While hiring a new client, it is essential to understand where their wealth or funds come from. Well, knowing about these elements is one of the crucial tasks while implementing Know Your Customer and Anti-Money Laundering compliance regulations. However, by conducting these procedures, you can safeguard your business from employing the wrong user.
Not only this, but these regulatory processes also help you in recognising their source of funds vs source of wealth. Moreover, these procedures enable you to verify whether these funds are obtained through legitimate means. By analysing all these factors, you are confident enough to make decisions about the customer’s risk levels.
In this blog, we will explore the differences between the source of funds vs source of wealth and how financial firms understand these sources while onboarding a new customer.
What is Source of Funds?
Source of funds, also known as SoF, refers to the means of the money or funds that are being used in a specific flow of transactions. While building a relationship with a new customer, it is important for businesses to consider and understand the client's source of funds. Since it helps them make sure that these funds are acquired through legitimate means and that the user is not engaged in any illicit activities.
Nonetheless, understanding the source of funds is also significant for compliance regulations. It helps you make sure that the entity you’re going to work with is not facilitating an illegal funding campaign.
In order to recognise the source of funds, it is important to collect the relevant information and several documents of the user and review it. This data may include financial histories, bank statements, and other documents. Through this, you will be able to verify the funds of the customers and determine if they’re legitimate to be invested in your business.
A person's source of funds may include:
- Pension release
- Selling of any property
- Selling of shares
- Lottery winning
- Gift from a relative
- Compensation award
What is Source of Wealth?
On the other hand, the source of wealth or SoW refers to the origin of the entire financial assets of the customers. Wealth usually includes clients’ businesses, economic means, and commercial activities through which they have obtained money. These assets remarkably contribute to the user’s entire net worth.
However, to determine the source of wealth of a person, you should consider why and how the person has obtained these assets and generated wealth through these assets. This is the basic information that you need to gather by collecting some relevant documents such as bank statements and financial history and investigating them.
Once you’ve analysed the source of wealth, it becomes easier to see a more transparent picture of your customer’s financial state. You can make decisions more hassle-freely whether or not you want to build a relationship with the customer.
In addition to this, the source of wealth describes how the person has acquired total wealth. It may include several sources such as:
- Business ownership
Source of Funds vs Source of Wealth
Well, the two terms may sound the same but these two concepts somehow overlap each other. Take an example, the source of funds vs source of wealth can be referred to as the person’s income. Yet, the major difference between the two terms is the extent of the analysis done by financial companies.
However, it is important to understand the differences between source of funds vs source of wealth. Source of funds essentially focuses on determining the origins of the money that is being used for the transactions currently. While the source of wealth involves the understanding of the client's overall financial state and how they have acquired their total assets.
For many businesses, the source of funds is the investigation of the moment in time in which the firm only assesses the transaction histories. While the source of wealth is investigated by determining the whole funds or assets collected throughout the customer's life.
How do Firms Verify Source of Funds vs Source of Wealth?
Before onboarding a new user, your business should conduct a risk-based analysis to implement SoF vs SoW checks. It is important to recognise high-risk customers and protect your business from future potential threats.
For instance, if you are onboarding a new user who is a politically-exposed person or high-net-worth individual, you may conduct an in-depth investigation before hiring them.
Source of Funds Verification
In order to verify the source of funds of an individual, you need to analyse whether the funds being used in a particular transaction are acquired through legitimate means or via illicit activities.
SoF measures are generally conducted once the user’s transactions fulfil pre-defined standards such as a specific amount or multiple transactions in a short time period. There are some scenarios that make the person’s transactions suspicious and make the businesses run SoF investigations.
While verifying the source of funds, organisations may ask for numerous documents through which they will verify the origin of the money. These documents may include:
- Financial documents
- Employment contract
- Proof of investments
Source of Wealth Verification
To verify the source of wealth, you need to determine the obtained income of the user and verify whether it came from legal sources or not. The SoW measures are generally useful during the client onboarding process or when you’re going to build a relationship with a new customer.
The main objective of verifying a customer's source of wealth is to recognise any illegitimate cash flows such as money laundering or financing terrorism. For this purpose, you require numerous documents from the client that may include:
- Business ownership papers
- Letter of employment
- Inheritance documents
Remember, if you run a financial institution, it is crucial to run SoF and SoW checks on every customer before employing them. In case you find any suspicious activity, you need to file Suspicious Activity Reporting to the authoritative law enforcement.
The two terms source of funds vs source of wealth are considered the same by many people but they’re not interchangeable. Therefore, before running any of these checks, it is crucial to know about the major differences between the two concepts.
Moreover, if you’re implementing KYC or AML compliance regulations, verifying the customer's source of funds vs source of wealth is crucial to minimise financial risks. It is vital to ask your clients to provide mandatory documents and adequate evidence during the user onboarding journey. Doing this helps your business build long-term relationships with your customers while reducing financial fraud.