When Lehman Brothers went bankrupt it had over 7000 legal entities in over 40 countries. So it seems from this chart that the large global banks have a long way to go before a high proportion of their legal entities are registered. Not surprisingly, the large Asian banks have been slow to register their legal entities.
Alacra has been integrating the pre-LEI data files from the endorsed pre-LOUs as the data has been published. In response to customer demand we have been adding these entities to the Alacra Authority File, our reference database that previously contained only rated, regulated and listed companies globally. Although there are many use cases for the Alacra Authority File, the most common are to facilitate entity identifier mapping and to identify low-risk clients and counterparties.
Surprisingly, very few of the entities that have been assigned a pre-LEI to date are rated, regulated or listed, so the Alacra Authority File has almost doubled in size from over 200,000 entities to just fewer than 400,000 entities. There are a number of reasons for this but perhaps the most important is the large number of funds, trusts and SPVs that have registered for an LEI.
Our next few posts will analyze the data from the four largest LOUs based on the number of pre-LEIs assigned: the GMEI utility, formerly the CICI utility, which is run by the DTCC and SWIFT and is assigning GMEIs; WM Datenservice, which assigns General Entity Identifiers or GEIs; INSEE, the French pre-LOU which is assigning LEIs; and the London Stock Exchange which is assigning IEIs. Our goal is to provide some high level information about what types of entities have been assigned a pre-LEI and what we know about them. The data presented in these posts is as of February 24, 2014. We have dropped the “pre” from pre-LEI and pre-LOU and refer to them as LEIs and LOUs.
Overlap between Alacra Authority File and LEI Universe
Listed, Regulated, Rated universe=213,000
Total LEI universe=190,000
Overlap between two universes=17,000
What’s a financial institution to do? The global regulatory bus hurtles down the road with a changing roster of drivers and a long list of destinations.
On both sides of the Atlantic, regulators are mandating the use of LEIs – Legal Entity Identifiers – in trade reporting. The CFTC mandate began last year and the EMIR mandate began last week. A wider European mandate by the EBA is around the corner. Never mind the fact that governance is not solid, adoption is slow, data quality is poor and there’s no funding model for the Central Operating Unit (COU). There is a mandate. Ultimately an effectively run Global Legal Entity Identifier System would allow regulators to assess systemic risk and would help financial institutions roll up counterparty risk. Other benefits would include accelerating the KYC process and reducing reference data costs. But effectiveness does not appear to be close.
Similarly, there are efforts in place to require financial institutions to improve the collection of beneficial ownership information when onboarding a client. In the US, FinCEN published an ANPR in early 2012 that was met with an uproar, and open forums to discuss the possible new rules were standing room only. In Europe, the Fourth EU Money Laundering Directive has a specific focus on the collection of beneficial ownership information. Plus, FATCA and the related IGAs require beneficial ownership information in some cases down to the 10% level. Regulators are moving at different speeds, with different levels of urgency, ostensibly in the same direction.
Then there is Delaware. About 30% of the 60,000+ US entities that have registered for a pre-LEI with the Global Markets Entity Identifier (GMEI) Utility (formerly the CICI Utility) have their registered address in Delaware. With Nevada and Wyoming, Delaware “has a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies – or by companies lacking information on their ‘beneficial owners,’ the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.” [Delaware, Den of Thieves? New York Times, November 1, 2013]
The beneficial ownership problem isn’t unique to Delaware; beneficial ownership information around the world is hard to collect because different jurisdictions either have no requirement or different requirements for the submission and accuracy of such data to a government registrar. In the UK, David Cameron has proposed that a central register of beneficial ownership be created. Even the Cayman Islands are considering changes to their beneficial ownership requirements. But these initiatives are limited, uncoordinated and might be counterproductive, as explained in this article: Why we might not benefit from naming beneficial owners.
So, one set of global regulators wants every legal entity to have a unique identifier. Another set of global regulators want financial institutions to be able to accurately identify beneficial owners. The jurisdictions that have the largest number of entity identifier registrations require the least beneficial ownership information. The governance of the legal entity identification initiative (GLEIS) is far from operational and the beneficial ownership initiatives have been met with revolt. The intersection of these initiatives will cost the industry dearly while providing little added value to regulators. While global regulatory bodies are focused on a number of important targets – systemic risk, trade reporting, financial crime – the scattershot approach is costly, time-consuming and ineffective. And given that in the US (and other jurisdictions) regulators are funded at a level to fail, it seems as if there’s got to be a better way.
In September we posted Upcoming Changes to KYC Beneficial Ownership Regulatory Requirements – A Primer, which outlined how different regulatory regimes were going to require more and more accurate beneficial ownership information. This post spurred several conversations with KYC practitioners, many of whom asked how technology might help with the beneficial ownership burden. Last Thursday I was on a panel at the AC
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