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Modernizing Trade Finance with the LEI

The Legal Entity Identifier is the key to a faster, cheaper and more secure future in commercial transactions


Author: Stephan Wolf

  • Date: 2018-11-29
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  • Estimated Reading Time: 7 minutes

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The commercial transaction lifecycle is complex and, in today’s digitized world, requires a surprisingly large amount of manual processing.

A huge opportunity exists to leverage automated entity identity verification technologies like the Legal Entity Identifier (LEI), to make the trade financing system run better on almost every front: faster, more cost effectively and with better security.

A joint white paper from McKinsey & Company and the Global Legal Entity Identifier Foundation (GLEIF) found that banks could save up to U.S.$500 million per annum by adopting the LEI in just one of countless trade finance processes: the issuing process for letters of credit.

This process is notably time consuming and involves multiple steps that require identity checks and reconciliation. To mitigate risk and comply with anti-money-laundering (AML) regulation and know your customer (KYC) due diligence, the banks of both the buyer and seller must conduct several counterparty checks. Here, cumbersome paper documentation still features heavily, together with manual database searches that, because they support name-based searches only, are prone to generating inaccurate results.

The use of the LEI here can automate many of these procedures, enabling the immediate, digitized identification of transacting entities, allowing banks to dramatically curtail the time and resources spent on background checks and investigations.

As well as driving efficiencies, the use of LEIs would also facilitate better risk management by allowing banks to maintain a more holistic view of the transacting entity and enhancing fraud detection. Using an entity’s LEI, for example, a seller’s bank could trace outstanding invoices to identify suspicious activity, like multiple invoices for the same shipment.

Essentially, the LEI makes two key activities in a complicated process – verification of entities and tracking an entity’s history – far simpler.

Investment banks also stand to benefit. The same joint white paper also found that broader, global adoption of the LEI could reduce annual trade processing and onboarding costs by 10 percent. This would lead to a 3.5 percent reduction in overall capital markets operations costs, amounting to over U.S.$150 million in annual savings for the global investment banking industry alone.

The benefits of utilizing the LEI extend far beyond banks, however. The technology promises to have a significant positive impact on the business community, too. To begin with, universal LEI adoption would enable a far more consistent customer experience for businesses seeking to access credit.

Earlier this month the Financial Stability Board’s Regional Consultative Group for Asia cited adoption of the LEI, together with other digital technologies, training and capacity development, as a solution to a variety of barriers faced by businesses when accessing trade finance. It noted: “While almost 80% of trade is financed by credit or credit insurance, access is uneven across entities, particularly small and medium-sized enterprises” citing “the perception of country risk, counterparty risk, anti-money laundering and know-your-customer requirements, and capital costs that do not fully reflect the risk characteristics of trade finance” as impediments that could potentially be addressed.

Asian Development Bank: “GLEIF search capability enables companies to source and evaluate new buyers and sellers in target markets.”

In August 2018, Janet Hyde, an investment specialist at the Asian Development Bank went a step further, suggesting that the LEI will help businesses grow, as well as facilitate their access to credit. In a blog post titled ‘How LEI will transform small business in Asia’ (see ‘related links below’), she points out : “For a start, the GLEIF search capability enables companies to source and evaluate new buyers and sellers in target markets, encouraging them to expand their businesses with greater confidence. Building such databases also helps large organizations to seek out new companies to transact with, including SMEs. This in turn creates more business opportunities for these companies which are already willing and able to participate in Asia’s supply chains.”

The LEI connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and thus answers the questions of 'who is who’ and ‘who owns whom’. GLEIF has published the Global LEI Index. It contains historical and current LEI records including related reference data in one authoritative, central repository. The Global LEI Index is the only global online source that provides open, standardized and high quality legal entity reference data. It brings efficiency, transparency and trust to legal entity identification.

GLEIF offers various means to access the publicly available LEI data pool e.g. via its web-based search tool or its file download service. Subject to the selected mode of accessing the LEI data pool, users are able to source additional information relevant to an LEI record such as enriched reference data or other identifiers that have been mapped to the LEI. Any interested party can access and search the complete LEI data pool free of charge and without the need to register.

Given the LEI’s manifold benefits to both the providers of trade finance services and the businesses that consume them, it is becoming harder to argue against its universal adoption. Support for the LEI is growing in line with stakeholder awareness and deployments are gathering pace around the world. As Janet Hyde observed: “The LEI would need to be adopted by all entities, not just financial institutions and trading companies: government departments and agencies, company, land and share registries, tax offices, sanctions lists, anti-money-laundering and know-your-customer directories, as well as auditors. Only then can truly comprehensive and meaningful portfolios of information be successfully constructed.” She concludes: “With widespread adoption, the LEI will enable communication across different platforms since there will be one standard that all market participants can agree upon supporting the entire life cycle of transactions.”

GLEIF couldn’t agree more, and we encourage all trade finance stakeholders to consider how the LEI can help transform their operations.

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About the author:

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.


Tags for this article:
Client Relationship Management, Data Management, Digital Identity, Global Legal Entity Identifier Foundation (GLEIF), Global LEI Index, Know-Your-Customer (KYC), LEI Business Case, Open Data, Risk Management, Regulation, Standards