• Clare Rowley, Head of Business Operations at GLEIF


• 26.10.2023 11:15 am
#kyc #payment

Efficiently accessing the data they need is a core challenge for organizations conducting due diligence and ongoing risk monitoring for corporate customers and suppliers. The information needed often comes from varying and disparate sources. KYC processes lack standardization due to the fragmented nature of national AML/CFT requirements. This prevents data sharing and ultimately shared cost savings among those organizations conducting these due diligence processes. One solution is to harmonize national implementations of FATF Recommendation 16. Leveraging the Legal Entity Identifier (LEI) within FATF Recommendation 16 for the identification of the originator and the beneficiary would finally enable the elements associated with each to be standardized and shared easily. 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 already endorsed the LEI for supporting the goals of its G20-endorsed Roadmap for Enhancing Cross-Border Payments. To demonstrate the LEI's value when transmitted in cross-border payment flows, GLEIF has been working with leading payments industry stakeholders to explore a variety of key use cases, including corporate invoice reconciliation, KYC, and customer onboarding; account-to-account owner validation; and screening efficiency for watch lists and sanctions.

The core KYC challenge

A core challenge for organizations conducting due diligence on corporate customers is to efficiently access the data they need for robust due diligence and ongoing risk monitoring, and this information often comes from varying and disparate sources. To add to the challenge, these sources differ greatly in their accessibility and formats. In some countries, automated access is supported by business registers, whereas in others, data can only be retrieved via a separate user interface. Data availability itself also varies significantly. Some commercial registers offer access to fully structured and rich datasets, whereas others only make limited sets of data points available in an unstructured way within documents.

These variations demonstrate the complexity of providing the data needed for entity verification and onboarding, together with the importance of accessing accurate, up-to-date, risk-relevant information. A key sticking point lies in the quality of the data being shared by companies and the vast number of ways to share such data. If pre-verified data can be built into the model in a consistent format, KYC checking has the potential to become fully automated, making it easier, cheaper, and faster.

For the benefits of automated KYC to be realized, however, the data shared between entities must be standardized. As a globally recognized identifier, the LEI enables clear and unique identification of legal entities participating in transactions, including financial and digital exchanges, by connecting to key reference information made publicly accessible on GLEIF’s website via the Global LEI Index. It is the only global online resource that provides open, standardized, and high-quality legal entity reference data. Each LEI contains information about an entity’s ownership structure, answering the questions of ‘who is who’ and ‘who owns whom’.

The timelines for KYC reviews and re-verification vary by bank. Generally, KYC review and re-verification is done annually for high-risk customers, every two years for medium-risk customers, and every three to five years for lower-risk customers. Considering every business wanting to obtain financial services must go through KYC processing, there are a vast number of KYC checks taking place across the world every day. Any streamlining of the process stands to enable huge time and cost efficiencies for the global financial system.

What is KYC checking, and why is it important?

KYC is designed to support governments and institutions in fighting fraud in all its forms, from counter-terrorism financing (CTF) to anti-money laundering (AML). ‘KYC checking’ is the mandatory process of identifying and verifying the client's identity when opening an account. These checks are then repeated at regular periods as financial institutions must ensure they have up-to-date information on the operating status, parent structure, beneficial owner, etc. If clients fail to meet minimum KYC requirements, financial institutions are likely to refuse to open an account and may even suspend existing client relationships.

How can the LEI enhance KYC?

If all entities had LEIs, compliance checks would be much easier. Currently, the majority of the KYC onboarding process is based on entity names and a long list of company identifiers (tax identifiers, business registration identifiers, regulatory register identifiers, data vendor identifiers, etc.). This makes the process of KYC onboarding highly susceptible to human error and misrepresentation due to conflicting reference data, such as names and addresses, in different languages and character sets. This would be solved instantly if entities presented their LEI, a standardized, alpha-numeric, machine-readable code that links to their corresponding record in the Global LEI Index.

Notably, the LEI would provide significant efficiency gains in the onboarding of complex multinational corporations (MNCs). The extent of the KYC checks required for MNCs makes this process naturally more prone to error – a problem that can be easily overcome with the LEI, which tracks MNC ownership hierarchies in the Global LEI Index. This especially holds true for offshore entities for whom real-time access to data via business registries is not available in all jurisdictions, meaning it can take weeks to obtain the necessary entity information if it is available at all.

The LEI also has the potential to benefit companies looking to conduct business in emerging markets. For multinational corporates who do business globally, KYC-related issues are commonplace when acquiring new business partners in emerging markets. The LEI presents a ready-made solution to this problem, as it provides the foundational starting point for KYC – a globally trusted identity that connects to key reference data describing the entity. For example, when Ceviant worked with a Nigeria-based entity seeking financial services, it was able to supply its LEI, which offered a level of trust and confidence rarely seen in the region.

Research conducted by McKinsey on behalf of GLEIF has concluded that broader adoption of LEIs could save the global banking sector between 2 billion and 4 billion USD annually in onboarding costs. This represents a potentially colossal saving of between 5 percent and 10 percent of the industry’s overall annual spend of more than 40 billion USD on the practice.

Looking forward, the LEI also has the potential to facilitate so-called” perpetual KYC” or pKYC, which is the key to ensuring onboarding data and risk profiles are kept up to date. If the LEI were mandated consistently for customer due diligence across jurisdictions in AML regulations, it could play a pivotal role in automating KYC processes - saving time and money for all stakeholders, including financial institutions, supply chain organizations, large corporates, and other regulated firms.

The future of the LEI in cross-border payment flows

Helping to automate KYC onboarding processes is just one use case in which the LEI's benefits are being harnessed to enhance cross-border payment flows. As part of its Roadmap for Enhancing Cross-Border Payments and in collaboration with other industry standard-setting bodies, the FSB is currently working to promote standardization in ISO 20022 payments messaging. This includes the definition and harmonization of data fields - including identifiers - being transmitted along the payment chain.

Should the LEI be integrated into ISO 20022 messaging, the value that has been demonstrated by its inclusion in KYC and customer due diligence processes will increase manifold across many more cross-border payment use cases. The logic behind including the LEI’s inclusion in payment messages is simple: when it is added as a data attribute, any originator or beneficiary legal entity can be precisely, instantly, and automatically identified across borders facilitating both trust and automation.