The rise of the LEI: Why the Legal Entity Identifier is becoming increasingly important for companies

13 November 2024

What is the Legal Entity Identifier (LEI)?

The Legal Entity Identifier (LEI) is a 20-digit alphanumeric code based on the ISO 17442 standard developed by the International Organisation for Standardisation (ISO). This code is permanently linked to important reference information that enables the unique identification of legal entities involved in official transactions. Each LEI contains information about an entity’s ownership structure and answers the questions ‚Who is who?‘ and ‚Who owns whom?‘. The publicly available LEI data pool, known as the Global LEI Index, acts as a global directory and dramatically enhances transparency in international markets. In today’s business world, where transparency and compliance are becoming increasingly important, the LEI is becoming an essential tool.

Significant use cases of the LEI

1. supplier and partner verification

The LEI offers a fast and reliable way of verifying business partners and suppliers for global companies. This enables companies to avoid the risk of cooperating with dubious or non-existent companies. The Legal Entity Identifier also simplifies the due diligence process in purchasing and supply chain management, enabling safer decisions. One clear advantage of the LEI is the reduction of risks in the supply chain. Especially in times of global trade relations and increasing compliance requirements, the LEI makes it easier to avoid dubious companies or companies with an unclear ownership structure.

2. simplification of international trade relations

In international trade – especially in complex supply chains – the LEI enables transparent tracking and identification of the companies involved. By using the LEI code, companies can create transparency along the entire supply chain, adhere to compliance standards and organise their logistics processes more efficiently. This promotes trust and facilitates coordinated collaboration between different players. In this way, the LEI can make a decisive contribution to minimising supply chain risks and ensuring compliance with global standards and regulations.

3. improvement of risk management

Another critical area of application for the LEI is risk management in mergers and acquisitions. Companies can use the Legal Entity Identifier to identify the companies involved, considerably simplifying due diligence processes, assessing financial and legal risks and supporting more secure decisions. Particularly in sensitive processes, such as investments, lending or mergers, the precise identification and traceability of the ownership structure plays a key role in making sound and secure business decisions. Using the LEI also makes recognising and assessing potential risks easier.

4. support with regulatory reporting obligations and transparency requirements

Regulatory requirements for transparency are constantly increasing in numerous industries. With the LEI, companies can prove the identity of their business partners by legal requirements and, if necessary, provide detailed information on the corporate structure. This improves and simplifies regulatory supervision in anti-money laundering (AML) and terrorist financing (CFT). The increasing importance of LEIs is particularly evident in the financial sector, where strict compliance requirements apply to banks, insurance companies and other financial service providers. For many companies, the LEI is a practical tool and a legal necessity to fulfil current regulatory requirements.

5. Trustworthiness on an international level

The LEI helps companies build international trust. For foreign customers, the LEI acts as a kind of ‚digital identity card‘ that enables them to find relevant information about a company easily. This strengthens credibility and promotes trust in the brand on a global level. Especially for companies that operate internationally, the LEI can be a decisive factor in opening up new markets and consolidating their position in the global market. Companies with an LEI signal high transparency and reliability to potential customers and partners, which is becoming increasingly important in an increasingly networked and regulated world.

6. Improved access to financial services and capital markets

Using a LEI code can also open the door to increased company access to financial services and capital markets. As the LEI enables financial institutions to verify a company’s identity and ownership structure efficiently, companies with an LEI can often obtain loans or attract investors more easily. This is particularly beneficial for small and medium-sized companies looking to establish themselves in growth markets and for a secure way to raise capital. By using the LEI code, companies can also often obtain better conditions for financial services, as they represent a lower risk of fraud and ambiguity.

Conclusion

The Legal Entity Identifier (LEI) is more than an identification number. It creates transparency, promotes trust and facilitates compliance with legal regulations – especially for international companies. Implementing the LEI enables companies to establish themselves in global markets and convince business partners and customers with an unambiguous identity. In addition, the LEI offers many advantages, such as more accessible access to financial markets, the reduction of business risks and adherence to compliance requirements. Given the increasing importance of transparency and trust in international trade, the LEI is almost indispensable for companies.