Legal Entity Identifier - Building Unique Global Identities For Businesses
The Legal Entity Identifier (LEI) is a 20-character, alphanumeric code that uniquely identifies a legal entity or structure that is a party to a financial transaction in any jurisdiction. The LEI connects to key reference information that enables a clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who’ and ‘who owns whom’.
Mohan Ramaswamy, CEO and Founder, Rubix Data Sciences says, “The LEI was developed as a collaborative effort by regulators across the world to push transparency in transactions across markets, products, and regions. Businesses and organisations must mandatorily quote their LEI for many types of transactions when doing business abroad. Not only from the regulatory standpoint, obtaining the LEI is very beneficial for businesses, especially those involved in export and import activities.”
Advantages of the LEI:
When we focus on the impact of LEI on businesses and industry sectors, it is interesting to note how large-scale adoption of LEI across markets and geographies has been resulting far-reaching benefits. Ramaswamy explains how since LEIs are the global standard for identification, using information associated with a company’s LEI means that one can be confident of the identity and ownership of the entity with whom one transacts. This enables better risk assessment and risk management.
Further, faster onboarding and KYC, in turn, improves the client experience. According to a GLEIF whitepaper on onboarding processes, 2 in 5 senior salespeople are concerned about losing potential customers during lengthy and complex onboarding processes. LEIs not only drastically reduce the administrative burden for all the parties involved, but they do so without compromising the integrity of the process. It can promote efficiencies among banks and large corporations by cutting down the labour and time taken for KYC and onboarding.
According to GLEIF and McKinsey, the global investment banking industry can save 3.5 per cent of its capital market operations costs alone by using LEIs to shrink onboarding costs by 10 per cent. There will be further savings in terms of reduced manhours in verifying and updating data.
Ramaswamy adds, “As LEI usage grows, regulators and market participants will be able to better understand corporate hierarchies and family trees. Through this, financial regulators can derive insights about ownership, control, and concentration risk in the economy. If we look at the future, open banking is being touted as the next big transformational trend in the financial sector. LEI Data Mapping will be a very important tool in fuelling this trend, as it will automate processes and eliminate the need for humans to perform manual checks and create compatible information.”
Globally, the LEI system reduces risk in the financial system by bringing about transparency, cutting down complexity in identity validation, reducing the secrecy around business relationships, and helping combat money laundering and terrorist financing. As the adoption of LEI becomes more popular and commonplace across regions and markets, with more regulators enforcing its use, the LEI will help provide stability to the global financial system, reducing the probability of events like the subprime crisis. The Global Legal Entity Identifier Foundation or GLEIF is a non-profit supranational body based in Switzerland that has been tasked to implement and oversee the use of LEI all over the world. To preserve the sanctity of the systems, GLEIF has accredited and appointed issuing organisations, called Local Operating Units or LOUs, in various jurisdictions and only these organisations are authorised to issue LEIs. Further, the GLEIF has appointed validation agents to operate under specific LOUs to streamline the LEI issuance process. In this context, the only LOU in India is the Legal Entity Identifier India Limited (LEIL), a 100 per cent subsidiary of The Clearing Corporation of India Ltd. LEIL is also recognised by the Reserve Bank of India (RBI) as an issuer of LEIs in India. “Rubix Data Sciences is the first Validation Agent to be appointed in India to work with LEIL to issue globally compatible LEIs in India. As a Validation Agent, Rubix helps Indian businesses obtain the LEI which enables them to get recognition and standing in the global marketplace. Our focus is on helping Indian businesses, particularly MSMEs, to get the LEI easily and cost-effectively,” Ramaswamy stated. Regulators in India, including the RBI, SEBI, and IRDAI, have mandated quoting the LEI for various types of transactions:-
“Given the unprecedented volatility in geopolitics, trade, and financial markets, the credit, supplier, and compliance risk of B2B counterparties is a key challenge for businesses in today’s times. Therefore, Rubix helps conduct KYC checks and assess and monitor counterparty risk at all stages of the credit lifecycle; Onboarding, Credit Decisioning, Risk Monitoring, and B2B Collection. Thus, we provide deep risk insights, leveraging alternate data, including social media data,” Ramaswamy added.
With the increasing demand for bank credit, supply chain finance, and credit insurance, risk analytics and technology will be required more than ever. For instance, the COVID-19 pandemic threw supply and distribution chains into disarray. Contrary to initial expectations, the need for risk decisioning tools increased dramatically during this time when businesses worldwide went bankrupt and faced serious financial challenges. This industry offers endless possibilities and the stakeholders are extremely upbeat about the scope in the future. It is inevitable that trade credit in India will grow as companies grow and supply and distribution chains get formalised. New partners will need to be assessed, and existing partners' risk will need to be monitored by the stakeholders of this industry.
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