One of the challenges in today’s complex and interconnected world of business is the ability to determine the identity of your counterparty in any transaction. Traditionally, you may have tried to do a basic identity check (KYC) of your customers, dealers, distributors, suppliers, and vendors by using their company registration numbers, GST Numbers, PAN Numbers, etc. In the face of increased identity fraud and growth in Anti-Money Laundering (AML) regulations, this may not be enough. Verifying the identity of your counterparties is even more important in global trade (exports, imports, and cross-border finance), where you could be unaware of the real identity and ownership of the international counterparties with whom you are dealing.
This is where the Legal Entity Identifier (LEI) can help you.
What is the Legal Entity Identifier (LEI)?
The Legal Entity Identifier (LEI) is a 20-character, alphanumeric code that uniquely identifies a legal entity or structure that is a party to a financial transaction in any jurisdiction. The LEI connects to key reference information that enables a 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’.
The LEI was developed as a collaborative effort by regulators across the world to push transparency in transactions across markets, products, and regions. Businesses and organisations must mandatorily quote their LEI for many types of transactions when doing business abroad.
In India, the LEI is recognised and may be required by the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDAI), for certain transactions.
Benefits of Obtaining the LEI:
- LEI is a global identifier that provides international recognition for your business or organisation.
- It is standardised across countries.
- It serves as an essential identifier in cross-border (international) transactions and helps cut down risks.
- LEI helps establish identities across the value chain for the sake of security and for obtaining finance.
- It confers global credibility on businesses, financial institutions, and organisations.
- Small and Medium Enterprises (SMEs) that obtain LEIs can stand out amongst their peers in the domestic and global marketplace.
- You can display the LEI on your website, letterheads, business cards, marketing material, and documents.
- The LEI gives exporters and importers global recognition with prospective buyers and sellers in overseas markets.
- The LEI makes it easy for banks to identify you as an exporter or importer when you are transacting internationally.
- On online marketplaces, the LEI in your profile helps potential overseas buyers know that your existence has been validated.
- With the expansion of B2B e-commerce, LEI is being increasingly used for better identification of buyers and sellers on online marketplaces. It drastically cuts time in KYC and onboarding, helps comply with Anti Money Laundering activities (AML) and Know Your Customer (KYC) regulations, and filters out fake entities.
- LEI also allows the validation of parent-subsidiary relationships.
- Issued LEIs can be easily searched on the GLEIF database; either on its web interface or via API.
- LEI searches always provide updated results, as the LEI has to be renewed annually. LEI renewal requires validation of the latest corporate details of the legal entity.
Regulatory Mandates Related to LEI in India
Regulators in India, including the RBI, SEBI, and IRDAI, have mandated quoting the LEI for various types of transactions.
RTGS/NEFT Transactions: The RBI has mandated the LEI Code for all payment transactions valued at ₹50 crores and above undertaken by entities (non-individuals) for Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
Cross Border Transactions: The RBI has mandated the LEI Code for cross-border transactions such as capital or current account transactions of ₹50 crore and above. The timeline to obtain LEI Number for this purpose is October 1, 2022.
Corporate Borrowing: The RBI has mandated the phase-wise implementation of the LEI system for non-individual entities borrowing ₹5 crores and above from banks, Non-Banking Financial Companies (NBFCs), and Primary Urban Cooperatives (UCBs) in India. Entities without an LEI Code are not to be granted renewal or enhancement of credit facilities.
Insurers/Corporate Borrowers: The IRDAI has mandated the implementation of the LEI system for all insurers and their corporate borrowers.
OTC Derivatives Markets: The RBI has mandated the implementation of the LEI system for all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives, and credit derivatives.
Non-derivative Markets: The RBI has mandated the phase-wise implementation of the LEI system for non-derivative markets, including Government securities markets, money markets, and non-derivative forex markets (cash, tom, and spot transactions).
Eligible Foreign Entities: The SEBI has mandated LEI Code for Eligible Foreign Entities (EFEs) in the commodity derivatives market.
The introduction of LEIs has changed the landscape of global financial transactions because it has made it easy to identify transacting parties. It has also made it simpler for organisations with LEI to take their business to the global stage. With one common identifier for entities of all forms, types, sizes, and jurisdictions, the confusion around verifying their identities has been considerably reduced. The LEI is playing a key role in the safe and secure growth of global finance and commerce. It is recommended that all entities obtain the LEI for seamless participation in global trade.
(The author is Mr. Mohan Ramaswamy, CEO & Founder, Rubix Data Sciences and the views expressed in this article are his own)
