Legal Entity Identifier and Compliance Value Chain

  • Legal Entity Identifier (LEI)

Introduction

The International Organization for Standardization (ISO) developed the ISO 17442 standard, which forms the basis for the 20-character alphanumeric Legal Entity Identifier (LEI). This standard links to essential reference data, enabling the distinct and unambiguous identification of legal organizations engaged in financial transactions. Each LEI provides details regarding an entity's ownership structure, addressing the questions of "who is who" and "who owns whom." Essentially, the publicly accessible LEI data pool significantly enhances transparency in the global economy.

The Role of GLEIF's Global LEI Index

GLEIF's Global LEI Index plays a major role in promoting transparency by providing convenient and free access to the complete LEI data for all interested parties. Authorities worldwide use the Legal Entity Identifier to make markets more transparent, with its usage mandated by more than 116 laws. In regulated environments, financial transactions often require the declaration of the LEI number by both counterparties.

The LEI database, which is publicly available, contains more than two million LEI numbers and codes. Historically, legal entities employed a wide range of identifiers for various purposes. The LEI is gradually replacing these diverse identifiers. The LEI's global nature and independence from the type of entity make it unique and well-positioned to become a standard identifier used by all businesses and countries.

LEI as a Master Identifier

The LEI can serve as a "master identifier" in the international digital economy, reducing the need for previous identifiers without necessarily replacing them. For example, an entity's International Securities Identification Number (ISIN) can be found in an LEI record, providing multiple data points for validating or verifying any given business.

LEI Compliance in the Compliance Value Chain

The compliance value chain comprises four main parts: onboarding, monitoring, detection, and reporting. The LEI compliance positively affects every element of this broader compliance process.

1. Onboarding: During the onboarding process, the LEI is crucial for Customer Due Diligence (CDD), Know Your Customer (KYC), and Anti-Money Laundering (AML) processes. The LEI helps ensure that legal entities are accurately identified and their ownership structures are clearly understood.

2. Monitoring: LEIs are used in monitoring transactions, communications, and market surveillance. By providing a standardized identifier, the LEI helps track and monitor activities more effectively, enhancing transparency and reducing the risk of fraud or illicit activities.

3. Detection: In the detection phase, which includes risk management, cybersecurity, and capital planning/stress testing, the LEI helps identify potential risks and vulnerabilities associated with specific legal entities. This facilitates better risk assessment and management.

4. Reporting: LEIs play a key role in information security, financial, and regulatory reporting. They ensure that reports are accurate and consistent, providing regulators and other stakeholders with reliable data on legal entities.

Internal systems, continuous background ID checks, and compliance management are examples of process tools and controls that benefit from LEI compliance. The LEI enhances the efficiency and effectiveness of these processes by providing a standardized identifier that can be used across various systems and applications.

Conclusion

The Legal Entity Identifier (LEI) is a critical tool for enhancing transparency and compliance in the global financial system. By providing a standardized identifier for legal entities, the LEI improves the accuracy and reliability of financial transactions, regulatory reporting, and risk management processes. GLEIF's Global LEI Index plays a vital role in making LEI data accessible to all interested parties, contributing to a more transparent and secure global economy. As the LEI continues to gain adoption, it has the potential to become a universal identifier that simplifies and enhances compliance processes across the financial industry.

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