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Introduction of Legal Entity Identifier (LEI) for Cross-border Transactions

The financial crisis of 2007-2008 forced the tax regulators and law makers across the world to keep a track on the transactions that are being taken across the boundaries and maintain the financial data of those entities carrying out their operations in multiple tax jurisdictions. One of the biggest obstacles in maintaining the financial data was the lack of any unique identification code like Legal Entity Identifier (LEI) nowadays that would have helped the tax authorities to identify the transaction details of the corporations, calculate the amount that is exposed to risk, help resolve the discrepancies in the market etc. to protect the financial lending institutions from failing.

In response to this disability of the tax regulatory authorities, the system of Legal Entity Identifier was developed in the year 2011 to track the financial transactions of the entities in different tax jurisdictions with the help of unique code assigned to these entities. The LEI Regulatory Oversight Committee (LEI-ROC) is a group of financial regulators from more than 65 countries and other public authorities that overlook the worldwide framework of Legal Entity Identifier and help promote it among the countries. As a result, most of the European countries and USA ask the entities for Legal Entity Identifier who are entering into such high volume cross border transactions.

What is a ‘Legal Entity Identifier’?

With the aim of improving the quality and accuracy of financial data systems, a unique twenty digit alpha numeric code is used to identify the parties making financial transactions worldwide.

Usually the legal entities mentioned here include the companies and government entities making high volume financial transactions and usually individuals are not included.

This code is developed by the International Organization for Standardization (ISO) based on ISO 17442.   

What is an ‘AD Category-1’ bank’?

An Authorized Dealer Category-1 bank is a bank (Scheduled, Commercial, State or Urban Cooperative) that has been authorized under Section 10(1) of FEMA to undertake all the capital and current account transactions in accordance with the directions that have been issued by the RBI from time to time. These banks are usually responsible for dealing in foreign exchange for a specific purpose, such as easing the facilities of foreign exchange for the Non Resident Indians (NRIs).     

What are the benefits of LEI code?

A Legal Entity Identifier code gives a unique identity to the entities that are making financial transactions on a global scale. Following are the benefits of allocating an Legal Entity Identifier code to the entities:

1. It helps in identifying the legal entities on a globally available legal database.
2. Every entry made in the Legal Entity Identifier database contains the information regarding the ownership of the entity. It acts as a global database of the non-individual entities participating in the financial transactions. 
3. The Legal Entity Identifier is used in prescribed regulatory reporting to the tax authorities and helps these tax regulatory authorities to monitor the trail of transactions made by these entities.

RBI has introduced LEI for Cross Border Transactions

Recently Reserve Bank of India (RBI) has introduced the use of Legal Entity Identifier for Cross border transactions to improve the quality and accuracy of financial data. RBI states that it will introduce this change in a phased manner wherein entities indulging in over the counter derivative and non-derivative markets, high value transactions and large corporate borrowers in centralise payment systems.

The RBI issued this circular in accordance with the power it has been entrusted with according to Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (FEMA), 1999.

The RBI has decided that AD category I banks shall be obligated to ask for LEI code from the entities involved in undertaking capital account and current account transactions of Rs. 50 crores and above under Foreign Exchange Management Act, 1999 from October 1, 2022 onwards. In order to avoid disruption and inconvenience in this process the AD Category I banks shall not block the transactions of the non resident counterparts of the India resident entities/ overseas entities if they do not carry the LEI code. Instead, the banks will process the transactions and at the same time encourage these entities to furnish the Legal Entity Identifier information in the transactions even before October 1, 2022.However, once these entities take the LEI code, then in the every future transaction undertaken by these entities, Legal Entity Identifier code shall always be used irrespective of the size of the transaction.

The AD Category I banks must be equipped with the requisite technology to be able to capture the LEI code every time the transaction is undertaken by such an entity. It is also the responsibility of these banks to verify the Legal Entity Identifier information furnished by any such entity from the global LEI database. The information with respect to the Legal Entity Identifier codes of these bodies can be verified from the website of Global Legal Entity Identifier Foundation (GLEIF).

The RBI has instructed the AD Category I banks to bring the contents of this circular within the notice of their constituent concerned and advise the entities undertaking large value transaction i.e. Rs. 50 crores and above under FEMA, 1999 to obtain their LEI code before the due date of 1^st October, 2022, if they haven’t obtained it already.

The Local Operating Units (LOUs) which have been given accreditation by GLEIF have been entrusted with the duty to support the implementation and use of Legal Entity Identifier. In India, the entity that is responsible for the issuing Legal Entity Identifier code is Legal Entity Identifier India Ltd. (LEIL) (http://www.ccilindia-lei.co.in). The RBI also recognises LEIL as the as the issuing body of LEI under the Payment and Settlement Systems Act, 2007. The LEIL has also been mandated to prescribe rules, procedures and documentation requirements for obtaining the LEI Code.

Conclusion

One of the reasons why the reforms that were supposed to take place right after the financial crisis of 2007-2008 were delayed was due to the lack of financial data related to the high volume cross border financial transactions. The tax regulatory authorities of multiple jurisdictions found it very difficult to track these financial transactions resulting in loss of taxes to the exchequer. So in 2011, it was decided that entities that are dealing in high volume transactions across multiple jurisdictions should assign all these entities a unique code which will be attached to every cross border transactions they make and help the tax regulatory bodies of different tax jurisdictions to monitor their activities. Owing to the success of this system, tax jurisdictions of a number of European nations, USA etc. have adopted it. With RBI too making efforts to introduce LEI in India, the Indian tax regulation will be strengthened by this effort.

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