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.