How Can We Reduce Legal Entity Identifier Management Risk in Banking?

With the banking sector handling and depending on Legal Entity Identifiers (LEIs) for business-critical processes, their global usage has tripled over the past two years. So far, 1.5 million LEIs have been issued and uptake is increasing rapidly.

Below Simon Wood, CEO at accredited LEI issuer Ubisecure, discusses with Finance Monthly the significance and function of LEIs, what they are and how they work, but more importantly how the financial sector can work to reduce the risks involved in managing LEIs.

Comprising of 20-character alphanumeric reference codes, LEIs are 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). Crucially, by utilising LEIs, companies of all sizes can identify themselves as a true legal identity and trade globally.

LEIs offer many advantages to the banking industry, ranging from significantly reducing costs in customer onboarding to establishing transparency and enabling trust in transactions. Indeed, McKinsey & Company, along with the Global Legal Entity Identifier Foundation, recently found that LEIs could yield annual savings of over U.S. $150 million within the investment banking industry alone.

Despite these benefits, however, if LEIs are not managed correctly the potential risks could result in harmful ramifications, including non-compliance fines and negatively impacted reputations. With that in mind, it is important that the banking sector not only educates itself on these risks, but that it also acts to deploy tools and strategies to manage LEIs safely and effectively.

The role of LEIs in banking

The value LEIs bring to the banking sector can be categorised in two key ways – by enhancing transaction identification processes, and by simplifying the process of tracing information about a transaction.

LEIs are an ideal mechanism in situations where an identification process is required for payments. At the same time, they allow financial institutions to optimise the efficiency of their systems through automating and augmenting verification methods.

LEIs are an ideal mechanism in situations where an identification process is required for payments. At the same time, they allow financial institutions to optimise the efficiency of their systems through automating and augmenting verification methods.

Where payments need to be routed to the correct entity in a large corporate group, LEIs serve an equally essential function, making all members of the transaction aware of who owns whom via LEI level 2 data. They also allow economic crime and identity fraud to be quickly pinpointed and averted.

It’s therefore unsurprising that the SWIFT Payment Market Practice Group is a key advocate of LEIs, and has formally declared the ‘huge potential’ they offer for improving payment processes.

Moreover, the cost of customer onboarding can also be significantly reduced with LEIs as they standardise one comprehensive identifier for KYC/AML processes. In fact, recent research from McKinsey & Company suggested that by using LEIs to support all stages of the ‘customer management lifecycle’, the banking industry as a whole could save around U.S. $2.4 billion a year.

LEI management considerations

With ISO 20022/SWIFT becoming the global standard for financial transactions, there is a strong push for the inclusion of LEIs in payment messages. Consequently, LEIs are set to play an even more fundamental role within banking over the next year – so it is increasingly vital that they are managed in a secure and efficient way.

This involves ensuring that workflows and systems are able to obtain LEIs as required, and also that they don’t lapse. Ultimately, a host of new risks are introduced when LEIs are missing, incorrect or out-of-date. The implications can be severe, resulting in held-up trade and potential non-compliance fines.

Organisations are required to acquire and uphold LEIs in line with specific regulations – such as MiFID/MiFIR in the EU for example. If this doesn’t happen, then trade will be delayed and transactions frozen until the issue is resolved. For this reason, LEIs should be issued at the earliest stage possible to avoid payment workflow delays and disruption down the line.

Mitigating the risk

The first step around countering LEI risk is to ensure that the relevant staffers are fully aware of the consequences that come with lack of LEI preparation. With this, its essential that strategies are put in place to provide the necessary education.

In practical terms, employing a robust LEI issuance and management solution can help to reveal the existence and status of all current LEIs within an organisation’s internal and external groups. This also helps to provide an overview of all the LEIs in play within a single view, so financial organisations can easily identify and issue LEIs to anyone with missing identifiers.

By automating the LEI issuing and renewal processes, banks can significantly cut down administrative burdens, while simultaneously guarding themselves against the risk of lapses or fines from regulatory breaches.

As LEI use cases are set to explode, there’s no question that they are the future for driving progress within banking. Yet although the benefits are significant, the industry must also be aware that the potential costs of lapsed, missing or incorrect LEIs are also considerable. To fully reap the rewards, then, implementing systems and processes to manage them effectively is vital.

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