LEIs and their value to regulatory compliance

Avid followers of the GLEIF website will have observed that the regulatory net is slowly but surely tightening on entities’ use of a Legal Entity Identifier (LEI) to settle cross-border financial transactions, to register overseas affiliates, and to enable transparent supervision by regulatory authorities. Established in 2012, the 20-character, alpha-numeric code is rapidly being adopted by entities worldwide not only to facilitate their trading activities, but also to ensure regulatory compliance.

In the first four months of 2020 alone six new pieces of legislation have been enacted which directly involve or require the use of LEIs. These follow global requirements implemented by the Financial Stability Board and other multilateral institutions, as well as national legislation by a small number of governments in Diligencia’s region of interest, the Middle East & Africa. In 2018 Saudi Arabia’s monetary authority made it mandatory for banks, insurance companies, reinsurance companies and finance companies to obtain an LEI for the purposes of regulatory supervision. In the same year South Africa’s Financial Sector Conduct Authority launched a consultation on the implementation of LEIs in the country.

Businesses in jurisdictions that have not yet enacted any national level regulations are not necessarily off the hook; several of the EU rules dictate that companies wanting to register a branch or overseas affiliate will need an LEI. It is likely that increasing pressure from the EU and the G20 will encourage regional entities to adopt the identifier – if not directly then via their national government.

Based on Diligencia’s mapping of the approximately 10,000 companies who have so far applied for LEIs in the Middle East & Africa, some of the trends are striking. Despite the UAE not having issued any legislation on the use of LEIs, it is the jurisdiction with the highest number registered, suggesting that there is a value attached – particularly for trading companies. Around 850 of these entities are registered in the UAE’s economic freezones, and over 300 in the DMCC alone, a freezone known for its jewellery and precious metals marketplace.

On a broader level the most popular entity types to hold LEIs include: funds (762, the majority of those are in South Africa), holding companies (626), trading companies (534), and banks (484). Corporate names on the register are dominated by international names – either as a result of inbound investment and franchising (e.g. Coca Cola, Pepsi and Hyatt) or outbound expansion by regional names such as Jumeirah Group.

As the commercial incentives of using LEIs combine with their value to achieving regulatory compliance, we anticipate and look forward to seeing their usage growing in the future.