ECSH33358 - Evidence of verification: source of funds and source of wealth

When reviewing evidence of verification, you may need to review documents relating to source of funds and/or source of wealth. It is important to understand the difference between these 2 terms to confirm a business has taken appropriate actions.

Source of funds (SOF) means the origins of the money used in a particular transaction.

Source of wealth (SOW) refers to the customers entire wealth and shows how the customer has accrued the funds. This could be family wealth, inheritance, divorce settlements, pension, sale of an asset, gift, salary or commission payments, dividends, investments, and so on.

You can find more guidance in the Joint Money Laundering Steering Group (JMLSG) guidance (simply search for the terms to find relevant guidance).

SOF and SOW checks must be performed where a customer is a politically exposed person (PEP) and where there is a business relationship or where either of the parties to any relevant transaction is established in a high-risk third country (HRTC).

A business must also carry out SOF checks at other times on a risk-based approach. Regulation 28(11) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) sets out that ongoing monitoring should include scrutiny of transactions including, where necessary, the source of funds to ensure that the transactions are consistent with the business’s knowledge of the customer, its business and risk profile. Businesses may ask customers how they intend to settle invoices for goods or services (cash, cheque, bank transfer, finance options, part-exchange). If customer activity deviates from this, further checks should be carried out. A business’s policies, controls and procedures (PCPs) should set out when and how it will carry out such checks when addressing a specific risk. For example, if a payment is received from a bank account which is not in the customer’s name, does the business identify and assess this as a risk?

You need to establish:

  • Who reviews SOF/SOW information and documentation?
  • Who checks that the money comes from the stated SOF?
  • Are SOF checks done before the establishment of a business relationship or occasional transaction?
  • What information and documents are accepted as SOF?

For example, during a visit to a high value dealer, you identify a customer who is resident in a country which limits the use of cash. You need to consider if the business has identified and assessed this risk, in line with the published “Understanding risk and taking action for High Value Dealers” on GOV.UK. You should establish what the business has done to satisfy itself it knows where the cash has come from. You may see evidence that the customer declared the cash at the port of exit, or how it sourced the cash in the UK? Does the evidence mitigate the risk of money laundering and terrorist financing?

 

PEPs

If you establish the business has a business relationship with a PEP, ask the business to explain:

  • If the purchase is for personal reasons or in the customer’s official capacity as a PEP?
  • Did the business seek to obtain any information that government funds were being used appropriately? (where appropriate)
  • How it mitigated corruption risk, for example by reviewing reports such as the Transparency International Corruption Perception Index
  • Did the source of funds match what the business was told? For example, if the PEP explained they were making a personal purchase, did the payment come from their personal bank account?

You should evaluate whether the business has:

  • Considered why and how the customer obtained their assets.
  • Established how they accumulated them.
  • Obtained documents to back up the SOW.

Documents you may see include:

  • Bank statements.
  • Documents confirming sale of shares, sale of property, pension release, or financial gifts.
  • Estate accounts showing an inheritance.
  • Cash withdrawals.
  • Tenancy agreements and bank statements showing rental earnings.

You may hear individuals who have accrued large wealth referred to as high net worth (HNW) individuals. Countries may have a different definition for HNW, but HMRC refers to them as “wealthy” individuals, who have an income of £200,000 or more, or assets equal to or above £2 million in any of the last 3 years.

Documents you may see may be obtained from publicly available information or from the customer: 

  • Estate accounts showing an inheritance.
  • Documents confirming investment returns.
  • Employment income as shown on employment contract, pay slips or bank statements.
  • Copies of audited accounts showing business profits.
  • Open-source information such as credible news sources if the customers wealth is in the public domain.


Breaches

Through your questioning and testing, you will be able to determine whether the business has met this requirement or breached the MLR 2017.

Where a breach occurs, you must discuss this with the business. Was it because a member of staff didn’t follow procedures or didn’t gather the right information from the customer? Is that due to a lack of training? As for other customer due diligence (CDD) breaches, there are likely to be associated breaches of MLR 2017 (such as regulations 18, 19 or 24).

If you have identified a transaction whereby you believe the business should have carried out SOF/SOW checks, but there is no record of it, you need to confirm whether checks were carried out but not recorded? This would be a record-keeping breach (regulation 40 of MLR 2017) rather than a CDD breach.