After the 2008 financial crisis, global market regulators agreed that existing identification processes were not fit for purpose. This is what led them to conceive the LEI.
LEIs are issued by Local Operating Units (LOUs) that benefit from local knowledge of infrastructure, corporate organizational frameworks and business practices. They are increasingly being required by regulatory bodies in the US, Europe and Asia.
Increased Security and Brand Protection
The global financial crisis triggered by the collapse of Lehman Brothers underscored the need for a common, simple system to identify and trace market participants and their connections. LEI codes are the result of that effort and bring trust, security and predictability to financial transactions.
In addition, the global LEI will cut costs and improve risk management for individual firms and across the entire financial system, according to McKinsey & Company. This includes reducing the volume of transaction failures; cutting data reconciliation, cleaning and aggregation costs; trimming regulatory reporting requirements; and enabling companies to better understand their own exposures by clearly identifying their counterparties.
Today, most regulated financial entities worldwide are required to obtain an LEI code before conducting financial transactions. In the US, for example, many of the country’s regulations including the Dodd Frank Act and The Commodity Exchange Act require that an LEI be provided for transaction reporting purposes. The Department of the Treasury and the Financial Crimes Enforcement Network also require an LEI for those wishing to report money-laundering activities.
For entrepreneurs planning to take their business global, understanding the importance of LEIs is crucial. Essentially, these codes are like business cards that confirm who is who. Without them, international trades cannot be completed and a business may be blocked by regulators or banks.
Fortunately, it is free and easy to get an LEI number for your company. Simply visit the LEI ROC website and complete a short registration form. While LEI codes are primarily used by regulated financial institutions, it is possible for any legal entity to register and receive one. Once registered, however, it is important to keep the code up to date. If a business fails to update its LEI, it will no longer be valid and will need to apply again to obtain a new one. For this reason, it is a good idea to include the code in all of your business communications and documentation. In addition, it is recommended that you register your LEI in multiple countries so that you have a backup in case of a technical failure or other unforeseen events.
Reduced Risks of Fraudulent Transactions
The financial crisis that began with the collapse of Lehman Brothers in 2008 underscored the need for a global solution to reliably identify legal entities involved in financial transactions. Previously, financial regulators and private-sector firms were unable to track the relationships and exposures between market participants and their subsidiaries or affiliates. The creation of the LEI system has helped address this issue and is a key component in improving transparency, security and integrity in the global financial ecosystem.
An LEI code uniquely identifies each legal entity and links it to critical “business card” type information (Level 1 data) as well as, where applicable, the direct and ultimate parent of the legal entity (Level 2 data). The resulting data is published in the public LEI directory provided by the GLEIF, making it accessible to all stakeholders worldwide. It is based on information provided by the local company registries, validated by the local LEI Operating Units (LOU) and updated annually. The benefits of an LEI Code that can be used as a single, unique identifier for all legal entities are substantial. The unified standard reduces costs associated with manual entity identification and onboarding by eliminating duplication, reducing the risk of errors, and speeding up the process. The LEI is also a key tool for global compliance and due diligence, as it enables companies to easily and quickly verify their counterparties’ identities across different jurisdictions.
Regardless of whether an LEI is required by regulation or implemented voluntarily, all financial entities should consider obtaining one. Those that do will benefit from improved internal reporting, better risk management, and lower costs tied to collecting, cleaning, aggregating, and maintaining data. The use of LEIs can also help ease the burden of regulatory reporting by reducing overlap and duplication with other identifiers, such as SSIs.
Of course, LEIs should be used in conjunction with other fraud prevention tools, including enhanced transaction monitoring, rigorous KYC processes and AI-driven anomaly detection systems. However, using LEI codes to identify and authenticate business partners and clients can significantly reduce the risks of fraudulent activity and make the global marketplace a safer place for all.
Increased Transparency
The global LEI system provides an efficient and cost-effective way to identify legal entities. By providing a unique identifier that can be referenced across databases, the LEI helps to remove duplicate data entry and ensures that consistent information is provided. This reduces costs and increases the reliability of financial reporting. It also makes it easier for regulators to monitor and assess risks in the market.
LEI codes provide a clear and unique identification of the legal entities participating in financial transactions. This allows them to answer the fundamental questions of ‘who is who’ and ‘who owns whom’ in the financial markets. This is important because it mitigates the risk of fraud and market misuse by making it more difficult for individuals or organisations to operate in a way that is not in accordance with regulations and best practice.
Another benefit of the LEI is that it improves transparency for all parties involved in a financial transaction. By making it easy for market participants to link up legal entities, the LEI enables improved risk management and enhanced decision-making. In addition, the use of LEIs enables regulatory bodies to better understand the connections between firms in their supervision activities, as illustrated in this guide about LEIs.
Regulatory bodies around the world are increasingly mandating the use of LEIs. For example, in the OTC derivatives markets, G20 leaders agreed that all companies trading in these products should have an LEI and report this information to trade repositories. This is one of the first steps towards addressing the lack of transparency in these markets, which was a key factor contributing to the 2008 financial crisis.
In addition, the LEI code will help to streamline compliance with other regulatory obligations, such as those arising from the Dodd-Frank Act’s Home Mortgage Disclosure (HMDA) regulation. Using LEIs to identify lenders and borrowers will enable HMDA data to be more easily compared, thus helping to improve the accuracy of lending estimates.
The use of LEI codes will save significant time and money for financial institutions. For example, a single company could save millions of dollars a year by reducing the number of manual tasks that would otherwise be required to reconcile its various internal and external data systems.
Increased Compliance
The underlying premise of the LEI is that it provides an international standard for identification, so that market participants can be unambiguously identified. This is a major benefit in financial transaction compliance. It allows regulators, financial institutions, watchdogs and other stakeholders to verify transacting parties based on their true identities instead of the ambiguous matching of names that currently takes place. This reduces risk, improves data quality and saves time and money for everyone involved.
It’s not hard to see why the LEI has become a critical component of many financial transactions. The global economy uses a variety of different systems for identification, leading to a lot of ambiguity in the financial system, and expensive, error-prone processes that could be avoided with one globally consistent and easily accessible identifier.
In the aftermath of the global financial crisis a decade ago, leaders of the world’s largest economies agreed to work together via the G20 and the Financial Stability Board to develop a solution that would help legally identify market participants across national boundaries and regulatory systems. A key piece of that solution was the development of the LEI – an internationally unique code that is linked to a legal identity and issued by an accredited registration authority. The LEI is a public, free-to-use identifier that offers accurate, accessible and reliable information about a company – including its legal name, its registry, its jurisdiction, whether it’s incorporated, a branch or parent of another entity, and its current status.
While a few of our interviewees pointed to some initial costs associated with moving from existing systems to the LEI, most cited the broader value of the system that will lead to savings in time spent on cleaning, matching and aggregating data, as well as in the cost of reporting to regulators. As the system evolves and grows, these benefits will become more widespread.
To move the needle on the adoption of the LEI, it will be important to shine a spotlight on some “killer applications” that inspire organizations to buy in without regulatory compulsion. We believe that identifying some of these will be possible, and will ultimately prove that the comparatively small fees to register an LEI are outweighed by the resulting cost savings.