Role of LEI in KYC & AML

In a world where most organizations are becoming more and more digital in all aspects of their everyday operations, the future of corporate digital identification is crucial. The Financial Stability Board and G20-backed Legal Entity Identifier (LEI) is a purpose-driven effort that will continue to evolve the traditional sticking point of identifying your business partners and customers in an online age. Given that the LEI was created with future technologies in mind, it offers a global, digital solution to a global, digital problem that will be applicable not just in the present market but also for a very long time.

The most recent version of the virtual LEI (vLEI) was designed to securely assign signing authority rights, and as PharmaLedger's implementation of the vLEI has demonstrated, this functionality is also functional in blockchain applications.

The LEI is expected to gain traction in tandem with expanding regulatory mandates and voluntary adoption, as businesses realize the benefits of obtaining an LEI number. If you are required by LEI regulations to have an LEI but have not yet got one, you may run the risk of encountering issues with banks, financial intermediaries, or regulators. You may also be faced with a "no LEI no trade" ruling or a transaction that is banned or delayed.

Technology has completely changed the way we operate. This includes significant time and cost savings from the automation and digitization of several manual procedures both inside and between enterprises. The emergence of digital technology has also greatly streamlined the establishment process, facilitating cross-border transactions and the exploration of new markets.

In this increasingly transnational digital economy, several distinct challenges come to light. One of them is the ongoing, expensive, and time-consuming process of confirming the identities of partners, suppliers, and customers. The advent of digital technology has also significantly expedited the establishment process, making it easier to do cross-border business and investigate new markets.

In an increasingly globalized digital economy, a number of unique issues emerge. One of the most costly, time-consuming, and continuous processes is the identification verification of suppliers, customers, and partners. This is where concepts like Know Your Customer (KYC), Anti-Money Laundering (AML), and the Legal Entity Identifier (LEI) become essential tools for businesses to ensure compliance and streamline operations. To explore the process of obtaining an LEI, you can refer to the LEI application page.

FAQ: Role of LEI in KYC & AML

1. What is an LEI and why is it relevant to KYC/AML?
The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code that uniquely identifies legal entities participating in financial transactions. It is issued under the Global Legal Entity Identifier Foundation (GLEIF) framework.

In the context of KYC and AML, the LEI helps financial institutions:

• Uniquely identify legal entities
• Verify ownership and corporate hierarchy (via GLEIF data)
• Cross-check client identities globally
• Simplify due diligence and screening

2. What role does LEI play in AML compliance?
LEI enhances AML measures by:

• Enabling risk profiling of clients based on global transaction patterns
• Identifying shell companies or complex corporate structures
• Aiding in screening against sanctions/watchlists via reliable ID
• Allowing centralized monitoring of multiple accounts held by the same entity

 3. Can LEI replace traditional KYC documents? 

No, LEI complements but does not replace core KYC documents (e.g., PAN, company registration, address proofs). It acts as a trusted data point to improve efficiency, reliability, and global identification. 

4. How can financial institutions integrate LEI into KYC/AML systems?

• Include LEI in onboarding checklists for corporate clients
• Automate GLEIF lookups during due diligence
• Link LEI data with transaction monitoring systems
• Use LEI to improve risk scoring models
• Validate and renew LEIs as part of ongoing due diligence (ODD)

5. What are the benefits of using LEI in KYC/AML?

• Reduces onboarding time
• Improves data accuracy and client verification
• Aids in detecting suspicious ownership structures
• Enhances regulatory reporting (e.g., FATCA, CRS)
• Lowers compliance costs in the long run

6. What challenges exist in using LEI for KYC?

• Voluntary adoption in some jurisdictions limits data coverage
• Not available for individuals (only legal entities)
• Data quality depends on entity self-reporting and LOUs
• LEIs must be renewed annually to remain valid