Webinar Replay | The Legal Entity Identifier (LEI): The Key to Unlocking Financial Inclusion in Developing Economies
Making Finance Work for Africa (MFW4A) and the Global Legal Entity Identifier Foundation (GLEIF) co-hosted on 13th February 2021 a webinar on the topic: “The Legal Entity Identifier (LEI): The Key to Unlocking Financial Inclusion in Developing Economies”. MFW4A has identified the need to strengthen AML/CFT/CFP compliance systems and practices in African jurisdictions to combat financial crime to enhance the integrity of financial sectors while fostering financial inclusion. Promoting initiatives such the LEI is considered an integral part of our program which aims to achieve this paramount objective.
This webinar showcased the results of an international flagship project designed to expand financial inclusion among SMEs especially on the African continent. The project was launched with the support of the German Federal Government through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH as a collaborative initiative between the Global Legal Entity Identifier Foundation (GLEIF), the Centre for Financial Regulation and Inclusion (CENFRI), Cornerstone Advisory Plus, Zimbabwe’s NMB Bank Limited and London Stock Exchange Group (LSEG).
All around the world, small and medium sized enterprises (SMEs) lack robust business credentials making KYC obligations burdensome for the businesses and financial institutions involved. As a result, millions face significant barriers to growth as their access to finance, particularly to trade finance, is either severely limited or denied altogether, and their capacity to establish contractual trading partnerships both domestic and international is constrained. Even gaining access to payment services is a challenge.
A 2018 publication entitled Promoting SME Competitiveness in Africa: Data for De-Risking Investment released by the International Trade Center (ITC) stressed that: “In times when transparency and availability of data are at a premium, greater efforts have to be made to ensure that national stakeholders in African countries have the necessary information to signal SME reliability and attractiveness to potential international investors.”
The Global LEI System is an open public system was born out the 2008 global financial system when the leaders of the G-20 nations had an objective to create this global system to support transparency in all types of financial transactions. The system has a three layers governance structure; at the top, the Regulatory Oversight Committee (ROC) which sets policies for evolving the system and carries out the regulatory oversight of the Global LEI System; in the middle the GLEIF which is responsible for the operations of system; and at the bottom there are 39 Local Operating Units (LOU) accredited by GLEIF to provide LEI issuance and renewal services. Users access the LEI Repository published by GLEIF via an open data license.
The LEI is a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who” and “who owns whom”.
The International Financial Corporation (IFC) highlighted the LEI as one of the emerging innovations for efficiency and effectiveness as it offers financial institutions (FIs) room to comply with AML rules and suggested that if respondent banks obtain LEI for them and their clients, they can easily establish the identity of counterparties. The World Trade Organization (WTO) recognized the LEI as a key enabler of trade which remains a key pathway for the development of countries. The LEI is expected to enhance transparency in the marketplace and build greater trust between market participants.
The limited transparency of African businesses, especially SMEs and local businesses and the perceived risk is often considered a major challenge to expanding trade finance portfolios and is among the main constraints to provide appropriate trade finance solutions to African enterprises. “The importance of trusted identity is just very critical in relation to the Africa’s trade finance gap (estimated above USD 81 billion in 2019) and anything that can be done to minimise the obstacles to finance provision – such as the lack of a verified identity – should be pursued with enthusiasm.”
In the African continent, there are 9,000 LEIs issued as of today out of 1,2 million global population and clearly there is work to do to broaden LEI subscription in Africa and this a major motivation behind the new initiative “The Key to Unlocking Financial Inclusion in Developing Economies”. This Initiative started way back in 2019 when GLEIF commissioned McKinsey to carry a study which revealed that the LEI could save up to 4 billion USD to financial institutions in client onboarding costs, and this is only one business line where the LEI can help enhance efficiency and reduced costs as there are also great benefits for trade finance and payments.
Following the study, the GLEIF introduced an operating model called the “Validation Agent” at the beginning of 2020 an onboarded its first Validation Agent, JP Morgan, in October. This enables FIs to generate LEIs for the clients as a by-product of their CDD procedures. This is a win-win engagement for all parties involves. For:
- FIs, it leads to efficiency in their operations;
- Corporates, it gives access a globally recognized identity; and
- The LEI system, it serves to the original goal put forward by the G-20 leaders of creating a uniform identifier for all legal entities across the world.
The objective of the project was to implement a Validation Agent partnership in Africa to enable LEI issuance to SMEs in a cost-effective manner. By providing a recognized identity to SMEs, the project will demonstrate how this identity can achieve numerous development outcomes such as easing doing business through efficient identification of counterparties in business relationships and enabling financial inclusion. In addition, the benefits of FIs and regulators include the ability to combat market abuses of financial fraud and risk management of micro and macroprudential risks.
Overall, panelists reflected on this flagship project focusing on the considerable potential of the LEI in helping FIs to fulfil KYC/CDD obligations. The project is expected to facilitate the wider adoption of the LEI on the African continent by encouraging more entities across the continent to obtain the LEI. It will support the openness of African financial sectors to the rest of world, strengthen Correspondent Banking Relationships (CBRs) by overcoming some de-risking drivers, help reducing the informality gap and connecting SMEs to global supply chains.
African FIs are struggling to establish and maintain CBRs either because of the lack of critical business size or non-compliance with international AML/CFT compliance standards. As a result, the African financial system is perceived as unprofitable and high risky by the international financial system. International banks make their decisions based on the risk- reward analysis and because onboarding costs related to African FIs far outweigh expected income from business relationships, they tend to de-risk from the continent.
In terms of fulfilling the local KYC requirements, banks that participate in this project and taking the role of validation agent can definitely leverage their KYC processes to obtain the LEI for their customers with minimal to no additional steps depending on each bank KYC framework. As a result, participating banks can obtain strong global business IDs for their customers and help them address globally recognized verification processes while streamlining the reports for fulfilling the local regulatory requirements. The LEI will allow them to also streamline their internal processes for periodic KYC renewals, ongoing customer information updates and these banks will also reinforce their KYC system thereby boosting their compliance function. Furthermore, being in the LEI system can facilitate the identification of parent links therefore the establishment of the ultimate beneficiary ownership (UBOs) that is now a requirement of the CDD that banks have to conduct as per the FATF requirements now translated in local regulations in most jurisdictions.
LEI enables easy verification of trade transactions, and with the pace of technology progress promoting interoperability, digitisation and digitalization of transactions and foster harmonization of trade processes. Additional benefits also include: improved risk perception, increased trade capacity and CB networks, increased income from TF/CB activities, reduction in illicit financial flows, enhanced data management processes, achieve greater consistency in standardized reference data. Also, the LEI enables automation as straight processing which translates in efficiency and reduction in processing time. Furthermore, the LEI could drive massive opportunities in terms of trade openness for the continent by helping African corporates accessing global supply chains, facilitating e-commerce and cross-border trade in a context where the Africa Continental Free Trade Area (AcFTA) is setting a new momentum.
The webinar attracted more than 300 registrants and 130 attendees. Among them, representatives of commercial banks, development banks, insurers, central banks, academics, and development agencies. Positive feedback from the audience is a good testimony to the interest of audience in the LEI system.
The speakers were:
Welcome and Closing: Mr. Hugues Kamewe, Financial Sector Advisor, MFW4A
Moderator: Ms. Clare Rowley, Head of Business Operations, GLEIF
Panellists: Representatives (GLEIF, CENFRI, CORNESTONE Advisory Plus, NMB Bank Limited, LSEG)
- Ms. Burcu Mentesoglu Tuncer, Senior Business Relations & Policy Research Manager, GLEIF
- Mr. Masiiwa Rusare, Integrity Lead, CENFRI
- Ms. Alberta Abbey, LEI Analyst, LSEG
- Mr. Erasmus Bhunu, Head of Business Banking, NMB Bank Ltd
- Mr. Yann Desclercs, Managing Director, Cornerstone Advisory Plus
- Mr. Second Muguyo, Finance and Admin Manager, Copperwares