Can the use of an LEI really help the AML industry?

16 Jun Can the use of an LEI really help the AML industry?

The commercial transaction lifecycle is complicated and, in today’s digitized world, the old styles require a large amount of manual processing.

While there are many opportunities in the global market, there also exists a big chance to leverage automation. For example, the entity identity verification technology like the Legal Entity Identifier (LEI), has made the trade financing system run better on almost every front. It has made transactions faster, more cost-effective and with better security.

It is known, tried and tested that incorporating the LEI in just one of the many trade finance processes can save a few million dollars.

The process of knowing who you are exacting transacting with is notably time-consuming and involves multiple steps that require identity checks and agreement.

To decrease risk and comply with anti-money-laundering (AML) regulation and know your customer (KYC) due diligence, both the buyer and seller must conduct several counterparty checks. The cumbersome paper documentation still exists profoundly, along with manual database searches that are prone to generating incorrect results.

The introduction of  LEI has automated many of the age-old paper pen procedures, enabling the quick, digitized identification of transacting entities, enabling banks and interested parties to drastically reduce the time and resources spent on background checks and investigations.

The use of LEIs facilitates better risk management by allowing banks and other legal establishments to maintain a more holistic view of the transactions and improving fraud detection.

The Global LEI System (GLEIS)

In 2011, the Group of Twenty (G20) called on the Financial Stability Board (FSB) to provide recommendations for a Global Legal Entity Identifier (LEI) and a supporting governance structure. This led to the development of the Global LEI System which, through the issuance of LEIs, provides unique identification of legal entities participating in financial transactions across the globe.

Global Legal Entity Identifier Foundation  (GLEIF), a not-for-profit organization was created to support the implementation and use of the LEI. GLEIF services ensure the operational integrity of the Global LEI System and are overseen by the LEI Regulatory Oversight Committee, which consists of representatives of public authorities from around the globe. LEI issuers are also known as the  Local Operating Units (LOUs), who are the organizations authorized to issue LEIs to legal entities engaging in financial transactions.

What Is LEI Code?

LEI Code is a 20 Character International Unique Identity Code assigned to entities who are parties to financial transactions.

Globally, the use of LEI has expanded and is being used in the areas related to Banking, Securities Market, Credit Rating, Market Supervision, etc.

The structure of the global LEI is determined in detail by ISO Standard 17442 and takes into account the Financial Stability Board (FSB) stipulations.

How Does The LEI System Benefit Industry?

As the global LEI becomes more widely used, it is expected to cut costs and improve risk management by individual firms and across the system. These savings will come primarily from operational efficiencies such as reducing the volume of transaction failures; lowering data reconciliation, cleaning, and aggregation costs.  A global LEI system will provide long-term benefits to companies by clearly identifying their counterparties and customers and improving internal risk management.

GLEIF offers various means to access the publicly available LEI data pool via its web-based search tool or its file download service.  Any interested party can access and search the complete LEI data pool free of charge and without the need to register.

LEI’s various benefits to both the providers of trade finance services and the businesses that consume them are making the implementation ‘s universal adoption easier.

LEI has opened an opportunity for simple global transactions with no harassment, more trust, and less fraudulence, making it prevalent among large corporate borrowers and  OTC derivatives markets.