Reducing Legal Entity Identifier management risk in banking

By Simon Wood, CEO at Ubisecure

The number of organisations using Legal Entity Identifiers (LEIs) has tripled globally in the past two years, with 1.5 million LEIs issued to date. As the uptake in these identifiers continues to rise, a large proportion are managed and relied on by the banking industry for business-critical processes.

From reducing costs in customer onboarding to creating greater transparency and trust in transactions, LEIs can bring – and are already bringing – value to financial service organisations in many ways. In fact,McKinsey& Company recently worked with the Global Legal Entity Identifier Foundation (GLEIF) to examine the potential LEI use cases for streamlining entity verification processes. They found that the LEIs could yield annual savings of over U.S. $150 million – a prediction highlighting the potential for LEIs to have dramatic cost saving and efficiency benefits.

However, while the advantages of LEIs are numerous, if managed poorly the risks can lead to damaging consequences – both from a financial perspective and in terms of reputation. It is therefore crucial that the banking industry develops an understanding of these risks and implements processes and tools to manage LEIs efficiently and securely.

Why do banks need LEIs? 

According to the GLEIF, there should be ‘one identity behind every business’ – and LEIs are on track to achieve this objective. LEIs are essentially 20-character alphanumeric reference codes designed to identify distinct legal entities and provide a free, publicly available, verifiable source of ‘who is who’ (organisation identity) and ‘who owns whom’ (organisation group structures). There are two fundamental ways that LEIs can benefit the banking industry: firstly, by improving transaction identification processes, and secondly, by streamlining the process of tracing information about a transaction.

LEIs are key for the identification process in payments, and allow banks to optimise efficiency throughout the system and automate and augment verification methods. They also help to ensure payments are sent to the correct entity in a large corporate group. With LEIs, all members of the transaction are aware of who owns whom through LEI level 2 data. Likewise, economic crime and identity fraud can be spotted and prevented. For these reasons, the SWIFT Payment Market Practice Group is a key advocate of LEIs, stating that they have ‘huge potential’ for improving payment processes.

What’s more, LEIs can reduce costs of customer onboarding. Through standardising one comprehensive identifier for KYC/AML processes, they can streamline entity verification processes. Recent research from McKinsey & Company found that LEIs could save banks approximately $2.4 billion annually in client onboarding efficiencies.

With LEIs, organisations of all sizes can identify themselves as a true legal identity and partake in global trade. Therefore, LEIs are a key player in the democratisation of identity.

LEI management risks

 Yet, as LEIs become increasingly essential within the banking ecosystem, it’s vital that they are managed effectively and efficiently. This means ensuring workflows and systems are able to acquire LEIs as needed, while ensuring they are prevented from lapsing. Missing, incorrect, or lapsed LEIs create new risks that banks must effectively manage.

The lack of an assigned LEI can risk delaying trade, or even lead to regulatory non-compliance fines – via MiFID/MiFIR in the EU for example. To trade globally, organisations must obtain and maintain LEIs in line with these regulations. Ultimately, without an LEI, trade cannot proceed (“no LEI, no trade” rule), and transactions may be frozen until an LEI is sourced. Allowing banks to issue LEIs in real-time, alongside ensuring organisations have LEIs from the offset, eliminates this step and reduces delays.

Problems arise when organisations without a registered LEI discover they need one during critical times, meaning banks have to respond rapidly to acquire LEIs by sending clients on to Local Operating Units (LOUs, LEI issuers). This makeshift method stops the banks from having an encompassing view of the LEI statuses of clients, or internal areas. The lack of unification here leads to additional admin time to apply and manage them.

Reducing LEI management risks 

To avoid disrupting core payment workflows, it’s necessary that banks are aware of the risks around lack of LEI preparation. This is especially crucial as ISO 20022/SWIFT is driving for the inclusion of LEIs in payment messages as it becomes the global standard for financial transactions.

One way to reduce LEI risk is by implementing an LEI issuance and management solution, which could discover the existence and status of all current LEIs within a bank’s internal group, and for external client groups. This offers an overview of the LEIs by merging them into one single view, allowing banks to identify and issue LEIs to entities that are missing identifiers. Automating the LEI issuing and renewal processes reduces admin time and effort for banks, while eliminating the risk of lapsing or fines.

Saving valuable time and money, it’s undeniable that LEIs are a necessary progression within the banking industry. Going forward though, it’s vital that they are managed correctly – otherwise financial organisations and their customers will be forced to face the consequences.