Financial Crime is Crippling the Global Economy. Breakthrough Identity Tech is Leading the Fightback

From global enterprises to SMEs, financial crime has its claws in businesses everywhere. Decentralized organizational identity is redressing the balance for the digital age.

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The opening pages of the 2024 NASDAQ Global Financial Crime Report makes for grim reading. In 2023, it says, more than an estimated US$3.1 trillion in illicit funds flowed through the global financial system. $782.9 billion is ascribed to drug trafficking, $346.7 billion to human trafficking, and $11.5 billion to terrorist financing. Losses to fraud scams and bank fraud schemes totaled $485.6 billion. Wearily, the report also concedes the inaccuracy of these numbers. They "represent just a fraction of the true scope, given how much crime goes unreported by victims and undetected in the current financial system."

This last point is crucial. It illustrates that documented examples of corporate fraud, such as FTX and Wirecard, are the visible tip of an iceberg almost unfathomable in scale. One that is buoyed as much by privately owned businesses as by the already heavily regulated world of publicly traded multinationals.

If the financial system is to strengthen its ability to fight financial criminality, a coordinated, multifaceted approach is required worldwide. Shortfalls in company operating procedures, risk management practices, supervisory oversight, and policymaking at both the business and regulatory levels, must all be addressed.

This effort begins at home, with every business owner’s commitment to financial transparency. Their first step is to make their firm’s verified corporate identity data easily available. The second step must be to bind this data to their transactions and other official interactions. Only then can we achieve the visibility and traceability needed to expose and, ultimately, eliminate corporate criminality.

This is the baseline upon which all other factors depend. Yet, of the hundreds of millions of legal entities around the world, few have this capability today. To help evolve the system, regulators everywhere are rightly insisting that financial institutions tighten their KYC and client onboarding procedures. But to truly make a dent, all actors involved in corporate transactions - from the individuals authorizing them at the company level all the way through to the supervisors tasked with exposing crime networks - must embrace digital innovation and automation as a fundamental. At this scale, manual supervision isn’t just impractical, it is impossible.

The willingness to make this data available is one thing. The job of harmonizing it, so it can be automatically verified by any counterparty or supervising authority, is quite another. This means negotiating, among others, concerns about privacy and data sovereignty, the potential for state overreach, language barriers, and myriad cultural variations in business practices that, for example, define how companies publish their identity information.

There are systemic challenges to overcome too: the proprietary systems that enable corporate transactions are intractable and resist integration, reporting mandates vary enormously and misaligned regulations continue to frustrate coordinated supervisory efforts across borders and jurisdictions.

Technology is the silver bullet. Recent advances in decentralized organizational identity have now brought a brighter future tantalizingly close.

For over a decade, all legal entities have been able to obtain a Legal Entity Identifier (LEI), a unique, globally standardized code which enables anyone, anywhere in the world, to trust that they are who they claim to be.

More recently, however, GLEIF, the official guardian of the Global LEI System, has pioneered a new form of digital organizational identity, the verifiable LEI (vLEI), and has established the governance framework and supporting ecosystem, which is now operational, today.

The vLEI has transformed the field of entity identity management and, specifically, how person-to-entity, or entity-to-entity, interactions can take place in the digital world. Crucially, it answers the need for automation in entity verification that will equip the global economy to fight financial crime, while maintaining data privacy and confidentiality. Using decentralized, tamper-resistant cryptography, the vLEI enables any company to digitally bind its LEI code to each transaction, and to further supplement it with verified identity data for the role-holder authorizing that transaction. And because the LEI and vLEI systems are based on internationally recognized ISO open data standards, any organization can utilize their services and enact them across all online platforms. GLEIF, which sits as the root-of-trust for all vLEIs, operates independently of geo-political, technological, and commercial influence so, uniquely, the system itself can also be trusted by everyone, everywhere.

From the entity’s perspective, adopting the LEI and vLEI means they can automatically establish computational trust with partners, customers, or governments in a wide variety of day-to-day transactions and interactions that greatly increase efficiency and reduce operating costs. These include approving business transactions and contracts, onboarding customers, transacting within import/export and supply chain business networks, and submitting regulatory filings and reports.

In short, it’s a win-win.

To demonstrate the depth of digitally verified identity data available in practice, GLEIF’s Chair of the Board, CEO, CFO and auditors cryptographically signed GLEIF’s 2023 Annual Report using vLEIs to confirm and seal its contents specific sections, or even facts, within the report or data set, digitally authenticating the year’s strategic and financial data for life. Having multiple vLEI signatories increases credibility, making significant and sensitive documents tamper-proof.

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