Key Takeaways:

• The Global Legal Entity Identifier Foundation (GLEIF) is an organization established to support the implementation and use of the Legal Entity Identifier (LEI).
• Legal Entity Identifier (LEI) is a 20-digit code issued to legal entities involved in financial transactions, enhancing transparency and traceability.
• GLEIF oversees the LEI system but does not issue LEIs; it ensures the integrity and reliability of the system.
• LEIs are crucial for identifying legal ownership and tracing financial transactions, aiding in preventing fraud and financial misappropriation.

 

In today’s digital landscape, the verification of customer identities has taken center stage. While many are familiar with individual verification processes like KYC and e-KYC, there’s a growing need to apply similar scrutiny to organizations, companies, and other legal entities. As information flows at unprecedented speeds and the push for data and identity decentralization intensifies, ensuring the authenticity of these entities, especially in the financial sector, becomes paramount.

However, the challenge arises when different countries and regions adopt varied certifications and identification schemes. How can one ensure consistency when faced with an array of identity management programs? And what happens when an identity verifier encounters an unfamiliar scheme, leading to potential discrepancies?

The solution lies in a unified identity management system that consolidates all legal entities, ensuring clarity and efficiency in the verification process. GLEIF, which stands for the Global Legal Entity Identifier Foundation, plays a pivotal role in this unified approach, overseeing its implementation and ensuring adherence to global standards.

What Is the Global Legal Entity Identifier Foundation (GLEIF)?

The Global Legal Entity Identifier Foundation (GLEIF) is an international non-profit organization established in June 2014 by the Financial Stability Board (FSB) to support the worldwide implementation of the Legal Entity Identifier (LEI). Its operations are overseen by the LEI Regulatory Oversight Committee (ROC), an alliance of public authorities from across the globe. This committee, composed of various governmental bodies, plays a crucial role in ensuring transparency within the global financial market.

While closely linked to the LEI system, GLEIF serves a distinct purpose. It does not issue LEIs itself, but instead focuses on maintaining the integrity and reliability of the entire LEI system. Understanding this crucial distinction is essential for comprehending the wider context of legal entity identification.

What Is Legal Entity Identifier (LEI)?

A 20-digit code, known as the LEI, is issued to businesses engaging in financial transactions, such as stocks, forex, bonds, mortgages, etc. This code uniquely identifies any institution providing financial services on a global scale. The financial institution issues the 20-digit code, linking it to all relevant information about the institution, thereby enhancing transparency. In many countries, LEI is a requirement to operate; this includes the U.S., U.K., Germany, etc.

According to world bank records, over 55,000 companies are globally listed on different stock exchanges. Hundreds of thousands of SMEs and MSMEs are scattered abroad; identifying who owns whom and who is responsible for what is crucial. These are a few rationalizations behind LEI’s creation and the massive support it received across borders, especially from countries in the G20.

With LEI, customers can accurately know who they transact with, just as financial institutions seek to know their customers. Investing without knowing the entity you’re dealing with can result in financial loss without knowing who to hold responsible.

The secrecy surrounding identities has encouraged some institutions to engage in fraudulent activities. This, on a larger scale, contributed to the financial crisis of 2007 – 2008. Additionally, risks such as data loss, identity theft, and other issues arise from inappropriate exposure of customer data. Furthermore, the difficulty in confidently identifying business entities has also led to untraced market abuses.

How LEI Works

The Legal Entity Identifier (LEI) system operates through a network of Local Operating Units (LOUs) that assign unique 20-digit identification codes to legal entities. These codes, adhering to the ISO 17442 standard developed by the International Organization for Standardization (ISO), serve as standardized identifiers for businesses, corporations, and other legal structures worldwide.

Breaking Down the LEI Code

The structure of an LEI code, such as “429700S8MZ49XURSDO75,” divides into four distinct sections:

• Characters 1-4: The first four digits indicate the Local Operating Unit (LOU) that registered the legal entity.

• Characters 5-6: These two characters, always set to zero, serve as reserved placeholders.

• Characters 7-18: This section identifies the legal entity in question as issued by the registering LOU based on the transparent code allocation policies of ISO 17442.

• Characters 19-20: The last two digits are used to verify the legal entity.

Accessing Key Information Through LEI

The Legal Entity Identifier (LEI) serves as a crucial tool for financial institutions and various stakeholders, simplifying the process of identifying legal entities involved in financial transactions. Each LEI code is not just a unique identifier but also a gateway to a comprehensive set of reference information about the entity, which includes:

1. The official name of the legal entity (company).
2. The registration number.
3. The registered address of the legal entity (e.g., the headquarter address).
4. The legal owner(s).
5. The country of formation, including the ISO country code (e.g., US, AU, DE, DK, NG, BE, etc.)
6. The date the LEI was issued.
7. The date of the last update of the LEI information.
8. The expiry date (due date for renewal).

With LEI, it allows regulators to efficiently trace funds in cases of financial misappropriation and swiftly identify the entities involved. This system not only fosters transparency but also provides a standardized, global reference framework. Such standardization is instrumental in determining legal ownership and facilitating the replication of successful practices across various markets and countries.

Governance and Oversight of the LEI System

The global recognition and adoption of the Legal Entity Identifier (LEI) rely on its ability to maintain the highest standards of credibility, reliability, and transparency. To achieve these objectives, the LEI system is subject to continuous monitoring and oversight by three dedicated bodies:

1. The Regulatory Oversight Committee (ROC): The ROC serves as the overarching governance body for the LEI system, providing strategic direction, establishing global policies, and ensuring adherence to international standards. The ROC comprises representatives from public authorities worldwide, reflecting the global nature of the LEI system.
2. The Local Operating Unit (LOU): LOUs are the operational backbone of the LEI system, responsible for assigning LEI codes, validating legal entity data, and maintaining the LEI repository for their respective regions. LOUs are accredited and supervised by GLEIF to ensure consistency and quality across the global LEI network.
3. The Global Legal Entity Identifier Foundation (GLEIF): GLEIF serves as the operational hub of the LEI system, managing the global LEI infrastructure. It also facilitates collaboration among Local Operating Units (LOUs) and promotes the adoption and use of LEIs worldwide. GLEIF plays a crucial role in developing and maintaining LEI standards, ensuring the quality of data. Additionally, it provides access to LEI data through its open data portal.

The Regulatory Oversight Committee (ROC)

The Regulatory Oversight Committee (ROC) was created in 2013 to put more structure to the Legal Entity Identifier development that started in the previous year (2012). ROC brings together public authorities from different countries to oversee the framework for legal entity identification and the Global LEI System (GLEIS).

On a broader scale, here is what the ROC represents, as seen on their official page. The committee “promotes the broad public interests to improve the quality of data used in financial data reporting, improving the ability to monitor financial risk, and lowering regulatory reporting costs through the harmonization of these standards across jurisdictions.”

1. Free, open, and easy access to all publicly available data.
2. These data should be continuously available. The Global LEI System should leverage modern technologies to ensure that interested or requesting parties have easy access to both old and new data across different devices.
3. There should not be restrictions on access, usage, or redistribution of these data.
4. Confidential data should remain confidential while adhering to applicable data protection legislation.
5. No intellectual property restrictions should apply to data except those determined necessary by the ROC to protect the broad public interest.
6. Users or registrants should have the freedom to decide how to use their Legal Entity Identifier without restriction.
7. Any eligible entity should be able to obtain an LEI under unbiased and non-discriminatory terms.
8. The design of LEI codes and reference data ensures uniqueness, exclusivity, accuracy, reliability, and timeliness of access. Additionally, they provide portability, persistence, and consistency.

The Local Operating Units (LOUs)

Local Operating Units are accredited organizations that issue LEI to applicants. They act as the intermediary between the GLEIF and the registrants. As the primary interface, legal entities interact with them to obtain their LEI. LOUs are also called “LEI Issuers” or “LEI Issuing Organizations.”

The LOU’s accreditation process helps the GLEIF determine whether an organization can issue Legal Entity Identifiers (LEIs) and maintain LEI reference data in the Global LEI System. Accredited organizations offer registrations, yearly renewals, and other LEI-related services. To be GLEIF accredited means being committed to data quality, safety, and excellent customer service on a global scale.

Registration, renewal, and general maintenance of an LEI code are all accompanied by a monetary fee. However, the GLEIF doesn’t charge excessive LEIs; the additional amount charged is solely from the LOUs. According to GLEIF, every charge must be based on the cost of service incurred by the LOUs, not excessive profit margins. The only charge that comes directly from GLEIF is 11 USD per year, which is to keep GLEIF running. All additional costs on any LEI purchased go to the registering LOU. LOUs can offer different prices and custom packages as they see fit. This approach increases competition and ensures that customers receive the best service. So let the best service win!

Second Quick Peek Into GLEIF

The Global Financial Crisis (GFC) of 2007 – 2008 left a negative mark on the financial world. It made it evident that structures must be established to avoid the repetition of such a catastrophe. In response to public feedback, the G20 summit took action. They advocated, with support from the private and financial sectors, that companies trading on the financial market should be easily recognizable and traceable. The Financial Stability Board (FSB) was established in 2009 to actualize this mission. A group of national financial authorities and international standards agencies allied to develop a practical regulatory and supervisory framework for the global financial system.

The FSB recommendations and necessary structures for the global financial system were endorsed in 2012, eventually leading to the creation of GLEIF in 2014. GLEIF enhances the trust and speed of business transactions, benefiting organizations directly. Indirectly, this efficiency also reduces costs for customers. One of the feats achieved by GLEIF is transparency by making information about entities available publicly on the global LEI index for anyone that needs it.

What Is FSB?

The Financial Stability Board (FSB) is a multilateral organization with representatives from different countries. Aside from monitoring the global financial system, this organization recommends changes and improvements. Among these recommendations is GLEIF.

The FSB promotes the implementation of policies and strong regulatory standards across different sectors and jurisdictions. FSB seeks to strengthen and increase the stability of international financial markets. As a result, the body comes up with other policies that are then implemented by each nationality. FSB doesn’t implement all policies or handle compliance enforcement in different countries. Still, it greatly influences the executives representing each nationality in the FSB body to achieve the goal.

After the G20 London summit in 2009, the FSB was established. It comprises all G20 major economies, the European Commission, and all former members of the Financial Stability Forum (this is the body that preceded the FSB). Check out the official about page of the Financial Stability Board for a holistic view of FSB.

What Is Global LEI Index?

The Global LEI Index is a centralized repository of historical and current LEI records with related reference data. Global LEI Index is the only global online source offering open, standardized, high-quality information or reference data about legal entities. In connection with the LEI, these reference data provide necessary information about different legal entities.

Using the GLEIF web-based search tool, anyone can access the LEI database for free to get information about any entity of interest. Another means of accessing the publicly accessible LEI database or the data pool is the file download service.

Conclusion

The United States and Europe have the highest use of LEIs because many regulatory bodies have made it a requirement. Now, different financial institutions can be recognized in transactions and regulatory reporting. As a result, authorities have been able to assess better risks associated with the institutions responsible for them. It has also helped control market abuse by suggesting the best corrective measures. 

The uniqueness of these 20-digit codes has made financial data more trustworthy with no gray area. The parent companies of each entity can be easily traced. This transparency helps expose hidden fees imposed on customers without specific explanations. For example, banks sometimes charge customers for transacting from one entity to another. These two entities are the same, operating under the same umbrella with different names. Officially, no transaction took place; just record updates. However, customers are made to believe they are paying for a process that doesn’t exist.

By knowing the identity of each legal entity, customers are empowered to stop using shady financial institutions or to initiate legal action, as hidden fees are ripping off many Americans. The same is true in other parts of the world, especially regarding investment and general banking services. LEI will have a sizeable positive effect in monitoring anti-money laundering compliance globally. Beyond identification by interested parties and regulatory bodies, LEI offers significant advantages. For banks, it can save costs and boost efficiency in digitizing their identities across countries and states.

Identity.com

With LEI, entity identity verification keeps improving, similar to how users’ identity management and credential claims are improving through Decentralized Identifiers and Verifiable Credentials, respectively. Identity.com has a significant interest in identity management, and it shows this by creating solutions that make web-based interactions safer and, by extension, make the whole ecosystem trustworthy. It is great news to see Identity.com contributing to this desired future as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.

The work of Identity.com as a future-oriented company is helping many businesses by giving their customers a hassle-free identity verification process. Identity.com is an open-source ecosystem providing access to on-chain and secure identity verification. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs for more info about how we can help you with identity verification and general KYC processes.