In the rapidly evolving financial industry, the importance of correspondent banking cannot be overstated. Correspondent banking, which is the provision of services by one bank (the correspondent bank) to another bank (the respondent bank) in different jurisdictions, is crucial for facilitating cross-border payments and trade activities. However, correspondent banking has also been plagued by numerous challenges, including high operational costs, compliance requirements, and the risk of financial crime. To address these challenges, the inclusion of Legal Entity Identifiers (LEIs) in ISO 20022 messages has emerged as a potential solution.
In this blog, we will put a spotlight on the LEI and the implications and benefits of streamlining correspondent banking through LEI inclusion in ISO20022 messages.
ISO 20022
The ISO 20022 standard for payments messaging allows for payment messages to carry a vastly increased amount of information in a structured format, allowing for more efficient screening. Any bank that wants to use SWIFT for cross-border payments will have to upgrade its messaging to ISO standards by November 2025 and Payment Market infrastructures (PMIs) of all major currencies are either live or in the process of adopting ISO 20022 by November 2025.
National regulators have already begun taking advantage of the new capacity offered by ISO 20022 to require additional information, including the LEI, so as to reinforce the efficiency and reliability of KYC processes.
Regulatory requirements to use LEI in Payments Systems
Since 2021, the Reserve Bank of India has already mandated use of the LEI for larger transactions (>500m INR ~ US $6k) via the RTGS or NEFT systems. The Bank of England has announced that from November 2025, use of the Legal Entity Identifier (“LEI”) will be mandatory for all payments between financial institutions using the CHAPS UK domestic payments system.
In May 2023, EU legislation (amendments to Directive (EU) 2015/849) made it mandatory for all cross-border funds transfers (defined as payments between EU and non-EU entities) to include the LEI of the payer and payee.
The US has set March 2025 as the date for the introduction of LEI in the Fedwire payments system albeit not on a mandatory basis.
What is a Legal Entity Identifier?
The Legal Entity Identifier (LEI) is a 20-character alphanumeric code for identifying legal entities worldwide. Each LEI number is unique and exclusive: it is assigned to a company once and may not be assigned to any other company. The first 4 digits of the LEI relate to the LEI Issuer and the last 2 are checksum digits.
The LEI record is public. It contains information about a legal entity, such as its name, address, ownership structure, and other details that help identify the entity and its relationships with other organisations. It also includes information about the LEI issuer and the status of the LEI.
Why was the LEI created?
The original driver behind the creation of a unique global legal entity identifier was the 2008 financial crisis. The demise of Lehman Brothers and other events exposed the lack of transparency in credit exposures that had been transferred using legal entities such as securitisation special purpose entities. Regulators also found they were unable to act quickly to wind up Lehman given the complexity and sheer number of legal entities within the group structure which made it difficult to identify financial counterparties.
What are the use cases for including the LEI in payments?
Sanctions Screening. The LEI should improve the accuracy of sanctions hits and can be used to “fast-track” or white-list approved payments reducing the number of unnecessary alerts that result from a match on the name only.
KYC / Onboarding. The LEI should allow banks to validate KYC information (such as name, address, subsidiaries) quickly and with certainty.
Trade Finance. LEIs would enable the immediate, digitized identification of entities and would allow banks to dramatically curtail the time and resources spent on background checks and investigations of counterparties.
Corporate Invoice Reconciliation. Use of e-invoices would allow the Debtor to verify the Supplier using the LEI and stop or proceed with the payment order.
Who issues the LEI?
In 2011, the G20 called on the Financial Stability Board to take the lead in developing recommendations for a global Legal Entity Identifier and a supporting governance structure. The FSB recommendations led to the establishment of the Global LEI Foundation in 2014. The Regulatory Oversight Committee, representing regulators from over 50 countries oversees GLEIF and GLEIF delegates the actual issuance of the LEI to Local Operating Units that tend to be market infrastructure providers or banks but also include data providers and technology firms.
What are the implications and benefits of streamlining correspondent banking through LEI inclusion in ISO20022 messages?
1. Improved Transparency and Standardisation:
The inclusion of LEIs in ISO 20022 messages allows for a clear and standardised identification of parties involved in correspondent banking. This improves transparency and reduces the risk of erroneous or fraudulent activities. With LEIs, banks and financial institutions can easily verify the identity of their clients and counterparties, making the process more efficient and secure. Moreover, with the standardisation of identification, cross-border payments and trade activities become more streamlined. This ultimately leads to a reduction in processing times and costs, benefiting both banks and their clients.
2. Enhanced Compliance and Risk Management:
One of the major challenges faced by correspondent banking is the increasing regulatory and compliance requirements. By using LEIs in ISO 20022 messages, banks can effectively comply with regulations and mitigate risks associated with correspondent banking. LEIs provide a holistic view of the legal entities involved in financial transactions, making it easier for banks to monitor and assess their clients' and counterparties' risks. This allows for better risk management, reducing the likelihood of financial crime and improving the overall integrity of the financial system.
3. Cost Savings and Efficiency:
Correspondent banking is a costly business, with high operational costs due to the complexity of cross-border transactions and compliance requirements. By streamlining the process through LEI inclusion in ISO 20022 messages, banks can achieve cost savings and improve efficiency. With standardised identification and improved compliance, banks can reduce manual processes and errors, leading to cost savings in the long run. The streamlined process also means quicker transaction processing, which can be a significant advantage in today's fast-paced financial industry.
4. Facilitates Regulatory Reporting:
LEIs also play a crucial role in regulatory reporting. With the increasing focus on transparency and accountability, regulators require banks to provide detailed data on their clients and counterparties. By including LEIs in ISO 20022 messages, banks can easily report accurate and timely data to regulators, reducing the burden of reporting requirements.
5. Promotes Financial Inclusion:
Streamlining correspondent banking through LEI inclusion in ISO 20022 messages can also promote financial inclusion. LEIs allow for the standardisation and transparency of financial transactions, making it easier for smaller, local banks to enter the correspondent banking market. This can lead to increased access to finance for underserved regions and improve global financial inclusion.
In conclusion, the inclusion of LEIs in ISO 20022 messages has the potential to revolutionise correspondent banking and address the challenges faced by this crucial aspect of the financial industry. By promoting transparency, standardisation, and efficiency, LEIs can benefit all stakeholders, including banks, clients, and regulators. As the use of LEIs continues to grow, we can expect to see a more secure, efficient and inclusive correspondent banking landscape.
