October 10, 2018 | Memo
SWIFT Sanctions: Frequently Asked Questions
October 10, 2018 | Memo
SWIFT Sanctions: Frequently Asked Questions
In 2012, Congress adopted legislation authorizing the president to impose sanctions on persons that provide financial messaging services to the Central Bank of Iran (CBI) or any other designated Iranian financial institution. 1 This legislation led to the disconnection of the CBI and other Iranian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial messaging service – widely seen as one of the most powerful sanctions imposed on Iran prior to the 2015 nuclear deal formally known as the Joint Comprehensive Plan of Action (JCPOA). 2 Iranian banks, however, were reconnected to SWIFT pursuant to the sanctions relief provided under the JCPOA. 3
On May 8, 2018, following President Trump’s announced withdrawal from the Iran nuclear deal, the Department of the Treasury warned that sanctions would be imposed on “specialized financial messaging services” like SWIFT unless they disconnected the CBI and all other re-designated Iranian banks by November 4, 2018. 4 As that deadline approaches, European diplomats desperate to save the JCPOA and undermine the Trump administration’s maximum pressure campaign are reportedly stepping up their efforts to deter the Treasury Department from acting. 5
This document is designed to help U.S. policymakers respond to frequently asked questions regarding SWIFT sanctions.
Frequently Asked Questions
1) Can a maximum pressure campaign on Iran succeed if designated Iranian financial institutions remain connected to SWIFT after November 4, 2018?
Failure to disconnect Iran from SWIFT will create major leakage in U.S. sanctions. The Obama and Trump Treasury Departments have emphasized that the entire country of Iran is a jurisdiction of primary money laundering concern pursuant to the USA PATRIOT Act. 6 The Islamic Republic will use whatever channels remain connected to the global financial system to continue its terror financing, money laundering, and illicit activities. Keeping Iran connected to SWIFT will also endanger the broader sanctions regime, including energy sanctions. European plans to use central banks or “special purpose vehicles” (SPVs) to process transactions with Iran rely heavily on SWIFT.
2) How significant was SWIFT’s sanctions pressure on Iran prior to the JCPOA?
Economic analysis of the pre-JCPOA sanctions regime and reports from the time are conclusive that disconnecting Iran from SWIFT was a crippling step that endangered Iran’s economy. In 2012, a European official told the New York Times, “It is a very efficient measure … It can seriously cripple the banking sector in Iran.” 7 Former Secretary of State Hillary Clinton called it “a very effective way of further isolating Iran and the Iranian flow of financial transactions.” 8 Former Treasury Secretary Tim Geithner said the combined impact of SWIFT and oil sanctions was “very, very significant” because it became “much, much harder for countries to pay for their oil from Iran and to pay for other financial activity with Iran.” 9 An international economics professor at the International Institute of Social Studies wrote that SWIFT sanctions on Iran made it “significantly harder to process international payments, while simultaneously constraining other bilateral economic flows.” 10 A researcher at the Hague Institute for Global Justice wrote that “the exclusion of Iran from the global financial system and SWIFT … forced Iranian companies to use the old system of hawala (money transfer), causing any transaction to become longer and more expensive.” 11
3) Would sanctions on SWIFT damage America’s ability to monitor illicit financing because SWIFT would scale back cooperation?
The Obama Treasury Department issued such warnings in January 2012 as part of a campaign to deter U.S. Senators from adopting sanctions on SWIFT in a Senate Banking Committee amendment. The Senators dismissed the argument, threatened sanctions on SWIFT, and forced SWIFT to disconnect the Central Bank of Iran and designated Iranian banks. 12 SWIFT did not scale back cooperation; all counterterrorism cooperation with SWIFT continued. Cooperation will continue this time, too, pursuant to the signed “Agreement between the United States and European Union on the Processing and Transfer of Financial Messaging Data from the European Union to the United States for the Purpose of the Terrorist Finance Tracking Program.” 13 The EU would be endangering its own citizens if it scaled back intelligence sharing, something German Chancellor Angela Merkel recently acknowledged when she threw cold water on a proposal to establish a SWIFT alternative to evade U.S. sanctions. 14
4) Would sanctions on SWIFT propel Europe to work with China and Russia to establish a SWIFT alternative where the U.S. has no transparency into terror finance, let alone Iranian sanctions evasion?
Treasury also advanced this argument in 2012 as part of a campaign against sanctions on SWIFT. 15 After Senators voted to pressure SWIFT, no credible alternative to SWIFT was ever established. It was not established because there is no such credible alternative. No legitimate bank is going to use an alternative service that is soaked in terror financing and has no access to the U.S. financial system. German Chancellor Angela Merkel also noted that the security benefits of maintaining the SWIFT system far outweigh any desire to retaliate against the U.S. for leaving the JCPOA. 16
5) Since America’s financial system depends on SWIFT, would sanctions on SWIFT endanger the U.S. financial system as well?
The SWIFT board of directors are individuals representing shareholder banks. Section 220 of the Iran Threat Reduction and Syria Human Rights Act is intentionally broad in authorizing the president to impose sanctions on financial messaging services like SWIFT. 17 The law allows the Treasury Department to impose financial sanctions on the banks represented on the board or on SWIFT officials, rather than targeting the cooperative itself. SWIFT operations would not be interrupted.
6) Unlike in 2012, the European Union now opposes U.S. sanctions on Iran, including those targeting SWIFT. How can SWIFT disconnect Iranian banks without an EU regulation ordering it do so?
In 2012, SWIFT looked to the European Union for political cover to disconnect Iranian banks but that was unnecessary. According to its Corporate Rules, “SWIFT reserves the right … to terminate the status of a SWIFT user in the event that … a SWIFT user demonstrates a conduct which is not in line with generally accepted business conduct principles.” 18 Undoubtedly, financing terrorism and proliferation demonstrate “conduct which is not in line with generally accepted business conduct principles.” By SWIFT’s own Corporate Rules, it has the right to suspend access for all designated Iranian banks.
7) Is there precedent for SWIFT disconnecting a country’s banks without a European Union order?
Yes. In March 2017, SWIFT announced that it would disconnect all remaining North Korean banks from its system. At the time, the banks were not subject to European Union sanctions and a European Commission spokesperson said, “This is a commercial matter for SWIFT. We do not interfere in the business decisions of any such company.” 19
8) Is there a concern that U.S. policymakers could overuse the threat of SWIFT sanctions?
Yes. SWIFT is a unique system. It is overseen by the central banks of the G-10 countries. Threatening to expel a country’s banks from SWIFT is one of the most serious financial sanctions possible. While threats posed by Iran and North Korea may rise to a threshold meriting expulsion from SWIFT as a tool to protect American and indeed global security, policymakers should be hesitant to use this tool as a response to fluid geopolitical crises.
Key Quotes on SWIFT Sanctions: 2012-2018
“We believe that using the SWIFT system is a very effective way of further isolating Iran and the Iranian flow of financial transactions.” – Hillary Clinton, then-Secretary of State, February 29, 2012. 20
“…it is a very important system because it is part of almost every international money transfer that occurs. So it could be a real problem for Iranian financial markets or financial institutions if they were banned from using [SWIFT], yes.” – Ben Bernanke, then-Federal Reserve Chairman, February 29, 2012. 21
“The combined effect of these latest sanctions, both to discourage countries from buying Iranian oil, or to encourage them to cut back significantly, and to make it much, much harder for countries to pay for their oil from Iran and to pay for other financial activity with Iran, the combined impact of those sanctions is very, very substantial.” – Tim Geithner, then-Secretary of Treasury, March 20, 2012. 22
“I think we do have to say a thank you to the European Union for the enormous action they have taken to intensify and follow the lead of the United States, but also what they were able to do with the SWIFT procedure that’s used to deal with financial banking has helped enormously as well.” – Wendy Sherman, then-Under Secretary of State, May 15, 2013. 23
“There’s a long list of sanctions, but another big element is Iran has basically been kicked out of the, what’s called the, SWIFT system, which is how you transfer money electronically. Literally … if Iran earns money overseas, it almost has to bring the cash back in suitcases. That’s what it’s come to. So it’s really hurting Iran.” – Tom Gjelten, NPR, November 22, 2013. 24
“[O]ur banking sanctions … have largely cut off the Iranian banking sector from the international financial system.” – David Cohen, then-Under Secretary of the Treasury, April 4, 2014. 25
“Many credit the Treasury’s assault on Iran’s financial system for its recent willingness to slow the development of its nuclear program in exchange for relief from sanctions. In particular, Iran was blocked in 2012 from the Swift network for international inter-bank payments after pressure was put on the institution by the EU and U.S. The effect of this and other measures was immediate. After inflation shot up, some estimate that in real terms private pay dropped by 35 to 40 percent. GDP fell 5.8 percent in 2012.” – Mark Malloch Brown, former UN Deputy Secretary General, and Harry Gibson, economist, December 22, 2014. 26
“Without SWIFT, there was nowhere to spend [the sanctions relief]. The Iranians have been complaining to us throughout the JPOA process that sanctions relief means little without the ability to bank.” – U.S. government official, April 2015. 27
“The SWIFT sanctions are more important at this point than any other type of sanctions because it affects all manner of industry and agriculture.” – Djavad Salehi-Isfahani, Iranian economist, April 6, 2015. 28
“With Iran re-connected to SWIFT, it will be poised to more easily move funds to terrorists’ coffers, foment conflict around the region, and possibly even procure equipment for a clandestine weapons program, should it choose to violate the nuclear deal.” – Jonathan Schanzer and Mark Dubowitz, Foundation for Defense of Democracies, July 17, 2015. 29
“One of the concerns we have had is the Administration did say when Congress put tougher sanctions in, moved forward particularly on the SWIFT notions, using the SWIFT system, there was great reluctance from the Administration about us taking that step. I think in retrospect taking that step was important and effective and helped tighten down the sanctions.” – Senator Mark Warner (D-VA), August 5, 2015. 30
“In light of the risks of doing business with Iran, the reintegration of Iranian banks into the global financial system, including via the SWIFT bank messaging system, presents perhaps the most concerning issue.” – Juan Zarate, former Deputy National Security Advisor and Chairman of the Financial Integrity Network, May 24, 2016. 31
“How can this enterprise justify facilitating the evil escapades of the world’s leading state sponsor of terror?” – John Bolton, National Security Advisor and former Ambassador to the United Nations, September 25, 2018. 32
“European governments might just be able to keep the Iran deal … on life support for a time. They plan to do this both through the SWIFT international banking system … Losing access to SWIFT again would severely hamstring Iran’s ability to trade.” – Michael Hirsh, Foreign Policy, September 25, 2018. 33
“Treasury — which has so far performed effectively in many other areas of sanctions enforcement — would risk undermining its own credibility if it established a different standard of compliance for SWIFT.” – Richard Goldberg, former National Security Advisor for U.S. Senator Mark Kirk, Foundation for Defense of Democracies, September 26, 2018. 34