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'Legal Entity Identifier' Finds Growing Uptake in Import-Export Trade

By Zack Andresen

Companies around the world are increasingly using the Legal Entity Identifier (LEI) system for trading partner validation, risk mitigation, and other benefits in import-export trade. The system, initially designed to increase transparency in the financial services sector, is now finding wider application amid the growth of cross-border digital trade.

What is the Legal Entity Identifier?

 

 

Each LEI consists of a unique, 20-character alphanumeric code that enables clear identification of a company doing business internationally. As of May 2017, over 500,000 organizations from 195 countries had procured LEIs,1 including over 130,000 in the United States.2 They are aggregated into a single-source, worldwide directory aimed at increasing transparency in global transactions, including import-export trade.3

 

"Entity identification can be a time-consuming, costly, and complex task," says the Global Legal Entity Identifier Foundation (GLEIF), which maintains the LEI Index as an open database.4 The index is accessible free-of-charge through an online search tool or downloadable XML file for integration into the internal databases of interested organizations.5 The "level 1" data currently available in the index identifies "who's who," including such details as an entity's official name, registered address, and country of formation.6 Level 2 information, on entities' parent companies, is expected to be available in the first half of 2018.7

 

Origins of the LEI

 

 

Following the financial crisis of 2008, global data standardization became a focus for both the public and private sector. 8In 2009, the G20 declared a need for more transparency surrounding the international trade of over-the-counter (OTC) derivatives.9 By 2012, the G20 had endorsed a framework for the LEI,10 and in June 2014 the GLEIF was launched as a not-for-profit organization tasked with supporting its global implementation.11

 

LEI for Import-Export Trade

 

 

While the LEI's initial focus was on the derivatives market,12 the benefits of a standardized entity recognition system also became clear among companies participating in the rapid growth of digital import-export trade.13 This has helped drive LEI registration by approximately 100,000 entities globally since September 2016.14,15

 

Still, the number of adoptees remains only a percentage of the 304,000 U.S. exporters and 184,000 U.S. importers operating today.16 As such, organizations like the International Chamber of Commerce (ICC)17 and World Trade Board18 have publicly endorsed the LEI in an effort to raise awareness of the initiative's benefits to businesses operating in global import-export trade. The World Trade Board has established a task force to drive adoption by large and small businesses engaged in cross-border trade, as well as educating technology and financial services companies on the merits of LEI. "While many national identification systems exist, they are not harmonized at the global level, which hinders the full potential of international trade," says the board, which was initiated by a financial software provider and includes public and private sector executives in the world of international trade.19

 

GLEIF recognized early that the LEI had implications for the larger business community. "Most organizations do not yet maintain a single database supplying up-to-date reference to existing or prospective clients, business partners, and counterparties," the foundation says.20 Using siloed internal corporate databases and multiple commercial services can lead to contradictory information on potential trading partners. In comparison, using the LEI affords companies the opportunity to access customer and business partner profiles from a single source, delivering greater efficiency and effectiveness in regards to risk mitigation, client relationship management, and even business development, GLEIF says.21

 

Additionally, organizations like the ICC forecast that data standardization initiatives like the LEI reduce risk in the realm of digital import-export trade financing, opening the door for "an entirely new world of digitalized global commerce."22 In an industry dialogue on the use of LEI in payment messages, other benefits cited include greater efficiencies in transaction screening, to meet regulatory requirements and manage costs associated with anti-money laundering requirements. However, some participating in the dialogue pointed to a chicken-and-egg problem, in the need for a critical mass of parties to payment transactions in all regions. They also expressed concern about the complication of adding the identifier into their payment processes.23

 

The

Takeaway:

While the LEI's initial purpose may have been more targeted toward the derivatives market, the global business community is coming to recognize the benefits of adopting this universal identifier for transactions within the context of global import-export trade.

Zack Andersen - The Author

The Author

Zack Andresen

Zack Andresen is a business technology writer based in Brooklyn, NY, but currently traveling the world with his wife and son. Learn more at ZackWrites.com.

Sources

1. “The Legal Entity Identifier Regulatory Oversight Committee - LEI ROC,” LEI Regulatory Oversight Committee; https://www.leiroc.org/
2. “LEI Statistics,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics
3. “Introducing the Legal Entity Identifier (LEI),” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/about-lei/introducing-the-legal-entity-identifier-lei
4. “Our Vision: One Identity Behind Every Business,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/about/our-vision
5. “Global LEI Index,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/global-lei-index
6. “Level 1 Data: Who is Who,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/access-and-use-lei-data/level-1-data-who-is-who#
7. “Level 2 Data: Who Owns Whom,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/access-and-use-lei-data/level-2-data-who-owns-whom#
8. “Regulatory changes impacting the SWIFT community,” SWIFT; https://www.swift.com/node/14361
9. “G20 Leaders Statement: The Pittsburgh Summit,” University of Toronto; http://www.g20.utoronto.ca/2009/2009communique0925.html#system
10. “G20 Leaders Declaration,” Council of the European Union; http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/131069.pdf
11. “This is GLEIF,” Global Legal Entity Foundation; https://www.gleif.org/en/about/this-is-gleif
12. Ibid.
13. “World Trade Board Initiative: To drive adoption of Global Legal Entity Identifier numbers by corporates and SMEs,” World Trade Symposium; https://worldtradesymposium.com/to-drive-adoption-of-global-legal-entity-identifier-numbers/
14. LEI in the Payments Market, Payments Market Practice Group; https://www.gmeiutility.org/Attachments/pmpg_paper_leidiscussionpaper_september2016.pdf
15. “LEI Statistics,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics
16. “A Profile of U.S. Importing and Exporting Companies, 2012 - 2013,” U.S. Census Bureau; https://www.census.gov/foreign-trade/Press-Release/edb/2013/edbrel.pdf
17. 2017 Rethinking Trade & Finance: An ICC Private Sector Development Perspective, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
18. “World Trade Board Initiative: To drive adoption of Global Legal Entity Identifier numbers by corporates and SMEs,” World Trade Symposium; https://worldtradesymposium.com/to-drive-adoption-of-global-legal-entity-identifier-numbers/
19. “World Trade Board Initiative: To drive adoption of Global Legal Entity Identifier numbers by corporates and SMEs,” World Trade Board; https://worldtradesymposium.com/to-drive-adoption-of-global-legal-entity-identifier-numbers/
20. “Our Vision: One Identity Behind Every Business,” Global Legal Entity Identifier Foundation; https://www.gleif.org/en/about/our-vision
21. Ibid.
22. 2017 Rethinking Trade & Finance: An ICC Private Sector Development Perspective, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
23. “Use of the Legal Entity Identifier (LEI) in Payments – Status Update,” Payments Market Practice Group; https://www.swift.com/file/41796/download?token=WJvoX_-m

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