LEI and the History of Identities for Businesses – Podcast Episode 81

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Let’s Talk About Digital Identity with Oscar Santolalla and Clare Rowley, Head of Business Operations at GLEIF.

Episode 81 is an identity stories special, where Oscar and Clare discuss the history of identities for businesses and how and why the LEI was created and introduced – including how the LEI has been adopted globally, the challenges is has helped to solve and what the future of LEI might be.

“We see there an emerging dialogue and focus coming from the trade, the supply chain community on the importance of LEI for trade participants.”

[Transcript below]

Connect with Oscar and Clare on LinkedIn.

We’ll be continuing this conversation on Twitter using #LTADI – join us @ubisecure!

To find out more about LEIs go to the RapidLEI Knowledge Base or contact the RapidLEI team.

Go to our YouTube to watch the video transcript for this episode.

 

Podcast transcript

Let’s Talk About Digital Identity, the podcast connecting identity and business. I am your host, Oscar Santolalla.

Oscar Santolalla: More than 2000 years ago in Persia, Egypt, ancient China and their contemporary civilisations, the first versions of what we now know as the passport were used to travel from one region to another. As the world became more populated and connected through roads and by the sea, passports became a vital piece of paper for people to enter from one country to another. But only in the late 21st century the passport became as standardised and globally acknowledged as we know it today.

But what has been the ultimate motivation for humans to travel the world? Trade, and it’s still today.

Companies have also existed for centuries. Some of the oldest businesses existing today were established in Japan, like Nishiyama Onsen Keiunkan a hot spring hotel founded in 705. However, the need for business registries came much later in history. The United Kingdom’s Companies House was created in 1844. The goal of British lawmakers at that time was that having a list of registered companies publicly available would help reduce fraud.

On the other side of the Atlantic, Dun & Bradstreet, a company that was founded in 1841 provided credit reports about businesses through several decades with a similar goal of helping businesspeople know the companies they were planning to trade with. In 1963 Dun & Bradstreet created the Data Universal Numbering System (DUNS) a unique nine-digit identifier for businesses. A few other similar business identifiers appeared but, as with the passports, the time for a global standardisation was still to come.

Let’s hear now the history of the Legal Entity Identifier, LEI, the 20-digit identifier for businesses and other types of organisations.

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Oscar: Today we have with us Clare Rowley. The head of business operations at the Global Legal Entity Identifier Foundation, the GLEIF.

Clare, what were the reasons why the LEI was created?

Clare Rowley: I will go all the way back to September of 2008. For participants in financial markets, financial institutions, this is a very memorable month because during this time there was what is now referred to as the Lehman weekend.

And of course, that led to a failure of an extremely important market institution, market player and the subsequent impact across the world. So, at this time, there were supervisors within financial markets, financial institutions, asking a very simple question to their regulated entities. That is, what is your exposure to Lehman Brothers? And the scary answer was – that was not really an easy thing to know and to determine, and it will probably take weeks and maybe even months to get that answer.

And the root of the problem was not that there was no data on the positions that were held, etc. Rather, it was the problem in identifying those several thousand legal entities associated with Lehman Brothers. So, at the time there was no design in data systems that made it easy to aggregate information across the entities and then clearly paint the different hierarchies existing, be it in the financial products or in the corporate structure itself. That left a window opening or some motivation for the leaders around the world to come together and to think about how to solve that problem.

So, if we fast forward to today, we’ll see that the Legal Entity Identifier, the LEI and that being part of the global LEI system has solved the problem of identity, largely starting in derivative markets, but bit by bit moving into all financial instruments such as securities, fixed income markets that are around the world. And you’ll see now that the LEI, it is incorporated into different regulatory reporting’s. And based on our, the foundation’s, last analysis, we are able to identify 294 regulations and policy recommendations that are coming from 24 jurisdictions around the world.

Oscar: Tell us more about how was the process behind the creation of these LEI standards.

Clare: So, it really was a fabulous international effort that was led by the Financial Stability Board. So, following the 2008-2009 financial crisis, you then had the G20 leaders coming together and making a recommendation. An open public means a system for identifying legal entities. And that recommendation was put to the Financial Stability Board.

So, the very first thing that the Financial Stability Board, an organisation international that is based out of Basel, Switzerland. Put their heads together and said, okay, first we want to look at the governance topic. So, they did a very extensive consultation to public sector entities, the regulatory, central banks, securities regulators, etc., but also an extensive outreach to private sector.

And that private sector was not just organisations like financial institutions, the intermediaries, etc., but also going into, for example, real world like the topic of supply chain, business registries. So not just focusing on the financial markets but looking into, for example, even payments, etc., where we see a lot of activity today. And overall, the Financial Stability Board concluded a governance structure that is that is very robust but inclusive of all different organisations or all different, you could say sectors.

So, let’s start at the top. We have three layers.

At the top we have the Regulatory Oversight Committee, and this is made up of more than 65 authorities from around the globe that are setting the policy and ensuring the policy evolves over time.

Then you have the Global LEI Foundation, the GLEIF, which is the organisation I represent. We are managing the operations. We are a not-for-profit Swiss foundation.

And then at the third level there is organisations called LEI issuers. And this is the most diverse grouping of organisations involved. We have 39 in total, and they are the local experts. So, they know what makes a legal entity, a legal entity, how to validate and verify that information at the local jurisdictional level.

So, this governance structure that was set up is very inclusive as you have the public sector there at the top. Then you have us, the foundation, which you could consider more like a neutral, not for profit organisation and helping to coordinate across the different layers. And then these LEI issuers, the 39 organisations are all different types of entities. You have private sector entities like London Stock Exchange, Bloomberg, you have business registers, etc. So, it’s a very mixed group and also allows the system to get a very wide input into how it should evolve into how it’s applied at the local level.

So, this public private partnership led by the Financial Stability Board, well, it was developed in a very intensive way with great participation coming from different areas. You see a governance structure that has persisted and that has really demonstrated how efficient it is.

And then on top of that, we have the LEI.

So, in parallel to the developments, the governance structure, there is also a desire to ensure that the LEI, the legal entity identifier was non-proprietary, a broad public good and therefore there was the engagement with ISO, the International Standardisation Organisation, to establish the LEI as that kind of standard, one that is open, public, freely accessible. And you will find the LEI is also represented as an ISO standard – 17442.

That standard describes the LEI itself, as well as the reference data such as official name, registered address. And something interesting there as well is the idea that it should evolve over time. So, you see already there have been updates to the standard to include, for example, references to how the LEI could be embedded in digital products like digital certificates. And that is a really fundamental principle of the system that the system in the governance structure, in the actual application of standards should evolve according to market participant needs over time.

Oscar: And when the LEI was – possibly said launch – was made available for organisations.

Clare: So, the foundation itself came into being in June of 2014. But you will find that the earliest LEIs were issued all the way back in 2012 and that gets us a bit to how it has been used since its creation. So, you might think to yourself and a standard for legal entity identity that’s really big and it also gets to the heart of data systems of how businesses interact – identify their partners. And if you think yourself or even, let’s say, as a business entity, how many identifiers you have, you will quickly think about, for example online platforms, logins with governments, logins to health insurance, whatever it is, etc.

And you will realise you have hundreds and hundreds of identifiers, either that you use personally or for businesses as well. So that therefore brings us to well, how do you get by in an interest and utilisation for such a system when it really gets to a very expensive end and difficult change for organisations, how to identify business partners itself and transactions etc. And that is where we see regulators in the first step of using the LEI.

They looked and they said, well, we know we have an area that’s changing rapidly where we have regulation coming into effect and change is occurring in industry and that was derivative markets. So back in 2012 when the first LEIs were being issued, they were being issued to help the financial market participants, both financial institutions, as well as companies that use derivatives for things like currency hedging, natural resource hedging, etc.

Those were the first entities to obtain the LEI and that was to ensure compliance with emerging regulations of the United States such as the Dodd-Frank regulation, and within Europe, the EMIR regulation and then the LEI expanded after that in to, for example, the markets in financial instruments directive in the EU so more broad use across the across the financial instruments markets.

But indeed, that’s why you see a bit of the disconnect between the first LEIs being issued in 2012 to meet the market demand, the regulatory implementations. But the actual full system itself with the GLEIF, there helping managing the operations, the publication of the data, etc. that was not fully in place until June of 2014.

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Oscar: The early 2010s saw the world becoming more digital and connected. Square, Stripe and later Apple Pay made it so easy to move money from the device that was already in our pockets. OpenID Connect made it so easy to use our digital identities across a seemingly unlimited number of services.

The concept of Identities for organisations was finally starting to take off thanks to the new LEI standard. So, how LEI is used today?

The ignition factor for LEIs came from the financial industry, but it was not the emergence of mobile payments or users’ convenience. It came through an unprecedented avalanche of regulations that mandated its use. These more than 300 global regulations covered most financial activity you could think of – Payments, Capital Markets, Private Banking, Treasury, Cross Border Trade, Letters of Credit, Lending, and the list continues.

In November 2018 the Bank of England became the first central bank with plans to make LEIs mandatory within certain transactions between financial institutions.

“The notes smelled musty, as if they had been stored under the floorboards” was said by the court.  This blatant example of NatWest bank shows how cash enters into the financial system in the millions to fund illegal activities when there are insufficient anti-money laundering checks. This case makes it very clear that banks and financial institutions must verify who exactly their customers are. How can bank employees know who are the beneficial owners of a company? Here is how LEIs are already helping.

Who are the job creators? The media often makes us believe that big corporations and billionaires are. But the evidence shows, as we discussed with Amit Sharma earlier in this podcast, that small and medium enterprises, SMEs, are the real job creators in both the richest and poorest countries.

Unfortunately, even in richer economies, small businesses find it very hard to get access to credit to secure their next 12 months of operation. Why? The main reason is that a company’s financial reputation is directly based on the owner’s financial score. What if the family, on top of not owning any property, never built up a good credit score to prove that they are reliable for re-payments? A bank would make its due diligence, follow their KnowYourCustomer KYC processes, and as a result deny them credit. How can we change this game and bring financial inclusion? Again, here is how LEIs can help.

There is no doubt that LEIs can make a big positive impact, and innovative companies are already making this happen.

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Oscar: So now let’s talk about the future of the LEIs. So, with the pandemic and the recent economic instability, what are the new challenges that the LEI has found?

Clare: When we talk about the future, what we see at the GLEIF is a pivot to the private sector, adoption.

And we see there – first, I will focus on trade. And to quote a recent publication that came from ICC UK, “the world’s 333 million companies support a global community of almost 8 billion people, all of whom rely on these companies to earn a living and live in a prosperous and more peaceful world.” So, 330 million companies, well, you can’t have a global economy – interactions between companies, customers cross-border without having a more efficient way of answering that very basic question, who am I doing business with?

So, we see there an emerging dialogue and focus coming from the trade, the supply chain community on the importance of LEI for trade participants. And that is particularly since the COVID pandemic, where we see fraudulent transactions as people, companies ran to go digital. Fraudulent transactions also have been on the rise. And that’s where the private sector becomes engaged, looking at the LEI, the accessing of the LEI via the LEI index as a means to provide real time access to unique identification of legal entities.

It helps the first step in creating an efficient and trust-based relationship to facilitate, for example, trade finance. And then, very importantly, eliminating manual inputs and the difficulties or cost driving exercises that manual management of data causes. So, for example, if you are relying on names and addresses to try to identify business parties, to try to communicate across business partners, you have problems with translation, transliteration, shortening of names, of addresses and all of that requires manual intervention just to get a transaction initiated, just to have and establish that very first trust between two business partners.

So, there you see an emerging interest in the LEI as a solution for KYC, anti-fraud and ensuring appropriate surveillance for anti-money laundering.

Identity also is extremely important for businesses. And access to a global identity can be life changing for small businesses, especially small businesses coming from developing nations where maybe their local business registry is not easily accessible to parties outside the country, etc.

And there we did a pilot project in Zimbabwe working with a financial institution that engaged in something we call the validation agent operating model. That bank was called, NMB bank and they decided to engage, to investigate. Well, how can the global LEI system offer its small business client’s access to this global identifier so as to broaden their ability to interact digitally and also make the small businesses more present and more accessible to business partners around the world.

And through this engagement, there’s a firm called Copper Wares that became one of the first mid-sized African companies to get an LEI. And there we have a finance manager from the company that notes – regarding Copper Wares having the LEI that “once were known out there. We expect life to be much easier, funding terms to be more accessible, credit terms to be more accessible. And overall, that helps us Copper Wares to produce more, employ more people and offer better prices and boost market share.”

So, we really see that driving need the ability opportunity for small businesses to promote themselves, to make themselves more accessible via this global identity as a very important pillar to the future and the growth of the global LEI system.

Oscar: Yeah, excellent. And you have mentioned earlier that the LEIs are maintained supported by a series of organisations is an ecosystem including the GLEIF. So how has the GLEIF and this LEI ecosystem evolved to help solve the challenges that you just mentioned?

Clare: So, I already mentioned with the with the COVID pandemic, of course, you had all sorts of business processes, operations that were going digital. And with that movement toward digital, it also highlighted, you could say, one of the shortcomings of the LEI system.

So as a starting point, the global LEI system, it is open public information. We are gathering the data that is validated, verified by these LEI issuers around the world. We gather that data, we run data quality checks, ensure the quality of it, and then ultimately put it together and publish it in a way that enables an easy website search, full file download, or API access for technical programmes.

That’s our role to ensure that the LEI remains an open public good, and we’re upholding the basic principles that were put forward by the Financial Stability Board and are overseen by the Regulatory Oversight Committee. So open public data, fabulous, easily accessible. But if you take that and now apply it to establishing a trust relationship, we have a disconnect.

For example, I, Clare Rowley, I could take any one of these 2.2 million LEIs that are out there. I could just choose it from the open public data. Go to a financial institution and say, “Yep, here I am, Clare Rowley. I represent this organisation. I would like to open a bank account with you”, and that financial institution now has to do the same basic checks, confirming authorised representative, etc. again. To ensure that, I, Clare Rowley actually am an authorised representative of this LEI.

So that has driven us to look more deeply into enhancing the LEI as a digital ID management tool. And we see there is a lot of value to expand the LEI as an organisational identity management tool and the fact that it is this global unique identifier. So, we look to leverage existing technologies such as digital certificates, and we also look into a new model of decentralised business identity, looking into, for example, the principles of self-sovereign identity.

So as to evolve the LEI in that it is not just that 20-digit alphanumeric code to identify firms, but also to enable firms to use it as a way to identify themselves. And verify the authenticity of their counterparty organisations without the need for that additional human intervention. So, we look to evolve the system to ensure it can enable instant and automated trust between legal entities and their authorised representatives.

Oscar: Indeed, the importance of connecting the individual’s identity with organisations, identity. Clare, final question how do you see the LEIs in, let’s say ten years from now?

Clare: So absolutely we believe that digital will drive a lot of the LEI growth and that is just the reality of the world we live in. Indeed, we had the COVID pandemic, now it starts two years ago, but we see that business processes and sectors still struggle with digitisation. So, we believe that this movement, these efforts will continue for many years to come.

But ultimately, digital is the future for business transactions. So, we think that that area will drive a lot of growth within the global LEI system. Right now, there is a major international effort ongoing that is led by the Financial Stability Board with the intent to make cross-border payments faster, cheaper, more transparent and more inclusive.

You will find that the LEI is involved in three of the building blocks of this initiative with our primary building block, our focus being around establishing  unique identifiers with proxy registries. So, the initiative it’s very ambitious, but what we really like about it is the visionary approach. So, it is looking very globally at the overall payments ecosystem and what needs to be done to ensure the evolution of the payments ecosystem to achieve those objectives faster, cheaper, more transparent, more inclusive.

And just see, in July of this year, the Financial Stability Board published a recommendation report regarding the LEI in cross-border payments. And you get that same flavour of the broader ecosystem needed to facilitate transactions cross-border in an efficient way. So, some of those recommendations go to international standard setting bodies, such as FATF, the BCBS. And there you will see the focus on using the LEI as a standardised identifier for sanctions list publications, but also as a means of identification of legal entity customers, beneficiaries within payments ecosystems, but also generally for customer due diligence.

So, we see that there will be a growth of the LEI in the cross-border payments. To facilitate that growth we envision a greater participation of financial institutions in the issuance and maintenance of the life. And I bring back this term the validation agent that is referring to financial institutions or other types of organisations that have expertise in identity validation verification where they incorporate LEI issuance into their operating procedures for corporate, for customer due diligence to seamlessly provide the LEI to the customer as a by-product of their validation verifications that they’re doing.

Today we have over ten organisations that are participating as validation agents, but we believe that the LEI will become more and more embedded in customer due diligence protocols as the cross-border payment initiative forwards.

And then the other area I mentioned briefly is sustainability reporting. So of course, this is a very hot topic across all sorts of sectors. Knowing the sustainability profile of suppliers, of merchants, etc. And there you see of course; data is core to addressing the question of sustainability and the current climate crisis. And there’s a lot of focus on, well, what metrics are being reported, the different markets, the different cuts you could say maybe it’s looking into carbon markets, human rights, labour conditions, etc. But a very important piece of that is the fundamental question, well, who is being reported on from a company level? And then how do I connect this information? So, a company, let’s just say a manufacturer, it could be reporting information on its carbon footprint, on its use of its participants, and labour markets, etc.

And those could be going to very different regulators, very different investors, consumers of information. And then, of course, there also publishing the traditional financial information on their investments, on their balance sheets, income statement, etc. All of that needs to be brought together in a way that facilitates analysis, facilitates investors to understand better the profile of the company, supervisory authorities, purchasers, the customers that would be interested in engaging in supplier relationships.

And so, you see identity is a fundamental pillar of helping us to address the data question around sustainability reporting. So, we believe that also as the interest and the as the world around sustainability reporting becomes more standardised, you will find the LEI there growing as a tool to connect.  You could say some of that real world information on the sustainability reporting with then also the financial markets information coming from companies.

Oscar: Fantastic. Great to see how LEIs are going to help us on these challenges in the coming years. Thanks a lot, Clare, for joining us.

Clare: Well, thank you, Oscar. A pleasure again to catch up.

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Oscar: There is no doubt that innovations will keep coming and will bring us surprises that are hard to imagine today. In the future, when you log into a digital service, not only you will have proved who you are but also which company you belong and if you can legally represent such business, all verified on real time.

These innovations will help fight against “musty” businesses, will help with international trade, will help us empower the real job creators, and more.

Don’t be surprised if a world in which LEIs are more ubiquitous than passports is the world we live tomorrow.

This was a special story episode of Let’s Talk About Digital Identity.

Thank you to our guest Clare Rowley. The story of this episode was edited by myself, Oscar Santolalla with help of Chloe Hartup and Elena Sanz. Want to hear more about LEIs? Next week we have an episode on the Electronic Trade Documents Bill. Stay tuned!