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Legal Entity Identifiers (LEIs): how can banks minimise risks?

Legal Entity Identifiers (LEIs): how can banks minimise risks? 35

 

By Simon Wood, CEO at accredited LEI issuer, Ubisecure

Legal Entity Identifiers (LEIs) play a key role in the banking sector. Each day, banks rely on these 20-character reference codes for trading, business customer onboarding and other essential business activity – especially now they have become mandatory by regulation in various trading processes.

It is no surprise, then, that LEI uptake has boomed in the past two years. 1.6 million LEIs have now been issued globally and the numbers are continuing to rise. It is also likely that current market uncertainty due to the COVID-19 crisis will increase the number of trading counter-parties needing LEIs.

As business models accelerate to become digital-first amid the pandemic, there has never been a more important time for financial organisations to establish online trust – which begins with effective digital identity management. Crucially, LEIs provide a standard for identification during global trade: the identifiers are publicly verifiable and ensure visibility over ‘who is who’ (organisation identity) and ‘who owns whom’ (organisation group structures). By delivering a strong organisation identity, LEIs ultimately ensure visibility in transaction processes and mitigate risk exposure.

Alongside heightening transparency and trust, LEIs also offer a range of additional advantages. For example, they can be used to help streamline automated customer and partner verification workflows, which in turn reduces time and operational cost.

Navigating complicated regulations can be difficult, and therefore a reliable, simple and efficient means of positioning an organisation as a true legal identity is vital. However, as LEIs are adopted at a rapid pace, ensuring they are used in the most secure way possible is equally important. With that in mind, banks should also be paying close attention to effective LEI management.

Building digital trust

Methods for customer verification and the tracing of transaction information can be simplified through the implementation of LEIs. In today’s banking sector, the large majority of transactions require identification during transactions, which is why LEIs are fundamental.

Where Level 2 data (‘who owns whom’) was previously unseen during transactions, LEIs guarantee transparency across the whole identification process. This is particularly important for large-scale transactions between corporate enterprises, as these transactions require the correct entities to match up with each organisation partaking in the procedure.

With LEIs, visibility of all identities in the transaction is readily available, and therefore everyone involved in the process has knowledge of who owns whom. As a result, threats such as fraud can be spotted, managed and resolved efficiently.

Streamlining processes

What’s more, LEIs can also streamline the customer onboarding process within financial organisations. LEIs create a single identifier to connect disparate KYC/AML practices, which means that all identity data components have better potential to be centralised and standardised.

This ultimately leads to significant cost reduction when it comes to customer onboarding, as revealed by McKinsey & Company – recent research outlined potential savings of approximately U.S. $2.4 billion each year in onboarding costs due to the use of LEIs.

What are the risks of LEIs?

With ISO 20022 moving towards becoming the global standard for payment processing, there has been a recent push to include LEIs in all payment messaging. As LEIs become widely used within transactions, securely managing them is critical. This involves having a comprehensive understanding of how and when to use the codes correctly.

The risk surrounding LEI management is evident when considering regulations such as MiFID/MiFIR in the EU. According to these rules, lapsed LEIs – which can include missing or expired LEIs – can have major business consequences. These include trading setbacks and large non-compliance fines. If an incorrect LEI is detected, regulators have the right to delay trade until a new LEI is issued, which ultimately pauses all future transactions between the organisations involved.

Cutting down LEI risks

Educating all parties involved in the transaction process on the potential risks of a lapsed LEI is key to optimising security. LEI sourcing can often be a last minute process, with banking staff urgently using accredited Local Operating Units (LOUs or LEI issuers) for ad-hoc LEI issuing. This can be avoided if all LEIs are correctly issued and registered as a synchronous and embedded part of the transaction process.

There are also LEI management solutions available that can help banks to successfully issue and monitor all LEIs in use. These solutions can consolidate the status of LEIs for both customers and all parties belonging to the organisation. With the current position of both internal and external LEIs brought into a single view, management is simplified and the risk of outdated, missing or incorrect LEIs is mitigated.

Another key benefit of LEI solutions is minimised expenses and time spent on admin tasks. By automating issuing and renewal processes, these solutions can ultimately lighten workloads across teams. Automated systems can also ensure compliance with identity regulations, as they are able to detect lapsed LEIs and alert teams instantly.

As the economic landscape becomes digital to the core, ensuring transparency across all transactions will be vital. Success will depend on what the GLEIF defines as our ‘collective ability to establish a global standard for digital trust’ – and trust ultimately depends on effective digital identity transformation.

Given their ability to provide a digital standard for digital identification, continual uptick in LEI usage and, indeed, use cases is inevitable. While this growth will come with increased risk, effective LEI management will ensure that financial organisations handle LEIs securely and efficiently.

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