The Association for Finance Professionals’ (AFP) Tom Hunt, CTP, director of Treasury Services, met with the Treasury Advisory Group (TAG) in April to discuss legal entity identifiers (LEI) with the Global Legal Entity Identifier Foundation (GLEIF). Participants were most interested in the future of LEIs and streamlining the know your customer (KYC) portion of the process.

GLEIF is a not-for-profit Swiss foundation founded in 2014 by the Financial Stability Board (FSB) and endorsed by the G-20. The board has 16 independent directors and is overseen by 71 regulators and 19 observers in the regulatory oversight committee (ROC), or LEI ROC.

There are 39 LEI issuing entities, which are commonly referred to as local operating units or LOUs. These LOUs go through a rigorous process of accreditation, where the chief component is demonstrating they have the ability to validate and verify LEI content or LEI requests, either in single or multiple jurisdictions around the globe. To date, 1.8 million LEIs have been assigned — 66% in European countries, and 16% in North America.

Europe currently has 49 different rules and regulations mandating the use of the LEI, while the U.S. has 26 laws that either mandate or make optional inclusion of the LEI. Up to now, self-registration has been the main means by which LEIs have been issued. GLEIF has introduced, just within the last six months or so, the concept of a validation agent.

JP Morgan was the first to become a validation agent (in Q4 of 2020) and is currently going through the proofs of concept process and is working with one local operating unit to be able to issue LEIs through the onboarding process for their clients. GLEIF has also been speaking to numerous financial institutions that are interested in doing the same. “We've got four or five in motion right now, and many other conversations that are happening day in and day out,” said Peter Warms, business development manager of GLEIF.

Tara Herrera, treasurer at Related Companies, said that her company uses LEIs for head transactions, and that they only apply for an LEI when they’re ready to do a trade. “At what point, with the banks, would you register the LEI as you're setting up an account?” she asked.  

“With regards to the onboarding process, it's fairly involved in the initial processes to be able to get an LEI,” said Warms. “The financial institutions are most acutely aware of when they need to get an LEI as it relates to regulatory requirements, because there is an overarching fear, if you will, to make sure that they are following the right guidelines and procedures in recognizing what regulators have put forth to follow. So, when an LEI is required, it's usually pretty immediate in the onboarding process.”

Jenifer Herdin, CTP, vice president of Corporate Treasury for PVH Corporation, wanted to know how Markit fits into it all. “We've got the corporations, the financial institutions, the trading partners, so on and so forth. But a necessary component to all of it are the KYC workflow providers, like Fenergo and Pega that provide the infrastructure to be able to do the onboarding,” said Warms. “And then you have the data vendors, whether that's Bloomberg or Markit. Many of these data vendors also provide KYC workflow capabilities as well, and I believe Markit is one of them.

“I'm not as familiar with Markit as I am Fenergo. There is a part of Fenergo that utilizes the GLEIF API to recognize in the onboarding process that it has all of the information it needs about this entity. Let me ping the GLEIF website and see if an LEI exists. If it does, I'm going to grab that LEI, I'm going to put it into this process. It's going to stick with the entity as we continue going through the onboarding process.

“I believe Markit does that in a similar fashion. However, Markit is not a local operating unit, so they can't do the assignment of the LEI, but they could be working in cooperation with another local operating unit to generate an LEI in a rapid fashion.

“This all relates back to know your customer (KYC). In the onboarding process today, think of the fact that often what is used in terms of proving identity is a copy of a passport, or a copy of a driver's license — a paper copy that is.”

“We’ve been in this COVID environment, a digital environment where, even opening bank accounts, there are some banks — and they blame it on regulation — that we're still trying to get hard signatures for,” said Hardin. “We’re going around multiple continents sometimes to get a bank account open. So, what dialogue are you having with the various regulatory authorities to make this an acceptable standard?”

“We actually are seeing interest from the financial institutions on wanting to be able to have to eliminate the wet signatures, in effect, and combine the validation agent capability with presenting credentials along with whatever additional documentation needs to be made in order to be able to open a business relationship with a financial institution,” said Karla McKenna, managing director of GLEIF Americas.

“We have begun to take a look at the way that verifiable credentials could be accepted in business contexts, the same way that digital certificates are,” said McKenna. “And we continue our research into this. But the preliminary research that I've done at this particular point in time, is that the regulation and legislation not only at the state level here in the U.S., but what we've seen so far with the eIDAS regulation in the EU, focuses less on the type of technology that's used, and more on the fact that a digital signature is present.

“We definitely have more work to do on that. At this particular point, the pilots that we're working with, and the proofs of concept that we've done so far to prove the vLEI concept, have essentially relied on partners or stakeholders coming together and agreeing that they would use this approach within a particular community user or ecosystem.”

“In my experience, unless and until the regulators of the banks get on board, banks may say, ‘Sure, you can do this,’ but they're still going to require all their paper until you get regulators that affirmatively put a stamp of approval on it,” said Karen Nash-Goetz, vice president and senior legal counsel for T. Rowe Price.

“Some other things to think about are, for example, in the United States, the CIP process that you have to go through, this is one of the very, very few regulations where the record-keeping requirement is not measured by the time you open the account and get the documents. It's measured by five years after the account is closed,” said Nash-Goetz. “T. Rowe Price has accounts at certain banks that have been open for decades. So how do we assure regulators that decades from now, that this electronic trail is still there, the technology is still there. When I started in my law practice, we were still working on big floppy disks. You have to constantly be mindful of reassuring regulators and reassuring banks that you're going to keep up with technology for this thing, because paper lasts.

“How is an LEI different from a Global Impact Investing Network (GIIN) number? Or what's the purpose of the GIIN number, then?” asked Hunt.

“We actually suggested that the LEI could be used as the GIIN,” said McKenna. “The GIIN is an identifier that is used within the Foreign Account Tax Compliance Act (FATCA), which is under IRS oversight. And so that is the organizational-level identifier that the organization must give when it reports under FATCA. We suggested that the LEI actually could have served that role in effect, and we had hoped that it could, but it was not adopted. The IRS went ahead with their plans to introduce the new identifier, which is really the IRS's equivalent of an LEI.

“As a number, in effect, I do not think that it is stood up by the same kind of reference data that we have behind the LEI. So, while it is a common identifier that they could use against that institution for FATCA reporting, it doesn't point back to reference data. And then, of course, it's not that top-level identifier that multiple parties could use to recognize that institution unless they were keeping track of the identities that were associated with GIINs.”

“Going back to the certified true copy of a passport … that's a royal pain. And I worry that it's going to get worse. If we can get financial institutions to agree on something, I think it'll make life for the corporates a lot better. But until they agree, you're going to have six different banks and seven different ways of making them happy,” said Matt Johnson, vice president and treasurer of Genesco.

“If you find that a standard works at the highest level, then everybody can ladder down from there,” said John Dourdis, vice president and treasurer, Conair. “That's what the confusion is. Tom, you had mentioned those in the past, that the banks have been used as a sort of enforcement tool for government agencies. And it's nothing standardized, so that's where all the confusion comes in.”

“Back to KYC, how do you envision this working with other KYC platforms such as SWIFT?” asked Herdin. “We're working with SWIFT to standardize that process, so how would that work?”

“We had a really good discussion with SWIFT just as recent as two weeks ago,” said Warms. “SWIFT was part of the original LEI. They still work in combination, or still have a working relationship, with one of the local operating units. We recently met, talked about the LEI and how they could use that more within their KYC tools. They were very receptive to it, and there were a few takeaways on both sides. We plan to reengage hopefully, in the next few weeks.”

“I think the consensus says it's very promising,” said Hunt. “Hoping to ease that burden from paper to electronic, or paper to digital — it would be very helpful.”

For more insights, download AFP’s Executive Guide on KYC Technology.