An LEI is a 20-character, alphanumeric code that provides a clear and unique identification to businesses and other entities participating in financial transactions (for a detailed description of the code itself, please see the Global Legal Entity Identifier Foundation website). It contains information on business ownership structures that regulators require to assess financial risks and promote market integrity. LEIs are part of global standards that rely on high data quality for enhancing transparency in marketplaces. More information on what an LEI is can be found at the Global Legal Entity Identifier Foundation’s website and at LEI Worldwide.
Following the 2008 financial crisis, there was an acknowledgement by regulators of the difficulty in identifying the parties to a transaction across markets, products, and regions (see the Financial Stability Board’s article on the LEI). The LEI became a regulatory response to this issue, allowing for the incorporation of key information for legal entities in a financial transaction (including digital) on “who is who” and “who owns whom.” Although the LEI was initially adopted for use in trade of financial derivatives, it has a host of other applications, including for loan issuance and business identification. For more information on the history of the LEI, see the Financial Stability Board’s website, along with SWIFT and this McKinsey report.
Although an LEI is not a legal requirement, there are several benefits for small businesses. For one, the LEI reduces the cost of onboarding clients, which are sometimes prohibitively high for bringing in new MSME clients. For trade finance, LEIs can speed up access to finance through better identification and can enable faster processing of letters of credit. LEIs also help with KYC (Know Your Customer) requirements, which are financial services guidelines requiring that identity is verified. Working with others that have an LEI number can also provide MSMEs with security in knowing about suppliers and partners and doing business overseas. Finally, LEIs can help MSMEs to comply with international regulations, secure their brand identity, and enhance their compliance reporting requirements. More information can be found in LEI Worldwide.
Governments and policymakers have a role to play in encouraging the adoption of the LEI, namely by raising awareness that this tool exists and has particular uses. Not only is it important to understand that an identity solution such as the LEI has been developed, it is also important to raise awareness of the ways it can benefit MSMEs by reducing their transaction costs and increasing their access to financial markets.