LEI as a game changer: New perspectives in the fight against money laundering and terrorist financing

8 september 2023

Money laundering and terrorist financing pose significant challenges for the global financial system. A legal Entity Identifier (LEI), a universal identifier, could help solve these problems and promote transparency in cross-border payment processes. The LEI enables the unique identification of legal entities and thus provides a basis for a more secure and efficient financial ecosystem.

The challenges of financial crime

In the digital economy, criminals use complex networks to operate across national borders. Financial institutions must comply with strict anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. However, more data is needed to cooperate and identify suspicious financial flows.

The Financial Action Task Force (FATF) has identified data sharing and standardisation as key to overcoming these challenges. The LEI plays a central role here, as it can significantly improve the efficiency and accuracy of monitoring and compliance measures as a universal identifier.

Why the LEI is crucial for cross-border payments

The LEI enables the exact identification of originators and beneficiaries in payment messages. This improves transparency and reduces inconsistencies in company identification. The Financial Stability Board (FSB) recommends integrating the LEI in cross-border payment processes as part of the G20 roadmap to improve these payments.

FATF Recommendation 16 and the LEI

FATF Recommendation 16, known as the ‘Travel Rule,’ requires basic information about the originator and recipient of electronic transfers. However, this rule currently lacks a reference to the LEI, which represents a missed opportunity to improve global standardisation and transparency.

Including the LEI could ensure that legal entities can be identified worldwide. This would increase the effectiveness of AML and CTF measures and reduce financial institutions’ costs and risks.

Advantages of LEI integration

Standardised identification:

The LEI provides a universal language for identifying companies, regardless of national borders.

Improved data updating:

LEI data is updated regularly to avoid outdated information.

Efficient risk management:

Financial institutions can better assess risks and optimise due diligence processes.

transparent ownership structures:

the LEI provides a clear view of complex corporate relationships.

International momentum to promote the LEI

Initiatives such as ISO 20022 payment messages and Project Aurora show that the integration of the LEI is crucial for standardising payment processes. In Europe, the MiCA regulation emphasises the importance of the LEI for crypto asset transfers and shows that the LEI is relevant not only for traditional financial transactions but also for

Conclusion

Integrating the Legal Entity Identifier (LEI) into regulatory frameworks such as FATF Recommendation 16 is a clear opportunity to increase trust and transparency in cross-border payments. The global financial industry should capitalise on this momentum to create a more secure and efficient ecosystem. The more widespread the LEI becomes, the better illegal activities can be recognised and combated.