Do Government Entities Need a Legal Entity Identifier?

Government entities are eligible to purchase an LEI Number, but do they need one? I’ll leave the final call to you but here are some arguments for why they can improve citizen to government trust as well as the global economy.

The GLEIF and LEI ROC decided to use the SNA 2008 to define resident Government entities as:

“non-market producers, part of the central, state or local government, social security funds or non-profit institutions (NPI) controlled by government units. International organizations are non-resident units created by international agreements or other arrangements for the provision of non-market services or financial intermediation at the international level”.

The GLEIF and LEI ROC have recommended the use of LEIs for government entities, stating:

“The ROC is convinced about the importance for government entities to have an LEI, both in emerging markets as well as in advanced economies and for any type of Government entity, central or local. Most respondents to the consultation confirmed this view, highlighting specifically the need for market participants to identify Government entities because they are significant debt issuer, participants in financial transactions or guarantors, as financial institutions and large corporates are. In addition, private actors have to report the LEI of Government entities in the same way as private sector entity in order to fulfil regulations such as anti-money laundering reporting and “know your customer” requirements. Some respondents added that a better identification of government entities with the LEI could enhance accountability for tracking government spending and enhance transparency by collecting government financial data in an automatable fashion which is required for digital structured documents.”

But what does this really mean in the grand scheme of things? In practical terms, how can an LEI improve government practices economically and financially? Let’s have a look at some examples.

Simplified Reporting

Like every business, a government entity or agency will spend money. Unlike other industries, the money being spent is the taxpayer’s. Therefore, there is an expectation of transparency and a need to create accurate financial reports.

Using the Legal Entity Identifier, government entities can adopt the iXBRL reporting format and publish these.

Ultimately, use of the LEI could result in a better relationship between government agencies and its citizens. Transparency is a key factor in trust and is already a key theme in digital transformation outside of the public sector.

The LEI ROC in their document state:

“Some respondents added that a better identification of government entities with the LEI could enhance accountability for tracking government spending and enhance transparency by collecting government financial data in an automatable fashion which is required for digital structured documents.”

Improved Efficiency and Delivery of Government Services

In the UK, someone like myself will have an identity held within the HMRC database, with my banks, at Company’s House and a few other places. Governments who use Legal Entity Identifiers have a unique opportunity to close data silos between agencies and even create maps that link data from external businesses. The GLEIF have already published LEI to ISIN and LEI to BIC.

In the future, it could be possible to match Company’s House registration to LEIs and to HMRC data, making HMRC’s work more efficient and reliable. With more reliable and granular reporting on business entities, government agencies can expedite investigations of misconduct and greatly reduce levels of fraud on the financial market.

One of the issues during this pandemic has been the large amounts of money spent by the government on PPE. Suppliers did not deliver, and taxpayer money was essentially wasted. LEIs would be useful in the onboarding and verification of companies to avoid fraud. Suppliers who do deliver can have their LEIs stored in a database for potential future work and the tender process can be streamlined for suppliers who have been pre-vetted.

Stephan Wolf, CEO of the GLEIF recently made this point in a LinkedIn post. He argued that even the local flower shop needs a Legal Entity Identifier. Transparency, even on a small scale can greatly reduce the likelihood of money laundering activity at a local level.

Improved Data Quality for Business Entities

Poor data quality leads to system errors and the cost of cleaning it up can be enormous (especially for the large and dated systems in the public sector). In a dream world, data would be entered correctly on collection and updated regularly. But we don’t live in that dream world, so we need to tap into alternative solutions to keep business databases up-to-date and accurate.

Legal Entity Identifier data is tied to a Global Legal Entity Identifier database. LEI issuers keep to a specific framework for registering LEIs (ISO 17442), which enables all LEI entries to be consistent in format. The fact that LEIs must be renewed every year also means that new relationships, addresses, phone numbers etc are updated and reflected in the database yearly.

Government applications and databases can use LEI Common Data File format V2.1, a publicly available file format file. Governments can also partner with LEI Issuers and become issuers of these identities, making company registration and local services like business rates and business tax more cohesive, linking all business entities to an LEI.

Improved User Experience

With the aim of issuing LEIs to local businesses, government agencies can give user access rights to business directors and other employees, enabling them to, more quickly and securely, access business services online. For example, a business owner can use their LEI to access HMRC, government grants, government communications as well as regulatory and policy information without having to leave their computer.

In partnership with the banks and estate agents, business owners could also use their verified credentials (LEI Number) to get access to business loans and be approved as tenants in commercial properties. Approvals can be made online with the final signatures signed digitally using a digital signature certificate linked to the company LEI – internationally recognised as a legally verifiable signature already.

As a verified credential, the LEI unlocks the ability for business owners to conduct transactions that would have otherwise required travel, face-to-face discussions, and unnecessary paper-based signatures. As we become an increasingly digitised world, we need to find secure ways of moving more transactions online and giving more time back to businesses to focus on what really matters.

Improved National and Global Economies

Governments issue bonds and other types of debt securities that, like all financial transactions, are liable to fraud. Probably the most cost saving application of LEIs in the public sector is the use of LEIs to conduct Know Your Customer and other due diligence checks on organisations before making large financial trades or securities financing.

The GLEIF have summed these points up well:

“In addition, private actors have to report the LEI of Government entities in the same way as private sector entity in order to fulfil regulations such as anti-money laundering reporting and “know your customer” requirements.”

The benefits to an entire country can easily be seen but there are global benefits that can also be realised through better KYC and a globally recognised verified credential for organisations.

How Government Entities Can Order an LEI Number

When ordering an LEI number, government agencies or entities should make sure to report ultimate or direct parents. According to the ROC report of 10 March 2016:

“Entities that have or acquire an LEI would report their “ultimate accounting consolidating parent”, defined as the highest level legal entity preparing consolidated financial statements, as well as their “direct accounting consolidating” In both cases, the identification of the parent would be based on the accounting principles definition of consolidation applying to this parent.”

Any government entity which is not consolidated in a financial statement should “opt out” and declare that it has “no known parent” according to Reporting Exceptions Format V1.1. Today, this means many entities are going unreported.

The LEI ROC have consulted on what further changes can be made to the Global Legal Entity Identifier System (GLEIS) so that government entities can be more easily identified and share their relationship structures.

They will do this by creating two new entity types “RESIDENT GOVERNMENT ENTITY” and “INTERNATIONAL ORGANIZATION”. For resident government entity, subcategories will be “CENTRAL GOVERNMENT”, “STATE GOVERNMENT”, “LOCAL GOVERNMENT” and “SOCIAL SECURITY”.

For entities that report a relationship, they will be able to choose from a new accounting standard: “GOVERNMENT ACCOUNTING STANDARD”. The International Public Sector Accounting Standards Board (IPSAS 35) has developed standards, guidance, and resources for use by public sector entities. This new occurrence will also apply to National Government accounting standards.

The First Step to a Digitised Government

Legal Entity Identifiers are just the beginning. Governments are working with the private sector all over the world to develop greater digitised services from walk-through biometric airports to partnering with banks so that citizens can have greater access to financial services. Whether it’s citizen or business identities, governments will have to learn how to offer access to services with better security and user experience for all. The first step is always going to be, verifiable credentials.