A comprehensive guide to Source of Funds checks
Understanding Source of Funds (SoF) is crucial in today’s regulatory landscape.
This guide provides a broad overview of SoF checks, explaining what they are, why they are essential for Anti-Money Laundering (AML) compliance and preventing financial crime, and key considerations for conducting thorough due diligence.
Whether you are a legal professional or the end user in a Source of Funds check – we address frequently asked questions and pain points in this guide, offering industry experts’ viewpoints and our own data driven insights.
What is Source of Funds?
The Legal Sector Affinity Group (LSAG) defines Source of Funds as the funds that are being used to fund a specific transaction.
These transactions can include buying a property, investing, or starting a business. Source of Funds checks (or SoF checks as they are often referred to) are about finding out where the funds being used actually come from, whether it’s savings, inheritance, a salary, or a loan, for example.
However, a true source of funds check is so much more than looking at a set of bank statements. As the LSAG puts it, 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.
Why do you need a Source of Funds check?
In a 2023-2024 report, the National Crime Agency estimated that there is as much as £100 billion in criminal profits laundered through and within the UK, or using UK-registered corporate structures. This has a real impact on people’s lives, from county lines to trafficking to crime.
Source of Funds checks help confirm that money being used in certain transactions is legitimately earned or acquired. They are essential for Anti-Money Laundering (AML) compliance, preventing fraud or financial crime and ensuring compliance with regulatory requirements when buying a property or making large investments.
The Solicitors Regulation Authority recently shared a statement on the importance of a proactive and well-documented approach to understanding the origin of your clients’ funds. They said that failing to do this can leave you exposed and at risk, and even published a range of information to help.
Still not sure why all of this is necessary? Check out our airport queues analogy.
At Armalytix, we believe we can help stem the rise in financial crime, stop the vulnerable being exploited and protect consumers from making poor financial decisions with our digital checks. Our Executive Chairman Mike Ward has said that conveyancers, estate agents and lenders need to be increasingly vigilant to do their part in preventing money laundering.
“The property market remains a hotbed for dirty money. However, we can strengthen compliance by using technology that promotes transparency and upholds the integrity of the financial ecosystem.”
What do you need to carry out a Source of Funds check?
Both the professionals carrying out the checks, and the end users providing their information, will have questions before and during the process. These might include:
1. What documents and evidence are needed?
Here are some examples of documents that may be used in a Source of Funds check:
- Payslips or employment income records
- Bank statements
- Inheritance paperwork
- Property sale contracts
- Investment account statements
- Gift letters, and potentially SoF for the person giving the gift
2. How far back should the SoF check go?
While 3-6 months is a commonly requested period for bank statements to show salary / savings, you should be prepared to go back as far as is necessary to evidence the origin of a specific lump sum.
If funds arrived in an account 2 years ago from an inheritance, the inheritance documents from 2 years ago will be required, not just the last 6 months of statements.
Why are Source of Funds checks so long and difficult?
In today’s world, lawyers are increasingly having to trawl through client bank statements and other financial documents to establish a client’s financial position.
Legal professionals in particular face significant hurdles in conducting SoF checks for residential, commercial and corporate clients, including:
- Manual, time-consuming processes that slow legal workflows
- Varying levels of complexity in each transaction
- Sensitivity around requesting financial evidence from long-standing corporate clients
- Complex financial structures and money movements between companies
Tom Lyes, our Head of Legal and Property Services, believes that these hurdles can also put a strain on client relations.
“With increasing regulatory demands, legal professionals need efficient tools to conduct Source of Funds checks without disrupting their client relationships. That’s why our solutions at Armalytix provide the technology and automation needed to enhance compliance, reduce risk, and save valuable time.”
The ability to save precious time and financial resource is critical for stretched law firms. Emma Fairbairn, Partner at Woodford Stauffer Solicitors, said about Armalytix: ‘It is ultimately saving us both time and money — it probably saves us at least 1-2 hours per purchase transaction’.
How can I make Source of Funds checks easier?
Understanding your client’s true financial position and the ability to identify risk sooner are two key requirements for firms undertaking SoF checks.
But how to achieve that? Critical to the solution is having an integrated check that combines fact finds, questionnaires and accurate data, all analysed and presented using smart technology to present the firm doing the check with the information they need to assess risk quickly and effectively.
Armalytix offers a solution that makes this process easier, faster, and more accurate.
We do this through:
- Up-front fact finds that help you understand the background and circumstances as to how the purchase will be structured and financed
- Highlighting of high-risk cases including money from overseas, cash transactions, etc. Giving you the ability to carry out more extensive investigations where enhanced due diligence is appropriate
- A Legal Eye-endorsed SoF questionnaire that is the most robust on the market, designed by risk and compliance experts to prove the appropriate supporting evidence
- Market-leading analysis to provide a clear audit trail on file, the report also includes the answers to the fact finds and SoF questionnaire
- Our Income and Risk insights make it simpler for your firm to spot the clients you should not be dealing with
- Our Account Verification tool helps you to stop money going to the wrong accounts
For your clients, we provide a simple, digital journey which integrates effortlessly into your existing workflows. With over 500 Trustpilot reviews and an Excellent 4.8 rating, our end users say the process is straight forward, quick and easy.
“I’ve used Armalytix a few times now and each time I am reminded how much easier their system makes the process of providing source of funds information than the old process of sending pdf copies of bank statements and payslips… The ability to answer a few quick questions to ascertain the finances of a transaction and then connect directly to my bank, confirm my income and explain where my money came from is truly refreshing.” – Armalytix user, Magnus Berry.
If you would like to know more about how we can help your firm enjoy a smooth process for your Source of Funds obligations, we’d love to show you Armalytix in more detail.
Book a quick, free demo today (or request a sample report) and we will run through how you can use the reports as part of your risk-based approach to identifying, assessing, understanding, and mitigating money laundering threats.
