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Legal Entity Identifiers for government entities

The LEI ROC has stated, at the GLEIS Forum on 22 May 2019, that government entities are eligible for a Legal Entity Identifier (LEI) as they are legal entities according to ISO 17442, in the same conditions as other entities.

i.e., “If they could enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way”.

They also found that entities that cannot be incorporated, such as ministries, agencies, and republics, are eligible for an LEI. It was clarified that these entities should enter a parent company when applying for an LEI, where previously, this information was not entered.

For this reason, the LEI ROC is looking to create a new item called “general government entities,” which could be filled out separately and help to clarify if there is no parent company, at least what industry these entities belong to.

This shows a small shift in the collection of entity data. The LEI ROC wants to know more about government entities and more accurately reflect the hierarchy of these entities. The LEI ROC has therefore published a public consultation on adding “general government entities” as a classification item under the Legal Entity Identification application process.

Here is a summary of that consultation paper.

Are government entities, such as ministries, agencies, and republics, eligible for an LEI even if they are not incorporated or have no other legal personality?

The LEI ROC has observed that the ISO 17442 definition of legal entities covers government entities. The criteria for eligibility for an LEI are the same as for any other type of legal entity.

According to ISO 17442, legal entities:

“include, but are not limited to, unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way.”

The LEI ROC is satisfied with this definition to include government entities that are not incorporated or have a legal personality as long as they enter legal contracts under the laws of their jurisdiction, such as issuing, buying, or selling financial assets.

To avoid duplication and data errors in the Legal Entity Identifier System, the LEI ROC suggests using the identifiers defined in the LEI Common Data File format V2.1.

How to figure relationship data within the general government sector

Under LEI application procedures today, the definition of a parent (either direct or ultimate) is currently based on accounting consolidation.

According to the LEI ROC report on 10 March 2016:

“Entities that have or acquire an LEI would report their ‘ultimate accounting consolidating parent’, defined as the highest level legal entity preparing consolidated financial statements, as well as their “direct accounting consolidating parent’. In both cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.”

This definition may not suit government entities as these relationships are not usually consolidated in financial statements.

The current standards in the Global Legal Entity Identifier System (GLEIS) state that a legal entity can opt out of collecting its parent’s entity information if there is no parent according to the definition. This could include legal entities whose parent is a natural person, does not prepare financial statements, or no known person controls the entity, such as a diversified shareholding. This means that under the current definition, government entities can opt out of parent reporting, and this is expected to happen in the majority of cases.

This is a difficult position to define. With corporations, the direct parent is generally the entity with shareholder control. Some organizations are partially or fully state-owned, and therefore there is a similar relationship. On the other hand, many government entities appear to exist more as siloed entities either on a local or national level and act independently from the levels above and below it, both financially and with accountability within the public sector.

Create a new item to identify general government entities

The LEI ROC recognizes that a government entity acts slightly differently from a regular legal entity. One example is that a government entity can exist when in debt and after going bankrupt. Right now, there is no way under the GLEIS to differentiate a government entity from other legal entities.

This is why the LEI ROC proposes to create a new item, “general government entities,” for completion by government entities in the application process of their LEI. The LEI ROC defines “government entity” from the System of National Accounts 2008 (SNA).

Institutional Units

SNA 2008 paragraph 4.2

“An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.”

Institutional units are grouped to form institutional sectors based on their functions and objectives. The five sectors are:

  1. Non-financial corporations
  2. Financial corporations
  3. General government
  4. Households
  5. Non-profit institutions serving households

General government

SNA 2008 paragraph 2.17 c

“consists of institutional units that, in addition to fulfilling their political responsibilities and their role of economic regulation, produce services (and possibly goods) for individual or collective consumption mainly on a non-market basis and redistribute income and wealth.”

General Government Subsectors

Later, the SNA paragraph 4.127 describes two subsections of the general government.

  1. All units of central, state, or local government (as described immediately below);
  2. Government units control all non-market NPIs.

“The sector also includes social security funds, either as separate institutional units or as part of any or all of central, state or local government. The sector does not include public corporations, even when all the equity of such corporations is owned by government units. Nor does it include quasi-corporations that are owned and controlled by government units. However, unincorporated enterprises owned by government units that are not quasi-corporations remain integral parts of those units and, therefore, must be included in the general government sector.”

Central government

SNA 2008 paragraph 4.134

“The central government subsector consists of the institutional unit or units making up the central government plus those non-market NPIs that are controlled by central government.”

State government subsector

SNA 2008 paragraph 4.140

“The state government subsector consists of state governments that are separate institutional units plus those non-market NPIs that are controlled by state governments.”

Local government subsector

SNA 2008 paragraph 4.145

“The local government subsector consists of local governments that are separate institutional units plus those non-market NPIs that are controlled by local governments. In principle, local government units are institutional units whose fiscal, legislative and executive authority extends over the smallest geographical areas distinguished for administrative and political purposes. The scope of their authority is generally much less than that of central government or state governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas. They are often heavily dependent on grants or transfers from higher levels of government, and they may also act as agents of central or regional governments to some extent. However, in order to be treated as institutional units they must be entitled to own assets, raise funds and incur liabilities by borrowing on their own account; similarly, they must have some discretion over how such funds are spent. They should also be able to appoint their own officers, independently of external administrative control. The fact that they may also act as agents of central or state governments to some extent does not prevent them from being treated as separate institutional units provided they are also able to raise and spend some funds on their own initiative and own responsibility.”

Social security scheme

SNA 2008 paragraph 4.124

“Social security schemes are social insurance schemes that cover the community as a whole or large sections of the community and are imposed and controlled by government units. The schemes cover a wide variety of programmes, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc. There is not necessarily a direct link between the amount of the contribution paid by an individual and the benefits he or she may receive.”

The issues with these definitions and defining government entities is mostly around how different countries organize their government. Some countries have several ministries, each as an institutional unit, while other countries have separate units that are defined to be under an overarching ministry. There are also some cases where the local units and ministries have no legal personality but represent the state when entering into contracts. It is also important to define when the government does not own a public corporation.

The GLEIS should be committed to identifying legal entities based on the ISO 17442 definition, for which a schematic structure can be represented in the following figure from the LEI ROC consultation paper.

The importance of LEIs for government entities

Bringing government entities under the scope of Legal Entity Identification is an important step for the future. Fighting for transparency and an open framework is just as important in the public sector as it is in the private sector, and if we think about where a lot of current fraud exists, we know that governments tend to be a target. The UK public sector alone is losing £20.6 billion a year to fraud.

If you’re interested in legal entity identification for your government entity, get in touch with us today.