An alternative to the SWIFT payment system should be developed in India to ensure the privacy of Indian citizens and to give a boost to the domestic economy, the Joint Parliamentary Committee on the Personal Data Protection Bill recommended in its report tabled in Parliament on December 16.
The Committee made this recommendation after it received feedback from stakeholders that there are possible chances of breach of privacy in the SWIFT system.
In making its recommendation, the Committee noted:
“The Committee observe that data protection in the financial sector is a matter of genuine concern worldwide, particularly when through the SWIFT network, privacy has been compromised widely. Indian citizens are engaged in huge cross border payments using the same network. […] The Committee, therefore strongly recommend that an alternative indigenous financial system should be developed on the lines of similar systems elsewhere such as Ripple (USA), INSTEX (EU), etc. which would not only ensure privacy but also give a boost to the digital economy.”
The Committee, however, did not elaborate on how such an alternative will replace the functions of SWIFT, which is a global standard used by over 200 countries, or how it will benefit Indian economy.
What are the problems with SWIFT?
1. US control over the network: One of the reasons the Committee believed that SWIFT might compromise the privacy of Indian citizens is because of the control the US might have over the network.
- Terrorist Finance Tracking Program: A memorandum received by the Committee stated:
“A series of articles published on 23 June 2006 in The New York Times, The Wall Street Journal and the Los Angeles Times revealed a program, named the Terrorist Finance Tracking Program, which the US Treasury Department, Central Intelligence Agency (CIA), and other United States governmental agencies initiated after the 11 September attacks to gain access to the SWIFT transaction database. After the publication of these articles, SWIFT quickly came under pressure for compromising the privacy of its customers by allowing governments to gain access to sensitive personal information. In September 2006, the Belgian government declared that these SWIFT dealings with American governmental authorities were a breach of Belgian and European privacy laws.”
- NSA monitoring: In 2013, based on documents exposed by whistleblower Edward Snowden, Der Spiegel reported that US’s National Security Agency (NSA) was tracking international payments using SWIFT and Visa.
“SWIFT was named as a “target,” according to the documents, which also show that the NSA spied on the organization on several levels, involving, among others, the agency’s “tailored access operations” division. One of the ways the agency accessed the data included reading “SWIFT printer traffic from numerous banks,” the documents show.” – Der Spiegel
2. Efficiency: SWIFT has been criticised for being inefficient. According to a 2018 Financial Times report: “Often transfers via Swift pass through multiple banks before reaching their final destination, making them time-consuming, costly and lacking transparency on how much money will arrive at the other end.” While SWIFT has tried to address these concerns by coming up with newer technologies such as the Global Payments Innovation, not all banks and countries are on board this service.
3. Hacks: The SWIFT network has been subject to multiple hacks. In 2016, hackers stole $81 million from Bangladesh central bank by exploiting vulnerabilities in the systems of members banks and sending SWIFT payment instructions that directed funds to the accounts controlled by the hackers. Following this incident, SWIFT strengthened its cybersecurity practices and audits of members banks. Nevertheless, in 2018, India’s City Union Bank was subject to a hack, which involved attackers transferring $2 million to overseas accounts using SWIFT through three transactions, out of which two were blocked by recipient banks.
4. Blockchain-based technologies: One of the biggest challengers to SWIFT is US-based Ripple, which the Joint Parliamentary Committee cited in its recommendation. Ripple is promising faster and cheaper cross-border transfers using blockchain technology and has onboarded over 100 banks across 50 countries.
5. Weapon in sanctions: SWIFT is a powerful tool used in sanctions. For example, in 2012, the US and EU forced SWIFT to cut off all Iranian banks from its network. Most of these banks were reconnected in 2016 following the lift of sanctions, but there were renewed calls to block Iranian accounts in 2018. More recently, Western Allies, the EU, Britain and US, are exploring options to cut-off Russia from SWIFT if it invades Ukraine. UK and US in 2014 also tried to block Russia from the network as a punishment for the country’s intervention in Crimea, but SWIFT refused to do so. Russia then created a backup network called SPFS.
What is SWIFT and how does it work?
Founded nearly 50 years ago, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgian-based cooperative society owned by thousands of member banks that serves as an intermediary of financial transactions between banks worldwide. The company connects more than 11,000 banks in over 200 countries to process over 35 million transactions per day.
SWIFT does not directly facilitate funds transfer in the form of clearing and settlement. The way SWIFT works is that if you are sending a payment using your Indian bank account to a US bank account, the Indian bank will debit the money from your account and send a secure message with the transaction details to the US bank. The US bank receives the money from the Indian bank’s Nostro/Vostro account held with the US bank and transfers the money to the recipient bank account. This process can get more complicated and involve more intermediaries if, for example, your bank does not have a Nostro/Vostro account with the recipient bank and has to rely on another bank that does.
Apart from transmitting messages between banks, SWIFT is also known for setting syntax standards for financial messages. Messages using these standards can be processed by financial processing systems even if they are not sent over the SWIFT network. SWIFT also provides services and software that allow banks to participate in the SWIFT network.
Also Read:
- SWIFT Network Has Picked Six Banks To Run Trials On Blockchains
- SWIFT Warns Banks Of More Digital Heists
- A Complete Guide To The Data Protection Bill, 2021
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