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Overhauling Transaction Compliance: The Power of the LEI

Part II: How the LEI can be leveraged to enable straight through processing, to strengthen the fight against financial crime and to prepare for a global digital identity ecosystem

Author: Stephan Wolf

  • Date: 2018-11-01
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The adoption of enabling technologies has transformed the way the world manages commercial and financial transactions. The mechanisms in place to enforce the regulatory rules that govern these transactions, however, have not kept pace and continue to utilize outdated practices. The process for matching the names of organizations participating in, or executing, financial transactions with those in sanctions and watch lists, for example, is slow, expensive and generates a huge number of ‘false hits’. As a result, additional resources are often needed to supplement the process with manual screening.

In this post, the second in our blog series exploring financial trust in the digital age, we focus on how the consistent adoption of the Legal Entity Identifier (LEI) across the global financial ecosystem, and especially in sanctions and watch lists, would enable automated straight through processing, resulting in more efficient and effective screening systems and a more robust defence against financial crime.

Sanctions and What Lists?

To combat fraud and other illicit transactions, publicly available sanctions and watch lists are maintained by a variety of supervisory authorities around the world. These lists typically comprise the names of persons and legal entities whose transactions are deemed to warrant further investigation.

Financial institutions responsible for enabling financial flows must ensure compliance with these lists by checking, sometimes manually, that the names published do not correspond with the names displayed on the transactions they perform with clients. Even though ‘natural persons’ typically represent two thirds of the entries on sanctions and watch lists, a high proportion of financial crimes involve the use of a company name. This is why identification of the legal entities that appear on these lists is so crucial to successfully curbing financial crime.

Currently, the compliance process requires financial institutions to match names only; it does not require the identities of the transacting parties to be confirmed, limiting its effectiveness. Additionally, in a global economy names exist in multiple character sets whereas most watch lists, and the financial system in general, works with basic Latin characters. The transformation of names between different character sets further adds to the ambiguity. Given that the current processes are also both expensive and inefficient, a significant opportunity exists to replace the name-based system with one based on identity, thereby making it faster, more effective and less expensive to administer for all stakeholders.

These benefits are readily achievable today. The solution lies in the generalization of the LEI.

Faster, better and more cost-effective compliance

The LEI is an international standard; a unique identifier linked to a legal identity and issued by an accredited organization. This means that when it is used in financial flows, compliance verification can be based on actual identities instead of just names. In reference to sanctions and watch lists, this means that transacting parties can be unambiguously identified, greatly reducing the number of false positives that the matching process generates today.

Indeed the benefits of LEI adoption for financial transaction compliance resonate at every stakeholder level.

Regulators, which define compliance policies and programs, can create regulatory rules that mandate a higher level of assurance, safe in the knowledge that identity-based legal entity matching can be performed automatically across the financial ecosystem by using the LEI in sanctions and watch list compliance. These supervisory authorities, together with their intermediaries, can greatly simplify list maintenance and publication processes, thanks to the financial ecosystem’s adoption of a single, global standard, significantly reducing cost and heightening efficiency. Lastly, universal adoption of the LEI would facilitate smoother information exchange between these authorities enabling closer coordination on the creation of sanction and watch list data globally.

Financial institutions can establish fully automated, straight-through processing, thanks to the interoperability enabled by the LEI. The identity-based compliance made possible by LEI adoption also increases the effectiveness of screening against sanctions and watch lists, enabling new efficiencies, lowering costs significantly and facilitating better, more robust compliance checks.

Clients of financial institutions who, of course, are the instigators of transactions also stand to benefit. Through use of the LEI, counterparties can be clearly identified. Additionally, the risk of being mistaken for a legal entity with a similar name appearing on a sanction list is reduced.

All parties involved in the execution of a transaction are responsible for its compliance, so LEI adoption provides them with a simple and streamlined method to verify identity before engaging with a party, proving their compliance from the outset of the transaction.

In the longer term, the broader implications for the financial ecosystem are hugely positive. The processes governing digital transactions will have finally evolved in line with the digital age. What’s more, by embracing a system where legal entity identification can be unequivocally assured, in an open, interoperable and instant digital format, all stakeholders will be able to transact with far greater confidence and faith.

Most importantly, however, the opportunities for financial criminals to cheat the system will be dramatically reduced on a global scale.

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About the author:

Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO.

Tags for this article:
Client Relationship Management, Compliance, Data Management, Digital Identity, Know-Your-Customer (KYC), Open Data, Risk Management, Regulation, Standards