The Legal Entity Identifier (LEI) is making the world a safer, more transparent place to do business

Guest Post By Darragh Hayes,
LEI Worldwide, 30th July 2020

What is the Legal Entity Identifier System?

The global financial system has been re-examined since the beginning of the global financial crisis in 2008. One of the key issues which not only triggered the fallout but prevented recovery was a lack of visibility and transparency into financial institutions such as the since liquidated Lehmann Bros. With a lot of uncertainty brought on by COVID-19, we are revisiting the lessons learned and new systems implemented since then. One of which is the Legal Entity Identifier system.

In the build-up to 2008, without proper transparency regulations, investments banks were engaging in risky ventures and began hedge fund trading with the derivatives markets. With no clear way to identify who was behind each transaction, these institutions and regulators were put in a precarious position.

In 2011 the G20 nations came together in Cannes, France and sought to resolve this issue. It was agreed that the world needed a new way of identifying companies engaging in financial transactions, this time on a global scale.

Previously, we could use identifiers such as ISINs and CUSIPs to give an identity record to assets. But we lacked transparency on who owned the assets, who was selling and who was buying. It was difficult to identify trade counterparties in the securities markets and this made it near impossible for regulators to spot systemic risk and damaging trends in the markets.

The G20 gave rise to the idea of the global Legal Entity Identifier (LEI) system. This was to be a database of all the companies transacting in the financial system around the world.

How does the LEI system work?

The G20 designated the Financial Stability Board (FSB) to provide recommendations on how to implement this. The FSB created the GLEIF (Global Legal Entity Identifier Foundation) who are responsible for overseeing the project.

Each legal entity (limited company/fund/trust) would be assigned an LEI number and this number would be used to identify it in transaction reporting.

Most importantly this database would be free to use, easy to access, accurate and global. You can access the LEI database here (try searching for a company you are familiar with like Google LLC, or Apple Inc): GLEIF Search Tool.

Today there are almost 1.7 million LEIs in existence and the LEI is currently being adopted as the single most important identifier in the global financial ecosystem.

What does an LEI look like?

An LEI is a globally verifiable 20 digit alpha-numeric code assigned to each individual company. Each LEI code is standardised and contains data about a company such as its identity, address and group structure.

The first four digits for the code belong to the LEI issuer or LOU. The next two always remain as zero, zero. The next twelve digits are unique legal entity identifier codes, and the last two are checking digits.

Who needs an LEI?

The adoption Legal Entity Identifier is primarily driven by regulation. To date, most LEIs have been registered in the United States (13%), followed by the United Kingdom, Germany, Netherlands and Italy. The European Union and the US have the largest and most advanced regulatory frameworks.

In America, the Securities and Exchange Commission (SEC) has mandated the use of LEIs for transaction reporting in the securities markets. Likewise, the European Securities Monetary Authority (ESMA) has mandated its use with regulations such as SFTR (Securities Financing Transaction Regulation) and CSDR (Central Securities Depository Regulation).

Regulatory bodies all across the world have followed suit and implemented their own versions, such as the HKMA (Hong Kong Monetary Authority) and ASIC (The Australian Securities and Investments Commission) have mandated the use of the LEI in OTC Derivatives transaction reporting.

Some example of companies that will require an LEI are financial intermediaries (CSDs), anybody issuing credit or debt (e.g mortgage brokers), funds, trusts, banks, investment firms, publicly traded companies and pension schemes. This can be looked at as any industry which is heavily regulated and involves large monetary transactions or investments.

What are the benefits of obtaining an LEI?

Having a Legal Entity Identifier is not just a regulatory requirement which must be adhered to. There are plenty of benefits to having one besides being compliant with global regulations, and many companies have adopted the LEI voluntarily.

The LEI gives your company brand protection and secures your digital identity. When your company is listed on the LEI index, it proves that you are a real company registered via a companies registry. This is why banks have begun including an LEI check to their customer onboarding and KYC procedures. Many banks will now ask for your LEI Code before issuing a loan or credit.

Recent research conducted by McKinsey has shown that the global banking industry can save up to $2-4 Billion US Dollars annually by replacing outdated, clunky KYC methods with a quick LEI check.

Having an LEI will also tell your international investors or customers that you are who you say you are, and stand behind your company. As is the case in many cases of fraud, or identity theft companies will have the same or a similar name. You can’t fake having an LEI Code and you can’t steal another company’s LEI.

How to apply for a Legal Entity Identifier?

Any entity that is considered a legal entity such as a company, trust, association, or government body may apply for a Legal Entity Identifier. This can be done at a designated Local Operating Unit or Legal Entity Identifier Registration Agent. An LEI  application takes between one to 24 hours to complete and your company will be automatically listed on the GLEIF LEI Index within 8 hours.

A third party can apply for an LEI on behalf of another company. For the purpose of registering an LEI you will be required to provide:

  • Official Company Name
  • Registered Address
  • Name of company representative (Director/CEO)
  • A registry document as evidence of the above

Legal Entity Identifiers also require annual renewal. This is to ensure that the data contained in the LEI system is up to date and accurate. If an LEI is not renewed it will be shown as LAPSED on the LEI index and this could cause blocked trades or payments, and complications with financial service providers.

For more information on how to apply or to obtain a Legal Entity Identifier please complete our Contact Us form or call+353 1 6874518. Company Registrations Worldwide team would be happy to assist you.