The global financial network provides a loophole for Tehran.

Jan 31, 2012
WSJ

Efforts to impose tough sanctions on Iran have gathered momentum in the last month, first with bipartisan legislation in the U.S. that targets Iran’s central bank, then with the European Union’s embargo (joined by signs of import reductions from Japan and South Korea) on Iranian oil. But there are always loopholes. The art of making sanctions effective consists in knowing how to close them.

Consider the case of the Society for Worldwide Interbank Financial Telecommunications, better known as Swift. The Belgium-based, member-owned cooperative provides a secure network to exchange financial messages and transactional data to over 10,000 financial institutions throughout the world.

That makes Swift one of the most critical access cards Iran still holds to the global financial system. Swift’s annual report notes that 19 Iranian banks and 25 Iranian institutions use Swift, and that in 2010 they “sent 1,160,000 messages and received 1,105,000 messages.” Primary Iranian users of Swift’s services include Banks Mellat, Sepah, Saderat, Post and Iran’s central bank—all of them designated by the U.S. Treasury as affiliates of Iran’s Revolutionary Guards Corps, involved in aiding Iran’s nuclear programs, or sponsoring terrorism.

Swift is also Iran’s gateway to a financial clearing mechanism (known as TARGET 2 and equivalent to the FedWire in the U.S.), through which it conducts much of its $35 billion in trade with Europe. Swift “offers more than mere technical assistance,” says Mark Dubowitz of the Foundation for Defense of Democracies, which has done most of the spadework on the issue. “They provide the prerequisite codes that allow you to process a transaction.” Without Swift, much of that $35 billion in trade couldn’t happen.

If Swift were an ordinary financial institution, sanctions would likely have already put an end to the services it provides Iran. But Swift insists its activities fall beyond the remit of current law. A Swift spokeswoman says its system “is only a secure messaging service,” and that “all decisions on the legitimacy of financial transactions under applicable regulations, such as sanctions regulations, rest with financial institutions and the competent international and national authorities.”

That may be true in a narrow sense, though we have our doubts. European law governing sanctions includes in its definition of a proscribed fund “documents showing evidence of an interest in funds or financial resources,” which is the kind of documentation Swift provides. The European Central Bank has its own guidelines governing access to TARGET 2, which also give it the authority to bar Revolutionary Guard banks.

Under its own bylaws, Swift has the authority to expel any user of its products who “has adversely affected, or may adversely affect . . . SWIFT’s reputation, brand, or goodwill, for instance if the prospective or existing user is subject to sanctions.” If Swift’s Board of Directors—including Chairman Yawar Shah of Citi and Deputy Chairman Stephan Zimmermann of UBS—think Revolutionary Guard-connected institutions don’t adversely affect Swift’s reputation, they should say so on the record.

Illinois Republican Mark Kirk had written an amendment on Swift to offer the Senate Banking Committee before his recent stroke, and it deserves to become part of the broader Iran sanctions bill due out this week. The amendment imposes sanctions on foreign financial institutions that employ “a member of the board of directors of an entity that. . . provides services relating to secure communications, electronic funds transfers, or cable transfers” that do business with designated Iranian banks.

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