Detroit is among the regions with the best technological revolutions in finance, insurance and fintech. Top financial institutions are set to help residents receive safe, affordable and transparent banking services. Well, LEI has come forth as a vital tool to allow for the transparency that is seen in these financial institutions. LEI enhances regulatory compliance, mitigation of systemic risks, facilitates global data sharing and other things.
You see, cybercrimes are increasing all over the globe, with Statista reporting an estimated $320 billion loss in the US alone. Just imagine, this figure significantly increased between 2017 and 2023 by over $300 billion. Now, these cybercrimes are causing a distrust between counterparty institutions, and especially those operating on cross-border basis. And this is where LEI comes in, providing reliable data to organizations to unambiguously identify corporate structures globally.
But you may ask, what is this LEI thing? How does it operate, and what is its role in the financial institutions in Detroit? You can visit LEI online - https://www.lei.net/ to get detailed information of how it works and and even sign up for one. On the other hand, this article will inform you of the reasons LEI is such a big thing in banks today.
But what is LEI?
This might be the first time you are coming across the term LEI, or maybe you’ve heard it before but you do not really understand what it is. Well, legal entity indicator, or LEI, is a 20-character code developed by International Organization for Standardization (ISO) that is used as a unique identifier of legal entities that involved in various financial transactions.
Essentially, this unique code has information that answers the questions, “who does what” and “who is the owner to whom.” In short, the publicly available LIE data can be used as a global directory, which is important for enhancing transparency.
Enhancing transparency
You can confirm that transparency is crucial in maintaining trust and confidence in every financial market. Actually, an online survey done in December 2023 by Statista stated that 56% of respondents preferred if financial institutions were transparent on the use of customer money. A further 41% said that they never had an idea on how their banks invested money and that they would want more insight.
Now, what LEI does is that it provides a standardized identification system that is recognized globally and investors are able to accurately identify and track whatever entities that are involved in a financial transaction. This is a vital element as the institution is able to mitigate risks and even fight financial misconducts fraud and money laundering.
Now, let’s take an example of the $40 million embezzlement on the Detroit Riverfront Conservancy. With the LEI, you can be able to tell who did what and when it was. This is quite possible since the saga revolves around a former employee of the institution and a nonprofit organization working towards revitalizing Detroit’s riverfront.
Strengthening regulatory compliance
Different regulatory authorities globally have come to realize the importance of legal identity indicators when it comes to the matter of compliance and regulatory oversight. The regulatory authorities in Detroit are no different. Actually, on May 2024, Ricco Dun, GLEIF’s senior business development manager was at the 47th annual IACA Conference in Detroit to explain on the latest developments concerning LEI and GLEIF.
You see, an initiative like Markets in Financial Instruments Directive II (MiFID II) necessitates that financial institutions use LEI to report derivative transactions and also find counterparties. Well, if you standardize entity identification, LEI will be able to take care of:
- Enhancing data quality for regulatory agencies
- Reduced costs of operations
- Facilitating regulatory reporting
Facilitating global data sharing
Since we are in globalization era, it is vital that institutions have cross-border data sharing in order to manage risks easily and ensure effective regulatory supervision. Now, you see, LEI comes through in facilitating data exchange between financial institutions, stakeholders and regulators across borders. This works to ensure that global financial systems are more efficient.
Business efficiency
Apart from mitigating risks and enhancing transparency in the banking system, LEI improves efficiency. One of the areas that is helped largely by the system is the cost of client-on-boarding. Actually, a research done by Mckinsey on behalf of GLEIF explained that this technology could help the global banking sector to potentially save between $2 billion and $4 billion annually.
In addition to that, LEI gives businesses the capability to better understand their counterparties corporate structures. This would enable the financial institutions to make more informed decisions. How simple it has become!
In conclusion
No one can debate that the legal entity identifier (LIE) has come through as a vital tool for enhancing transparency, mitigating risks, strengthening regulatory compliance and improving functions of financial institutions. Even as financial markets continue to grow and become interconnected all over, we can never overstate the importance of LEI in ensuring integrity and stability.
