Source of Funds and Source of Wealth

Source of Funds and Source of Wealth. What are they and how are they different?

Source of Funds and Source of Wealth checks can be challenging and sometimes difficult for legal professionals to apply in practice. What are they, and why are they different?

What is Source of Funds?

The best place to find the definition and surrounding guidance comes from the Legal Sector Affinity Group (LSAG) and their Anti-Money Laundering Guidance for the Legal Sector. In general, this a great resource for any COLP, COFA or Risk & Compliance Officer.

LSAG guidance states:

‘Source of Funds refers to the funds that are being used to fund the specific transaction in hand – i.e., the origin of the funds used for the transactions or activities that occur within the business relationship or occasional transaction. The question you are seeking to answer should not simply be, “where did the money for the transaction come from?” but also “how and from where did the client get the money for this transaction or business relationship?” It is not enough to know the money came from a UK bank account.’

Here are Armalytix’s 3 tips to consider when looking at Source of Funds:

  1. Assess the risk. Higher risk matters will often involve more investigation. Is there a gift? Is money coming from overseas? Is there a complex purchase structure?
  2. Analyse the collected information. Do the bank statements show what you’d expect to see? Is this explanation consistent with what you know about your client?
  3. Evidence the decision making. Record your rationale on the file.

What is Source of Wealth?

From LSAG again:

‘The source of wealth refers to the origin of a client’s entire body of wealth (i.e. total assets). SoW describes the economic, business and/or commercial activities that generated, or significantly contributed to, the client’s overall net worth/entire body of wealth. You should seek to answer the question: “why and how does the individual have the amount of overall assets they do – and how did they accumulate/generate these?”’

Here are Armalytix’s 3 tips to consider when looking at Source of Wealth:

  1. Assess the wealth in context of the risk. Does it make sense and can you understand how the client has obtained their overall wealth based on the information and evidence provided?
  2. Get all the relevant evidence. Ensure you collect and assess all documents that account for the wealth. For example, audited company accounts or rental income statements.
  3. Evidence the decision making. This is so important we’re mentioning it twice. If the file was selected for a file review or by a regulator, would you be comfortable?

What’s the difference?

Source of Funds is all about understanding how and where the client got the money for the transaction. Source of Wealth is about understanding the client’s overall position and how they have accrued their total wealth.

They are separate from each other and should be treated as such.

In higher risk circumstances, it is important to evidence both Source of Funds and Source of Wealth. This ensures that the Source of Funds evidence collected to fund one transaction is not then used again to fund another.

Let’s have a look at an example:

A client can demonstrate to you that they possess £800,000 to fund a property transaction and those funds have been derived legitimately by providing Source of Funds evidence.

A criminal client could then go to another department in your firm or to another firm and (in the absence of any source of wealth checks being undertaken) potentially use the same Source of Funds information to then buy another £800,000 property or use for another investment/business activity.

Evidencing Source of Wealth would help stop or mitigate this occurring and may also lessen the risk of blending funds from another part of the client’s total wealth, which may include the proceeds of crime – particularly in higher risk situations.

Why is all this important?

Having looked at what they are and what the difference is, it’s probably worth a quick word on why they are important. Why are we doing all this?

Earlier this year, it was estimated that £88bn worth of money is cleaned by criminals annually in the UK. This has a real impact on people’s lives from county lines to trafficking to crime. Our mission at Armalytix is to create a hugely positive impact on society. With our digital checks, we believe we can help stem the rise in financial crime, stop the vulnerable being exploited and protect consumers from making poor financial decisions.

Join us for a live product demo

At Armalytix we are transforming the way law firms manage source of funds and wealth challenges through open banking and intelligent data analysis.

Schedule a demo here. We’ll walk you through the system and answer all of your questions.

By The Armalytix Team — 2 September 22

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