Finance

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

Published

3 weeks ago

September 11, 2023

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Clare Rowley, Head of Business Operations, GLEIF

In this blog, GLEIF’s Head of Business Operations, Clare Rowley, explores how the LEI is uniquely positioned to strengthen the fight against international financial crime and why an upcoming review of the Financial Action Task Force (FATF) Recommendation 16 is an unmissable chance to leverage the LEI to ensure trust and transparency within the cross-border payment ecosystem.

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 spiraling 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 are 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(https://www.bis.org/author/beju_shah.htm)

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 defenses 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.

Business

How can law firms embrace automation and revolutionise their payments?

Published

18 hours ago

September 28, 2023

editorial

Attributed to: Ed Boal, Head of Legal at Shieldpay

Once again, AI is dominating international headlines. This time, it’s due to a closed-door meeting this month between tech leaders and US senators to discuss the technology’s regulation.

AI and automation isn’t just for the likes of Big Tech. We’re seeing predictive and automated technologies transform almost every sector and the legal industry is no exception. In fact, recent research from HBR Consulting found that 60% of law departments had implemented a legal data analytics tool last year and more than 1 in 4 indicated they were using AI for at least a single use case.

However, adoption isn’t without its challenges. Reticence remains among some and there’s also the danger of ‘transformation fatigue’ slowing real progress. If law firms want to reap the many benefits of automation – including revolutionising their payment processes – these challenges need to be carefully considered and thoughtfully addressed.

An area of great opportunity

Often seen as conservative, the legal industry has been gradually warming up to the idea of automation and technology.

While some pioneering firms have been quick to embrace automation tools, others remain cautious about disrupting their established workflows. As we navigate this landscape, it’s clear that certain areas of legal services are ripe for innovation.

One area is contract management. The process of drafting, reviewing, and managing contracts has traditionally been time-consuming and prone to human errors. Automation can alleviate these pain points by streamlining the entire lifecycle of contracts, from creation to renewal, thereby enhancing efficiency and reducing risks.

Another promising domain is legal research. Thanks to advancements in natural language processing and machine learning, legal professionals can now leverage AI-powered research tools that analyse vast volumes of legal data to provide accurate insights and case precedents swiftly.

But, while progress is undoubtedly being made, the legal sector still lags other sectors when it comes to innovation.

What’s getting in the way of progress?

This isn’t always down to a resistance to change. Often, it’s a result of firms spreading their resources too thinly across numerous technology initiatives.

Ed Boal

Attempting to tackle everything at once can result in ‘transformation fatigue’, where the benefits of individual innovations get diluted – leading to frustration and slower progress.

Before legal firms embark on digital transformation projects, a critical first step is introspection. Recognising and acknowledging areas where legacy processes and manual tasks still hold sway is paramount to optimising the impact of automation.

For many firms, archaic practices continue to consume valuable time and resources, diverting attention from higher value, billable tasks. One often-overlooked area is payments.

Legal firms play a critical role in complex transactions, from M&A and real estate deals to litigation and arbitration payments. The associated admin and processes represent a drain of firms’ time and resources. Spanning everything from collating stakeholder payment details and verifying payee identity to ensuring compliance with Know Your Customer (KYC) and Anti Money Laundering (AML) regulation, this adds unnecessary stress for lawyers – who would rather dedicate their time and expertise to their clients’ legal needs.

The repercussions of such time-consuming financial processes reverberate throughout the entire organisation. Administrative burden weighs heavily on the team, affecting productivity and ultimately, the bottom line: recent research from Shieldpay, surveying the UK’s Top 100 law firms, found that almost 1 in 3 (32%) say KYC collection and verification checks take 4-9 working days.

At the same time, firms are exposed to significant financial risk which can make handling client funds a costly endeavour. Not only are they penalised with fines if found to be in breach of stringent client account rules but firms are also subject to hefty premiums for Professional Indemnity (PI) insurance. No wonder 73% of all legal professionals and 90% of junior law professionals are concerned about the risks and time costs associated with holding client funds.

Revolutionising payment transactions

In short, manual payment processes are more than just an inconvenience for modern law firms. They can damage relationships with clients – who have come to expect a fast, painless and automated payout experience in a digital world – and impede revenue generation by tying up top talent in an endless cycle of paperwork and (unbillable) admin.

So how can firms take the pain out of legal payments?

Fortunately, new payment technologies have emerged as a formidable ally. Third-party payment providers offering solutions for law firms, such as escrow and paying agent services for specific transactional deals, or more embedded payment solutions such as managed accounts (TPMAs) – i.e. outsourced client account functions – offer secure and instant transactions, while prioritising transparency and automation.

TPMAs operate as an escrow payment service in which the third-party – a licensed external payments partner – receives and disburses funds on behalf of a firm and their client(s).

With advanced encryption ensuring data security, working with a regulated payment partner means legal professionals and their clients can engage in financial transactions with peace of mind – while law firms benefit from improved operational efficiency.

And the advantages don’t stop there. Enhanced transparency builds a sense of confidence and trust, while the elimination of manual data entry and repetitive tasks allows legal professionals to devote more time to legal services and fostering stronger relationships with their clients.

AI and automation has much to offer the legal sector. But its adoption must be carefully planned in order to avoid transformation fatigue that risks stalling progress altogether. With typically shallower pockets than Big Tech giants, it’s important for law firms to focus their efforts on specific areas that could benefit from automation, rather than rush to overhaul their entire way of working, all at once. This controlled phase-out is the key to avoiding adoption frustration, seeing a real impact on profits and productivity and setting firms up for real, lasting change.

Business

In-platform solutions are only a short-term enhancement, but bespoke AI is the future

Published

2 days ago

September 27, 2023

editorial

By Damien Bennett, Global Director, Principal Consultant, Incubeta

If you haven’t heard anyone talking about artificial intelligence (AI) yet, then where have you been? Conversations about AI and its advantages to society have been a key talking point over recent months, with advances being made in the generative AI race and ChatGPT opening a whole plethora of possibilities. Many have highlighted the advantages of AI, but notably it’s ability to create human-like content.

But these discussions have only scratched the surface of what AI is capable of doing. It is for far more than just essay writing, adding Eminem to your rave and photoshopping dogs into pictures.

In marketing, we have been using AI for years, for everything from analyzing customer behaviors to predicting market changes. It’s enabled us to segment customers, forecast sales and provide personalized recommendations, having a huge impact on how our industry works.

It is even, for the more savvy marketers of the world, becoming a key tool in maximizing budget efficiency – which is apt, considering over 70% of CMOs believe they lack sufficient budget to fully execute their 2023 strategy.

Now, as AI becomes more intelligent, the number of efficiencies it can unlock continues to rise. Not only can it help brands get the most out of their available resources and identify any areas of waste, but it can also help highlight new opportunities for growth and maximize the impact of your budget allocation.

The trick, however, is to veer away from the norm of using in-platform solutions with a one-size-fits-all approach and create your own, bespoke solutions that are tailored to your business needs.

Pitfalls of in-platform solutions

In-platform solutions aren’t by any means a bad thing. In fact, built-in AI tools have become increasingly popular, owing to their ease of integration, user-friendly interfaces and minimal set up requirements. They come pre-packaged with the platform, offering the user the ability to leverage AI technologies without the need for in-depth technical expertise or the upfront cost of building a solution from scratch.

However, the streamlined and accessible nature of in-platform AI solutions comes at the expense of complexity and customization. They are designed to serve a broad user base, but for the most part are built using narrow AI solutions with predefined features and workflows.

This makes them great for assisting with common AI tasks, but they lack the flexibility to tailor functionality towards unique business requirements or innovative use cases, limiting the potential efficiencies and cost savings that can be unlocked. Additionally, if a business’ competitors are using the same platform, they are probably using the same AI solution, meaning any strategic advantage gained from these will be reduced.

Bespoke AI solutions, on the other hand, may carry a higher initial investment – but can offer a significantly more attractive ROI over a short amount of time.

Why customized and adapted AI is the key

The difference between bespoke AI and in-platform solutions is similar to that between home cooked food and a microwave meal. Yes, it is more time consuming to prepare, and yes it likely carries more of an upfront cost, but the end result is going to be far more appealing and will carry more long-term value (financially… not nutritionally).

That’s because bespoke solutions, by nature, will have been tailored to address your brands specific needs and challenges. These custom-built tools allow for much greater efficiencies by streamlining workflows across different channels, automating more complex tasks, and providing deeper, more relevant insights.

The increased level of optimization can significantly improve productivity and reduce operational costs over time, offering a higher ROI. The increased flexibility of bespoke AI also allows brands to implement innovative use cases that can significantly differentiate them from their competitors.

The data analyzed can be specifically chosen to match business requirements, as can the outputs of the AI tool, providing a significant advantage when understanding and acting on the insights provided.

Additionally, these tools are, by nature, more scalable. They can be updated, upgraded and expanded as needs change, ensuring they continue delivering value as the business grows. They can also be designed to integrate with any existing IT infrastructure, from CRM systems and databases to marketing platforms and sales tools – leading to more efficient and effective decision-making.

Managing finances with AI

It’s no secret that AI in marketing automation has, and will continue to, revolutionize the way marketing is done. It has a bright, if slightly terrifying, future and can help CMOs to unlock new efficiencies, maximize the impact of their budgets and increase their ROI. And as this technology becomes more advanced, its impact will only increase.

But we already know that…and so does everyone else.

So, in order for businesses to make themselves stand out from the crowd , they must look to fully adopt the power of AI. Creating a customized and unique AI solution could be the way to set yourself apart from your competitors. A bespoke AI tool can provide brands and businesses with features unique to them and their business needs. As a result, companies will benefit from more useful data and better results to make more data-driven decisions for their business. Ultimately, this will help brands to maintain a competitive edge over their competitors, deliver ROI and most importantly optimize their budgets.