When onboarding your clients, Source of Funds and Source of Wealth can be one of the key elements within the customer risk assessment and risk management process.
We work with hundreds of reporting entities, and in our conversations with compliance officers have heard that the collection of Source of Wealth (SoW) and Source of Funds (SoF) can be a challenging and grey area.
To make things easier to understand, we have put together some guidance for you to help you navigate this dynamic area of AML.
SoW, SoF, and Customer Due Diligence
Customer due diligence requires reporting entities to understand the nature, background and circumstances of your client.
For high-risk clients, reporting entities must collect evidence to verify the financial position and body of wealth of the client in line with the UK’s Anti-Money Laundering legislation. The financial circumstances of a client can be categorised into two parts: Source of Funds and Source of Wealth.
SoW/SoF collection and verification can be a complex and challenging aspect of a reporting entity’s compliance framework. What’s more, the extent of evidence collected can be very nuanced and differ from client to client. Unlike identity verification, there is no one size fits all approach and the regulations offer little direction on how to understand a client’s body of wealth.
It is important for a reporting entity to be able to determine when SoW/SoF is required to be collected and what evidence should be obtained to verify the wealth of their client.
What is Source of Wealth and Source of Funds?
Source of Wealth (SoW) has a broader focus and refers to the understanding of the origin of your client’s assets. It describes how the client has acquired their total body of wealth through economic, business and/or commercial activities e.g. property transactions, investments or gifting. An example of this would be copies of audited company accounts and sale and purchase agreements when verifying the source of wealth for a commercial property client.
Source of Funds (SoF) has a narrower focus. It refers to the understanding of the origin of funds that are used for the specific transaction or activities that occur within the business relationship. It is important to understand the activity that generated those specific funds e.g. savings from employment or inheritance. An example of this would be loan agreements from the bank for a mortgage along with salary payslips over the last quarter to confirm funds for a property purchase.
The Wolfsberg Group offers further useful reading on Source of Wealth and Source of Funds. Click here to read its FAQ on the topic.
When to collect Source of Wealth or Source of Funds information
Under the UK’s Anti-Money Laundering legislation, source of wealth and/or source of funds should be collected whenever enhanced due diligence is triggered. This may be when the client presents a high risk of money laundering, e.g. where the client is:
- Established or involved in a high-risk country
- A Politically Exposed Person (PEP) or a relative or close associate of a PEP
- Positive match for any sanctions, watchlist or adverse media matches
- Fails identity verification checks.
Or if the transaction is unusually large and complex and the client has difficulty providing the due diligence information.
Please see the Financial Conduct Authority’s handbook on onboarding clients who are PEPs here.
What to collect for Source of Wealth or Source of Funds Evidence
The types of data and documents that you use for verification will vary depending on the circumstances and information that the client provides to you. It is important to make sure that the evidence provided matches your understanding of the client’s wealth.
Our compliance officers often find dealing with clients who derive their source of wealth/funds from crypto or other digital assets challenging. This is a rapidly evolving space with many nuances.
Here are some of the possible suggestions to determine the source of wealth/funds from crypto:
- Financial/Bank Statements: Many crypto purchases are made by sending from a traditional Financial Institution to a centralized cryptocurrency exchange, so you should be able to see transactions on any financial/bank statement.
- Service Provider Documents: If a customer receives crypto from a service provider (i.e. crypto exchange / P2P exchange), the provider most probably will keep the transaction history that a customer can provide.
- Mining Details:
- If a customer is part of a group of miners (mining pool) they can provide payout history.
- If a customer is stating they operate on their own, details such as equipment purchase receipts or utility bills (which would reflect large usage of electricity) would be requested. Additional evidence might include links to their social media accounts, company websites etc.
- Employment Contract: Some users get paid in crypto for providing consulting, marketing etc. Most details of payment would be found in an agreement
There should be a range of documents you can use to verify how funds have been acquired. SoW/SoF information will usually state the wealth the client has and should paint a clear picture of how the individual or entity has acquired this wealth over time.
Source of Wealth/Source of Funds does not need you to account for all a client’s assets but rather is a tool to help you build a rationale on why they have such wealth and to provide assurance that it was obtained through legitimate means.
Importance of Source of Wealth and Source of Funds
Reporting entities must follow Anti-Money Laundering regulations or face regulatory fines. SoW/SoF collection also aids in the fight against illicit and criminal thoroughfare of money throughout the country.
The correct verification of your client’s wealth will allow you to confirm it is not derived from criminal activities, including the proceeds of corruption. Understanding the funds for use in a particular transaction (SoF) and the client’s funds more generally (SoW) can help to confirm this.
How we can help
Providing such information can seem to be intrusive, but with a company like First AML, you can rest assured that your information is secure. We have achieved and maintained the ISO27001 certification, which means we have one of the highest levels of data security.
Let our team of AML specialists help guide you and your customers through the process of providing Source of Wealth/Funds evidence. Our team are experienced in dealing with the sensitive and confidential nature of collecting and verifying a customer’s Source of Wealth/Funds and can ensure its a smooth and seamless process for everyone involved – if you’re interested in this, please get in touch.
About First AML
First AML streamlines the entire anti-money laundering onboarding and compliance process. Backed by real expertise, its cloud-based KYC Passport allows complex entities to share their verification across multiple companies and geographies, at their discretion.
Making an otherwise complex and manual onboarding process simple for clients and cost effective and compliant for businesses, First AML delivers efficiency and time savings, protecting reputations, and enabling companies to be on the right side of history in the face of global threats.