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Primer on RU: Understanding SWIFT, Sanctions, and Correspondent Banking.

Luke Raven provides an accessible and clearly set out explanation of the issues surrounding the imposition and effect of financial sanctions.

I have seen a lot of coverage of SWIFT & Sanctions recently, thrown into the spotlight by Russia's invasion of Ukraine and the subsequent reactions of world governments. While there has been a lot of very technical conversation, as Einstein said, "if you can't explain it simply, you don't understand it well enough", and a lot of discourse so far seems to prove him right. I have seen SWIFT referred to as plumbing and a thermostat, Sanctions referred to in terms including "a financial WMD", and a crucial related concept called 'correspondent banking' referred to ... almost not at all. This gap in the literature makes discourse difficult, and for this reason, even though I am undoubtedly not the foremost expert on these areas, here is a 101 on the relevant concepts to help people understand what's going on and to set the baseline for further discussion.

First - why these things, are how are they related?

Most people don't actually understand how money moves around the world, including many in the banking and finance industry. I myself am probably among the "less but still somewhat informed" cohort. But these concepts all relate to the way in which that happens for the vast majority of money sent and received internationally.

Basically, when a customer asks their bank to send money to someone overseas, the bank won't be able to just 'magic' the funds into the recipients account - there will be a need for the bank who provides the account to give the beneficiary their funds.

So, how does this happen? Well, the information letting the bank know that there's a payment coming has to travel through a messaging system (which is where SWIFT comes into play), and the actual money needs to travel through one or many bank accounts along the way in order to ultimately arrive as well (according to established 'correspondent banking' arrangements).

This is already complex, but it gets worse. Unfortunately, criminals, terrorists, and even rogue nation states want to participate in the global financial system and send money overseas in order to launder money and conduct other illicit transactions. For this reason, powerful parties including world government departments (such as OFAC in the US & DFAT in Australia), intergovernmental organisations (like the UN Security Council), and supranational organisations (like the EU) may require banks not to allow money to flow to prohibited (or Sanctioned) people. In fact, Sanctions can make it illegal for the sender's bank to allow a transfer to the intended recipient because THEY themselves are prohibited, or because the recipient's BANK is prohibited, or because the COUNTRY they're in is prohibited, and it's even possible to Sanction a transaction dependent only on the underlying PURPOSE or INDUSTRY it relates to. If only there were a topical way to visualise this...

So banks need correspondent banking relationships in order to actually send money, a messaging system in order to ensure the money gets where it needs to go, and a way to ensure that they protect themselves (and the rest of us) from sending money to or from the 'bad guys'. Clear yet? ... No? Okay, read on.


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