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Understanding the Value of Global Identifiers in the Fight Against Financial Crime

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By Clare Rowley, Head of Business Operations, GLEIF.

Money laundering and terrorist financing create significant systemic risks in the global financial system. The intricate webs spun by fraudsters and criminals to evade detection crisscross national borders and legal jurisdictions, commonly exploiting multiple financial institutions and legal entities. In today’s instant digital economy, this is exposing financial institutions to spiralling costs and risk as they contend with both increasingly stringent anti-money laundering (AML) regulations and a variety of screening requirements against so-called ‘watch lists’ and international sanctions. These factors are contributing to a cross-border payments ecosystem hamstrung by high costs, low speed, and insufficient transparency.

Fragmentation compounds these challenges. The data used by financial institutions to detect and monitor suspicious financial flows are not standardized or readily consumable and shareable, which inhibits collaboration and drastically limits their capacity to expose complex, global criminal networks.

Harmonizing cross-border data flows to overcome these ongoing challenges is an increasingly urgent priority for financial industry stakeholders. In line with the G20-endorsed roadmap to enhance cross-border payments, the Financial Action Task Force (FATF) has identified data-sharing, data standardization, and advanced analytics as underpinning effective AML and counter-terrorist financing (CTF) initiatives across borders. More specifically, Project Aurora – an analysis by the Bank of International Settlements (BIS) Innovation Hub – identifies ‘data quality and standardization of the data identifiers and fields’ contained within the payment messages as important factors.

This has significant implications for the Legal Entity Identifier (LEI). As the only established universal entity identifier globally, it is uniquely positioned to play a foundational role in the fight against financial crime. When the LEI is added as a data attribute in payment messages, any originator or beneficiary legal entity can be precisely, instantly, and automatically identified across borders.

The Financial Stability Board (FSB) has endorsed the LEI to support the goals of the Roadmap for Enhancing Cross-Border Payments and has called for increased LEI references across payments. As part of this Roadmap’s prioritization plan, the FATF is also reviewing its recommendation 16. Considering this context, an upcoming review of FATF Recommendation 16 is an unmissable chance to leverage the LEI to promote trust and transparency within the cross-border payment ecosystem.

Understanding FATF Recommendation 16

The FATF Recommendations set out a comprehensive and consistent framework of measures that countries should implement to combat money laundering and terrorist financing, as well as the financing of the proliferation of weapons of mass destruction. Recommendation 16, often referred to as the ‘Travel Rule’, specifically aims to ensure that basic information on the originator and beneficiary of wire transfers is immediately available.

While the interpretative note to Recommendation 16 references name, address, and national identifiers as important data elements for inclusion within the transaction message, it does not currently reference the LEI.

This is a missed opportunity. Yes, national and local identifiers such as business codes play an important role within borders and legal jurisdictions, but they are, by their nature, inherently limited in their capacity to contend with the increased complexity and fragmentation associated with cross-border commerce. In this effort, they should be complemented using an additional weapon: a globally recognized identifier, like the LEI.

The opportunity for the LEI within FATF Recommendation 16

In this context, the LEI directly solves core challenges. By addressing inconsistencies in how entities are identified, connecting a greater range of datasets, and capturing entity relationships and ownership structures, the LEI can deliver increased transparency, improved risk management, and enhanced monitoring, reporting, and analytics to bolster efforts to tackle financial crime.

There are, for example, over 1,000 legal entity registration authorities worldwide, and the format of respective business registration numbers varies greatly across different countries and jurisdictions. This lack of standardization in how entities are identified makes it difficult to exchange and integrate data on a global scale.

For example, in Germany, there is currently no unique ID that can be used to link datasets from financial and non-financial sources. Consequently, records are linked in many cases using a method based on the name/legal seat and trade register number of the relevant entities. However, this method presents many problems, such as mistakes resulting from typos in the names/legal seats of the entities during the manual data entry procedure and the fact that the trade register number cannot play the role of a unique ID. The LEI overcomes these issues by providing a common language and structure to facilitate holistic analysis. It is also directly mapped to other useful identifiers such as the Business Identifier Code (BIC), Market Identifier Code (MIC), and OpenCorporates ID to provide a comprehensive view of a legal entity.

Furthermore, using the LEI as a unique identifier would guarantee that entities from different databases could be linked for the purpose of unambiguously identifying entities. France, for example, already has a unique national code (the SIREN code) but can still benefit from the LEI as a means of obtaining information on the direct and ultimate parent and as a unique identifier for entities from other countries.

In parallel, the core attributes of legal entities (such as directors, major shareholders, and ownership structures) are subject to frequent updates and changes that demand ongoing data updates. Yet depending on the jurisdiction, business registration data update cycles vary widely, often resulting in outdated information that undermines the entire system. This demands solutions that accommodate regular updates, and LEI data can be updated proactively whenever there are changes or as part of the annual renewal process. Data consumers can also easily track the changes and, if required, challenge outdated information.

Similarly, company mergers and acquisitions can create complex and fragmented company structures that often span multiple jurisdictions. The LEI provides a simple and transparent historical view of a legal entity, as well as enabling the monitoring of ongoing mergers and acquisitions.

Collectively, these benefits have various downstream impacts that mitigate the constraints of cross-border commerce to help tackle financial crime. Regulatory reporting and compliance / AML requirements can be streamlined with increased accuracy. Counterparty risk management and due diligence are improved as it is far easier to assess and verify the legitimacy of a legal entity involved in a transaction. And the oversight of complicated and opaque supply chains is greatly simplified, leaving fraudsters and criminals with fewer places to hide.

Given these clear benefits and as part of the planned review of Recommendation 16, GLEIF posits that where the originator or beneficiary is a legal entity, a trust, or any other organization that has legal capacity under national law, the LEI should be included within the information accompanying the qualifying wire transfer.

Regulatory momentum for the LEI

Such a move would also align with ongoing standardization initiatives and broader industry sentiment.

The Committee on Payments and Market Infrastructures’ (CPMI) ongoing consultation on harmonization requirements for the use of the ISO 20022 messaging standard is exploring ‘the use of a common single structured way to identify persons, entities and financial institutions involved in cross-border payments’. As part of this consultation, GLEIF has engaged extensively with industry stakeholders and contends that the identification of financial institutions should be performed with the LEI (in combination with the BIC), as the global nature of both identifiers makes them particularly effective for accurately identifying sanctioned entities. GLEIF also affirms that the LEI should be introduced as the identifier of the debtor/creditor in payment messages.

Indeed, the Project Aurora initiative highlights how the inclusion of the LEI in ISO 20022 payment messages, when combined with additional data fields available in the messages, could ‘help identify a greater range of money laundering activities involving legal entities.’

“Project Aurora demonstrates that data quality and standardization of data identifiers are important enablers for the data sharing and advanced analytics needed for effective AML/CFT efforts. Using the LEI for the identification of businesses involved in cross-border payments would significantly advance the ability to share information and overcome the inconsistencies in how entities are identified today in cross-border payments.” Beju Shah, Head of the BIS Innovation Nordic Centre

The European Union’s recent Markets in Crypto-Assets (MiCA) regulation also offers a compelling precedent. MiCA addresses Recommendation 16 by extending the scope of the existing EU Transfer of Funds Rule (TFR) – first adopted in 2015 and applicable to traditional transfers of funds – to include transfers of crypto-assets. Under the recast TFR, the Crypto-Asset Service Provider (CASP) of the originator must ensure that transfers of crypto assets are accompanied by various data points on the originator and beneficiary (for non-individuals). Importantly, this includes the current LEI or, in its absence, any other available equivalent official identifier.

The pace of industry momentum behind the use of the LEI in financial flows is a clear testament to its vast potential to strengthen the world’s defences against cross-border criminality. The more widely the LEI is utilized in this manner, the more value it will deliver to the world’s regulators, financial institutions, and law-abiding legal entities. Its inclusion within the FATF Recommendation 16 would mark another significant step toward a world where the illicit forces cheating the system are quickly and readily exposed, and the vital trust that underpins cross-border trading relationships is fortified as a result.

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