Bypassing SWIFT messaging system

Cross-border payment settlement does not take place in currency notes. The settlement is made through clearing arrangements by counterpart banks abroad where resident banks maintain accounts in which inward receipts are credited. Outward payments are settled by debiting from the same accounts. Executed through a messaging system, the payments are settled simply by accounting entries - debit and credit.

Historically, the messaging system was initiated manually - by postal mail. Later, telephone exchange facilitated money transfer between two sides of the Atlantic in mid-90s of the 19th century. This is known as Telex (TT) system. In the last century, SWIFT (Society for Worldwide Interbank Financial Telecommunication) emerged as the best solution to the messaging system run by electronic means. Still today, it dominates interbank messaging networks.

With SWIFT messaging system, US dollar plays a dominating role in the global payment system. 

Currently, financial sanctions work as invisible war weapons. The sanctions are implemented by switching off the financial messaging networks. Russian invasion of Ukraine has unwittingly made innocent countries face problems in settlement of payments with Russian banks and business enterprises.  Imposition of sanctions has led to switching off the messaging system. A search for alternative modes of payment is on in order to bypass sanctions.

Russia is a trade partner of Bangladesh with a trade volume of around US$1.0 billion. Reportedly, Bangladesh trade with Russia and a few new destinations for exports is settled with third countries, especially through global trade hubs like Singapore, Hong Kong, Dubai, Zurich, etc. Such an arrangement suits the current situation. There are some alternative messaging systems for payment settlement - INSTEX, CIPS, SPFS, INSTEX, which facilitate legitimate trade between Europe and Iran. CIPS is a Chinese payment system to settle both domestic and international payments in RMB (Chinese currency). On the other hand, SPFS is a Russian payment system which is claimed to be a substitute for SWIFT. SPFS may be a settlement platform for its network partners, without covering international interbank transactions.

Bangladeshi banks are used to working within SWIFT network. Most of the external transactions are in US dollar, settlement of which is made through bank accounts maintained in major cities of Europe and the USA. Since accounts are maintained in these locations, resident banks are in their grips. Bangladeshi banks, according to insiders, are fearful of unknown challenges resulting from use of messaging networks other than SWIFT. The current situation does not appear to be suitable for using alternative messaging systems. Besides SWIFT, Bangladeshi banks use international card channels for settlement of travel and small-value payments, exchange houses for repatriation of wage income, and online payment gateway services and different mobile wallets for repatriation of service income from ITES, freelancing earnings. These networks are based in Europe and the USA.

Since earnings and payments of cross-border transactions of Bangladesh are in US dollar, China in its capacity for our inputs sourcing stations with billions of US dollars in amount can be an alternative settlement destination through RMB.

This option may be exercised provided our receipts, received through China in their currency, from problem-ridden countries could be used for making payments to China and relevant others as import payments. Despite this, we need to use US dollar for buying RMB for settling payments in deficit cases.

There are other options as observed in a neighbouring country. The options are to settle cross-border payments in non-convertible local currencies. Resident banks need to maintain accounts with counterpart banks in partner countries in their currencies and vice versa. Receipts of home country are to be deposited in accounts maintained with the host country. Payments of the host country are to be deposited in their accounts maintained with home country.

At the end, position is netted off. Imbalance like payable position needs to be settled otherwise through third countries. Another option available is counter trade. Under the system, authorisations need to be given to exporters, importers, or traders to enter into arrangements voluntarily with counterparts abroad for settlement of value of goods imported to home country (say Bangladesh) against value of goods exported from Bangladesh.

Foreign counterparts need to maintain escrow accounts in convertible currencies with banks in Bangladesh. Same accounts will also be maintained by Bangladesh parties abroad.

In case of imports into Bangladesh, the escrow accounts will be credited with equivalent convertible currencies against payments from importers in local currencies. The balances held in the accounts will be used to make payments to exporters shipping goods under counter-trade channel, and service charges to Bangladesh parties working as facilitators.

Proceeds against exports from Bangladesh will be deposited to escrow accounts maintained by Bangladeshi parties abroad.

Funds credited therein need to be utilised for settlement of payments against imports into Bangladesh and payments of service charges to counterparts abroad.

The counter trade arrangement needs to be monitored by banks maintaining escrow accounts for periodical settlement. The imbalance may be settled by making outward remittances to legitimate beneficiaries in a third country against underlying transactions through normal banking channel. Similarly, our receivables, if any, can be arranged from third countries by counterparts. Under the arrangements, banks just maintain records without executing real transactions. Only periodical settlement is executed.

Transactions are executed by exporters, importers or traders under counter-trade model, for which banks will be free from unseen risk.

 A little portion is transacted in local currency   through banking channel.

Thus exporters and traders can explore, with government help, various alternative options including counter trade for maintaining cross-border commerce and bypass financial sanctions.

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