Last updated on July 2nd, 2021 at 04:04 pm
A legal Entity Identifier, LEI is a 20-digit alphanumeric, unique code that is defined by a standard of ISO 17442. Each LEI contains important information about the entity’s ownership structures. It has everything about ‘who owns whom,’ ‘who is who.’ You can call it a global business directory, which is defined to enhance transparency in the marketplace.
If you have ever seen a code with subparts on any product, that’s LEI. The concept of bar codes and LEIs started back in the ’40s when Wriggle’s Chewing gum gets swept in the electronic reader. But, while the concept of bar codes was already popular, the need for LEI came because the bar codes still lag the need to have a standardized system for labeling legal entities.
In addition, the process was also time-consuming; require a lot of money and resources, causing fraud, market abuse, and financial crises. Then, LEI’s was introduced back in 2011 to track the financial transactions and to bring transparency in the market.
Financial Stability Board (FSB) claims that the adoption of LEI offers applications like to improve risk management, better assessment of micro and macro-prudential, and more. Furthermore, its free global identifiers and is adopted by various regulators and investors.
Also, there are various LEI issuers that maintain and issue identifiers as the primary interface in the global directory. These issuers are financial data vendors or financial exchanges, who are further accredited by GLEIF (Global Legal Entity Identifier Foundation).
How LEI Work?
The companies who need the (LEI) legal entity identifier database should contact the issuers, give them the information they need and fee for the LEI. The issuer will then cross-verify the information like business registration numbers, connected companies, and more. The basic data the LEI issuer will ask is:
- The official or registered name that is in records
- The registered address of the entity
- Place of entity formation
- Code for representing countries and their subdivision
- Other information like data for first and last LEI information, expiry date, and more
How Legal Entity Identifier in Digital Certificates
Although everything in the digital world is encrypted and is quite safe, things become unsafe if you are using this encrypted information on an unsecured website. This way, you have sent your private information to the cyber-criminal. While HTTPS and other sites, add an extra layer of privacy, for cybercriminals, it is very easy to hack them as well. That’s the reason why LE’s are gaining popularity in the financial world.
Any company trading with money has to have LEI and should declare their parent and child company. In addition, LEI is used as a new tool for KYC (Know Your Customer). Using LEI in the digital certificate used to increase system efficiency.
Applications Of Legal Entity Identifiers
- Provide verified information about all parties in the transaction
- Help in creating efficiency in financial transactions and minimizing costs
- Offer smooth data validation in the payment cycle
- Give insights about who owns what
- Help in streamlining the KYC (Know Your Customer) process
- Help to fight financial crime and frauds
Challenges On Adopting LEI
- Change In System: Changing the traditional payment format to the new one is costly. Also, GLEIF and SWIFT already support BIC.
- LEI Is Costly: Currently, the company’s have to get their own LEI, which is costly. The approximate cost for first-time registration is 220 USD and 68 USD for annual renewal. If you have submitted the right documentations and your business is registered, you will get LEI on the same day when ordered.
- Its Adoption, Globally: Although the LEI is not mandated yet for identifying other parties in payments, companies still consider it a more strategic adoption of LEI because it can change the financial market operations.
LEI ensures safe business and maximum compatibility. And, now that you know how LEI is important to use them and make secure transactions.