KYC and source of funds in an escrow: what you need to know

Before escrowing the funds of a transaction, the escrow lawyer carries out checks on identity and source of funds. Far from being a fussy formality, this check — the KYC — stems from the anti-money-laundering and counter-terrorist-financing (AML/CFT) obligations that bind a lawyer who handles funds. It protects the transaction just as much as it secures each party.

Why an escrow entails a KYC check

The lawyer who receives and holds funds on behalf of third parties, through their CARPA account, is a professional subject to AML/CFT rules. On that basis, they must identify the parties, understand the nature of the transaction and be satisfied as to the lawful source of the funds before escrowing them and then releasing them. The CARPA also exercises its own control over each movement.

KYC, KYB: what are we talking about?

KYC (Know Your Customer) refers to all the checks used to identify a party and to understand the transaction. Where the party is a legal entity, this is referred to as KYB (Know Your Business).

• KYC — individuals: verification of identity and, as the case may be, of address and source of funds;
• KYB — legal entities: verification of the existence and structure of the company, of its legal representatives and of its ultimate beneficial owners (UBOs).

Source of funds and source of wealth

Two neighbouring but distinct concepts are verified. The source of funds concerns the immediate origin of the sums committed to the transaction: where exactly does the escrowed money come from? The source of wealth looks, more broadly, at how the party built up their wealth. Depending on the profile and the amount, one or the other — or indeed both — are documented.

Which documents are requested?

The supporting documents vary according to the party's profile:

• Individuals: a valid identity document (national identity card, passport) and, in some cases, a recent proof of address and/or evidence of the source of funds;
• Legal entities (KYB), in particular family holding companies: an up-to-date and recent Kbis extract (generally less than three months old), together with the identity of the ultimate beneficial owners (UBOs) and the legal representatives.

Enhanced controls in certain situations

Enhanced vigilance applies in specific situations: high amounts, complex investment structures, or the presence of a politically exposed person (PEP). These additional checks ensure the lawfulness and transparency of the transaction, by clearly identifying the financial flows and the legal responsibilities.

A guarantee of security for all parties

KYC is not an obstacle: it is a safeguard. By documenting the identity of the parties and the source of funds, it reinforces the traceability of the transaction, protects everyone against the risk of challenge and strengthens the evidential value of the escrow. Anticipating the collection of documents, from the opening of the matter, makes it possible to escrow and release the funds without delay.

Preparing a transaction? Fidens sets up the escrow on a CARPA account and carries out the necessary KYC/KYB checks, in complete confidentiality.