Rubix Data Sciences, FEBIS member that has been recently appointed Validation Agent for Legal Entity Identifier in India answers some questions about the LEI to help us understand what it is about and its benefits.
What is L.E.I?
The Legal Entity Identifier (LEI) is a 20-character alpha-numeric global reference code that uniquely identifies every legal entity or structure that is a party to a financial transaction in any jurisdiction. It connects to key reference information that enables a clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and answers the questions of ‘who is who’ and ‘who owns whom’.
Why was the L.E.I system created?
During the Global Financial Crisis of 2008-09, Lehman Brothers collapsed, and at that time regulators and private-sector firms struggled to assess how deeply market participants were affected by their exposure to the fallen entity. They grappled to untangle the vast interconnected network of market participants that were exposed to Lehman Brothers and their financial connections. The Global Financial Crisis was a watershed moment and there was a definitive call for making transactions across markets, products, and regions more transparent. It became clear that regulators and companies needed an international system for identifying financial connections to better understand risk exposures. Thus, the LEI was developed as a collaborative effort by regulators across the world to push transparency in transactions across markets and geographies.
How did the L.E.I system come about?
Before the financial crisis of 2008-09 struck, several attempts to develop a globally standard identification system for entities had failed. The downfall of Lehman Brothers strengthened the resolve among regulators and the major economies of the world to develop such a system. In 2011, leaders of the G-20 countries entrusted the Financial Stability Board or FSB with the responsibility of making recommendations for the creation of a global Legal Entity Identifier and a governing structure that could support it.
The Financial Stability Board is an international body with members from 24 countries and standard-setting and international organisations. Its task is to monitor and make recommendations about the global financial system.
In 2013, ministerial-level representatives from the world’s largest economies, acting through the FSB, handed over the supervision of the global LEI project to the Regulatory Oversight Committee or ROC. The members of the ROC include more than 80 regulators from at least 50 countries. With this, the seeds of the LEI system, as it is today, were sown.
Who is in charge of its development and management?
In June 2014, the Regulatory Oversight Committee established the Global Legal Entity Identifier Foundation or GLEIF in Basel, Switzerland, as a not-for-profit organisation for the implementation and use of LEI. The foundation continues to be backed and overseen by the ROC, representing public authorities from around the globe that have come together to drive forward transparency within global financial markets. The LEI data pool, known as the Global LEI Index, is publicly available on the Global Legal Entity Identifier Foundation’s website and can be regarded as a global directory that greatly enhances transparency in the global marketplace. The data in the LEI pool is non-proprietary, there are no restrictions to access, and information is instantly available at any time. This open and unrestricted access to LEI data is GLIEF’s core service to the public.
To ensure that the Global LEI System evolves according to user requirements, GLEIF has created dedicated stakeholder groups to enable consistent exchange of information with representatives of specific market segments. It further safeguards the operational integrity of the Global LEI System by accrediting the LEI issuing organisations before making them authorised issuers. These LEI issuers operate in specific jurisdictions and are called Local Operating Units or LOUs. Only LOUs are authorised to issue LEIs to legal entities engaging in financial transactions. Further, the GLEIF has appointed validation agents to operate under specific LOUs to streamline the LEI issuance process. In this context, Rubix Data Sciences is the first Validation Agent to be appointed in India to work with the Legal Entity Identifier India Limited, a GLEIF-accredited LOU, to issue globally compatible LEIs in India.
Ultimately, GLEIF’s role is to ascertain that all parties implementing the LEI are observing its governing principles and standards, including reliability, quality, and uniqueness, as these are crucial to achieving the “one golden standard” for the LEI.
How many entities in the world have an LEI?
As of the date of this podcast, GLEIF had issued 2,199,093 LEIs of which 2,103,736 are active. The United States has more than 260,000 active and issued LEIs, the highest among all countries, followed by the UK, Germany, Italy, and Spain. In India, there are more than 99,000 active LEIs.
What kind of entities can apply for an LEI?
Any entity or organisation undertaking financial transactions can apply for an LEI. This includes all kinds of legal entities, including trusts and partnerships. In fact, several regulators around the world mandate financial intermediaries, funds and trusts, banking and financial institutions, and listed entities or companies that issue debt, securities, or equity, to have an LEI.
It is prudent for all business entities across countries to obtain the LEI to avail of its various benefits.
How are LEIs issued?
Firstly, a legal entity applies for an LEI through an LEI issuer through self-registration. In this process, the entity must supply accurate reference data to the LEI issuer. This data includes:
- Business card information such as the official name of a legal entity and its registered address.
- Relationship information for the identification of the direct and ultimate parents of a legal entity, if applicable.
Thereafter, the LEI issuing organisation verifies the reference data with credible, government or statutory sources and issues an LEI number. The LEI issuer charges a fee for this process when the legal entity submits the application.
GLEIF then publishes each issued LEI in the Global LEI Index, which is a complete LEI data pool. It is unique because it is the only globally accepted open online source of high-quality reference data about legal entities in any corner of the world.
Why do entities need LEI, and what are its benefits?
The introduction of LEIs has changed the landscape of global business because it has made it easy to identify transacting parties. The LEI is playing a key role in the safe and secure growth of global finance and commerce.
Let me enumerate some of its benefits:
- The LEI is a global identifier that provides international recognition for your business or organisation. An LEI code cannot be replicated, stolen, or faked. It is a fool-proof way of mitigating fraud and identity theft.
- It is standardised across countries. Therefore, with one common identifier for entities of all forms, types, sizes, and jurisdictions, the confusion around verifying their identities is considerably reduced.
- It serves as an essential identifier in cross-border (international) transactions and helps cut down risks, making it simpler for organisations with LEI to take their business to the global stage.
- Even in domestic markets, LEI helps establish identities across the value chain for security purposes and obtaining finance.
- Small and Medium Enterprises (SMEs) that obtain LEIs can stand out amongst their peers in the domestic and global marketplace, as an LEI confers global credibility.
- LEI is particularly beneficial for exporters and importers as it provides global recognition among prospective buyers and sellers in overseas markets. It also makes it easy for banks to identify them as an exporter or importer when they transact internationally.
- In this age of e-Commerce, displaying the LEI on online marketplace profiles helps potential buyers know that your existence has been validated. It drastically cuts time in KYC and onboarding, helps comply with Anti Money Laundering activities (AML) and KYC regulations, and filters out fake entities.
- LEI also allows the validation of parent-subsidiary relationships, which helps trace the ultimate beneficiary of any transaction.
- Verifying the identity of a counterparty with LEI is very simple. Only a simple search on GLEIF’s open database needs to be done through its web interface or API. The result of such a search will always provide updated information, as the LEI requires annual renewal. During renewal, the latest corporate details of the legal entity are validated once again.
Large-scale adoption of LEI across markets and geographies will have far-reaching benefits.
- It can promote efficiencies among banks and large corporations by cutting down the labour and time taken for KYC and onboarding.
- Faster onboarding and KYC, in turn, improve the client experience. According to a GLEIF whitepaper on onboarding processes, 2 in 5 senior salespeople are concerned about losing potential customers during lengthy and complex onboarding processes. LEIs not only drastically reduce the administrative burden for all the parties involved, but they do so without compromising the integrity of the process.
- As LEIs are the global standard for identification, using information associated with a company’s LEI means that you can be confident of the identity and ownership of the entity with whom you transact. This enables better risk assessment and risk management.
- According to GLEIF and McKinsey, the global investment banking industry can save 3.5% of its capital market operations costs alone by using LEIs to shrink onboarding costs by 10%. There will be further savings in terms of reduced manhours in verifying and updating data.
- Above all, as the number of entities with LEI increases, the transparency and accountability in the marketplace increases, reducing the probability of events like the subprime crisis.
How can LEI benefit the business information industry, in concrete business information providers like FEBIS members (and the whole economy)?
Widespread adoption of LEI, especially in the financial industry, means that the data reported to regulators and used within the organisation for risk management will be more reliable and readily fit for usage.
The LEI can be easily incorporated into KYC or credit reports by business information providers, and it serves as a cross-border identifier. If the business information industry adopts the LEI widely, it will become globally ubiquitous and help prevent identity theft and fraud.
By leveraging the LEI, regulators are able to identify businesses that pose a threat to the stability of the financial system.
As LEI usage grows, regulators and market participants will be able to better understand corporate hierarchies and family trees. Through this, financial regulators can derive insights about ownership, control, and concentration risk in the economy.
If we look at the future, open banking is being touted as the next big transformational trend in the financial sector. LEI Data Mapping will be a very important tool in fuelling this trend, as it will automate processes and eliminate the need for humans to perform manual checks and create compatible information.
Globally, the LEI system reduces risk in the financial system by bringing about transparency, cutting down complexity in identity validation, reducing the secrecy around business relationships, and helping combat money laundering and terrorist financing. As the adoption of LEI becomes more popular and commonplace across regions and markets, with more regulators enforcing its use, the LEI will help provide stability to the global financial system. The Business Information Industry can play a key role in driving the usage of the LEI across countries.
What would you say are the main differences between LEI and other unique numeric identifiers developed by private entities within the business information industry?
Several national, regional, and other identifiers are being used to cover specific needs in business, but the LEI stands out compared to them because it is truly global and has already been adopted by many regulatory authorities in the world. As it is based on an ISO standard, it is independent of local regulations and is jurisdiction-agnostic. Besides, any GLEIF-accredited LOU (Local Operation Unit), anywhere in the world, can issue an LEI.
The Global LEI system was designed to be universal with a wide scope for application. This is crucial to cater to the cross-border needs of the present-day globalised trade. Validation of identity in such a complex environment is critical for ensuring financial stability, and that is feasible only with a global identifier such as the LEI.
The LEI system came into being for the express purpose of creating transparency in financial transactions. Therefore, it has many use cases. For example, banks simply need to check GLEIF’s open LEI database to monitor group exposures when providing credit to any business, as it helps fully understand who the real recipient of the liquidity is. While conducting tender processes for sensitive sectors like defence, government departments can run a check to exclude companies that may have foreign links. Perhaps, the greatest advantage of LEI would be in cross-border fraud prevention.
While offering all these benefits, at its core, LEI ensures standardisation and a single format across the world. The information it contains can be retrieved at any location from a single source, which is the GLEIF database. Besides, more than 100 regulations by governments all over the world already mandate the use of LEI for certain types of transactions, and governments and international regulators have been able to reach a broad consensus over its development and use. This gives LEI an edge over other identifiers, making it the gold standard for identity validation at present.
You can listen to this content also via the FEBIS Podcast episode #20, available via different platforms: https://www.febis.org/media/podcast/