Source of Funds (SoF) vs Source of Wealth (SoW)

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 (SoW) in respect of any aspect of the matters that they work on, not just the client's own situation.

A lack of proper SoW record-keeping has been highlighted by the SRA as one of the top three concerns identified during recent AML inspection campaigns. Many firms are failing to adequately document how a client acquired their wealth, leaving significant gaps in their compliance files and increasing the risk of regulatory breaches.

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 are the red flags of illegitimately acquired funds or wealth?
• 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 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. Typical sources of funds include:

• Savings.
• Pension releases.
• Property sales.
• Company dividends.
• Share sales.
• Inheritance.
• Legal compensation.
• Gambling winnings.
• Divorce settlements
• Gifted deposits
• Loans

How to Identify an Individual’s Source of Funds

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 or entity possesses, contributing to their overall net worth. It encompasses all the sources of funds, including:

• Assets.
• Income(s).
• Savings.
• Inheritance.
• Business relationships.
• Company dividends.
• Investments.
• Any other sources of income.

How to Examine Sources of Wealth

When conducting customer due diligence checks or KYC measures, it is important to assess the risk profile of the individual or entity to fully understand how they have accumulated their wealth. SoW verification may involve:

• Reviewing documents such as bank statements, tax returns, or sale agreements.
• Using professional screening software.
• Assessing public records and databases.
• Obtaining client declarations and questionnaires.
• Examination of Source of Funds evidence (where such has been obtained)

How Far Back Should These Checks Go?

We are often asked how far one must “go back” when assessing the Source of Wealth, especially in cases where the subject of the check is not an individual, but an entity such as a company or trust.

This question usually arises when the ownership structure is layered or complex. For example, a company might be owned or part-owned by another company, which in turn is owned by another, and so on. This kind of structure is common in corporate groups and can easily lead to uncertainty over how deeply due diligence should be carried out.

The general rule is this: you must trace ownership and control back far enough to provide a credible and reasonable explanation of where the wealth ultimately originated. The aim is to understand not just how the entity came to hold the assets it has today (SoF), but how the wealth underpinning those assets was accumulated in the first place (SoW).

If a holding company owns the client company, it may be necessary to trace ownership back through each parent company until a natural person or a clearly defined SoW is identified.

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 then risk assessed (and documented).

Companies, trusts, and other entities can also be third-party funders. They, too, must be subject to SoW checks, which can be particularly challenging for law firms to keep on top of.

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?

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 is focused specifically on understanding the sources contributing to the individual's 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.

What Are the Red Flags of Illegitimate SoF and SoW?

Common red flags indicating an illegitimate source of funds or wealth include:

• Unexplained or Inconsistent Income: Sudden, large deposits or lifestyle upgrades that don’t match stated occupation, salary or business profits.
• Complex or Opaque Ownership Structures: Use of multiple shell companies, trusts or offshore entities that obscure the Ultimate Beneficial Owner (UBO).
• Frequent, High-Value Transactions: Repeated high-value deposits, withdrawals or transfers just under reporting thresholds.
• Use of High-Risk Nations: Funds routed through banks or financial institutions in countries with weak AML controls, known as tax havens.
• Reluctance/Inability to Provide Documents: Missing, forged, or vague paperwork supporting source of funds (e.g. tax returns) and wealth (e.g. share certificates).
• Unusual Transaction Patterns: Fast movement of money between accounts, layering through multiple currencies or frequent third-party payments with no business rationale.
• Politically Exposed Persons (PEPs) Without Clear Origin: Funds linked to public officials or their associates, especially where there’s evidence of corruption.
• Third-Party Funders With No Clear Business Case: Donations, gifts, or investments from unknown or unrelated individuals/entities that don’t align with the client’s profile.
• Discrepancies in Declarations: Contradictory statements about sources of wealth, or documentation that doesn’t match verbal descriptions or publicly available records.

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. This usually includes the application of enhanced due diligence (EDD) measures to closely inspect business activities whilst the investigation is ongoing.

Why 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:

• A gift or the involvement of another funder.
• A sudden influx of money, such as:
  • Gambling or lottery winnings.
  • An inheritance.
  • Divorce settlement proceeds.
  • A change of career or a new income stream.
  • An insurance or compensation award.

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

Some firms include a mandatory interim risk assessment for the SoW and the SoW for certain types of matters. 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. Regulators have adopted the view that ‘...if it’s not written down; it never happened’.

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.

Regulations require firms to carry out ongoing monitoring of their clients, which includes regularly reassessing the SoW; not just at the outset of a matter, but throughout the entire client relationship. This obligation applies even to long-standing clients who may have been known to the firm for many years. Changes in a client’s financial profile, the nature of transactions, or external risk factors may trigger the need for a fresh review. Practitioners must therefore remain vigilant and ensure that the client’s wealth continues to align with what is known and expected, documenting any updates or discrepancies as part of their compliance obligations.

‘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 within the money-regulated areas. It is imperative, therefore, that for each piece of separate advice, the fee earner documents their consideration of the SoW.

Firm-Wide Monitoring of SoF and SoW

Having a clear picture of 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 places, including file reviews, supervision sessions, training and team meetings.

Best Practices When Monitoring SoF and SoW

For those in the legal sector, there are several “best practices” which should be kept in mind for a holistic approach to AML. These notably include:

• Implementing risk-based periodic reviews of customer profiles and transactions.
• Automating alerts for unusual patterns using electronic Know Your Customer (eKYC).
• Verifying and updating supporting documents whenever risk indicators change.
• Establishing clear thresholds and red-flag scenarios tailored to client risk tiers.
• Maintaining an auditable trail of all SoF/SoW verifications and decision notes.
• Documenting that your firm has considered and verified SoF and SoW at the start of and during business relationships.
• Providing ongoing AML training focused on particularly troublesome scenarios.
• Escalating suspicious activities immediately with MLROs and conducting enhanced due diligence.

Improve Your Team’s AML Knowledge With Bespoke AML Compliance Training

At PDA Legal, we provide bespoke AML training which is tailored to the specific and individual needs of your firm. We offer two approaches to our bespoke training courses:

• Ad-hoc training courses, or,
• Frequent live learning packages, which start from just £9.50 per delegate per session.

This training is designed to improve your firm’s risk-based approach to AML, helping every individual know their role in the fight against money laundering. For more information or to ask any questions, please don’t hesitate to contact us today.

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