#18 in the in the LEI Lightbulb Blog Series – The Financial Stability Board Encourages Use of the LEI to Enhance Data Standardization and Harmonization for Cross-Border Payments
The publication of a new consultation report from the Financial Stability Board (FSB) recommends the enhanced use of standardized global identifiers such as the Legal Entity Identifier (LEI) to promote increased alignment and interoperability across cross-border payment data frameworks.
All LEI supporters and interested industry stakeholders are encouraged to respond to the consultation, reinforcing the significant value the LEI brings in enabling faster, cheaper, more transparent and inclusive cross-border transactions.
Author: Clare Rowley
Date: 2024-08-20
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In October 2020, the G20 endorsed a roadmap to enhance cross-border payments developed by the FSB in coordination with the Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI) and other international organizations and standard-setting bodies.
Following publication, the FSB, CPMI, and other partner bodies have focused on addressing priority ‘themes’ to advance the roadmap. One priority includes enhancing cross-border data flows by addressing friction across the laws, rules, and regulatory requirements for collecting, storing, and managing data—collectively called ‘data frameworks.’
Having engaged with market participants, the FSB has published ‘Recommendations to Promote Alignment and Interoperability Across Data Frameworks Related to Cross-border Payments’, proposing a series of policy recommendations to increase the alignment and interoperability of associated regulatory and data requirements.
The need for greater data standardization and harmonization
Varied implementations of rules and standards across jurisdictions—combined with poor underlying data quality, fragmented data sources and formats, and inconsistent data exchanges—create significant complexity when processing cross-border payments and contribute to an opaque ecosystem with limited trust, high costs, and low speed.
In today’s digital world, complexity inhibits automation and prolongs the need for manual intervention. This reduces the speed of payments and sustains the resource-intensive measures needed to ensure compliance with local requirements, stringent anti-money laundering (AML) and counter-terrorism financing (CFT) regulations, and various screening requirements against ‘watch lists' and international sanctions. Inevitably, the sheer volume of cross-border payments being made globally leads to painfully high numbers of ‘false positive’ alerts and declined transactions. At the same time, suspicious actors and criminal networks continue to slip through undetected.
To address this challenge, there is a clear need to promote the harmonization, standardization, and consistent implementation of payments-related data requirements across jurisdictions. This will help to enable faster, cheaper, more transparent, and inclusive cross-border transactions while maintaining their safety and security, supporting the G20 roadmap.
Enhancing the use of LEI as a standardized global identifier
Global identifiers play an integral role in overcoming the inherent limitations of national and sector-specific alternatives, which are neither designed for nor suited to the complexity and scale of cross-border payments ecosystems. Importantly, the FSB encourages the use of standardized global identifiers, including the LEI, within Recommendation 6:
This recommendation further reinforces the FSB’s position that the LEI is a key identifier that can support the strategic goals outlined in the G20 roadmap and should be widely adopted across the global payments ecosystem.
While other entity identifiers such as the Business Identifier Code (BIC) are available, the FSB rightly notes the LEI’s independence from any specific messaging network and its universal availability to all legal entities globally. This means that 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.
By promoting increased data standardization and harmonization, the LEI can enable and support straight-through processing (STP), helping to optimize customer due diligence (CDD) processes and sanctions screening.
Industry momentum for the LEI in cross-border payments
The FSB’s latest endorsement references and reflects the broad industry momentum for including the LEI within cross-border payment messages.
In October 2023, the CPMI published its 'Harmonized ISO 20022 data requirements for enhancing cross-border payments'. In a landmark development and following feedback from various industry stakeholders during the consultation phase, the CPMI recognized the LEI as an equivalent identifier to the BIC for identifying financial institutions and legal entities within a payment message. The FSB addresses this in Recommendation 3 of the consultation report, which calls on national authorities to encourage the adoption of the CPMI harmonized data requirements.
In parallel, The Wolfsberg Group published its updated Payment Transparency Standards, which supports using the LEI within ISO 20022 payment messages to enhance the accuracy of identification information. Additionally, the Swift Payments Market Practice Group (PMPG) has outlined how global adoption of the LEI in ISO 20022 payment messages can support key cross-border use cases, including sanctions and watch-list screening, KYC and client onboarding, fraud detection, and the fight against vendor scams; e-invoice reconciliation; and account-to-account validation.
The Financial Action Task Force (FATF) has also launched an ongoing consultation on proposed updates to FATF Recommendation 16 to include globally standardized entity identifiers such as the LEI. Often referred to as the 'Travel Rule', Recommendation 16 specifically aims to ensure that basic information on the originator and beneficiary of wire transfers is immediately available. Recommendation 4 of the FSB consultation report urges national authorities to implement FATF Recommendation 16, including using standardized entity identifiers, such as the LEI.
The value of the LEI beyond cross-border payments
The more widely the LEI is utilized across business identification use cases globally—including simplifying global supply chains and trade—the more value it will deliver to all ecosystem participants. This is predicated on GLEIF’s ongoing commitment to a strong, credible, and globally expansive LEI issuance ecosystem overseen by international regulators and underpinned by high-quality, accurate data. In addition to these foundational benefits of the LEI, innovations such as the verifiable LEI (vLEI) are now delivering a much-needed enhanced layer of digital security and efficiency to the digital economy.
The consultation period closes on Monday, 9 September 2024.
The ‘LEI Lightbulb Blog Series’ from GLEIF aims to shine a light on the breadth of acceptance and advocacy for the LEI across the public and private sectors, geographies, and use cases by highlighting which industry leaders, authorities, and organizations are supportive of the LEI and for what purpose. By demonstrating how success derived from strong regulatory roots is giving rise to a ground swell of champions for further LEI regulation and voluntary LEI adoption across new and emerging applications, GLEIF hopes to educate on both the current and future potential value that ‘one global identity’ can deliver for businesses, regardless of sector, world-wide.
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Clare Rowley is the Head of Business Operations at the Global Legal Entity Identifier Foundation (GLEIF). Prior to working with GLEIF, Ms. Rowley worked at the United States Federal Deposit Insurance Corporation where she led technology initiatives improving bank resolution programs and contributed to research on subprime mortgages. Ms. Rowley is a CFA® charter holder and holds a MS in Predictive Analytics from Northwestern University.
