Source of Funds vs Source of Wealth

It is incumbent upon firms in the legal sector to ensure that staff involved in financial transactions understand not only as to where a client obtained the funds for a transaction, but also how this relates to their overall wealth.

However, all law firms, including those conducting non-transactional matters, are expected to remain vigilant for any unusual or suspicious sources of wealth in respect of any aspect of the matters that they work on; not just the client's own situation.

These checks are normally performed as part of the firm's "Know Your Customer" (KYC) checks, but they are only valid if the staff members conducting the work has a clear understanding of each term, as an incorrect understanding could lead to an incorrect assessment, which in turn could result in a higher risk of money laundering, tax evasion, terrorist financing, proliferation financing or other financial crimes going undetected.

In this article we will address the following:

• What is "Source of Funds"?
• What is "Source of Wealth"?
• What are the differences between SoF and SoW?
• Why is it important to know the differences?
• What can you do to improve your AML knowledge further?

What is “Source of Funds” (SoF)?

Source of Funds (SoF) refers to the origin of the funds being used in a particular transaction. It is essential to understand as to both how the funds have been obtained and where the funds are coming from to verify that they have been derived legitimately. This process is a key aspect of due diligence and anti-money laundering (AML) compliance.

SoF verification might sometimes involve reviewing bank statements showing the specific funds that are intended to be used. However, it is generally not sufficient to simply view a bank statement to see money entering/leaving that account in isolation. Instead, you should be able to identify a paper-trail of financial records which enable you to track the finances back to a legitimate, original source.

By establishing the source of funds, businesses can reduce the risks associated with financial crime and money laundering.

What is “Source of Wealth” (SoW)?

Source of Wealth (SoW) refers to the total wealth that an individual possesses. It encompasses all the sources of wealth including assets, income(s), savings, inheritance, business relationships, company dividends, investments, and any other sources of income.

When conducting due diligence or KYC measures, it is important in assessing the risk profile of the individual to fully understand how they have accumulated their wealth. SoW verification may involve reviewing documents such as bank statements, tax returns, and other financial records.

Gifted deposits and funders other than the client

It is increasingly common, especially in conveyancing matters, for some of the funding to come from sources such as family or friends. Typically referred to as ‘giftors’ the sources of their wealth must also be checked, evidenced and the risk assessed (and documented).

Companies, trusts and other entities can also be third party funders. They toi must be subject to SoW checks.

In essence, even if the gift is a proportionately small amount of the transaction, similar controls for due diligence must be applied to the giftor as for the client.

What are the differences between SoF and SoW?

Whilst there is some overlap, the main difference between Source of Funds (SoF) and Source of Wealth (SoW) lies in their focus.

• SoF is focused specifically on identifying the origin of funds being used in a particular transaction, whereas 
• SoW encompasses an individual's total wealth  

Therefore it is important to remember that SoF and SoW are not the same thing. In matters within the money regulated sector, both must be performed as they are integral parts of AML compliance and due diligence processes.

The following matrix provides examples from each. Where SoW is concerned, the same checks must be applied to any giftors and other funders.

When do we need to monitor SoF and SoW?

The process of monitoring is not something that takes place only at the outset; it must continue throughout the life of a matter or transaction.

A variety of factors can change or evolve during the course of an instruction, such as the arrival of a gifor or another funder, or the client suddenly coming into money (perhaps a gambling or lottery win, an inheritance, a divorce, a change of career or income stream, an insurance or compensation award, etc).

Legal practitioners must remain vigilant and be ready to query any changes or events where sources of money are concerned, and to again go through the process of due diligence where appropriate.

Some firms include a mandatory interim risk assessment for SoW and SoW during certain types of matter. For example, whereas a conveyancer will have conducted a thorough SoF and SoW check as soon as possible at the outset of a property purchase matter, they are required to conduct another ‘sweep’ to check that their understanding of the situation is still correct (or otherwise take action to resolve), and they must document the outcome of their decisions.

What about for returning or repeat clients?

It is best practice to treat each matter as an island. That is, even if the client is well-known to the firm, the fee earner should still clearly document the outcome of their assessment of SoF and SoW.

It is not impossible for existing records of evidence to be considered as valid for the new instruction, but again, the reasons for their acceptance need to be documented.

Practitioners must also bear in mind that just because the previous tranche of matters for a client were ‘ok’ from a SoF/SoW perspective, this does not automatically mean that any new instructions will be equally satisfactory. The situation of a client can/will change during their relationship with the firm; it is only sensible to assume that their SoW might also be subject to change.

‘General advice’ matter files can give rise to risk in this respect, where multiple instructions are managed on a single matter. Such instructions might not include actual transactions, but could include advice about objectives that fall inside of the money regulated areas. It is imperative therefore, that for each piece of separate advice the fee earner documents their consideration of SoW.

What about non-transactional and areas of law outside of the scope of money regulation?

Firms in all areas of law must remain ever vigilant for potential SoW irregularities. Solicitors have a duty to report concerns about instances of financial crime, even if they are not about the client.

For example, in an immigration matter, a sponsor of the client might have indicated that they work in a minimum wage occupation themselves, and yet they arrive with the client at the firm’s office, driving a £150000 luxury car and dressed in a £3000 suit; both of which might be legitimately owned, but could appear to be a little out of character for someone on a low wage.

What if we are concerned about SoF or SoW?

Gaps in understanding on the part of the fee earner or gaps/inconsistencies in evidence should prompt concern..

It is essential however, not to give away knowledge of your concerns as that could amount to ‘tipping off’.

Concerns might later be resolved, but in all cases, any suspicions should be swiftly discussed with the appropriate person at the firm, often the MLRO whose guidance must then be followed.

Firm-wide monitoring of SoF and SoW

Having a clear picture as to trends for SoF and SoW activity provides valuable risk data to the firm, and especially to the MLRO.

The MLRO is required to provide reporting at Board level on risk data so as to support the firm’s review of the risk to which it is exposed and the veracity of the controls that it has in place to manage it.

Sources of information in this respect can come from many sources, including; file reviews, supervision sessions, training and team meetings.

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