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Going the Extra Mile – How Source of Wealth Checks Can Protect You

As governments around the world begin to clamp down more aggressively on global money laundering activities, as well as closing off channels used to fund international terrorism, regulatory compliance is of vital importance.

The onus to ensure that every check and procedure is completed is on individual financial institutions, e-payment service providers, online gaming sites, and other types of enterprise where some form of financial transaction occurs during the course of their day to day operations. KYC (Know Your Customer) and client onboarding processes are just two examples of the steps necessary to ensure compliance.

However, in order for businesses and financial institutions to be seen to be going the extra mile, there are two additional checks that can be undertaken. These are known as Source of Wealth (SOW) and Source of Funds (SOF) checks and, while the two are often mistakenly confused as one and the same, they are in fact separate checks, each with its own definition.

Source of Wealth checks specifically deal with how a client under scrutiny, actually acquired their funds to begin with. For example, did they acquire their wealth through an inheritance of sorts? Through investments or the sale of real estate? SOW checks can play a vital role when it comes to going the extra mile to ensure that your client and their funds are from a legitimate source, thereby reducing the risk of indirect money laundering complicity.

Source of Funds checks specifically deal with where a client’s funds are drawn from. For example, does the client have a bank account held in the United Kingdom (or other countries)?

The Importance of SOW/SOF Checks as They Relate to MLR

Completing Source of Wealth and Source of Funds checks with every client isn’t just about going the extra mile, both are mentioned in the Money Laundering Regulations (MLR) of 2017. In fact, there are two areas of the Regulations where these checks are mentioned:

In Regulation 28 (S11 (a))

“…scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile;”

In Regulation 35 (S5 (b))

“…take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person;”

Practical Application of Source of Funds Checks

With the above extracts from the MLR as a guide, applying SOF checks in real world situations becomes easier. For one, the law does not actually require you to have to prove that your client’s funds are clean. However, you do need to be sure that those funds do not indicate any possible hint of money laundering activities tied to them.

There are several considerations or factors that can help you to determine when SOF checks are essential:

  1. You have some concerns with regards your client’s net wealth and/or source of funds due to information received that might link the client’s funds to possible illegal activities or sources.
  2. Your client is a PEP or Politically Exposed Person.
  3. Your client hails from a jurisdiction considered to be high risk (crime, money laundering, terrorism).
  4. One or more shareholders involved in the client’s business or enterprise do not hold any form of online presence that can be evaluated or corroborated in any way.
  5. Where purchasing of property is involved.
  6. The pending transaction is of a significantly high value.
  7. The funds are located in an area or jurisdiction where Combating the Financing of Terrorism regulations or Anti-Money Laundering regulations are limited.
  8. If you are acting as an executor or on behalf of executors and all relevant funds need to be checked.
  9. If the funds that have been acquired and put forward, were earned in any foreign jurisdictions.
  10. If any assets are located in or have been earned in any territories listed as suspect territories, and further investigation or checks are required for further due diligence.
Establishing Source of Wealth

You will not need to run a SOW check if your client clearly demonstrates that their wealth was acquitted legitimately either through the sale of a house or property, through legitimate investment, or by means of a legitimate inheritance.

However, if in doubt, running SOW checks for the following is advisable:

  1. If your client obtained their wealth through entrepreneurial means, reviewing their website (they should have one), online profile, business or company name is recommended. Recording these details, along with a succinct description of the business is also recommended.

2. If the client obtained their wealth as an entrepreneur, but sold their business on to a third party. Obtaining the date of sale as well as the name of the party that bought the business, is recommended.