Sanctions 101: How banks can navigate SWIFT and export bans

By Terry Monteith

The agreement among the U.S., United Kingdom and European Union to delist certain Russian banks from the Society for Worldwide Interbank Financial Telecommunication was seen as part of a broader response strategy shortly after Russian forces began the invasion of Ukraine. Based in Belgium, SWIFT connects more than 11,000 financial institutions operating in more than 200 countries and is averaging more than 45 million messages a day in 2022—including orders and confirmations for payments, trades, and currency exchanges.

The implemented sanctions effectively ban Russian financial institutions from taking part in global financial transactions. In an interview with NPR in January, Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University, described cutting the country from SWIFT as a “nuclear option” that could have wide-ranging effects. Just before the delisting, French finance minister Bruno Le Maire echoed that sentiment, describing the measure as a “financial nuclear weapon.”

The White House issued a statement saying, in part: “We commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”

The keyword there is “selected,” as the list is limited to seven banks (Bank Otkritie, Novikombank, Promsvyazbank, or PSB, Bank Rossiya, Sovcombank, Vnesheconombank, or VEB, and VTB Bank). Notably absent are Sberbank and Gazprombank, two of Russia’s largest banks by assets. The selective ban primarily boils down to Europe’s reliance on Russian energy and the concern that a total ban may create catastrophic upheaval in the global energy markets.

Russia was one of the biggest SWIFT users before the partial ban, with more than 300 Russian banks using the system as the primary method of domestic and international bank communication. Removal from SWIFT means Russian banks cannot make or receive payments from foreign financial institutions anywhere in the world. Normal banking is no longer a possibility at a fundamental level for these institutions.

What do these latest regulatory moves mean for banks and payments processors on a global scale, and how can technology support compliance efforts? Determining the long-term impact is complicated.

Are there viable workaround methods for Russia?

Russia may move to its alternative financial communications network, the System for Transfer of Financial Messages, created after the country’s forces annexed Crimea in 2014 and was previously threatened with being disconnected from the SWIFT system, or China’s Cross-Border Moscow Interbank Payment System. Even if Russia does take either route, financial experts say they are inadequate, and not true one-to-one alternatives.

SPFS includes only 400 participant banks from 23 countries—including Turkey, Uzbekistan, and Kazakhstan—operates during weekday working hours only and includes size limitations to its messages making it unable to handle complex transactions. China may be the second-largest economy in the world, but CIPS only settles payments in the Chinese yuan and partly relies on the SWIFT network for its operations, meaning transactions would still potentially be a breach of the partial SWIFT ban.

Russians are crypto-savvy, so they could follow the lead of other nations like Iran and North Korea by using crypto or digital assets to potentially bypass the sanctions without the need to abide by strict know-your-customer rules. But the balance between cryptocurrency activity on the blockchain and transactions processed by traditional financial institutions is incredibly uneven. There isn’t enough viable liquidity to support Russia in this way.

Oversight and monitoring activity ensure digital banking institutions would not help Russia or else face similarly negative consequences. Any surge in transactions on any of these routes would likely attract the attention of international regulators to their detriment as well.

How banks can help businesses

With so much uncertainty surrounding the international conflict, businesses must have proper processes and tools in place to successfully navigate evolving developments and remain compliant. Whether it’s revamping internal company protocols or external communications with merchants, financial institutions will need to embrace innovation to tackle these constantly changing developments.

At the very least, companies should be working with payment providers who are blocking sanctioned banks and regions and should seek compliance guidance to block transactions if they were transacting in sanctioned regions. Visa, Mastercard, and American Express have taken action, suspending operations and blocking transactions from Russian and foreign bank-issued cards making purchases inside and outside of Russia. The latter company also suspended its Belarus operations.

While there is not a full embargo on trade into Russia, businesses based in the U.S., EU, and U.K. should be aware of specific sanctions by product type, targeted at products with advanced technologies. Specifically, new export control restrictions are in effect.

The Department of Commerce Bureau of Industry and Security has listed items in its export administration regulations that require a license to be exported to Russia unless an exception or special provision applies. Items run the gamut to include electronics, telecommunications components, information security, sensors and lasers, navigation and avionics accessories, aerospace and propulsion systems, and more. The European Union Council and the U.K. also issued their specific licensee regulations.

The idea behind these export bans is to deny Russia’s ability to import advanced technologies in the defense, aviation, and maritime sectors. Over time, this secondary tactical move will have a significant economic impact on the Russian economy and military capabilities.

How can global payment networks and banks use technology to adapt?

Global banks should have experience with sanctions, and with the right technology partners, sanctioned banks or regions will be automatically blocked for customers for whom payments are provided. Compliance teams and risk officers should have already been proactively brainstorming about potential exposure to Russian financial entanglements, and what could be done to protect their company.

Businesses at this time should be sure their providers have flexible and robust transaction and AML compliance monitoring, sanctions lists and politically exposed person screening in place. Fine-tune rules and activity patterns, and leverage partnerships with industry-wide visibility to understand up-to-the-moment best practices. This will be very important with the frequent changes and prioritizing best practices that need to be implemented immediately.

With conflict continuing, Moscow may likely seek alternatives while having already prepared for extended sanctions. “Take a step back with your teams and embed the idea that this isn’t business as usual,” said counterterrorism finance expert Juan Zarate at the ABA’s Washington Summit, further explaining that the sanctions are a rapid and aggressive response that are unprecedented in scope and impact and “aren’t going to roll back the tanks, but they can change the [Putin] regime’s calculus in terms of next steps.”

Terry Monteith is SVP for acquiring and risk at BlueSnap.