Source of Wealth and Source of Funds – Best Practice AML

Background

As a financial institution or DNFBP, it is important to understand where customers get the money they use for their transactions and investments. Money launderers’ methods are constantly evolving; they are becoming more creative in disguising the origin of illicit funds. As a result, it is increasingly difficult to trace the origin of funds and assets.

Therefore, companies need to implement KYC measures and controls as part of AML/CFT compliance. These include, for example, customer due diligence (CDD) and transaction monitoring measures. There is an obligation to verify the origin of funds.

When considering origin, a distinction is made between the source of a customer’s assets and the source of his or her funds. However, the difference is not clear to many. That is why we explain it in the blog article.

Difference between Source of Funds and Source of Wealth

Source of Funds and Source of Wealth are not the same thing. They are two different terms that have different meanings.

Source of Funds

Source of funds (SOF) refers to the origin of money or assets used in a particular transaction or business relationship. In other words, how the funds to be used in a particular transaction (or future transactions) were generated. For example, if a customer makes a transfer of 10,000 euros, the question is how the customer raised the money to fund the 10,000 pound transaction.

Source of Wealth

Source of wealth (SOW) refers to the origin of all wealth, i.e., a person’s accumulated wealth. It describes how a client or his or her family acquired all of their assets over a lifetime.

Source of Wealth and Source of Funds Examples

Source of Wealth Example

• Employment income
• Business ownership interests
• Inheritances
• Investments

Source of Funds Example

• Savings
• Pension releases
• Share sales and dividends
• Property sales
• Gifts
• Lottery/gambling winnings
• Compensation award

Importance of SoW and SoF

The source of funds and wealth is critical to anti-money laundering and counterterrorist financing efforts, as both can be good indicators that customers are involved in criminal activity. A fundamental element of due diligence to clients/customers is understanding the nature, background, and circumstances of the client. This includes financial circumstances – i.e., source of funds (SoF) and source of wealth (SoW).

There are many reasons why the origin of funds and the origin of assets are relevant and queried. Below we have compiled a list of relevant factors.

• Understanding and assessing money laundering and terrorist financing risk
• Confirming that a client’s assets and sources of income match their client profile and professional background
• Preclude funds derived from illegal activities from being laundered through their company/service
• Identify necessary control measures to mitigate risks associated with the source of a client’s reported funds or assets.

Recommendations for Practice

The explicit regulations may differ depending on the industry, consider e.g. the regulations from FAFT. at . Nonetheless, we have outlined the basic guidance below.

• Appropriate measures must be taken to review SoF and SoW as part of enhanced due diligence (EDD) when applied to politically exposed persons (PEPs)
• There should also be due diligence checks on other applications of due diligence based on a risk-based approach to asset sourcing
• It can also be considered as part of the ongoing monitoring of any business relationship (whether high risk or not)

But: Basically, it can still be said, not all suspicious financial activities warrant inquiries into the origin of funds, and the financial authorities do not recommend them for every suspicious case. For example, sometimes customer identification discrepancies and other identification problems may be better resolved through enhanced due diligence (EDD) than through a SOF investigation.

SoF: Things to Consider

• The source of funds should be evidenced in accordance with the risk rating and may affect your risk rating
• It is not only number or collecting documents that is important, but also, for example, whether the evidence is reasonable and realistic (for example, how many monthly statements fit the risk profile)
• Document your arguments and decision making in order to support any subsequent investigations by law enforcement authorities

SoW: Things to consider

• Take into account the level of risk and whether it is a PEP
• Even if this is about the business relationship/transaction, a look at the customer’s overall assets should be taken into account
• Pay attention to the quality of the documents: are the customer’s explanations and evidence reasonable/feasible?
• Document your arguments and decision making in order to support any subsequent investigations by law enforcement authorities

In summary, when identifying sources, that is, collecting information on the origin of funds and assets, it is relevant that the information helps to identify the ML/FT risks associated with a customer. Andthat a customer profile can be created based on this information. Documentation is especially critical in higher risk scenarios, as it helps verify the customer’s information and ultimately serves as a control measure against such higher risk.