What Is a Legal Entity Identifier (LEI) Number and Who Needs One?
While you may not have heard of global LEI numbers before, if you have dreams of taking your business global one day, it's important to understand what they are and why they matter. First introduced in the wake of the financial crisis of 2007-2008, this identification code system was designed to address the fact that each country has its own unique code system for recognizing corporate involvement in financial transactions.
Though this system had been fine for domestic transactions, things become more complicated when international transactions are made. LEIs (or legal entity identifier codes) show who is involved in a particular transaction, helping to minimize risk in an increasingly global world. For entrepreneurs planning for global growth, understanding LEIs are a vital part of doing business.
What are LEI numbers?
LEI numbers act as a way to identify who is involved in a transaction as well as who owns the entity involved in a transaction (when applicable). The code, however, doesn’t contain information about the transaction itself. Instead, it acts as a type of business card that essentially confirms who is who.
The vision of the Global LEI Foundation (GLEIF) is to have one universal registration number for all entities around the world. As LEI Register explains:
A legal entity identifier code (LEI code) is standardized with ISO certificate 17442. This consists of a combination of 20 numbers and letters. Numbers 1-4 always show the ID of the LOU which has issued the LEI. Numbers 5-6 have always a value of 0. Numbers/Letters 7-18 are unique to each entity. Numbers 19-20 are for verification purposes.
The global LEI system is overseen by the Regulatory Oversight Committee (ROC), which is comprised of financial market regulators, public authorities, and observers from over 50 countries around the globe. This organization also oversees global identifiers such as Unique Transaction Identifiers (UTIs), Unique Product Identifiers (UPIs), and Critical Data Elements (CDE).
GLEIF, which is led by directors from the private sector, also provides oversight for the operational responsibility of LEI codes in an effort to maintain a universal standard on a global scale.
What makes LEI numbers so important?
As ROC explains:
G20 leaders agreed at the Pittsburgh Summit in 2009, as part of a package of reforms to strengthen the resilience of the OTC (Over-the-Counter) derivatives markets, that all OTC derivatives transactions should be reported to trade repositories. A lack of transparency in these markets was one of the key problems identified by the global financial crisis. Trade reporting, by providing authorities with data on trading activity, is key to identify potential vulnerabilities to financial stability in these markets.
By adopting LEI codes on a global scale, firms will be able to improve their risk management and assess risks on both a micro and macro scale. Using a uniform identifier for entities, regardless of whether they are performing a transaction, also helps reduce the likelihood of fraud and market abuse.
For financial regulators, the use of LEI codes makes it easier to identify potential threats to the global financial system. LEI numbers are also used by regulators and market participants to better understand the corporate structures of those involved in transactions, as understanding “who owns whom” can be just as important as identifying the organization directly involved in a transaction.
Notably, financial regulators in several countries, including the United States, United Kingdom, Canada, Australia, and Singapore, now require that companies use LEI codes as part of their reporting rules. Government organizations such as the Federal Reserve System and Commodity Futures Trading Commission are also requiring or encouraging LEI use for filing and reporting purposes.
What entrepreneurs need to know
The use of LEI codes doesn’t just make an impact at a macro level. As a report from the U.S. Department of the Treasury explains:
We and many industry participants expect the LEI to decrease costs and improve risk management, at the firm level and across the system. These savings would come primarily from operational efficiencies, such as reducing the volume of transaction failures; lowering data reconciliation, cleaning, and aggregation costs; and reducing regulatory reporting costs. In addition, a global LEI would provide long-term benefits by enhancing the ability to perform business functions such as "know your customer" and improving enterprise risk management.
For entrepreneurs seeking to expand their business internationally, LEI codes can make it easier to evaluate whom they should do business with. Thanks to the enhanced transparency provided by LEI codes, entrepreneurs can understand exactly whom they are interacting with. By eliminating manual entity identification, organizations can save money and remain up-to-date regarding business partners and clients alike.
Because this reference data is accessible to all, the potential benefits of LEI expand as more businesses adopt this important standard. For example, research from McKinsey and GLEIF determined that if LEIs became more broadly adopted, the global banking industry could save $2 to 4 billion each year on client onboarding costs (up to 10% of the current expenses associated with these activities).
Broader use of LEI could streamline a business’s ability to apply for loans or perform trust verification for potential partnerships. Ultimately, through widespread adoption of LEI, small and large businesses can ensure a more stable financial future.
It is important to note that individuals cannot apply for an LEI number. LEI codes can only be given to companies that are officially registered in their home country. For a solopreneur, this would require registering as an LLC or sole proprietorship to qualify for receiving your own unique LEI code. LEI codes must also be renewed annually, otherwise they will become inactive.
Your ability to manage your business’s finances will make all the difference in your ability to successfully scale. By mitigating financial risk involved in international transactions, you can move forward with confidence as you plan for your business’s future.
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