Ever hear the old Abbott & Costellos's Who's on First sketch, where there’s much confusion due to the names of fictitious baseball players? Well, in business, confusion around a company name can also cause big problems, significant delays and even losses, especially as commerce expands globally - and it’s no laughing matter. A more precise standard for identifying legal entities is necessary and thus the introduction of the Legal Entity Identifier (LEI) is a significant development for improving the transparency of commerce.
The LEI is a 20-digit, alpha-numeric code that identifies legal entities participating in financial transactions. Each LEI is unique and contains reference information that enables simple and quick identification of an entity. As an international standard (based on ISO 17442), all LEI information is openly published and accessible to all.
While companies often have business registration numbers in the country they are formed in, an LEI is an international standard designed for more seamless cross-border transactions. Business registration standards will vary according the country, but the LEI format is the same across the globe.
While the Global Legal Entity Identifier Foundation (the foundation tasked by the Financial Stability Board to operate the LEI system) was only established in 2014, there are already numerous regulations for having an LEI when conducting financial transactions.
For example, MiFID II — the EU directive for numerous trading compliance activities — calls for every financial trade to have an LEI (or a natural person identifier, if it’s an individual). While the directive came into effect on January 3, 2018 the ESMA issued a six-month temporary reprieve on full LEI requirements, in cases where the client is in process of acquiring an LEI, or where the client is a non-EU issuer.
It’s up to each different regulator in each country to determine how they will adopt the LEI standard. Already, there are 75 different regulations in jurisdictions around the world that require LEI. A further 42 regulations request LEI, while six global regulatory bodies recommend LEI on a national or regional level.
For companies requiring an LEI, the process is fairly simple: companies contact an LEI issuing organization, provide the necessary information, and pay the appropriate fees. The issuing organization then checks the information against an authoritative source, such as a business register, and if everything checks out, you get your LEI.
The minimum data that is necessary to confirm an LEI is:
- The official name of the legal entity as recorded in the official registers
- The registered address of that legal entity
- The country of formation
- The codes for the representation of names of countries and their subdivisions
- The date of the first LEI assignment, the date of last update of the LEI information, and the date of expiry, if applicable
The actual 20-character LEI is divided into three parts. The first four characters are to identify the issuing organization, characters 5-18 identify the company, while the last two characters are check digits.
As global business and third-party relationships becomes more complex, the need for clear and speedy business identification grows. Common standards, like LEI, enable better identification and better data sharing, helping to lower costs and speed up business processes. Of course, appropriate due diligence is still necessary; one number won’t magically solve all Know Your Business (KYB) requirements. But, as an added data point and extra check to ensure you can trust your business relationships, LEI is another useful tool for international business growth.
Need to expand your knowledge of LEI in the identity space? The Global Legal Entity Identifier Foundation is hosting a day-long workshop on identity management for legal entities in San Francisco on May 17, 2018. There will be a discussion as part of a panel on technology solutions for identity management. Watch the GLEIF site for more details on the workshop – including the agenda, speakers and registration information.