• Kirsten Saliba
  • 3 May 2022
  • 5 mins
  • 326 views

Understanding where the money a customer is using to make transactions and investments has come from, is something very important to any business, making it a vital part of AML/CFT compliance, particularly to KYC/KYB requirements.

As money launderers and financial criminals use increasingly inventive and sophisticated methods to conceal the sources and uses of illegally obtained money, firms have to work harder than ever to establish the source of a customer’s funds and wealth.

This means you need to implement an array of regulatory measures and controls such as Customer Due Diligence (CDD) and transaction monitoring measures to protect your business, your assets and your customers, as well as contribute to the fight against financial crime.

Two of these measures involve investigating and finding out Source of Funds and Source of Wealth. It is important to note, that these things are not one and the same, they are two separate terms and have their own individual meanings.

Firstly, you have Source of Funds which refers to how the funds that will be used for a transaction or investment were generated. As an example, if you present a customer with an invoice for $20,000, then the question that would need to be asked is, how have they generated the money needed to pay for that invoice?

On the other hand, Source of Wealth refers to how someone has generated their wealth over the course of their lifetime. Therefore, in this case, the questions needed to be asked would be how the client accumulated their current total wealth, and there may be a variety of different methods that It was generated, which we will go through later.

Source of Funds

Funds can come from a number of different sources, and each would have to be investigated to ensure the legitimacy of their origin before finalising a transaction. Here are some examples along with proofs that could be used:

Occupation Income – Confirmation of annual salary

Savings – Statement from a savings institution

Sale of investments – Original copy of contract notes or confirmation of sale

Inheritance – Certified copy of Will of signed confirmation of inheritance

Dividends from a company – Certified copy of contract of sale

Gambling winnings – Confirmation from lottery company or winnings’ receipt

Gifts – Documented evidence of the source and source of wealth of the gift giver.

Source of Wealth

Sources of wealth need to be investigated via the activities that have generated or contributed to the accumulation of a customer’s wealth over the course of their lifetime. Some examples of sources of wealth that would need to be investigated are:

Inheritance

Investments

Business Ownership

Employment

Why are these Considerations so Important?

A fundamental element of client due diligence is understanding the nature, background and circumstances of your customer. This includes their financial position and making an assessment as to whether the services provided to the client are in keeping with your understanding of that background and circumstances.

You must take adequate measures to check SoF and SoW, as a part of Customer Due Diligence (CDD) and you should also consider doing so as a part of ongoing monitoring of any business relationship (whether high risk or otherwise).

You should also apply a source of wealth check in other applications of CDD on a risk-based approach.

The Importance of AML Source of Funds Enquiries

Of the two, Source of Funds are considered more pertinent to AML/CTF compliance efforts both Source of Funds and Source of Wealth should be taken into account when establishing a customer’s possible involvement in criminal activity.

If a customer is flagged as high risk and an enquiry into the origin of their money is initiated Source of Wealth may be used as a way to support a decision about Source of Funds.

Both are crucial not only in protecting yourself but also in helping the fight against money laundering and terrorism financing as both are very good indicators that customers are involved in illegal activities.

In cases where the sources do not match a customer’s risk profile, or established transaction activity, you need to use that information to inform your compliance responsibilities and when submitting Suspicious Activity Reports (SARs) to relevant authorities.

A Source of Funds enquiry should involve a number of measures and considerations. They must be first conducted in alignment with the customer’s profile, the higher the degree of risk, the greater the level of scrutiny must be.

Collecting evidence is crucial but an explanation from the customer should also be sought to clarify anything that raises red flags.

You should document every step of the process in order to inform subsequent investigations.

We’re Here To Help

Source of Funds and Source of Wealth are just two necessary CDD checks needed as part of having a robust regulatory framework within your company.

Emerging technologies like AI and machine learning can help you to protect your company from fraudulent activity and financial crimes.

Here at Sekuritance, the Sekur. Transact module of our compliance platform can fulfil all of your needs. As well as KYB and KYC, our technology covers KYT, AML, Sanction Screening and so much more. Our RegTech Platform lets you know your customers inside and out, to better assess them, understand transactions, the reasons behind them and where the finance for them is coming from. This helps you deal with your customers with peace of mind and lets you spot and eliminate the risks of illicit activity.

Visit us at www.sekuritance.com and get in touch to see how we can protect you and your business.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

Stay tuned for more info and follow us on:

Twitter: http://twitter.com/sekuritance

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Website: https://sekuritance.com

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