What Happens When a Legal Entity Identifier (LEI) Lapses?

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What Happens When a Legal Entity Identifier (LEI) Lapses?

In today’s business landscape, Legal Entity Identifiers (LEIs) have become essential for identifying legal entities engaged in financial transactions globally. Therefore, the expiration or lapse of your LEI can have significant consequences for your business. In this blog post, we will explore the implications and potential challenges that arise when your LEI lapses and highlight the importance of timely LEI renewal.

What is an LEI?

The LEI is a unique 20-character alphanumeric code that is assigned to legal entities involved in financial transactions. It serves the purpose of validating the identity of legal entities, promoting transparency and regulatory compliance. LEIs are overseen by the Global Legal Entity Identifier Foundation (GLEIF), Switzerland, a supranational not-for-profit organisation set up for the implementation of the LEI system globally.  The GLEIF has authorised organisations, known as Local Operating Units (LOUs) to issue the LEI after verifying the identity of organisations requesting it; the LEI registration process involves the provision of essential information about the legal entity and matching it against various statutory identity databases (such as tax registration, Registrar of Companies, etc).

Understanding LEI Expiration

LEIs have a specific validity period, typically one year, after which they expire. The expiration date is predetermined at the time of issuance, and you will be notified well in advance to facilitate timely renewal. The reasons for an LEI to lapse can vary, but the most common ones include failure to renew, incorrect information, or a change in the legal entity’s status.

Consequences of a Lapsed LEI

When an LEI lapses, it can have several consequences for your business:

Regulatory Non-Compliance and Legal Implications: Failure to maintain a valid LEI can result in regulatory non-compliance, as many financial regulations all over the world require entities to possess an active LEI for certain transactions. This non-compliance may lead to your business facing penalties, fines, legal repercussions, and strained relationships with regulators. Sometimes these financial consequences can be substantial, negatively impacting your entity’s financial stability and resources.

In fact, in 2020, the Commodity Futures Trading Commission imposed a $5 million fine on Morgan Stanley Capital Services LLC for failure to comply with swap data reporting obligations including failure to report the correct LEI. Investigations revealed that Morgan Stanley Capital Services LLC had allowed its LEI to lapse between 2013 and 2018.

Lapse will be a Permanent LEI Record: The historical records of LEI codes in the GLEIF LEI database are permanent and unalterable. In the event that your LEI code lapses, this information will be permanently documented in the database’s history section. Anyone who examines your LEI code in the future will be able to easily discern that it expired, just like the CFTC could with Morgan Stanley.

Impact on Financial Transactions: Financial institutions and counterparties often rely on LEIs to identify and verify entities involved in transactions. With a lapsed LEI, your entity may face difficulties in conducting various financial activities, such as opening bank accounts, applying for loans, participating in capital markets, or undertaking cross-border transactions and trade.

Difficulty in Conducting Business with LEI-Reliant Partners: Business partners, including customers, suppliers, and vendors, may require a valid LEI for due diligence purposes. Without an active LEI, your organisation may face challenges in establishing or maintaining business relationships, potentially leading to missed opportunities and decreased credibility.

Increased Risk and Reputational Damage: A lapsed LEI can undermine your business’ transparency and visibility, making it harder for stakeholders to assess its legitimacy and track its financial activities. This lack of transparency can raise concerns, increase risk perception, and damage your entity’s reputation among investors, clients, and regulatory bodies.

Restricted Access to Financial Markets and Services: Without a valid LEI, your business may encounter limitations in accessing financial markets and services. This restriction can hinder its ability to raise capital, trade securities, or engage in other financial activities, ultimately impeding its growth and competitiveness.

Limited Visibility and Transparency for Stakeholders: LEIs enhance transparency by providing a global identifier for legal entities. With a lapsed LEI, stakeholders such as investors, regulators, and business partners may find it challenging to obtain accurate and up-to-date information about your entity’s ownership, structure, and financial health. This limited visibility can erode trust and confidence in your organisation.

Proactively Renewing Your LEI

To avoid the repercussions of a lapsed LEI, you should take proactive steps to renew it on time. The process is simple and seamless. Some actions that you should take to keep your LEI active are:

Understanding the Renewal Process and Timeline: Familiarise yourself with the LEI renewal process and be aware of the renewal timeline. Being proactive and setting reminders for renewal can help prevent inadvertent lapses.

Identifying the Responsible Party for LEI Renewal: Determine who is responsible for managing your entity’s LEI, whether it is an internal team or an external LEI service provider. Clear ownership of the renewal process ensures timely action.

Required Documentation and Fees: Gather the necessary documentation and information required for LEI renewal. This may include verifying and updating entity details, confirming legal entity status, and paying the applicable renewal fees.

Seeking Assistance from LEI Service Providers: If you are unfamiliar with the LEI renewal process, engaging the services of an LEI service provider can simplify the renewal process and ensure compliance with all requirements. Beware of fraudulent websites that claim to assist in LEI issuance at costs lower than official agents, and always approach a GLEIF-accredited Validation Agent, such as Rubix Data Sciences. To renew your lapsed LEI through Rubix, click here.

The Bottomline

Understanding the implications of a lapsed LEI is crucial for businesses operating in today’s financial landscape. Failure to renew an LEI can lead to regulatory non-compliance, transactional difficulties, and reputational damage. By proactively managing LEI renewals and recognizing the importance of maintaining a valid LEI, you can ensure compliance, transparency, and uninterrupted business operations in an increasingly interconnected and regulated business environment.

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