If you are taking part in international financial transactions you will likely already be required to have a Legal Entity Identifier (LEI), as it is primarily driven by regulation in the financial services sector. However, there are many ancillary benefits associated with having an LEI Number for your company.
A Legal Entity Identifier is a 20 digit alpha-numeric code that is assigned to each company to help identify it on a global database. The Global LEI System is a G20 endorsed, ISO standard that assigns LEI Codes to each market participant and uploads them to a freely accessible, standardized database.
The need for such an identifier arose with the liquidation of Lehmann Bros and the capital markets in 2008. The world felt the shockwaves of the crash due to having relaxed regulatory requirements around securities trading, identity management and a lack of standardized reporting systems, which to put it frankly caused a cataclysmic mess. The LEI system is an effort to bring about more transparency and decrease risk associated with the abuse of capital markets activity. Something that will serve us well in the era of COVID-19 and negative fuel prices.
The fruits of having such a system whereby all market participants are listed on a single database are plentiful. The LEI is now being rolled out with already 1.6 million LEIs and they are having a profound effect in multiple business use cases. McKinsey recently published a report stating that the LEI system can save the banking industry between 2-4 billion USD annually in KYC checks alone.
The best thing about the LEI system is that anybody can get one. Find out why you should do it today here:
1) Trust in Identity
Knowing who you are dealing with, and being able to prove who you are is very important in a world where most transactions happen online.
Your international customers or potential buyers will want you to prove that a) you are a real company and b) you are who you say you are. Having a Legal Entity Identifier is a guaranteed way of proving you are a registered entity and showing you stand behind your company.
Digital certificates have helped reduce fraud, well, the LEI is an extra layer of security. In many cases of fraud, or identity theft companies will have the same or a similar name but be registered in a different jurisdiction. Unlike names and jurisdictions, you can only have one unique LEI that is both permanent and immutable.
This is why the LEI Number has become such a trusted identifier for many regulators and lawmakers.
There is a famous maxim that was coined by regulators when the LEI was first being adopted in 2018, it goes “No LEI, No Trade”. This means that your trades will be blocked in many instances if you are not identified to financial intermediaries via an LEI.
In 2018, MiFID 2 was introduced along with a whole host of financial regulations such as EMIR, SFTR & CSDR. The main aim of these regulations was to bring structure, responsibility and standardization to the trading of international securities, particularly within the EU.
The one thing all of these regulations has in common, is that the entities who they apply to must have an LEI code.
3) Global Recognition:
Previously, if you were contemplating engaging in transactions with a company in China for example, without knowledge of the Chinese language you had very little way of knowing or researching their validity. If I want to search about a UK company I can access the Companies House database easily, but what if I wanted to know about a French company, or a Russian company. Where would I go?
The LEI is the solution to this. The LEI system is the global version of the Companies House, or any national company registry for that matter. By having an LEI, your customers from abroad can easily find reliable, up to date and meaningful information about you and moreover, they can trust that information. There are already many investors and banking institutions who request an LEI before they will engage in business with a potential customer or company.
4) Use cases set to grow exponentially
Witnessing the success of the LEI, and watching the system grow from its infancy to its maturity other industries are starting to take note and incorporate it into their practices and systems.
- Many organisations have adopted an LEI check as a critical step in their KYC processes.
- LEIs add an extra layer of security to digital signatures, PKIs and SSL Certificates.
- There are multiple cases of the LEI being integrated with a blockchain system. Already in the works is an “organization wallet” whereby the delegation of signing authority will be facilitated by a distributed ledger technology.
- With access to LEI data banks can make their Anti-Money Laundering (AML) processes more efficient by easily identifying and flagging high risk transactions and suspicious behavior.
5) Easy to get:
The process for obtaining a Legal Entity Identifier is relatively cost effective, fast and hassle free.
You can apply for an LEI Number at an accredited LEI Registration agent such as LEI Worldwide. The application form requests basic company information such as name, registration number and registered address.
Once the application has been submitted your LEI Number will be generated and uploaded to the global LEI index where it will be accessible to regulators and customers worldwide adding an extra layer to the ever increasing importance of digital identity in the modern world.