The need for the LEI System in Global Shipping
The Bank of International Settlements (BIS) compare the standardization power of the LEI to that of the standardization of the shipping container and the economic advantages that came with it.
The paper written by Francis Gross alludes to the fact that making basic micro-data freely available on participants in a marketplace would have huge benefits to the wider economy, but must be i) globally standardised, ii) real time and iii) must be granular. These are the three key characteristics which make up the global LEI system.
It has become quite apparent that the absence in the past of an accurate, comprehensive, and international system for the identification of parties to financial transactions has created a multitude of problems. Incidences of money laundering and corruption continue to cause major issues as highlighted by the recent release of the Pandora Papers, which uncovered evidence of fraud and money-laundering reaching to the highest echelons of society.
With large corporate bodies wrapped up in an intricate web of faceless subsidiaries it is getting harder and harder to know who you are dealing with. And more over, harder to answer the age old questions of “Who owns Whom?”.
One industry that knows this more than others is the ‘Shipping Sector’. Maritime shipping is the backbone of world trade. It is estimated that some 80 percent of all goods are carried by sea. As of 2019, the total value of the annual world shipping trade had reached more than 14 trillion US Dollars. Shipping offers the cheapest mode of transport per tonne. The shipping industry’s ability to transport goods cheaply and in large volumes, and with a minimal environmental footprint highlights its huge importance in world trade.
In an industry so big it is essential that there is a system in place that enables clear and unique identification of legal entities participating in financial transactions, namely, the Legal Entity Identifier (LEI).
To give you an idea, there are around 5,250 container ships in operation globally. Each container ship can carry up to 22,000 container units (TEUs) each around 20-40ft in length. Each one of these containers may belong to a different company, or some to the same company but different branches of that company.
How do you know who owns what?
Shipping companies around the world have voluntarily adopted the LEI, and simply assign the LEI of the company to its containers. This works very well as the LEI is standardised globally, and machine readable, meaning it can easily be integrated into software systems and management portals, working similar to a barcode in a store.
The LEI can be used by a company to track its cargo, and by the ship crew to identify what belongs where using a globally recognised identifier.
The Legal Entity Identifier has previously been compared to shipping containers in a 2014 Forbes article by Tom Groenfeldt
“When shipping containers were first introduced, they came in a variety of shapes and sizes, so it was difficult to transport and store them. A public-private partnership led to the development of the standard 20- and 40-foot containers.
The Legal Entity Identifier is similar. In 2012 the G20 asked regulators to develop a global system to identify financial firms, at least initially, that would be attractive to users. Now the LEI has 300,000 registered entities and can answer the question of Who?
The next step will be to use LEIs to show Who owns Whom — to show at least parent-child corporate relationships, and a third step will be to show Who Owns What, as LEI’s get attached to products.” - Forbes
The introduction of the Legal Entity Identifier (LEI) system offers a global system to identify legal entities. The primary benefit of the LEI system comes from its KYC (know your customer) applications. The ability to identify and aggregate all the existing and potential clients inside corporate systems that brings big benefits to many entities.
This includes when dealing with a customer thousands of Kilometres away such as a supplier of cargo ships or potential client looking to use your services.
“It is the only open, standardized and regulatory-endorsed system capable of establishing digitized trust between all legal entities, everywhere” - GLEIF
Other benefits of the Legal Entity Identifier System Include:
1. It is Unique: The Legal Entity Identifier system architecture assumes that only one LEI can be assigned to a legal entity. It assumes LEIs cannot be reused, duplicated and are annually renewed.
2. Reduce Risk: The LEI system can reduce risk associated with financial transactions because you are more able to assess the situation and make informed decisions.
3. Reduce Onboarding Costs: LEIs can reduce onboarding costs by 10%, resulting in an overall reduction in capital market operating costs. McKinsey recently published a study claiming that broader adoption of the LEI would save the global banking sector between 2-4 billion USD annually.
4. Promote Transparency in the Marketplace: By registering for an LEI, you’re making a commitment to promoting transparency within the global marketplace and improving your own credibility. The LEI system is destined to become the global standard for the unique identification of legal entities across the global financial sector and beyond.
How to get an LEI Code:
LEI Worldwide have been providing LEIs globally since 2017. With global coverage, LEI Worldwide can have an LEI code issued to you within hours regardless of your jurisdiction or entity type.
LEI Worldwide allow you to get your LEI Number hassle free and no need to even register an account. To receive confirmation of your new LEI number in the fastest, most secure way possible complete the 5 minute LEI application form here.