have
achieved traction within their domestic economies, they have not yet gained broad
use in cross-border activity.

Examples of Financial Sanctions After World War II

Several readily accessible sources provide details on sanctioned entities for ex-
ample, governments, businesses, or individuals and the specific activities that are
forbidden, how the sanctions are implemented, and which entities are tasked with
administering sanctions. Across countries, the Global Sanctions Database produced
by Felbermayr, Kirilakha, Syropoulos, Yalcin and Yotov (2020) and Kirilakha, Fel-
bermayr, Syropoulos, Yalcin and Yotov (2021) divides sanctions into economic and
financial sanctions, details which countries imposed the sanctions and the sanctioned
entities, categorizes the purposes of the sanctions, reports their duration, and offers
an assessment of sanction effectiveness.
For the United States, the Department of the Treasury provides specifics for fi-
nancial sanctions on the Office of Foreign Assets Control (OFAC) website.1 As one
example, the OFAC defines “blocking a transaction” as: “blocking a transaction in-
1
For details, see [Link]
programs-and-information.

3
volves accepting or segregating the funds or securities associated with the transaction
and then freezing those funds, securities or accounts so that the owner is effectively
denied access until appropriate action is taken by OFAC. Blocking can occur when
a transaction is initiated at an institution or when funds or securities are moved
through an institution during a transfer.”
The remainder of this section describes specific episodes of financial sanctions,
explaining how and why sanctions were imposed, with the purpose of outlining the
different forms that financial sanctions can take and how they have evolved over
time.

US Sanctions against North Korea in the 1950s

In June 1950, North Korea invaded South Korea; in response to this attack, on
June 25 and 27, the United Nations Security Council passed Resolutions 82 and
83, sponsored by the US, calling for North Korean authorities to withdraw, and
recommending urgent military measures by UN members. The US imposed sanctions
against North Korea in the 1950s, with the purpose of helping the US win the Korean
War.
The US sanctions had both trade and financial components. The trade restric-
tions, such as a total embargo on exports to North Korea, were instituted just three
days after the outbreak of the war (June 28). In addition to the embargo, the De-
partment of the Treasury issued the Foreign Assets Control Regulations (FACR) in
January 1951, forbidding any financial transactions involving North Korea and its
nationals. Moreover, the Department froze North Korean assets held under US ju-
risdiction (see Chang 2006). China, a North Korea ally in the war, was also subject
to the same sanctions.
The US did not impose restrictions on North Korean’s access to the infrastructure
allowing international payments and financial transactions; rather, they made such

4
transactions illegal for US residents. Financial sanctions against North Korea are an
example of sanctions where financial transactions and ownership of financial assets
are impaired, but access of the country to the infrastructure of payment system is
not affected.

US Sanctions against Chile from 1970 to 1973

In the 1960s, Chile received extensive credit from the US and from international
organizations based in the US, such as the Inter American Development Bank. In-
deed, in 1970, 60% of Chile’s debt was owed to the US government (Helwege 1989).
Moreover, in the late 1960s, private credit from the US had become increasingly
important, with US commercial banks providing significant lines of credits.
In 1970, Salvador Allende won the Chilean presidential election and started pur-
suing domestic and international policies contrary to US interests in the region.
Between 1970 and 1973, the US put in place a series of economic measures against
Chile which became known as “the invisible blockade,” aimed at destabilizing the
country and overthrowing Allende (Petras and Morley 1975, Petras and Morley 1978,
and Olson 1979).
In addition to trade restrictions, financial activity between the US and Chile
decreased significantly. The US tightened official-sector credit flows towards Chile:
US-AID loans were reduced from $45 million in 1969 to $1.5 million in 1971; Import-
Export Bank credits evaporated entirely. In addition, the Inter-American Devel-
opment Bank reduced the credit provided to Chile from $46 million in 1970 to $2
million in 1972 (Livingstone 2009).
US private financing also declined dramatically: short-term lines of credit from US
private banks declined to around $30 million, and short-term US commercial credits
dropped from 78.4 percent of the total in 1970 to approximately 6.6 percent in 1972
(Petras and Morley 1975 and Petras and Morley 1978). Additionally, US suppliers

5
were demanding “cash in advance” for essential raw materials and parts sales to
Chile, putting further pressure on Chile’s finances (Petras and Morley 1975, Olson
1979, and Livingstone 2009). The reduction in private-sector lending may have been
due both to the nature of the policies put forward by the Allende government which
were generally not business friendly (e.g., completing the nationalization of American
copper companies in Chile that began in 1965) and to the desire of US financial
institutions to be aligned with the policies of the US government (Sigmund 1974 and
Petras and Morley 1978).
As in the case of the sanctions against North Korea, the US did not target the in-
frastructure of financial transactions. Different from the North Korean case, however,
the US did not adopt explicit measures forbidding financial transactions between the
US and Chile or freezing the US financial assets owned by Chilean residents. Instead,
the US government relied on the economic disruption brought forward by a little-
publicized reduction in both official-sector and private-sector lending to the country
(Olson 1979). The US economic pressure on Chile ended after the military coup that
overthrew the Allende’s government in late 1973.

European and US Sanctions against South Africa in the 1990s

Since the early 1960s, the United Nations (UN) and many countries called for and
implemented economic sanctions against South Africa in order to pressure the South
African government to abandon its apartheid policy of racial segregation (Crawford
and Klotz 1999). In 1963, the UN Security Council adopted a voluntary arms em-
bargo, which it made mandatory in 1977. In November 1973, the OPEC counties
extended their oil embargo to South Africa.
Although some financial sanctions were put in place in the 1960s and 1970s (e.g.,
Japan banned direct investment in 1964 and then loans in 1975), more extensive fi-
nancial sanctions were introduced during the South African debt crisis of 1984-1985,

6
along with a tightening of trade-based economic sanctions. In 1986, the European
Community, the US, and Japan sanctioned import of gold coins (the Krugerrand)
and certain steel and iron products. However, most forms of gold, which accounted
for 42.6% of the value of South African merchandise exports, were not sanctioned
(Crawford and Klotz 1999 and Levy 1999). Financial sanctions mainly focused on
foreign direct and portfolio investments in South Africa. The European Community
sanctioned new direct investments, but member states were not required to impose
binding sanctions; indeed, Great Britain and Germany the two major investors in
South Africa decided not to do so (Crawford and Klotz 1999, (Becker 1988), and
Hefti and Staehelin-Witt 2011). The US sanctioned new direct investments through
the Comprehensive Anti-Apartheid Act (CAAA) of 1986, along with portfolio invest-
ments and credits and loans; the CAAA also prohibited US banks from accepting
deposits from South African government agencies (Becker 1988).
The South African apartheid regime ended with the general election of 1994. Sim-
ilarly to the US sanctions against North Korea, the 1980s financial sanctions against
South Africa did not involve the infrastructure of cross-border payments; indeed,
they were more limited than sanctions on North Korea, targeting mainly foreign di-
rect investment into South Africa. Moreover, similar to other cases described above,
sanctions were accompanied by significant actions by non-government actors, such
as divestment by US universities and pension funds from companies doing business
in South Africa. As a result of both pressure from the anti-apartheid movement and
the concerning conditions of the South African economy, several banks and multina-
tional companies disinvested from South Africa in the 1980s. For example, in July
1985, Chase Manhattan Bank decided not to extend credit or to make new loans
to South Africa; immediately after, other international banks and investors moved
their funds out of the country, leading the Johannesburg Stock Exchange (JSE) to
drop sharply and the rand to plummet. In 1986, in response to customer pressures,

7
Barclays Bank ended its loans to South Africa and withdrew from South African
operations. In the same year, General Motors withdrew from South Africa, followed
by many other US corporations (Crawford and Klotz 1999).
Although the sanctions’ goal was ultimately achieved, the contribution of foreign
economic and financial pressures to the regime downfall is still debated (Levy 1999).
During the sanctions period (1986Q4 to 1991Q1), South Africa suffered an average
net capital outflow of 2% of South African GNP. However, this is mostly attributed to
poor economic conditions, rather than to the impact of sanctions. Indeed, although
sanctions made capital scarce, the annual cost to the South African economy is
estimated at less than 0.25% of South African GNP; the relatively low effectiveness
is attributed to the lack of sanctions by the UK and Germany, to the fact that
sanctions did not cover reinvested profits (80% of FDI into South Africa), and to
the fact that only the US sanctioned portfolio investment (Hefti and Staehelin-Witt
2011).

EU and US Sanctions against Myanmar in the 1990s and 2000s

In the 1990s and 2000s, the EU and US adopted several economic sanctions
against Myanmar in response to systematic violations of human rights and civil
liberties by the country’s ruling military junta. In 1991, the EU imposed an array of
traditional economic sanctions, including an arms embargo, a suspension of bilateral
aid, and a visa ban on Myanmar officials (Giumelli and Ivan 2013). In 2000, the
EU strengthened the existing economic sanctions and added a financial component,
freezing the funds held abroad by the persons included in the visa ban. In 2004, the
EU imposed restrictions on EU investment into Myanmar, in particular into Burmese
state-owned firms (European Commission 2005). Similar restrictions on investment
into Myanmar were introduced by the US. Finally, Canada, the EU, and the US
stopped providing preferential financing for exports to or investment in the country

8
(Martin 2012).
Myanmar is a significant example of international pressure to impose restrictions
on the country’s access to the infrastructure of the financial system. Beginning in
2004, human rights groups, such as Human Rights Watch, urged SWIFT to remove
Myanmar banks owned by the ruling military junta from its network, pointing out
that the military dictatorship could use the network to evade the economic and
financial sanctions. In this instance, SWIFT refused to disconnect the banks, in
order to maintain an apolitical posture, on the ground that no EU law restricted
access to SWIFT by Myanmar (Wong and Nelson 2021).

US Sanctions against Afghanistan in the 2000s

In the late 1990s and early 2000s, several countries and international organiza-
tions imposed important economic and financial sanctions against the Taliban regime
ruling Afghanistan. The goal of these sanctions was to force the Afghan government
to stop sheltering and training terrorists. These sanctions were aimed at putting
pressure not only on segments of the economy but also on specific individuals. An
example of financial sanctions imposed against Afghanistan is US Executive Order
No. 13129, issued in July 1999, banning all trade with Taliban-controlled areas, freez-
ing Taliban assets in the US, and prohibiting financial contributions to the Taliban
(Hufbauer, Schott and Oegg 2001).
Shortly afterwards, in October 1999 and December 2000, the UN Security Coun-
cil adopted two rounds of sanctions against the Taliban regime (Council Resolutions
1267 and 1333; see Francioni and Lenzerini 2003 and Ghufran 2001). The Coun-
cil’s actions included travel bans, an arms embargo, and a ban on exports of acetic
anhydride, used to manufacture heroin (of which Afghanistan is the world’s largest
producer). Finally and most importantly, these sanctions froze funds and other fi-
nancial assets, owned directly or indirectly, by the Taliban, Osama bin Laden, and

9
individuals transacting with him. One of the main goals of these sanctions was to
coerce the Taliban to hand over Osama bin Laden. The effectiveness of these sanc-
tions, however, is still debated, as the Taliban did not turn over bin Laden nor did
al-Qaeda stop its terrorist activity.
Sanctions against Afghanistan intensified after the September 11, 2001 attacks.
On September 23, 2001, to weaken the financial support of al-Qaeda, the US Presi-
dent issued an executive order expanding the list of individuals and entities subject
to the asset freeze, including fundraising organizations (Hardister 2002). Reducing
the financial capabilities of terrorist organizations was seen as a key component of the
“war on terrorism.” Moreover, the US created the Foreign Terrorist Asset Tracking
Center in the Treasury Department to coordinate the activities of the US agencies
on the financial front.
Importantly, the US “war on terrorism” included a covert monitoring of global fi-
nancial transactions through the SWIFT network (Connorton (2007); Koppel 2011).
In October 2001, the US Treasury established a secret program later referred to as
the “Terrorist Financing Tracking Program” (TFTP) but more commonly known as
the “SWIFT Program” through which the Office of Foreign Assets Control (OFAC)
would issue subpoenas to the SWIFT data processing center in the US. The amount
and type of data accessed by US authorities is not publicly known. As SWIFT ac-
knowledged, initially the scope of US searches covered the entire SWIFT database,
with the transfer to the US Treasury of all messages within a certain time period.
Subsequent subpoenas, however, were narrower and limited to specific dates and
countries of origin or destination (Koppel 2011). According to US Treasury officials,
in 2007-2008, US counter-terrorism analysts at the CIA (in charge of extracting
individual-level information from the SWIFT messages) searched less than one per-
cent of the subset of SWIFT messages sent to the US Treasury (Amicelle 2011).
The existence of the program became public in 2006, following a series of articles

10
in major US newspapers. Although the program was legal under US law, it generated
controversies both in the US and EU because of its implications for privacy and civil
liberties (de Goede 2012). In particular, the Treasury received details about millions
of messages, including senders’ and receivers’ personal data. Although the data were
obtained from the US-based SWIFT operating center, they contained information on
non-US citizens too and European authorities expressed serious concerns regarding
possible violations of European privacy law (Amicelle 2011; Koppel 2011; de Goede
2012). Negotiations between the US and EU, combined with mounting media pres-
sure, led to an agreement on the SWIFT surveillance program between the US and
the EU in June 2007, limiting the use of the data by US authorities for counterter-
rorism purposes, limiting the retention period for the data to 5 years, and allowing
monitoring of the program by EU officials (Connorton (2007); Koppel 2011).
Moreover, EU pressures led SWIFT to improve its data protection standards
and to create two message-processing zones: one in Europe (with processing cen-
ters located in the Netherlands and Switzerland) and one in North America (with
processing centers located in the Netherlands and the US), thereby separating EU
traffic and US traffic. Countries have the option to choose which processing zone
(and therefore pair of processing centers) they want to belong to. This change means
that all traffic within the European processing zone, to which most countries have
opted to belong, is not accessible by US surveillance.

The Infrastructure of Cross-border Payments

Cross-border payments infrastructures are a critical component of how govern-

ments, companies, and households actually can pay for their international purchases,
whether of goods, services, or financial assets. Once we understand this infrastruc-
ture, it becomes clear why restricting access to the infrastructure has been part of

11
several sanction packages, especially in the most recent years, including the 2022
sanctions against Russia discussed in “The Role of SWIFT in the Implementation of
Financial Sanctions” section.
Payments within a single country typically settle on the books of commercial
banks or of the central bank. For instance, if entity A wants to send funds to entity
B, A will instruct A’s own bank, which will make a payment to B’s bank. If both A
and B are customers of the same bank, the payment can be settled on the bank’s own
books. If, however, A and B are customers of different banks in the same country,
the settlement will typically occur on the books of the central bank. Many central
banks, in fact, have set up “real-time gross settlement” (RTGS) systems that allow
the settlement of payments between banks in real time, on a gross basis. In the
United States, Fedwire Funds Services is a notable example. In the case of A and B
just described, the payment will result in a decrease of the account balances of A’s
bank with the central bank and an increase in the account balances of B’s bank.
Now consider cross-border payments, which are payments between residents lo-
cated in different countries. Few central banks allow their domestic payment system
to be accessed by banks that do not have a physical presence within the country and
that are not subject to the country’s regulation and supervision; a notable example is
the Swiss National Bank, which allows institutions without a presence in the country
to access its real-time gross settlement system (Swiss Interbank Clearing). Tradition-
ally, however, cross-border payments occur through “correspondent banking”: banks
use the services of “correspondent banks” in order to execute cross-border payments
(Bank for International Settlements 2016). The correspondent bank is usually either
a large bank or a local branch/subsidiary of the bank initiating the payment, located
in the foreign country where the payment must be sent. Banks may have more than
one correspondent bank in a given country.2
2
Correspondent banking is also used for domestic payments when a bank does not have an account

12
 A “correspondent account” is an account that a “respondent bank” has at a
foreign correspondent bank, usually in the foreign bank’s currency. Both banks will
keep a record of this account, and common terminology here is to refer to Nostro and
a Vostro accounts, where the terms are the Italian words for “ours” and “yours.” The
record kept by the respondent bank of the money that it keeps with its correspondent
bank is the Nostro account, whereas the record kept by the correspondent bank of its
respondent bank’s money is the Vostro account. Panel (a) of Figure (2) illustrates
how a correspondent-bank relationship would allow a payment between parties A and
B in different countries. In this example, if A wants to send money to B, who resides
in another country, A’s bank will instruct its correspondent bank in the country
where B resides to send money to B’s bank through the domestic payment system of
B’s country. The Nostro account of A’s bank (an asset on the bank’s balance-sheet)
will be debited for the amount paid; similarly, the Vostro account (a liability on the
correspondent bank’s balance sheet) will also be debited.
Cross-border payments through a correspondent banking relationship may be
more complex than in the previous example and involve more than one intermediary.
For instance, say that A and B agree that the payment should be in a third country’s
currency. As shown in Panel (b) of Figure (2), A’s bank will instruct its correspondent
bank in the third country to transfer funds (through the third country’s domestic
payment system) to the correspondent bank of B’s bank in the third country. In
some cases, many correspondent banks are involved in the settlement of a payment.
As correspondent banks are compensated for their correspondent services, the higher
the number of banks involved, the higher the cost of the transaction.
Correspondent banks typically perform their own diligence for anti-money laun-
dering (AML) and countering the financing of terrorism (CFT) purposes based on
with the central bank; for instance, in the US, community banks and credit unions often do not
have accounts with the Federal Reserve.

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 (a) Two countries

(b) Three countries

Fig. 2. Cross-border payments and correspondent banking

Source: Authors’ construction. Panel A shows the flows in a cross-border payment executed through
a correspondent bank. Panel B shows the flows in a cross-border payment executed through corre-
spondent banks domiciled in a third country.

the requirements of their jurisdictions. The Financial Action Task Force (FATF), an
intergovernmental organisation established in 1989 by the G-7, develops AML/CFT
guidance on effective supervision and enforcement. Normally, AML/CFT policies
do require institutions to conduct due diligence on their respondent banks but not
on the customers of their respondent banks; nevertheless, correspondent institutions
are usually required to monitor respondent banks’ transactions “with a view to de-
tecting any changes in the respondent institution’s risk profile or implementation of
risk mitigation measures” (FATF 2016). For instance, in the US, banks are gener-
ally required to collect information on the origin and the recipient of transactions.
Sometimes, correspondent banks may be held liable by the authorities of the coun-
try where they are located for violations of AML/CFT laws or regulations by their

14
respondent banks.
Compliance with AML/CFT laws and regulations often makes correspondent
banking relationships very costly for the correspondent bank. This is especially true
if the respondent bank is located in a small country, where the volume of transac-
tions is low, or in a country deemed at high risk for AML/CFT compliance. The high
cost and low profitability have resulted in a decrease in the number of correspon-
dent banking relationships over the last decade, a phenomenon called “de-risking”
(Grolleman and Jutrsa 2017; Miller 2022). The number of active correspondent
banks worldwide fell by roughly 22 percent between 2011 and 2019, with banks los-
ing correspondents even as the value of cross-border payments continued to grow;
the decline has been especially pronounced in Latin America. At the same time,
the number of country-pairs linked by a correspondent relationship the so-called
“corridors” has decreased by ten percent, leaving some regions, especially in Latin
America, Oceania, and Africa, with very few corridors (Rice, von Peter and Boar
2020 and Bank for International Settlements 2020).
The reduction in correspondent banking relationships implies that some cross-
border payment activity, especially if it involves small countries, needs to go through
a longer chain of banks, potentially increasing the cost to end-user. Although com-
prehensive data on the cost of correspondent banking is lacking, the World Bank
collects data on the cost of migrants’ remittances, with the aim of reducing it to
promote financial inclusion; although the cost of remittances from G20 countries
has been steadily decreasing since the 2010s, the concern is that de-risking by banks
may slow down the process, or even lead to higher remittance costs in some countries
(World Bank 2022).
The high cost of correspondent banking activities has also led to the develop-
ment of alternative arrangements to facilitate payment activity between residents
of different countries (see Bech and Hancock (2020) for a detailed analysis of these

15
arrangements). These arrangements may be sponsored by a single country or may
be the result of multilateral agreements among a group of countries. For instance, a
country may want to allow its residents to send and receive payments from a larger
economy or currency area. One example is Switzerland, which established the Swiss
Euro Clearing Bank (SECB) to allow its residents to send and receive euro payments
from the European Union. Similarly, the Central Bank of Mexico, in a joint effort
with the Federal Reserve, established “Directo a Mexico” to connect its own payment
system to that of the United States.
Conversely, a country may want to set up a system to facilitate the use of its own
currency by foreign residents or to facilitate regional transactions. As a prominent
example, in 2015, China established the Chinese Cross-Border Interbank Payment
System (CIPS) to facilitate the use of the renminbi in international transactions. As
CIPS has developed a messaging system alternative to SWIFT, we will discuss it at
more length in the next section, which describes the SWIFT messaging network and
its origins, as well as its use in financial sanctions.
Sometimes, a group of countries, usually neighbors, may jointly develop a pay-
ment system to allow their residents to transact among themselves; for example,
the Southern Africa Development Community, a group of 16 countries in southern
Africa, set up its own real-time gross settlement system for transactions in South
African rand. Another example is the East Africa Payment System (EAPS), which
offers multi-currency payments for countries in the East Africa Community, which
includes Burundi, Kenya, Rwanda, Tanzania, and Uganda.
Even if both parties to a transaction are residents of the same country, there
are cases in which payment in another country’s currency may require the costly
intermediation of correspondent banks. This friction has prompted some jurisdictions
to set up “offshore” payment systems, processing payments in a currency different
from that of the country where the payment system is based. For instance, Hong

16
Kong has set up parallel real-time gross settlement systems that, in addition to the
Hong Kong dollar, will also settle payments in euros, US dollars, and renmimbi.
Finally, foreign-exchange transactions pose a particular type of settlement risk
as they require the payment of an agreed amount in one currency against an agreed
amount in another currency.3 What is called “payment vs. payment” settlement
mitigates settlement risk by only allowing two legs of a foreign-exchange transaction
to settle contemporaneously. The CLS Bank, based in the United States, is a special-
ized financial intermediary set up in 2002 to allow the settlement of foreign exchange
transactions on a payment vs. payment basis; it currently allows for foreign-exchange
transactions in 18 currencies (Galati, 2002).4 CLS has 70 members, which are major
financial institutions that hold accounts with CLS, and it settles the transactions
between its members on its books.

A History of SWIFT

In the middle of the twentieth century, banks had been communicating nationally
and internationally through Telex. For readers who have not yet reached retirement
age, the Telex is a teleprinter network that originally used existing telegraph and
telephone networks and allowed speech and teleprinter signals on the same connec-
tion. Introduced in the 1930s, the Telex quickly replaced the telegram in business
use and grew fast in popularity: by 1957, there were more than 30,000 users world-
wide, and in the late 1970s, more than one million. However, Telex messages were
costly and carried high operational risk: because Telex communication allowed to
3
Settlement risk in foreign-exchange transaction is usually referred to as “Herstatt Risk:” in 1974,
Herstatt Bank, a German bank active in foreign-exchange trading, was closed by German authori-
ties after it had received payments for foreign-exchange transactions, but before it could make the
outgoing payments, leading to a freeze in the foreign-exchange market.
4
The 18 currencies are: Australian dollar, Canadian dollar, Danish krone, euro, HK dollar, Hun-
garian forint, Israeli shekel, Japanese yen, Mexican peso, New Zealand dollar, Norwegian krone,
Singapore dollar, South African rand, South Korean won, Swedish krona, Swiss franc, Pound
sterling, US dollar.

17
send unformatted texts with no pre-specified standard, a cross-border transaction
would often require the exchange of more than ten messages and authentication
procedures between banks were also labor intensive (Scott and Zachariadis, 2012).
By the early 1970s, there was a growing presence of European and US banks in
overseas markets and a rise in cross-border payment activity. Banks began looking
for ways around the high costs and other limitations of Telex. In one prominent
example, in 1973, Citibank’s information technology subsidiary (Transaction Tech-
nology Inc.) developed a proprietary messaging system called MARTI (Machine
Readable Telegraphic Input). By mid-1974, this network was in place and a pilot
implementation had been conducted with one of Citibank’s correspondent banks,
Wilmington Trust. Citibank tried to force the adoption of MARTI on other corre-
spondent banks, both in the United States and Europe, announcing that the deadline
for compliance would be March 31, 1975. Many correspondent banks, particularly in
Europe, resisted the imposition of a proprietary standard from a single bank (Scott
and Zachariadis, 2014). Indeed, European banks feared the establishment of a US-led
monopoly for the transmission of financial information.
Thus, in 1973, 239 banks from 15 countries founded SWIFT, the Society for
Worldwide Interbank Financial Telecommunication, as a non-profit financial institu-
tion. The goal was to create a data processing and messaging network that would
be shared among banks worldwide, with standards collectively designed by private
companies for community purposes (Scott and Zachariadis, 2014). SWIFT is head-
quartered in Belgium and is organized as a cooperative society owned by its members;
membership was originally limited to banks but is now open to broker-dealers and
investment-management institutions.5
Figure 3 shows the role of SWIFT in the correspondent bank transaction we
5
For details, see the SWIFT website at [Link]
matters/swift-user-categoriesshareholding-eligibility.

18
described earlier and illustrated in Figure 2. The primary role of SWIFT is as a
message carrier: the SWIFT network securely transports messages containing the
payment instructions between financial institutions involved in a transaction. In
addition to providing the messaging network for financial transactions, SWIFT offers
a secure person-to-person messaging service for the transfer of sensitive business
documents, for example, contracts and invoices.
Importantly, SWIFT is not a bank and does not manage accounts or hold funds
on behalf of its customers. Neither is it a clearing or settlement institution. SWIFT
only provides the platform allowing the secure exchange of financial information and
proprietary data across financial institutions worldwide. Namely, SWIFT provides
two main services to the financial sector: (1) a secure network for transmitting
messages between financial institutions and (2) the development and maintenance of
a set of syntax standards for financial messages (Scott and Zachariadis, 2012). For
this reason, SWIFT does not eliminate the role of correspondent banks and other
institutions involved in the settlement process.
SWIFT’s messaging network is run from three data centers, located in the United
States, the Netherlands, and Switzerland.6 SWIFT uses undersea fiber-optic com-
munications cables to transmit financial data across countries (Sechrist, 2010). The
CLS Bank, which as we described earlier operates the largest multi-currency cash
settlement system, conducts millions of transactions and trades worth trillions of US
dollars a day on the same undersea cables. SWIFT’s data centers share information
in near real-time; in case of a failure in one of the data centers, the other centers are
able to handle the traffic of the whole network.
The other fundamental purpose of SWIFT has been the development of a set of
syntax standards that would facilitate financial transactions, overcoming the high
6
As we mentioned above, these three centers create two separate message-processing zones in Europe
and in North America.

19
processing costs and low reliability associated with Telex and easing information
transmission. New standards are continuously developed and replace older ones.
For example, ISO 9362, developed in 1994, defines a standard format for Business
Identifier Codes (BIC) to uniquely identify financial and non-financial institutions
worldwide; ISO 10383, developed in 2003, defines codes for exchanges and market
identification; ISO 13616, developed in 2003, defines the International Bank Account
Number (IBAN) to uniquely identify bank accounts worldwide; and ISO 20022, de-
veloped by updating earlier standards in 2004 and 2007, defines a universal mes-
sage scheme for electronic data interchanges between financial institutions, including
payments, credit and debit card transactions, and securities trading and settlement.
These formats are currently the main standards used in financial transactions.
SWIFT’s standardization of financial messages has become the most influential
and widely-used in the financial industry. Indeed, the International Organization
for Standardization (ISO) appointed SWIFT as the Registration Authority (that
is, the entity responsible for defining and maintaining the rules) for several ISO
standards. Currently, there are nine broad categories of SWIFT messages, ranging
from funds transfers to foreign exchange transactions.7 Table A1 in the appendix
shows a fictitious example of transaction involving one of SWIFT’s most common
messages, the MT103 funds transfer message.
7
These categories are; Customer payments and cheques (MT1XX), Financial institution transfers
(MT2XX), Treasury markets - Foreign exchange and derivatives (MT3XX), Collection and cash
letters (MT4XX), Securities Markets (MT5XX), Treasury markets - Precious metals and syndica-
tions (MT6XX), Documentary credits and guarantees (MT7XX), Traveller’s cheques (MT8XX),
and Cash management and customer status (MT9XX).

20
Fig. 3. The role of SWIFT in cross-border payments
Source: Authors’ construction. This figure replicates Panel B of Figure 2 highlighting the role of
the SWIFT network in facilitating cross-border payments.

Although SWIFT shareholders can only be banks, broker-dealers, and investment

management institutions, the network can be used by a much broader set of institu-
tions, including any supervised financial institution, international or intergovernmen-
tal bodies involved in finance and payments, non-supervised financial institutions,
corporations, financial market regulators, payment systems, and security-market in-
frastructures.8
As Figure 4 shows usage of the SWIFT network has grown steadily: in 2020,
more than 11,000 institutions, located in more than 200 countries, were connected
to SWIFT. In 2020, more than 9.5 billion messages were sent through the network,
with an average daily volume of 37.7 million messages. Roughly 49 percent of this
traffic was for securities trading and 45 percent for payments. The share of messages
regarding securities trading has steadily been increasing over time, going from 40
percent in 2007 to almost 50 percent in 2020. Twenty-seven percent of the traffic
originated in the Americas, 59 percent in the region comprising Europe, the Middle
8
For detailed user and shareholder eligibility criteria see: [Link] The
expansion of the eligibility criteria to use SWIFT started in the late 1980s. Today shareholders
represent only roughly one fourth of users.

21
East, and Africa, and the rest in the Asia-Pacific region (SWIFT, 2020). At the end
of 2020, 39 percent of total payment value was sent in US dollars and 37 percent in
euros; in terms of trade finance, the US dollar represented 86 percent of the value
of SWIFT traffic, whereas the euro represented only 7 percent, with the Chinese
renminbi amounting to 2 percent of the total value (SWIFT, 2021).

Fig. 4. Number of Institutions Connected to SWIFT and Number of

SWIFT Messages
Source: authors’ calculations using data from Scott and Zachariadis (2014) and from SWIFT Annual
Reviews from 2007 to 2021. The black line reports the number of institutions connected to SWIFT;
the blue line reports the number of SWIFT messages (right axis).

Because SWIFT is not a payment or settlement system, the National Bank of

Belgium does not regulate it as such. Since the late 1990s, however, it has been
subject to the oversight of the Belgian central bank, together with the other central
banks of the Group of Ten (G-10) countries and the European Central Bank, as a
critical service provider. The oversight primarily focuses on the systemic risks related

22
to the confidentiality, integrity, and availability of the SWIFT network. In 2012, the
SWIFT Oversight Forum, including an additional 15 central banks, was set up to
increase information sharing on oversight activities. Because of the complexity of
the SWIFT regulatory regime, the impact of central banks’ oversight mainly occurs
through cooperation and moral suasion.
Over the years, SWIFT has completely displaced the systems that were previously
used for communicating across financial institutions and across borders; indeed, most
countries have discontinued their Telex communications services in the last decade or
so. In a nutshell, SWIFT has become a critical institution for international payments
without any major competitors.

The Role of SWIFT in the Implementation of Financial Sanctions

SWIFT has two key roles: allowing SWIFT participants to exchange information
through the SWIFT network and setting standards for messaging. International
sanctions involving SWIFT prevent sanctioned entities from accessing the SWIFT
network; as we discuss below, since SWIFT standards are public, sanctions cannot
prevent countries from developing parallel systems that employ SWIFT standards.
Furthermore, because SWIFT is a cooperative, its mission is to act in the interest
of its entire member community. As such, SWIFT typically tries not to make policy
decisions that exclude users or restrict their access to the platform. Decisions to
impose sanctions belong to the governments of countries, and governments around
the world may (and do) impose very different sets of sanctions. As it is incorporated
under Belgian law, SWIFT must comply with Belgian and EU laws and follow the
sanction regimes under those jurisdictions.9
9
This is explained at the SWIFT website at [Link]
0/swift-and-sanctions.

23
 On some occasions, SWIFT has resisted political pressure to disconnect a country
from its messaging system. For instance, in 2004, SWIFT resisted the call from
human rights groups to remove Myanmar from its network even after the United
States and the European Union had imposed sanctions on the country. In 2014,
SWIFT resisted pressure from pro-Palestinian groups to disconnect Israeli financial
institutions. With these actions, SWIFT reaffirmed its commitment to function as
a neutral financial service provider.
However, in February 2012, the United States passed the Iran Sanctions, Ac-
countability, and Human Rights Act of 2012, authorizing the US president to impose
sanctions on persons or institutions that provided financial messaging services to
designated Iranian financial institution, including SWIFT. As a response to the US
legislation, SWIFT announced the decision to discontinue access to designated Ira-
nian financial institutions as soon as it had clarity from the European Union. On
March 15, 2012, the European Union passed EU Regulation 267/2012 forbidding
SWIFT from providing financial messaging services to some EU-sanctioned Iranian
banks, including Iran’s central bank. SWIFT complied with this regulation and
disconnected the EU-sanctioned Iranian banks from its system.
The imposition of a financial sanction via SWIFT can happen without any leg-
islative action from Belgium or the EU. In 2017, Belgium decided it would no longer
allow SWIFT to provide services to certain UN-sanctioned North Korean banks, and
SWIFT removed these institutions. The following week, SWIFT disconnected the
remaining North Korean banks, without being required to do so by either Belgian
or EU law. Although SWIFT offered an explanation for this follow-up decision by
saying that the remaining banks had failed to meet its operating criteria, it did not
explain what exactly the banks did that justified the suspension.
Similarly, SWIFT may decide to follow the directives of a country even if it is not
required to do so by Belgian and EU law. In 2016, Iranian banks were reconnected to

24
SWIFT following the Joint Comprehensive Plan of Action also known as the Iran
nuclear deal of 2015 agreed to by Iran, the United States, China, France, Russia,
the United Kingdom, Germany, and the European Union. When the United States
withdrew from the deal in 2018, it gave SWIFT a six-month period to disconnect
the re-sanctioned Iranian institutions, or face US sanctions. Since the EU had not
withdrawn from the treaty, EU regulation did not force SWIFT to disconnect the
Iranian financial institutions re-sanctioned by the US. After the six-month period
ended, however, SWIFT decided to disconnect the Iranian banks from its system “in
the interest of the stability and integrity of the wider global financial system.” US
sanctions on SWIFT would have imposed a significant impact on the global economy,
given the centrality of SWIFT to the global payments system.
In 2014, following Russia’s annexation of the Crimea region of Ukraine, the United
States, the European Union, and Canada introduced targeted sanctions against Rus-
sian individuals and entities, mainly travel restrictions, asset freezes, and restrictions
on debt and equity financing. On September 18 2014, the European Parliament also
passed a non-binding resolution (EU Resolution 2014/2841), urging EU members to
exclude Russia from the SWIFT system; SWIFT objected to the resolution, reiter-
ating its commitment to neutrality.
In February 2022, following Russia’s invasion of other areas of Ukraine, Canada,
the European Union, Japan, the United Kingdom, and the United States agreed to
remove some Russian (and Belarusian) banks from SWIFT, and the European Union
accordingly issued EU Council Regulations 2022/345 and 398. SWIFT complied with
the new EU regulation and, on March 12, 2022, it disconnected seven Russian and
three Belarusian banks and their subsidiaries from its network. Three more Russian
banks, one more Belarusian bank, and their subsidiaries were disconnected in June
2022.

25
The Emergence of SWIFT Competitors

The use of the SWIFT system as a tool for financial sanctions by the European
Union, the United Kingdom, Canada, and the United States has encouraged other
large countries around the world to consider building systems of their own. None
of these alternatives has yet been especially successful, but their short-run goal may
just be to set up a backup system both to gain expertise in the underlying technology
involved and in case their access to SWIFT is threatened in the future.
In 2014, following the political pressures to disconnect Russia from SWIFT, Rus-
sia developed its own financial messaging system, SPFS (System for Transfer of
Financial Messages). SPFS can transmit messages in the SWIFT format, and more
broadly messages based on the ISO 20022 standard, as well as free-format messages.
More than 400 banks have already connected to SPFS, most of them Russian or
from former Soviet Republics. A few banks from Germany, Switzerland, France,
Japan, Sweden, Turkey, and Cuba are also connected. By April 2022, the number of
countries with financial institutions using SPFS had grown from 12 to 52, at which
point the Central Bank of Russia decided not to publish the names of SPFS users.
Due to its limited scale, SPFS mainly processes financial messages within Russia; in
2021, roughly 20 percent percent of all Russian domestic transfers were done through
SPFS, with the Russian central bank aiming to increase this share to 30 percent by
2023 (Shagina, 2021).
In 2019, following Iran’s loss of access to SWIFT caused by the US threat of
sanctions, France, Germany, and the United Kingdom developed the Instrument in
Support of Trade Exchanges (INSTEX), a special-purpose vehicle with the mission
of facilitating non-SWIFT transactions with Iran. INSTEX was joined by other
EU nations and made available to all member states. Although its use is limited
to humanitarian purposes, it provides an example of countries setting up a parallel

26
system to SWIFT to side-step the threat of sanctions by another country. Note that
INSTEX is not a pure messaging system, but rather a clearing house that allows
payments between Europe and Iran; payments are netted within the system and
direct payments between Iran and the EU happen only if there are import-export
imbalances. Although the system is operational, it has been largely unused since
its setup. Indeed, the first INSTEX transaction did not happen until March 2020,
covering the import of medical equipment to combat the COVID-19 outbreak in Iran.
Sometimes a country decides to set up a parallel system to SWIFT for purposes
that reach beyond immediate concerns over sanctions. In 2015, the People’s Bank
of China launched the Chinese Cross-Border Interbank Payment System (CIPS)
with the purpose of supporting the use of the renminbi in international trade and
international financial markets. In contrast to SWIFT, but similar to INSTEX,
CIPS is not only a messaging system but also offers payment clearing and settlement
services for cross-border payments in renminbi. It started with 19 direct participants
and 176 indirect participants from 50 countries; at the end January 2022, there were
1,280 participants from 103 countries. Among the direct participants, eleven are
foreign banks, including large banks from the United States and other developed
countries. The system is overseen and backed by People’s Bank of China. Similarly
to Russia’s SPFS, CIPS uses the SWIFT industry standard for syntax in financial
messages. Indirect participants can obtain services provided by CIPS through direct
participants. In 2021, CIPS processed millions of transactions for a total value of
around 80 trillion yuan ($12.7 trillion).
Several Russian banks are connected to China’s CIPS as indirect participants,
which facilitates Russia’s business in renminbi, whereas only one Chinese bank is
connected to Russia’s SPFS. The presence of SPFS and CIPS allows participant
institutions to interact with Russian banks, even if these banks are disconnected
from SWIFT. However, although CIPS has more participants than SPFS, its overall

27
usage is not comparable to that of SWIFT; the CIPS payment volume is about 0.3
percent of the size of SWIFT. Most of China’s CIPS transactions still actually use
the SWIFT network, as many firms do not have access to a separate CIPS terminal
(Yeung and Goh, 2022). Therefore, it may be hard for CIPS to become a viable
substitute to the SWIFT network in the near future.
Finally, since 2001, India has developed its own secure messaging network for
financial transactions, the Structured Financial Messaging System (SFMS), which
allows inter- and intra-bank messaging within India. Similarly to China’s CIPS and
Russia’s SPFS, SFMS supports the ISO 20022 standard and is therefore compatible
with SWIFT. A fundamental difference is that SFMS is a purely domestic messaging
system. As a result, India does not bypass SWIFT for international transactions. In
October 2019, Russian, Chinese, and Indian news media reported that these countries
plan to link their respective systems together (Wong and Nelson, 2021), but the
extent to which this has actually happened is not clear.

The Bottom Line

Financial sanctions have often been used in international relationships, espe-

cially by Western countries, with their importance increasing over the recent decades.
Sanctions that restrict access to the institutions and infrastructure supporting in-
ternational payments, such as the SWIFT network, are particularly disruptive. Any
kind of cross-border economic activity, be it financial or real, requires access to the
international payment system. Recently, some countries have invested in creating
alternative systems to allow cross-border payments without relying on institutions
based in the West. While currently limited in scope, over time these alternative sys-
tems could meaningfully reduce the effectiveness of restricting access to the existing
infrastructure of cross-border payments based in the West.

28
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Appendix

Table A1 shows a fictitious example of transaction involving one of SWIFT’s most

common messages, the MT103 message: Single Customer Credit Transfer, a type of
message to convey a funds transfer instruction. When a bank sends a payment
message, they include values of relevant details to each SWIFT field. Each field
is associated with a Field Name which provides a brief description for the field’s
purpose. There are rules for each SWIFT field regarding content and format. For
example, field 33A is a mandatory field specifying the value date, currency, and
settled amount at the interbank level. Entries to this field must conform to the
(YYMMDD)(Currency)(Amount) format.

Table A1. Fictitious example of SWIFT payment message with explana-

tion of different fields.
The Sender Bank is notifying the Receiver Bank of a funds transfer on behalf of the Sender’s client,
Robert Lewis, to be delivered to the Receiver’s client, Evergreen SARL.

32