There are many misconceptions about Source of Funds and Source of Wealth. Many people think they are one and the same thing. Many people question the point of asking for Source of Funds and Source of Wealth. Many people are unsure as to the level of detail required when collecting information regarding Source of Funds and Source of Wealth. Many people fail to realise the situations when documentation regarding Source of Funds and Source of Wealth should be requested.
This article aims to address these misconceptions and will at the same time provide guidance to those practitioners who deal Source of Funds and Source of Wealth on a regular basis.
1. Source of Funds vs Source of Wealth
Source of Funds and Source of Wealth are NOT one and the same thing. They are two separate terminologies that have their own separate meanings. On the one hand, Source of Funds refers to how the funds to be used in a particular transaction (or future transactions) were generated. For example, if a client is issued with an invoice/transaction of ?10,000, the source of funds question to be asked would be how that client has generated the money needed to fund the invoice/transaction of ?10,000.
On the other hand, Source of Wealth refers to how someone generated their wealth throughout their lifetime. Therefore in this case, we would need to question the client as to how such wealth was generated. The answers in this case may vary from client to client, and answers may range from salary earnings from employment to inheritance.
2. Why do we ask for Source of Funds and Source of Wealth?
Many practitioners in the industry collect Source of Funds and Source of Wealth information without knowing the reason why such information is collected. It is only when you know why such information is collected that you realise the extent of the information you need to fulfill your AML obligations as required by law.
There are a number of reasons why Source of Funds and Source of Wealth is requested:
- In order to understand and assess the money laundering and financing of terrorism risk that one is exposed to during the course of a business relationship or occasional transaction;
- In order to confirm that the customer's wealth and sources of income are in line with their customer profile and professional/working background;
- In order to detect and prevent funds derived from illicit activity being laundered through a subject person's institution;
- Requesting such information helps subject persons identify and detect what control measures must be adopted to mitigate any risks associated with the source of funds or wealth declared by a client.
3. How much detail is enough detail?
This is a question that does not have a definitive quantitative answer. One cannot say that having a sentence or a paragraph of information is enough or not enough.
The simple answer to this question would be having as much detail as is required to paint a clear picture of the client's Source of Funds and Source of Wealth, that would provide enough comfort to the subject person that the detail obtained will enable them to assess the profile of the client as well as the appropriate ML/FT risks associated with that client.
As an example, simply having 'Salary from employment' would not be a good description for source of funds. This description does not give any details as to the employment position, the amounts in question, whether the amount in question makes sense in the context of that employment position, how long that person has been employed in that position, and whether it makes sense in the context of the person's educational and professional working background, which company that person is employed with, which industry that person works in, as well as which country that person is employed in.
In this case, therefore, it is vital that these details are collected because they will help to identify whether the source of funds makes sense in the context of the transaction and whether it is in line with the customer profile, and the collection of these details will also help to identify and assess the ML/FT risks associated with such funds.
Another example of poor detail in relation to source of wealth this time, is 'Wealth derived from investment.' This description is not enough to fully ascertain the details needed to paint a true picture of the client profile and assess the corresponding ML/FT risks.
In this particular case, it is recommended that additional detail is sought, such as obtaining information on the type of investment conducted (whether it was investment in shares, stocks, bonds, real estate, crypto-currencies, etc.), the period of time over which the investment was made, how the initial funds used in the investment were made, and also information on the initial amount invested as well as the amount of wealth generated from such investment/s and whether the amounts in question make sense in the context of the client's overall wealth and profile.
4. Do you always need to request supporting documentation for Source of Funds & Source of Wealth?
The simple answer to this question is that it depends on the risk score of that particular client. In the case of lower risk clients, obtaining enough Source of Funds and Source of Wealth information to paint a clear picture of the client profile and the ML/FT risks associated with that client should suffice. In higher risk cases, it is highly recommended that supporting documentation is requested that can be used as a control measure to reduce the ML/FT risk accordingly.
The supporting documentation that a subject person must collect may vary depending of the Source of Funds or Source of Wealth declared. If the funds are generated through income from employment, a copy of recent payslips or recent bank statements showing the incoming transfers will suffice as proof of Source of Funds. If, for example, the Source of Wealth was generated through inheritance, the documentation that can be requested would include a copy of the will as well as a death certificate of the deceased relative.
Concluding remarks
Ultimately, the most important thing about collecting Source of Funds and Source of Wealth information is that the information helps the subject person identify the ML/FT risks associated with a client as well as helping subject persons to build a customer profile based on the information. Documentation is vital in case of higher risk scenarios, where such documentation will help to verify the information that the client is purporting and will ultimately serve as a control measure against such higher risk.
You can read more about Source of Funds and Source of Wealth here.
Originally published 19/05/2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
