By Alexandre Kech, chief executive at GLEIF.
With criminals flourishing in the shadows of the global economy, shining a light on the legal entities involved in cross-border transactions is a foundational requirement to restore trust. For even the smallest organisations, this represents a compelling opportunity to make transparency a strategic priority and combat risk by advancing the identifiability of legal entities across global marketplaces.
The scale, sophistication and impact of corporate fraud have reached unprecedented levels worldwide.
Interpol’s 2024 Global Financial Fraud Assessment reports that “financial fraud has increased and diversified significantly [and] represents a pervasive, global threat”. Even more sobering is the expectation that the “magnitude of financial fraud [will] grow in tandem with technological advancements and the expansion of virtual services across the globe.” With Nasdaq estimating that at least US$3.1 trillion in illicit funds flowed through the global financial system in 2023, even the most diligent organisations find themselves impacted.
The potential pitfalls are many: Organisations may invest in a sham operation, inadvertently inherit hidden criminality during a merger or acquisition, or unknowingly use a supplier that flouts labour or environmental protections.
Putting aside the cost and impact of the actual fraud itself, organisations must contend with growing compliance burdens and the threat of financial penalties—along with reputational damage—should any regulatory missteps be identified. There are also untold opportunity costs as organisations swerve sound investments, deals and suppliers that appear too risky or shady on the surface.
More profoundly, high fraud levels erode the trust between counterparty organisations—particularly across borders and jurisdictions—which stymies innovation and impedes the economic growth societies need to prosper.
The root cause of these issues stems from a fundamental lack of transparency and identifiability across the global marketplace. A report from PWC, for example, found that it is “very common” for even multi-billion-dollar, publicly traded companies to have incomplete information about their suppliers. The impact of this opacity ripples through all levels of the global business community, evidenced by shortfalls in risk management, operational efficiency between counterparties and, importantly, also in regulatory supervision.
Given this increasing need for global transparency and identifiability, there is growing industry momentum for the use of the Legal Entity Identifier (LEI) and its digital counterpart, the verifiable LEI (vLEI), in cross-border ecosystems.
All legal entities can obtain a LEI—a unique, globally standardised code that enables anyone, anywhere in the world, to trust that the bearer is who they claim to be. The result is the unprecedented availability of verified corporate identities, including detailed information relative to the ownership structures and subsidiary relationships of legal entities everywhere. This open availability helps all stakeholders to “connect the dots” and ensure the accurate and consistent identification of the legal entities across the full lifecycle of counterparty transactions in all their forms, encompassing payments, supply chain relationships, and environment, social and governance (ESG) obligations.
Yet gaps in identifiability still linger. If entities within a corporate structure are not reported or become outdated, for example, the capacity to assess risk and identify criminality is, at best, delayed. At worst, it is inhibited.
Happily, the job of plugging these gaps is neither cost, time nor resource-intensive. It does, however, require commitment. The reality of the fight against financial crime is that it requires every business to demonstrate transparency. This starts with firms making trust a priority by ensuring their corporate identity data is not only easily available, but also accurate, current and complete.
In exchange, each organisation is then empowered with the identity credentials needed to access the investment, trade finance, and supply chain relationships that permit their full participation in the global, digital economy—safe in the knowledge that their operations and reputation are underpinned by a proven, globally recognised foundation of trust.
Promoting transparency with the Policy Conformity Flag
In recognition of this opportunity, the Regulatory Oversight Committee (ROC) and GLEIF have reaffirmed their strong and continued commitment to encouraging LEI renewals and promoting current, complete reporting by legal entities of open, standardised, and high-quality legal entity reference data.
The Policy Conformity Flag was launched to provide global data users with a simple and clear visual sign indicating whether an individual LEI record is up-to-date and complete with relationship reporting. Possessing an LEI adorned with a “conforming” status delivers various benefits to both individual organisations and the wider ecosystem.
An organisation with a conforming LEI strongly signals that it is reliable, trustworthy and fully committed to transparency. From a practical standpoint, this makes doing business easier by demonstrating to counterparty organisations that its LEI can be used to automate and streamline due diligence checks, onboarding and myriad other business processes.
Increased accuracy and completeness in data reporting also means interconnections between legal entities can be detected and critical data sets more efficiently shared and matched. Only on this bedrock of high-quality data can today’s advanced analytics accurately identify hidden market risks and reveal the complex criminal networks used to obfuscate and perpetuate fraud.
It also provides a simple and elegant way for legal entities everywhere to ensure technical compliance with more than 200 regulations worldwide that reference the LEI.
Collectively, these benefits promise to significantly bolster trust and transparency across the global marketplace. Each time the LEI is utilised in a new business identification use case, the value delivered to all ecosystem participants compounds, and the world moves another step closer to achieving the universal visibility and traceability needed to eliminate corporate criminality.
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