Source of Funds and Source of Wealth in AML Compliance

Understanding sources of funds and sources of wealth form a crucial part of combatting money laundering and terrorist financing. When sources of funds and wealth do not match the profile of customers or potential customers are involved in criminal activities. Financial companies have a duty to report their suspicions to relevant domestic authorities. 

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Understanding The Differences Between Sources of Funds and Sources of Wealth

Financial and legal firms within the money laundering regulated sector are required to undertake certain checks into the client’s source of funds and wealth in order to ascertain within reasonable doubt whether or not assets have been obtained through criminal activity. While the terms source of wealth and source of funds sound similar, there are a few differences: 

Source of Wealth

Source of wealth is the method by which a client or their family acquired their total wealth, e.g. the firm will need to examine activities that may have generated and led to the accumulation of their assets. Sources of wealth can include investments, business ownership, employment, or an inheritance. 

Source of Funds

Funds can come from a number of sources, including pension payouts, the sale of shares or property, savings, dividends, gifts, lottery or gambling winnings and compensation awards. 


AML and Source of Funds

Anti Money laundering source of funds inquiry should adopt a risk-based approach, with a greater degree of scrutiny applied to higher-risk customers. A newlywed couple who has combined their savings to put down a deposit for a shared home is likely a lower-risk client than an offshore company with a complex business structure acting under power of attorney and spending substantial funds on commercial property and other assets. 

Firms should collect documentary evidence to support their SOF inquiries, as well as reasonable explanations from their clients. This should be documented every step of the way in order to inform or support any investigations the process may result in. 

Documentary evidence should be easy to acquire. If a client claims their funds originated due to an inheritance being paid out, a copy of the letter from the executors stating the amount inherited, along with a copy of their bank statement showing the money paid from the executor’s account, should suffice. 

Dividends’ certificates, lottery receipts and property sales completion documents are also good sources of evidence. Customers who refuse to submit evidence or act evasively should also raise a red flag. 

Bear in mind that not all suspicious transactions or financial activities will warrant a complete source of funds investigation. Customer identification discrepancies may be best resolved by enhanced due diligence (EDD) measures, for example. 


How to Respond to SOF Concerns

If there are any concerns about a client’s source of funds, firms must address the potential compliance risk according to applicable regulatory requirements. This may include halting the customer transaction, not commencing a business relationship with a potential client or terminating the existing relationship, or implementing enhanced monitoring and oversight of a customer’s transactions. 

Whatever the decision regarding the application of a source of funds checks, firms should document everything the client says, the checks they have carried out and the reasons for drawing their conclusions. There is no need to carry out a full forensic investigation, but it’s important that firms are satisfied that monies used for the transaction have not originated from criminal conduct. This is essential in order to prove that the firm has complied with its regulatory and statutory obligations. 

Where a source of funds check reveals suspicious activity, the firm should submit a SAR or suspicious activity report to the relevant authority, e.g. the Financial Crimes Enforcement Network (FinCEN). 


Becoming Compliant

Firms must develop and implement suitable KYC (Know Your Customer) measures as the foundation of effective Source of Funds checks. These processes will help firms understand who their customers are and what type of business they are engaged in. 

These checks should include Customer Due Diligence (CDD) checks in order to better make decisions about their SOF, including collecting a range of identifying information such as:

  • Full names
  • Addresses
  • Date of birth
  • Company Incorporation information 
  • Beneficial Ownership of Entities

Checks should not just occur during onboarding. Financial institutions should monitor their customers’ transactions in order to detect any activities inconsistent with their customers’ established SOF, including unusual volumes of transacting or transactions involving high-risk jurisdictions. Sanctions and PEP (politically exposed persons) screening should also form part of regular customer due diligence checks. 


Conclusion

Examining clients’ source of wealth and source of funds may reveal suspicious activities that warrant filing a SAR with the authorities. Ignoring or failing to examine clear red flags can have considerable consequences, including the imposition of fines.
Financial institutions should ensure that they have the necessary protocols in place to thoroughly but unobtrusively interrogate their clients’ source of funds and wealth to stay compliant. Checks and questions should be thoroughly documented as part of this process.
Sanctions screening is an essential part of the KYC process. To learn more about Sanctions and Watchlist screening, get in touch with sanctions.io.

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