Understanding Source of Wealth and Source of Funds
Understanding a customer’s financial background is an important part of an effective anti-money laundering and combating the funding of terrorism (AML/CFT) framework. Two key concepts used when assessing a customer’s business and risk profile are Source of Wealth (SoW) and Source of Funds (SoF). The Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) require subject persons to assess and, where appropriate, obtain information on the purpose and intended nature of the business relationship and establish the customer’s business and risk profile.
Although the terms are sometimes used interchangeably, they serve different purposes. Understanding both helps businesses assess whether a customer’s financial activity is consistent with the information known about them and whether there may be indicators of money laundering or funding of terrorism.
The FIAU has also issued guidance on obtaining source of wealth information relating to parties other than the customer, recognising that, in certain circumstances, subject persons may need to understand the origin of wealth or assets belonging to beneficial owners or other parties connected to the customer
Why Are Source of Wealth and Source of Funds Important?
The purpose of obtaining Source of Wealth and Source of Funds information is to help businesses understand whether wealth and funds are consistent with a customer’s profile and the nature of the business relationship. This information forms part of a risk-based approach to customer due diligence and ongoing monitoring
Source of Wealth
Source of Wealth refers to how a person, entity or legal arrangement accumulated its overall wealth. Examples may include:
- Employment or professional income.
- Business activities and profits.
- Investments.
- Inheritance.
- Sale of assets.
- Long-term entrepreneurial or commercial activities.
The focus is on understanding how wealth was generated over time rather than simply establishing that assets or funds are available
Source of Funds,
Source of Funds refers to the origin of the specific funds involved in a transaction, investment or business relationship. Examples may include:
- Funds held in a particular bank account.
- Proceeds from the sale of property or other assets.
- Dividend income.
- Loan proceeds.
- Revenue generated from business activities.
- Funds expected to be used within an ongoing business relationship, such as trading income generated by an operating company.
- Income, distributions or investment proceeds generated by a holding company.
Understanding the source of funds helps businesses assess whether a particular transaction or the funds expected to be used throughout a business relationship are consistent with the customer’s profile, activities and expected level of business.
A customer may have substantial overall wealth, but there may still be a need to understand the source of the specific funds being used in a transaction. Equally, understanding the origin of funds alone may not be sufficient where the broader source of wealth remains unclear.
What Does This Mean for Businesses?
Subject persons are expected to apply a risk-based approach when determining whether source of wealth or source of funds information should be obtained and the extent of any enquiries made. The level of information and documentation required will depend on the circumstances of the case, the customer’s risk profile and the nature of the business relationship.
The FIAU’s guidance recognises that there may be circumstances where businesses need to consider parties other than the customer. This may arise where:
- Beneficial owners contribute funding or assets to a company.
- Additional resources are introduced into a customer relationship by third parties.
- Trusts, foundations or associations receive significant contributions.
- Financing arrangements involve parties connected to the customer.
In such situations, it may not be sufficient to understand only the customer’s activities. Depending on the circumstances, a subject person may also need to understand how the relevant individual, entity or legal arrangement generated the wealth or assets being introduced into the relationship.
The FIAU has also highlighted that enquiries should remain proportionate. Collecting information or documentation where it is clearly unnecessary would be inconsistent with the risk-based approach and may also raise data protection considerations.
Where higher-risk circumstances exist, such as politically exposed persons (PEPs), complex ownership structures, unusual transactions or other elevated risk indicators, additional enquiries and supporting evidence may be required as part of enhanced due diligence measures
Conclusion
Source of Wealth and Source of Funds are important elements of customer due diligence and ongoing monitoring. They help businesses better understand their customers, assess whether financial activity is consistent with the customer’s profile and identify circumstances that may require further scrutiny.
By applying a proportionate, risk-based approach and obtaining sufficient information where appropriate, businesses can strengthen their AML/CFT controls and support the effective management of financial crime risks.
For further information, advisory support and tooling contact us at Diligex for assistance.
Disclaimer: This article is intended for informational purposes only and does not constitute legal, regulatory or compliance advice. Readers should consult the applicable legislation, regulatory guidance and seek professional advice before taking any action based on the information contained herein. Information in this article is accurate to the best of our knowledge at the time of publication and may be subject to change thereafter.
