The LEI and the Compliance Value Chain

1. Onboarding: Customer onboarding is essentially the process that new users or clients go through to begin using a new service or product. Customer onboarding is relatively simple for certain industries, however in regulated financial services settings the process of onboarding a new client, such as a bank onboarding a financially regulated vehicle is more complicated. Legal boxes must be checked such as Anti-Money Laundering (AML) checks and Know Your Customer (KYC) checks.

This is known as Due diligence (DD), whereby a reasonable amount of investigation is taken such as verifying the identity of the individual or entity being onboarded. Previously, and in many cases still, due diligence is time consuming, and seen as a laborious ‘must do’ exercise. The Legal Entity Identifier, is streamlining a lot of DD as it is similar to having pre-clearance.

Where an LEI is present, it is guaranteed that the legal entity in question has already undergone many of the identity checks being carried out by the onboarder during the process of obtaining an LEI.

The LEI record will tell the onboarder the legal name of the entity, trading name (if present), the entity type (ltd, LLC, fund, trust etc.), the date of incorporation, in some cases the organisation structure known as Level 2 Data, parent and child legal entities, and soon with the introduction of the GLEIF vLEI, the legal signing authorities of that entity. 

If used appropriately this will save financial institutions (FIs) time and resources from having to complete these checks themselves, which can be prone to human error, which we demonstrated in our blog on Inventing Anna and the LEI, and the recent fines received in the UK by Santander for AML breaches.

Recent independent research conducted by McKinsey on the LEI concluded that if the global banking sector were to replace current KYC practices with the LEI, it would save the industry 2-4 billion USD annually. 

2. Monitoring: Monitoring in terms of regulatory compliance relates to the internal quality assurance tests that FIs are required to carry out in order to meet the standards set by their regulator and operational obligations. 

The LEI can add value to financial transaction monitoring. As the LEI is modern and system agnostic, it can easily be integrated with existing systems and enhance machine learning functionality. For example, payment messages can include an LEI so the payee and payer can be identified by way of their LEI codes. 

This would allow for instant reconciliation of funds for accounting purposes. The LEI could complement the IBAN which is currently used in Europe, however an IBAN only identifies a bank account, rather than the payer. In the UK, the Bank of England are committed to utilising the LEI in this fashion for their CHAPS payment messages, fast-tracked by the recent UK Electronic Trade Documents bill.

Likewise in India, the Reserve Bank of India (RBI) have mandated that any monetary transaction in or out of India above the value of 5 Crore (approx 50 million Euro) will have both counterparties (the payer and the beneficiary) to the transaction identified by way of an active LEI. 

Moreover, ISO 20022 is a new ISO standard that is setting the foundations for electronic data interchange between financial institutions in a digital financial landscape, which will modernise legacy systems we have come to know such as SWIFT.

GLEIF have become a member of ISO 20022 and recently published a White Paper outlining the benefits of the LEI to ISO 20022 payment messages.

“LEI provides improvements across numerous use cases, this paper provides an overview of how the LEI can be used in the Sanctions screening space (with even more potential improvements once the regulators come on board and add the LEI into the sanctions screening lists) reducing fraud for Corporate Treasurers, account to account owner validation and also improvements across the industry for Know your Customer (KYC) processes.”

GLEIF White Paper