Written by 15:36 Financial Centre

The Challenge is the Medium Sized Business

The task of identifying all legal entities involved in a financial transaction beyond doubt is less of a challenge for corporations than for small and medium-sized enterprises. At the same time, reporting requirements on the supply chain are also increasing for medium-sized companies, so that the topic of identifying suppliers is also gaining in importance for them, warns Stephan Wolf, CEO of the Global Legal Entity Identifier Foundation (GLEIF).

Supply chain legislation, know-your-customer requirements, anti-money laundering, sanctions lists – the demands on companies to know all business partners and to be able to identify them beyond doubt in transactions are increasing. This is contributing to the further spread of the Legal Entity Identifier (LEI). The LEI is a 20-character alphanumeric code linked to reference data that uniquely identifies legal entities involved in financial transactions. “We expect to cover close to 90% of global market capitalization with the LEI,” reports Stephan Wolf, CEO of the Global Legal Entity Identifier Foundation (GLEIF). The large corporations almost all have LEIs, according to Wolf. “The challenge is the midmarket.”

Medium-sized companies often ask why they actually need a globally unique identifier like the LEI, Wolf tells us. After all, their business is essentially national in scope. That may be true on the sales side. “But the supply chain is international – even for SMEs,” the CEO emphasizes. And that’s where the LEI could play a role. After all, the requirements for companies to report on who supplies them are increasing.

Of course, there are already other identifiers, such as the Bank Identification Code, the BIC, Wolf notes. The BIC is an ISO standard used as an address on the Swift network, he says. The rules for assigning it, as well as the collection of associated data, are designed for that purpose, he says. With the BIC, for example, it could happen that the name of a Polish company is English, even though the company is registered in Poland under a Polish name. “You can’t get the two names together at first,” Wolf explains.

Digitization of the supply chain

This is where the LEI works, he says, because it is an ISO standard and agnostic. This means that it was not created for a specific use case. It advances the digitization of the supply chain, he said, because it creates a common framework for the payment world with BIC and IBAN and for the supply chain with SAP programs and invoice numbers – a single identifier from contract to bill of lading to invoice.

“We are also concerned with the digitization of the supply chain from the perspective of global suppliers,” Wolf explains. Currently, he says, his foundation, i.e. GLEIF, is participating in the Savannah project together with the United Nations and the Monetary Authority of Singapore, among others. The goal, he says, is to help small companies in the Asian-African region meet ESG requirements that the Western world places on them. Otherwise, these companies risk not being able to find customers for their products and services.

Wolf is betting that regulation of wider dissemination will provide a tailwind for the LEI. The global standard for the exchange of electronic messages between financial institutions, i.e. for payment messages, already includes the LEI as an input field. So there is already standardization, he said. “But now it’s a question of whether regulators worldwide will make LEI mandatory.” He recalled that the Financial Stability Board, or FSB, had made a recommendation that LEI be used for identification in cross-border payments. “In a nutshell, the standard is already there, but now the regulators have to write their laws and the banks have to implement them.”

Wolf also believes that the issues of sanctions and money laundering are drivers for LEI. However, he said, a very precise distinction must be made. When it comes to sanctions, he says, there are official lists of who you can no longer do business with. Every company that operates internationally has to do a lot of checks before it knows whether it can do business with someone. That’s where the LEI could help.

Meanwhile, anti-money laundering does not work with lists. Rather, banks would have to report suspicious transactions. The authorities are interested in the beneficial owner. But criminals often hide behind a bundle of companies. And it often takes years to untangle such a web of companies. The LEI could simplify this work.

Cooperation with vendors

At the same time, the foundation is working to make LEI more attractive by collaborating with data vendors, service providers that professionally prepare price and reference data and make it available to investors, among others. “In the Western world, we have very large data vendors. All of these vendors use LEI internally,” Wolf reports. S&P, for example, publishes the internal S&P identifier in conjunction with LEI on its GLEIF website. So you can use LEI to bring S&P data together with, for example, London Stock Exchange data, Bloomberg data or WM data, he says. WM Datenservice belongs to the WM Group, which also publishes the Börsen-Zeitung. In this respect, LEI helps German and European companies to identify their business partners without any doubt in the various data pools.

Source: Article from August 5, 2023 in the Börsen-Zeitung, by Detlef Fechtner.
Photo Stephan Wolf: GLEIF

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