The global crisis of 2008 triggered by the downfall of the US investment bank Lehman Brothers sent shock waves across markets and economies around the world. One of the results of the political and economic turmoil that ensued was the increased transparency and regulatory control of the practices and operations of market participants.
What are LEI Codes and How do they Safeguard Information?
The establishment of the LEI system saw a series of regulatory initiatives put in place on a global scale. These prompted resulted in many market participants adopting unique Legal Entity Identifiers. Identifying every single financial transaction is a good practice that can introduce an added level of security by authenticating the transactions.
There are other methods to make financial transactions safer, such as using identifiers such as ISINs and CUSIPs to give an identity record to assets. However, switching to LEI has unique benefits. Most importantly, the unified LEI database that was proposed by G20’s Financial Stability Board (FSB) will be free to use, easy to access, accurate and global. The LEI database is easily accessible and you can search for any company using the GLEIF Search Tool.
Today, close to 1.7 million companies and organizations use LEI identifies with the LEI is currently being adopted as the single most important identifier in the global financial ecosystem.
The benefits of obtaining a LEI code extend beyond it being a mere regulatory requirement, which must be adhered to. By staying compliant with global regulations, companies receive additional brand protection that secures their digital identity.
The LEI gives your company brand protection and secures your digital identity. When your company is listed on the LEI index, it serves as a validating qualifier that proves that you are a real company registered via a regulated companies’ registry. For this reason, both banks and financial service companies have begun including an LEI check to their customer onboarding and KYC procedures. For many banks, asking for a LEI Code before issuing a loan or credit is now part of the assessment phase of their customers.
Evolving Threats and Evolving Safety Mechanisms
For years, email and SMS verification have been the standard for most online banking and services, including Forex brokers and exchanges. However, an increase in malicious attacks related to the current coronavirus pandemic mean that hackers have little problem bypassing through the weaker implementations even of two-factor authentication systems, either by intercepting codes or exploiting account-recovery systems. The end result has been that the overall security of the sector was weakened by the very mechanisms supposed to ‘fix’ it.
Emails and SMS have been at the center of a lot of two-factor hacks, most recently as a way to, intercepting software tokens and setting up last-minute call-forwarding arrangements to intercept codes used for 2FA (Two Factor Authentication) in transit. The security threat is bigger than people think with nearly one-third of Forex trading platforms becoming the victim of a targeted attack.
These factors became part of the reason the financial sector adopted the new, unified standard of LEI codes. Apart from providing an easy identifier for legitimate businesses, they will also tell your international investors or customers that you are who you say you are, and stand behind your company. In this day and age when cases of fraud and identity theft are prevalent, a LEI Code that cannot be replicated, stolen or faked is the closest to 100% guarantee you can find.
LEI codes have managed to introduce some standardization into the current chaotic market so much that recent research conducted by McKinsey showed that the global banking industry can save up to $2-4 Billion US Dollars annually by replacing outdated, slow KYC methods with a quick LEI check.
Because LEI codes require annual renewal, they introduce an element of necessity for companies to keep up-to-date with current regulations and requirements. Consecutively, this means companies are all the more likely to also regularly update their security systems and policies, check for vulnerabilities and breaches and ensure their databases are up to date and accurate. A LEI code that is not renewed will be shown as LAPSED on the LEI index, which could cause blocked trades or payments, and complications with financial service providers.
Adapting to the New Normal
The introduction and adoption of the LEI code system is quickly paving the way for a new path for companies to enjoy a strong relationship with their customers. By fostering an environment of trust and verifiable data, customer privacy and exceptional cybersecurity are becoming a reality.
Naturally, this new model will require new skills and active participation from both private and government entities if it is to become a gold standard. In essence, the adoption of LEI codes globally will turn banks into data companies. This will demand a portfolio of IT, back-office, finance and risk infrastructure skills that can compete with the best digital companies. Eventually, IT functions are likely to merge fully into the business segment to measure up to the changing needs for privacy, transparency and security.