Landmark Anti-Money Laundering (AML) legislation, finalized by the EU in Q2 2024, calls for the Legal Entity Identifier (LEI) to be used by financial institutions for customer identification and verification of legal entities during onboarding procedures, writes Clare Rowley, head of Business Operations at the Global Legal Entity Identifier Foundation (GLEIF), in a blog post.
Financial institutions, financial software solution providers and treasury management solution providers across this jurisdiction must begin the process of integrating the LEI within the technologies and workflows used to facilitate payments.
The legal foundation and, consequently, the business case for integrating the LEI into financial institutions’ entity identification processes and cross-border payment technologies have now been firmly established.
A groundbreaking package of legislative reforms to the EU’s anti-money laundering / counter-terrorist financing framework was recently published in the EU’s Official Journal. Its constituent parts will come into force in June and July 2024, with the core of the implementation planned for July 2027. Among the reforms are new Know-Your-Customer (KYC) measures concerning legal entities, which require the disclosure of their LEI, where available.
With the conclusion of the AML package, the European Union has established a workable legislative foundation for using the LEI in cross-border payments. Specifically, the new AML Regulation references the LEI as part of identifying and verifying customers and beneficial owners for legal persons.
Additionally, the 2023 recast of the EU’s Transfer of Funds Regulation (TFR), first adopted in 2015, ensures that transfers are accompanied by key data points on both originating and beneficiary entities, including, where available, the LEI.
In parallel with the AML reform package, the EU’s Instant Payments Regulation (IPR) will enable Payment Service Providers (PSPs) to utilize the LEI to verify beneficiaries for instant credit transfers in euros.
In addition to the foundational benefits of the LEI, the advent of the verifiable LEI (vLEI) brings an enhanced layer of security and efficiency to the payment industry. For example, vLEI can facilitate verifiable digital invoice signing between clients and suppliers, significantly reducing invoicing fraud.
By adding a vLEI signature to a digital invoice, the authenticity of the invoice can be verified, ensuring that it has been issued by a legitimate entity. This can be particularly beneficial in preventing common fraudulent activities, such as invoice redirection fraud, where fraudulent actors intercept and alter invoice payment details. This is only one example of vLEI further improving trust and transparency in transaction processes, thereby fortifying the integrity of the payment ecosystem.
Validation agents
A growing number of financial institutions and other supervised organizations involved in legal entity identification and verification are assuming the role of Validation Agent in the Global LEI System, with the goals of enabling cost and process efficiencies and the delivery of an enhanced client lifecycle experience.
Today, there are more than 15 Validation Agents globally, with a network spanning Africa, Australia, China, Europe, India, the Middle East, and North America. Each can utilize their business-as-usual client onboarding processes to obtain and maintain LEIs for their clients in cooperation with accredited LEI Issuers. The advent of the EU’s AML legislative package provides a clear invitation for more to follow.