LEI and KYC: How Can Legal Entity Identifier Help With Your Business KYC Process

The fast-paced nature of the world means financial institutions can no longer put customers through rigorous identity checks.

If you bombard today’s customers with too many questions in your KYC (Know-Your-Customer) process, they will exit your site and jump to your competitors’. Nobody likes being stressed. 

This is why many institutions trim down their KYC to the barest minimum to avoid losing customers.

Unfortunately, this leaves a loophole for people to hide important info about themselves. Since you didn’t ask, why share?

To improve your business KYC process without risking customer loss, we want to introduce the concept of LEI to you. But first, let’s establish some facts about KYC.

What Is KYC (Know-Your-Customer)?

As the name implies, KYC is a process by which entities try to verify the identity of anyone they’re dealing with. 

Entities here could refer to banks, investment companies, credit unions, nonprofits, government organizations, trade unions, or regular businesses. 

As you know, KYC involves a series of checks, all of which are done to manage risks such as money laundering, terrorism financing, identity theft, scam, etc.

So, essentially, KYC is a form of financial risk management procedure.

The importance of a good KYC practice cannot be underestimated, especially seeing the recent growth in cybercriminal activities.

According to Deloitte, “The estimated amount of money laundered globally in one year is 2−5 percent of the global GDP, which is in the range of US$800 billion to US$2 trillion.”

In 2020 alone, 47 percent of Americans experienced financial identity theft. That’s according to a report by Aite Group.

Reports like these show just how important KYC operations are.

How Are Traditional KYC Practices Executed?

Every business or institution has its own system of KYC checks. However, according to the UK Government website, identity checking consists of 5 parts:

Part 1: (‘strength’)

Involves asking customers to show proof of the identity they claim. This could be via passport number, registration number, or social security number. 

Part 2: (‘validity’)

Involves verifying the validity of the identity customer showcased.

Part 3: (‘activity’)

Involves verifying the activity of the identity customer showcased. For example, is the driver’s license still in use?

Part 4: (‘identity fraud’)

Involves verifying that a customer is or is not at high risk of identity fraud 

Part 5: (‘verification’)

Involves verifying that the identity is who they claim to be

LEI and KYC: How Legal Entity Identifiers Help With KYC

One of the major challenges facing traditional KYC processes is the enormous amount of resources and time that goes into executing them. 

According to recent research by the Global Legal Entity Identifier Foundation (GLEIF), the following discoveries have been made regarding the length of time and resources it takes to complete regular KYC processes.

GLEIF conducted this study by surveying hundreds of people involved in the financial space. After the study, here’s a brief summary of what they found:

1. That 6 in 10 senior salespeople in banking spend more than 1.5 days of their week (27% of their working week) onboarding new client organizations.

Clearly, that’s a lot of time that could be spent doing other profitable things like bringing in new customers. 

How does LEI help with this:

LEI Number, or legal entity identifier number, is a global reference number that makes it easy to verify an organization’s identity in just one check. With an LEI Number, banks and other financial institutions can verify customers’ identities in a matter of hours rather than days. This saves precious time.

2. On average, 50% of financial institutions use four identifiers to help identify client organizations.

Having to check multiple documents to verify an organization’s identity leaves a lot of room for mistakes. 

How does an LEI Number help?

You only need to check one data to verify an entity’s identity with an LEI registration number. This makes a lot of sense, especially when you consider the number of clients most institutions attend to.

Imagine doing a four-document check for hundreds of customers in one day. That’s already a bedrock for error. But with an LEI Number check, you can reduce the number of checks required per client. 

3. That the process of client onboarding, including knowing your customer (KYC) due diligence, takes six weeks, on average.

Again, this discovery further proves that traditional KYC processes lead to wastage of precious employee time. Imagine spending six weeks before you can accurately profile a client. That’s a lot of time you could direct into other profitable activities.

How does an LEI Number help?

Like we said earlier, a legal entity identifier number makes it possible to verify a client organization in a matter of hours rather than days (let alone weeks). Once you get a hold of an entity’s LEI Number, you can quickly do a verification check on the GLEIF platform, knowing that every detail you find is reliable and trustworthy.

4. 57% of respondents agree that the reliability of reference data is a challenge.

To think that many financial institutions spend six weeks profiling clients only to end up with data even they don’t trust. To be honest, that’s a futile effort if you ask me.

How does an LEI Number help?

As you’ve probably heard, an LEI application Number is a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). Also, the whole concept of legal entity identifier is a directive of the G20. Finally, the GLEIF is the official not-for-profit body established to oversee everything LEI Number-related.

With reputable backings like these, it’s hard not to trust any information you find on the GLEIF website. In short, verifying an entity using an LEI number is a better and more reliable way of doing things.

With a legal entity identifier number, you can relax knowing you’ve gotten authentic information about a client organization.

5. 55% of respondents agree that the resourcing of onboarding is a challenge.

It’s not only hard to find dedicated personnel to execute proper KYC practices, it’s extremely hard to find the right guys who’re willing to be on seat doing just that.

How does an LEI Number help?

You don’t need any special employee appointment to conduct LEI checks. Even regular on-desk staff can do simple LEI Number checks. The GLEIF website is simple enough for a layman to navigate, let alone finance professionals.

6. 55% of respondents agree that lengthy processes mean a risk of business loss.

It’s not hard to guess that many customers will choose not to operate accounts or carry out certain business transactions because of the lengthy verification checks they have to go through. This is particularly true for clients who’re small business owners.

How does a LEI Number help?

Getting a legal entity identifier Number for your client or asking them to open one is a much faster way to get their verification done.

Within a few minutes, an entity can set up an LEI Number, which is issued in less than 24 hours, and which they can then use to perform any transaction they need to.

7. 61% of respondents agree that digital technology will further complicate the process.

The advent of social media and other digital media platforms has made it even more difficult to accurately profile a client organization. An organization known to you as ABC may go on Facebook to do business as XYZ.

How does a LEI Number help?

A legal entity identifier requires that an entity should declare its every form of existence. That means showcasing even the parent bodies or child subsidiaries.

When you have access to a client’s LEI Number, you automatically have access to every information that makes them what and who they are.