The International Organization for Standardization (ISO) 17442 standard defines the attributes that are essential for Legal Entity Identifier ("LEI"). As per the standard, the term 'legal entity' includes but not limited to unique parties that are financially or legally responsible for financial transactions performance or entering into legal contracts irrespective of their constitution. Hence it includes trusts, partnerships, government entities. The only exclusion being natural persons.
Therefore as per definition, government entities are eligible for LEI. However, eligibility and applicability are different, and hence the need to obtain an LEI will depend on the national financial regulators.
The LEI Regulatory Oversight Committee ("LEI ROC") has stated in the Global Legal Entity Identifier System ("GLEIS") forum on the 22nd of May, 2019 that government entities are eligible for LEI as they are covered under the definition of LEI as per the ISO 17442.
Government entities may not have a legal identity or may not be incorporated as a legal entity, but as long as they enter into legal contracts of issuing, buying, or selling they are eligible for LEI.
Since government entities are not incorporated like other financial institutions, the challenge in providing details about parent entities while obtaining an LEI will be faced, and hence the LEI ROC is looking to create a new item called 'general government entities'. The LEI ROC is proposing a shift in the way information is collected, it wants to know more about government entities and more about its hierarchy and hence issued a public consultative document named ‘LEI eligibility for General Government Entities’.
The summary of this consultative document is as follows:
First of all, the document illustrates the reason for introducing general government entities in the GLEIS framework.
Are Government Entities Such As Ministries, Republic, And Agencies Qualify For An LEI Even When They Are Not Incorporated Or Have No Legal Personality?
The LEI ROC is satisfied that although the government entities do not have a legal personality, they are included in the definition of LEI as they enter into legal contracts under their jurisdiction laws like buying or selling financial assets.
How To Figure Relationship Data Within The General Government Sector?
The whole purpose of LEI is to understand the ‘who owns whom’ in a financial transaction. Hence LEI application procedures require that the entities applying for LEI must report their ‘ultimate accounting consolidating parent’ and ‘direct accounting consolidating parent’. So entities must report the highest legal entity preparing the consolidated financial statements and also the immediate entity consolidating the financial statements. The definition of a parent will be the accounting definition of consolidation applying to this parent.
With Government entities, this becomes a tricky position to define. There are some entities in the public sector that are fully or partially owned by the state and some government entities that operate in isolation even though operating in the public sector and they are independent of the levels above or below them, both financially and in terms of reporting.
Create A New Item To Identify General Government Entities
Given all the challenges in labelling the government entities as per the requirements of LEI, the LEI ROC has suggested the creation of a new item ‘General Government entities’ in the application of LEI, which will bifurcate the Government and Non-Government entities.
The LEI ROC takes the definition of government entities from the System of National Accounts (“SNA”) 2008
- Institutional Units - SNA 2008 paragraph 4.2
“An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and transactions with other entities”.
They are not government entities, but as the definition suggests proximity between the legal entity and institutional unit definition, they are taken into consideration for the general government entity definition.
- General Government - SNA 2008 paragraph 2.17c
As per the definition, the general government sector consists of institutional units that not only fulfil political responsibilities and their role of economic regulation but also produce goods and services for individual or collective consumption mainly on a non-market basis and redistribute income and wealth.
- General Government Subsectors - SNA 2008 paragraph 4.127
It describes two subsections of the general government-
- All units concerning central, state or local government
- All non-market, non-profit institutions that are controlled via government units
- Social security funds either as individual, institutional units or as part of any or all of central, state or local government
It does not include-
- Public corporations even though all equity is owned by government units
- Quasi-corporations which are owned/controlled by government units
Nevertheless, However, it does include unincorporated enterprises owned by government units that are not quasi-corporations.
- Central Government Subsector - SNA 2008, paragraph 4.134
It includes institutional units and NPI controlled by the central government institutions. Central Administrations is defined under SNA 2008, paragraph 4.135 as comprising all institutional units that extend their authority over the entire territory of the country.
- State Government subsector - SNA 2008, paragraph 4.140
It includes institutional units that exercise some government functions at a level between the central government and government at the local level. A country may be divided into states, and these institutional units are those whose fiscal, legislative, and executive authority continues to extend to individual states. The state government usually has fiscal powers within its area of competence.
- Local Government Subsector - SNA 2008, paragraph 4.145
It includes local governments that are separate institutional units. The scope of their authority is much less than the central or state government, and they may or may not be entitled to levy a tax on institutional units resident in their areas.
- Social Security Scheme - SNA 2008, paragraph 4.124
These are social insurance schemes that cover the community as a whole or large section of the community and are controlled by government units. The schemes provide incentives in cash or kind to the sections of the society that need it most like for old age, unemployment, health care, maternity, family allowance.
The challenge of defining government entities exists due to the fact of how different countries organise their government. In some countries, several ministries are institutional units, while other countries have separate units that are defined to be under an overarching ministry. In some countries, the local ministry has no legal identity but represents the state while entering into contracts.
Despite all the challenges faced in bringing government entities under LEI, it is a move that is much warranted. Transparency in dealings must extend to all sectors that enter into legal contracts.
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