How to Reduce Legal Entity Identifier Risk

Legal Entity Identifiers (LEIs) have been rapidly growing in adoption because of the many benefits they bring to organisations. Despite these benefits, an LEI number managed incorrectly can result in risk and harm for the organisations managing them.

At the end of the second quarter in 2020, there were 1.6 million LEIs issued globally. With this statistic in mind, we thought it was a prudent time to share advice and tips on managing LEIs and avoiding the risks.

The Risk for Trading

Organisations trading on the financial market should be careful about ESMA guidelines on trade reporting validation requirements. For any companies that are reporting under regulations such as MiFID II or ESEF iXBRL format where an LEI is required, ESMA guidelines state that the LEI field:

shall be populated with a LEI accurately formatted and in the LEI database included in the GLEIF database maintained by the Central Operating Unit.”

  1. The status of the LEI shall be “Issued”, “Pending transfer” or “Pending archival”.
  2. The InitialRegistrationDate of the LEI shall be equal or before the trading date.
  3. The EntityStatus shall be Active or if the EntityStatus is Inactive, the LastUpdateDate shall be equal or after the trading date.

In short, this means that organisations should ensure they have an LEI valid before the trading dates listed in their report. The LEI must be also be “Active” or else it will be labelled with the error code “The executing entity LEI is not valid”.

The consequences of not obtaining an LEI in time or not keeping your LEI number valid during submission of trade reports can vary but ultimately trade deals will be blocked from going through until the LEI is valid.

The Financial Conduct Authority has previously charged £1.50 per line of incorrect or non-reported data. But the size of these fines can be staggering if left unfixed. Take the case of Merrill Lynch International (MLI) who had been fined £13,285,900 by the Financial Conduct Authority (FCA) for incorrectly reporting 35,034,810 transactions and failing to report another 121,387 transactions between November 2007 and November 2014.

The Risk for Payment Processing

Payments has long been an area strife with fraud and inaccurate data. This isn’t good for the financial market but it also affects the businesses who process the transactions. If you cannot be entirely sure who is doing the transaction and you cannot easily find duplicates, there is room for error, lost revenue, non-compliance and more.

Financial institutions and regulators have already made adjustments to the way they operate in order to reduce these burdens. SEPA, FATCA, AML and sanctions regulations all require extensive data cleansing, data validation, conversion exercises and customer screening. Most financial institutions have to satisfy local and international regulators as part of their business model.

The customer-centric model of LEIs is already gaining traction and while LEIs are not mandated yet in the payments industry, adopting the ISO 20022 standard will put organisations ahead of their competitors. LEIs make data cleansing, data validation and customer screening incredibly easy (and trustworthy) not least because of the LEI data mapping and data quality reports.

Ultimately, knowing who is behind a business transaction is crucial for the payments industry. As SWIFT puts it:

Using the LEI for such identification will bring significant benefits, for example, by reducing fraud at the transactional level by leveraging the LEI to better detect attempts at duplicate invoice financing, or by better associating traditional trade finance mechanisms like Documentary Letters of Credit to specific parties in messages used to transmit these instruments around the globe.”

The Risk of Lapsed LEIs

One cannot get away with a risk-based blog without discussing, albeit in short, the risk of a lapsed LEI. We’ve already touched on the point with regard to MiFID II – lapsed LEIs can mean trade is halted. You can think of a lapsed LEI in any industry in a very similar way, it is a barrier to getting trade done.

With LEIs being so widely adopted and the number of regulators requiring them or requesting them increasing, not having a valid LEI will only slow you down. There are many options for avoiding lapsed LEIs but the best idea is simply to purchase multi-year LEIs. Local Operating Units will ensure renewal is undertaken automatically upon reviewing the data and checking there isn’t anything that needs to be added or changed in your record.

Multi-year LEIs are often cheaper per year and far more effective than giving responsibility to someone in the organisation who may not be there when the time comes to renewing. Here’s 5 reasons you should renew your LEI:

  1. High quality data – ensuring LEI reference data is to the highest possible quality and accurate.
  2. Operational efficiency – having a renewed LEI keeps trade flowing and avoids delays in operations.
  3. Credibility – LEIs are globally recognised business passport. This offers your business credibility when expanding to a global market, where your brand may not otherwise be well known or respected.
  4. Reliability – a valid LEI gives organisations trading with you, trust. Trust because they know you are a verified entity trading on the financial market and they can see your trading structure.
  5. Transparency – the wider goal of LEIs is to create transparency on the financial market. By being a business who also wants to trade transparently, you’re signifying that you can be trusted.

The Risk of Being Left Behind

The final risk to consider is the risk of being left behind. Whether or not you’re bound by regulations to acquire an LEI number, your organisation can benefit in the onboarding of new clients, the digitalisation of verification (eKYC), increased financial inclusion and the reduction of fraudulent transactions in B2B (especially in the banking industry).

With the reduction in face-to-face transactions, organisations are having to accelerate digital transformation initiatives by over 5 years. LEIs are only part of the solution but they can contribute to making the digital economy more trustworthy and more efficient as it transitions online.

We have already covered the McKinsey report that showed the banking industry could save $2-4 billion in onboarding costs alone. The CEO of Ubisecure, Simon Wood, has spoken about the particular benefits to the banking industry in Finance Monthly:

In practical terms, employing a robust LEI issuance and management solution can help to reveal the existence and status of all current LEIs within an organisation’s internal and external groups. This also helps to provide an overview of all the LEIs in play within a single view, so financial organisations can easily identify and issue LEIs to anyone with missing identifiers.”

In short, as organisations are looking to improve their digital processes, LEIs certainly have a part to play and will be an important factor in recognising those organisation who have found opportunities in this pandemic from organisations who have failed to do so.

Moving to Multi-Year LEIs

As we saw with the $550k fine to Citibank in 2017, improper reporting of LEIs can lead to large fines doled out by the FCA. Moving to multi-year LEIs, as I have mentioned, has the potential for greatly reducing the burden of organisations keeping their LEIs valid while reducing the risk of fines and non-compliance.

Unlike the process for manual renewal, multi-year LEIs use automated systems to check changes in organisational details. Our systems will know if your details have changed and need to be updated or if nothing needs to change and an LEI can be reissued.

Finally, just to make up for any additional burden with yearly renewals, ManagedLEI offer discounts of up to 25% for each additional year you purchase. Not only is it cheaper to buy multi-year LEIs, it reduces the administrative burden.

Buy a 10 year LEI for just £32 a year! Or check out our other multi-year deals.

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