Legal Entity Identifiers in Know Your Customer (KYC)

Legal Entity Identifier (LEI) is a 20 digit unique code which identifies parties to financial transactions across the world. It is a global reference number that identifies every legal entity or structure, i.e. a party to a financial transaction in any jurisdiction. 

In today’s world of digitalisation, most businesses are transacting financially online. With the convenience of online business comes a substantial risk of cybercrimes and fraud practices. Organisations must proceed with caution, and hence stringent measures for identifying the other party to the transaction needs to be in place. Know Your Customer (KYC) norms have been formulated precisely to serve this purpose. It helps organisations identify the party they are transacting with. So let us understand the substance of KYC norms.

What is Know Your Customer (KYC)?

KYC is a process adopted to identify the parties the organisation is transacting with and assessing the risk associated with the same. For all financial transactions, it is mandatory for the customers to provide due diligence and identify themselves and submit proof for the same. 

KYC is part of risk management as it helps in identifying the risk involved in transacting with the other parties and monitoring the same. Given that the following are the steps involved in the implementation of KYC norms. LEI can be a part of the customer identification process; accordingly, the burden on due diligence and AML is reduced, as the credibility of the new client is established right at the identification stage.

How Does Legal Entity Identifier (LEI) Help in Implementing the KYC Norms?

The GLEIF surveyed 100 senior salespeople in the banking sector across the US, UK and Germany. The results of the survey portrayed the following results:

• 52% of the respondents believe that the onboarding time is going to increase.
• Around 50% of the respondents expect that new technologies will be integrated into the onboarding process.
• 61% of the respondents believe that the growth of digital solutions will make identity verification more challenging, as the number of new clients will increase.

As per the survey results, it is evident that the verification of a new client is going to be a challenging process in the face of digitalisation. It will increase time and also complexity as frauds will increase, and regulations will become more stringent. Financial Institutions are continually looking at ways to effectively implement the KYC norms so as to save on cost and also employee time. As evident, the KYC process is cumbersome, and the lapse in the same can cost the organisation a very high amount. To make the process effective LEI is the answer.

LEI is up-to-date and complete information on all that is needed to identify the other party to the transaction. LEI is a one-stop verification code for all KYC mandated checks. Instead of checking the credentials of the party at 4-5 places, organisations can verify the same at one place that is LEI.

Integrating LEI in entity verification methods like Digital Certificates, KYC Utilities based on blockchain technology, and Digital Signatures will allow a business to connect all the records of an organisation and provide certainty of identity. By providing a common link, LEI will make identifying who owns whom simple and thus provide a safe platform for the global digital marketplace. Verification of LEI for a transacting party requires that the LEI must be obtained by the party first and be vetted by an independent Local Operating Unit managed by the Global Legal Entity Identifier Foundation (GLEIF). Once the data is in the LEI database, the systems of the organisations can be set up so as to enable verification of customer data to save time and cost. LEI is the future of all customer verifications globally and will make financial transactions more credible in the platform of virtual transacting and prevent cyber crimes and financial terrorism.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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