Unless you live under the rocks, you must have heard about legal entity identifiers. The term is getting thrown around a lot lately. And it's mostly within the financial and business space.

If you're curious to know whether your business needs a legal entity identifier number, I'm happy to tell you that you've come to the right place.

In this post, we're going to answer the age-old question: Who needs an LEI? So, let's roll.

What is really an LEI?

To benefit those who may not know, let's set the ground up first.

Legal entity identifier (LEI) is a 20-character alphanumeric code developed by international financial regulatory bodies to enable transparency, trust, and clarity in the global financial space. The concept was invented to help clients, investors, business owners, and government bodies know who they're dealing with and what other businesses that person.

In short, LEIs were developed to curb age-old challenges like fraud, money laundering, impersonation, financial data misrepresentation, amongst other common financial hiccups.

Now that we're all in the know, let's get back to the subject of the day, which is who needs an LEI?

Who needs an LEI?

I've been asked this question a lot of times. And each time, I always give the same answer I'm going to give you now.

There are two kinds of people who need the legal entity identifier number.

• The first category:

Businesses and institutions are mandated by law to have an LEI number. These may include institutions like banks, credit unions, brokers, investment companies, insurance companies, financial traders, RTOs, ISOs, government agencies, etc.

• The second category:

This category is a bit descriptive. It points to businesses that answer YES to the question below. 

Do you think prospective business partners, investors, and customers may have a reason to doubt the legitimacy of your business? If yes, you also need an LEI Number, regardless of whether you sell puppy dogs or accept Bitcoin investments.

Why would prospective partners and clients doubt your business?

Perhaps because you operate from a foreign country, lack enough social proof, have some negative remarks about you online, or are a newly launched brand. By default, people doubt these types of businesses.

If you fall in this category, a legal entity identifier number can help prove you can be trusted.

Do people trust the LEI?

Yes, people involved in the financial space know and trust the LEI. They know it's ISO-backed and has a credible history behind it.

However, not everyone knows about LEI yet. It's possible you may find an investor who wants to invest in your brand but doesn't trust that you're completely legitimate and who doesn't know about LEI either. To convince this type of people, you may first need to sensitize them on the subject of legal entity identifiers. Thankfully, lots of credible and believable information sources out there support LEI. Your potential investor can find confirmatory statements on government websites, credible Not-for-profit organization sites, and also popular financial websites (e.g., Forbes).

Who doesn't need the LEI?

Individuals generally don't need LEI. If you're an individual trader on the financial market, a simple online retailer, a freelancer, or a solopreneur with no official branding, you won't need an LEI Number.

Technically speaking, people who fall in this category are not considered 'LEGAL ENTITIES.' You're more or less just a regular individual, whereas LEIs are designed for legal entities.

Types of businesses that need LEI

In case you need further convincing, here are some popular business types that could really use an LEI. Of course, we can't possibly discuss all the business types that we have out there. We've only chosen a few.

We've already described the two categories of businesses that need LEI. You should refer to that section of the post in case you can't find your business type below, or you're in doubt.

1. Financial institutions

The first group that requires LEIs is financial institutions. Whether you're a brokerage firm, a financial audit group, a bank, or a credit union, you definitely need to file an LEI application today.

For these kinds of businesses, transparency is highly important, especially considering the level of KYC proceedings that must be observed.

Imagine a private audit group not having a legal entity identifier number. How would such a company confidently walk into an organization to conduct a financial audit?

2. Financial associations

This group includes businesses offering tax services, retirement services, savings packages, and loan offers. Whether you're doing it on a small scale or you've gone global, you definitely need a legal entity identifier number if you want to be taken seriously.

3. Financial advisors

If you call yourself a financial expert, a financial advisor, or a financial consultant, you need certificates like the LEI to prove your legitimacy to clients.

Of course, you can use other certifications to affirm your status, but having an LEI is definitely an added bonus. Clients will be happy to know that they can verify your business name on the GLEIF site anytime they want.

4. Financial Market Traders

If your business trades on the financial market - whether stocks, bonds, Forex, equity, CFDs, etc. - you'll need an LEI to stay in business.

In your case, LEI is required for two reasons:

1) Because it is mandatory. As a financial trading company, LEI ownership is one of the many certificates you'll be required to have by regulatory bodies.

2) Because it helps prove your legitimacy (in case you're taking trades for others): Before someone can trust you with their money, they need proof that you can be trusted. One way to showcase your trustworthiness is by having an LEI.

5. Investment companies

Another type of organization that requires a legal entity identifier is an investment company. Before you can take investments from clients, you need to comply with the terms stated in the regulatory mandates of the state you're operating in.

Take the EU, for example; before an investment company can proceed with trades, the company and its clients must both possess LEIs. Otherwise, the EU authorities will block any transaction from taking place.

6. Government agencies

Many agencies in the USA are required by the Office of Financial Research to have an LEI. Agencies like the Federal Reserve Bank, Commodity Futures Trading Commission (CFTC), and the National Association of Insurance Commissioners (NAIC).

7. Brokerage firms

Brokerage firms, or brokers for short, need LEI, too. As with the other business types we've discussed, brokers need LEI to ascertain their legitimacy and also to comply with major regulatory mandates in the country or jurisdiction they're operating.

Like in the case of the investment companies, clients of brokerage firms may also be required to have LEIs before being allowed to participate in the buying and selling of assets/securities.

8. Mortgagers

Whether you're targeting individual homeowners or corporate organizations, mortgagers need LEI Numbers to function properly.

For starters, LEI enables traceability of all their mortgage dealings, as well as pointing out real estate businesses they're in league with.

9. Insurance companies

Individuals and companies use insurance companies to protect themselves against loss. To operate as an insurance company in some countries, you need to have an LEI. In cases where you wish to insure foreign parties, you also need this need. 

Not to forget, having an LEI helps alleviate any fears prospective clients may have about the legitimacy of your brand.

10. B2B Overseas business owners

If you're dealing with other business owners, customers, or investors across the border, you need to have a legal entity identifier number. Foreign investors or business partners may not have access to your local business registry. As such, there's no way they can confirm you're real. 

But with an LEI Number, they can quickly look you up on the GLEIF (Global Legal Entity Identifier Foundation) website.