Legal Entity Identifiers in KYC

Organizations of all shapes and sizes who do business with clients, agents, or consultants, need to make sure they know who they are doing business with. Trying to verify a business entity, especially in the online world, is a tough task. Cybercriminals want to impersonate companies so they can get access to finance or launder money. That puts your organization at risk too. Legal Entity Identifiers (LEIs) can go a long way in solving this challenge but first, let’s take a step back and dive into KYC a little more.

What is Know Your Customer (KYC)?

KYC is a process of understanding who you do business with and assessing their suitability or risk to your organization. Banks, insurers, creditors and more are increasingly demanding (thanks to the global drive in KYC regulation) that customers provide due diligence information to ensure they are who they say they are. KYC regulation is now expanding into other industries such as not-for-profit.

KYC typically involves:

  1. Customer identification through a collection of personal information.
  2. Screening of data against global watch lists.
  3. Determination of risk for customer to commit money laundering, terrorist finance, or identity theft.
  4. Creation and assessment of a customer profile.
  5. Monitoring transactions against a customer’s expected behavior profile.

In essence, KYC is about risk management. It’s also about reducing the amount of financial crime in the market and ensuring that you can trust business transactions online. The Anti Money Laundering Regulation (AML) has been key in spearheading KYC regulation.

It refers to Customer Due Diligence checks or (CDD) whereby financial services firms must:

  • check the identity of the customer,
  • verify the identity of the customer,
  • assess, and where appropriate obtain information on, the purpose and intended nature of the business relationship or occasional transaction.

According to the UK Government website, identity checking consists of 5 parts:

  1. get evidence of the claimed identity (‘strength’)
  2. check the evidence is genuine or valid (‘validity’)
  3. check the claimed identity has existed over time (‘activity’)
  4. check if the claimed identity is at high risk of identity fraud (‘identity fraud’)
  5. check that the identity belongs to the person who’s claiming it (‘verification’)

But identity verification doesn’t stop at individuals. Organizations must also check the identity of a business. According to AML regulations, this means checking:

  • the name of the corporate body
  • company number or registration number
  • registered address
  • full name of each of the board of directors.

Where do Legal Entity Identifiers come in?

KYC has been around for a long time and a lot of research has been done on ways to improve the process. Currently:

  • 6/10 senior salespeople in banking spend 1.5 days a week on onboarding new clients.
  • 50% of financial institutions use an average of 4 identifiers in their KYC onboarding.
  • 57% of respondents agree that the reliability of reference data is a challenge.
  • 55% of respondents agree that the resourcing of onboarding is a challenge.
  • 55% of respondents agree that lengthy processes mean a risk of business loss.
  • 61% of respondents agree that digital technology will further complicate the process.

The burden continues past the onboarding stage as organizations must keep client data up-to-date through regular verification of business information and changes to ownership structures. What if this could all be done through an open system? What if you only needed to check one place to verify all the client information needed for onboarding?

This is where LEIs come in.

Adopting LEIs for each client transaction can save time, gain transparency and streamline onboarding. This is because the LEI database is open, up-to-date, and contains all the information needed to identify an organization.

Financial institutions can move away from the verification of several pieces of data into the verification of a single piece of data for an organization, the LEI. McKinsey published a report showing that the banking industry could save between US $2-4 billion in client onboarding, we’ve covered this report in more detail here.

How to improve KYC with Legal Entity Identifiers

According to UK Finance, in 2018

“the advanced security systems and innovations in which the finance industry invests to protect customers stopped more than £1.6 billion of unauthorised fraud. But despite this, criminals successfully stole £1.2 billion through fraud and scams in 2018.”

With this startlingly high number, it’s no wonder that financial institutions and other organizations are looking for ways to protect their income better. Processes need to be adapted for online workflows and eKYC, which is completely online, needs to be secure and trusted.

LEIs are fast growing and most trading companies are now required to have one but they cost little to nothing for a company to get so there is no barrier to adoption. You can require your customers to have a LEI, vetted by an independent Local Operating Unit managed by the Global Legal Entity Identifier Foundation (GLEIF). Once that data is on the LEI database, you can set up your systems to check the reference data in the database to save time and money in manual verification and checking.

In the example of a business loan application. eKYC could check and verify a business with a LEI in minutes and a loan could be granted with little to no friction for the customer.

Want to know more about LEIs? Click here.