Legal Entity Identifiers (LEIs): How Global Best Practice in Trusted Business Identification Could Help Sustain Economic Growth across Africa
Trusted identity: A key ingredient for Africa’s economic future
Author: Stephan Wolf
Against the backdrop of a continent-wide downturn in 2016, Africa’s economies have proven resilient. The African Development Bank forecasts 4% growth in GDP across the continent in 2019, and the agreement reached in March 2018 to establish the African Continental Free Trade Area has created the largest free trade area in the world. Under the right future conditions, this could see the continent become a major economic force on the global stage.
With so much opportunity for growth, it is more important than ever to acknowledge the role of trusted identities in creating successful trading conditions. When acting in a business capacity, knowledge of who you’re doing business with is a significant factor in risk mitigation, combatting fraud and subsequently the success – or failure - of a deal (or even an economy, when considered at scale).
Yet, in some developing countries globally, it’s estimated that more than 50% of economic activity is conducted by unregistered entities – or businesses without transparent credentials. The lack of a trusted identity can preclude participation in both intra-regional and international trade and can cut businesses off from important services such as a supply chain, payments and as already mentioned, finance. In extreme circumstances, this can increase vulnerability to corruption and fraud, resulting in wider economic decline and dependency on development aid.
GLEIF supports the vision that prosperous economies start with transactional trust. This can be embedded in economies by a universal and transparent identification mechanism for businesses worldwide – the Legal Identity Identifier (LEI).
What is a LEI?
Any business can register for a LEI – a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information describing a legal entity, including its name and its ownership structure (detailing ‘who is who’ and 'who owns whom’), which is validated against third party sources. LEIs are published alongside the corresponding reference data in an online global directory known as the Global LEI Index, which is maintained by the Global Legal Entity Identifier Foundation (GLEIF). This is the only global online resource that provides open, standardized and high-quality legal entity reference data which is freely available. It provides transparency across the global marketplace.
GLEIF: Rooted in transparency and simplification
Historically, the accurate identification of legal entities on a global level has been a complex, time-consuming and expensive task. Prior to LEIs, the lack of a single open and up-to-date database containing standardized and consistent data on entities meant that identification processes relied extensively on manual checks across multiple sources, many of which might use names rather than identifiers, resulting in confusion. For example, a large bank’s client services division recently found that it had an average of five names – with minor variations in its database – for the same organization. This type of inconsistency, across divisions of the same company, businesses and jurisdictions on a global scale, makes it extremely challenging to trace and link information on entities from multiple sources. The resulting lack of transparency in the past has led to financial crises, market abuse and fraud.
Following the 2008 financial crisis, regulators and capital market players needed to quickly assess the extent of market participants exposed to Lehman Brothers and each of its hundreds of subsidiaries. This exposed a critical need for a system to identify and understand exposures at the legal entity level instead of the aggregate, parent-company level. In order to remedy this, the Financial Stability Board (FSB), together with the finance ministers and central bank governors represented in the G20, advocated developing a universal LEI for any legal entity involved in financial transactions. The FSB subsequently established GLEIF to support the implementation and use of the LEI.
Why is the LEI important to economic growth?
Regulatory action related to the LEI to date has largely focused on initiatives relevant to LEI in regulatory reporting and supervision for financial instrument transactions. This reflects the immediate objective pursued with the introduction of the LEI standard following the financial crisis: to increase the authorities’ ability to evaluate systemic and emerging risk, identify trends and take corrective steps. Beyond current mandates, however, there are abundant macro-economic benefits afforded by a trusted universal entity identification mechanism used by all market participants across all sectors: financial inclusion opportunities for all businesses, enhanced risk management and the ability to better address fraud to name a few.
How does the LEI fix business problems?
In addition to the economic benefits afforded by the LEI, it can also deliver significant benefits to businesses. A GLEIF report explores the challenges of entity identification in financial services. A New Future for Legal Entity Identification found that onboarding new businesses presented one of the biggest issues, due to the lack of a streamlined process. Over half (57%) of salespeople in banks said they spend 27% of their working week (equivalent to more than 1.5 days per week) onboarding new client organizations. With over half of financial institutions using an average of four identifiers to help identify client organizations during onboarding, it is clear that inefficiencies are rife throughout the process.
To make matters worse, these inefficiencies have business critical implications. 39% of respondents reported a risk of losing business due to the length and complexity of the process, with 15% of new business believed to be at risk as a result of the client losing patience with the process and 14% of business lost because the client’s identity cannot be verified.
These are significant figures for any business and clearly highlight how LEI adoption for client organizations can lead to a slicker onboarding process, improving client experience, reducing the risk of lost business and optimizing efficiencies. For example, the report found specifically that introducing LEIs into capital market onboarding and securities trade processing could reduce annual trade processing and onboarding costs by 10%. This would lead to a 3.5% reduction on overall capital markets operations costs (USD $150 million in annual savings) for the global investment banking industry alone. These are significant findings, and when extrapolated to the wider business community outside of financial services, give an indication of the efficiencies that the LEI can offer many businesses.
LEIs: Why Africa and why now?
Recent regulatory changes have resulted in consolidation within the African banking sector, making the industry stronger and more resilient. The current focus on sustainability across the continent provides the opportune time to consider further ways to future proof the sector by adopting one global digital identity which will reduce costs, bring simplicity to onboarding and transacting and lead to a deeper understanding of the marketplace.
At a macro-level, as Africa’s economies continue to strengthen, the continent’s journey to digital transformation will also progress. LEIs fulfill a real need in today’s digital world. Through one global digital identity, they allow the universal, consistent and transparent identification of millions of business entities on our planet. This provides the trust needed to build optimal conditions for international trade success. The LEI provides certainty of identity in any business or online interaction, making it easier for everyone to participate in the global marketplace.
By replacing siloed information with a standardized approach, LEIs take the complexity out of business transactions and enable smarter, less costly and more reliable decisions about who to do business with.
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Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO.