How the LEI Can Help Financial Institutions ‘Address’ a Growing Challenge in ISO 20022

Addresses are foundational to the global economy. As noted by the Universal Postal Union, "addresses form an important part of the basic information needed to ensure communication (both digital and physical) between individuals, governments, and organizations."

Given the fundamental role in enabling legitimate access to global commerce, incorrect, incomplete, or incongruous address information is often seen as a 'red flag' signaling nefarious activity within cross-border payments. The Financial Action Task Force (FATF) Recommendations, which set out a comprehensive and consistent framework of measures to combat money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction, make this clear. Specifically, FATF Recommendation 16 aims to ensure that basic information (including address) on the originator and beneficiary of wire transfers is immediately available and included within the payment message.

Address formats and payment messages

Yet the inclusion of address information within a payment message, where every extra byte increases costs and reduces speed, presents particular and unique challenges. Address structures are wildly inconsistent across countries and jurisdictions and can be unfathomably complex, given the vast array of potential combinations. Cross-border payments compound this complexity. These transactions often involve organizations with addresses in different languages, formats, and colloquial styles.

In a bid to accommodate, payment messaging standards have favored character-limited free text lines or open fields for address information. While this approach offers a degree of flexibility (to account for the inherent variability), it also resists automation and thus inhibits straight-through processing (STP) because manual intervention is often required.

The ISO 20022 messaging standard aims to solve this problem through the introduction of highly structured, discrete, character-limited elements for specific address information, reflecting a broader drive for more consistent and structured data in payment processing to promote greater interoperability in cross-border payments and beyond. 

As of today, the following address fields have been defined within ISO 20022:

• Address Type
• Address Line
• Department
• Sub Department
• Street Name
• Building Number
• Building Name
• Floor
• Post Box
• Room
• Postcode
• Town Name
• Town Location Name
• District Name
• Country Sub Division
• Country

While such highly specified address structures are undoubtedly useful in some domestic use cases where, for example, entities share the same address formats and language, cross-border payments reveal limitations.  

This is hardly surprising; it would be practically impossible to provide standardized fields for every conceivable variation in physical address structures globally. To take one real-world example, an entity whose address is listed as the third floor of a building, within a golf course, close to a business park, near a ring road. Similarly, what is the practical, scalable solution for jurisdictions where street names are uncommon and addresses must be described in terms of proximity to local landmarks (i.e. 75 meters north and 50 meters east of a Church)? Add in the need to parse different languages and writing systems, and it is apparent that different organizations are not going to interpret addresses the same way.

Mapping the LEI to ISO 20022

Rather than add further structured fields in response to outliers (which stand to only contribute to further complexity), overcoming this problem requires a common, globally consistent starting point. This is especially true for the creditor address data information in cross-border payment transactions. While debtor address information can be sourced from the debtor agent’s KYC master records, the debtor interpretation of the creditor address into the ISO 20022 format is recognized as being 'problematic'.

Happily, such a common, globally consistent starting point for address information already exists within the Legal Entity Identifier (LEI). The LEI is a 20-character, alpha-numeric code that connects to key reference data, including address information, that enables clear and unique identification of all entities participating in a financial transaction.

In comparison to the highly structured ISO 20022 address format, the LEI is more streamlined and minimally structured to account for the significant variability and flexibility. This is particularly important in the context of cross-border payments, where differences in address format are guaranteed. While this means that the format of the structured address within the LEI does not match exactly the format of the structured address within an ISO 20022 payment message, the LEI Index can be used to map LEI address data into the ISO 20022 format.

Put simply, the LEI address information should be considered compliant with ISO 20022, and relevant address fields can be retrieved from the LEI reference data in an automated manner to reduce ambiguity and enable STP.

GLEIF provides this mapping here and highlights the opportunity for financial institutions to reduce the complexity of structuring beneficiary customer information by leveraging the LEI as the organizational identifier for the beneficiary. This will "reduce the touch points and impact on clients, optimize resources and investments while enabling the bank to provide significant improvement in client experience."

GLEIF has also received direct industry feedback from financial institutions flagging that it would be helpful and logical to leverage the LEI reference data to meet ISO 20022 requirements on customer’s address since the LEI is mandatory for most of these messages.

Supporting the global fight against financial crime

The ability to map LEI address data into the ISO 20022 format has important implications. The challenges of address validation are emblematic of an increasingly pressing need to improve data quality to bolster the global fight against financial crime. Project Aurora - an analysis by the Bank of International Settlements (BIS) Innovation Hub - identified 'data quality and standardization of the data identifiers and fields' contained within payment messages as key factors. This echoes the findings of the FATF, which has flagged data-sharing, data standardization, and advanced analytics as underpinning effective anti-money laundering (AML) and counter-terrorist financing (CTF) initiatives across borders.

Given this directional trend, leveraging the LEI to overcome challenges in interpreting address information stands to become a powerful way to align with emerging regulation. Looking more broadly, the LEI offers unique benefits to support globally standardized, lightweight, efficient payment messages that can be fully automated, helping to realize the promise of faster, cheaper, and more transparent and inclusive cross-border transactions.

For this reason, GLEIF has engaged extensively with various stakeholder groups across the industry on the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) consultation on ISO 20022 harmonization requirements, advocating that the LEI be introduced as the identifier of the debtor/creditor in payment messages and be allocated the same status as the Business Identifier Code (BIC) regarding the substitution of name and postal address.

GLEIF has also highlighted an unmissable opportunity to consider the use of the LEI in the planned review of FATF Recommendation 16. GLEIF posits that where the originator or beneficiary is a legal entity, a trust, or any other organization that has legal capacity under national law, the LEI should be included within the information accompanying the qualifying wire transfer.