Funds, its Sources, and its Necessity.

In anti-money laundering (AML), the Client Due Diligence (CDD) and Know Your Customer (KYC) programs most often involve the process of understanding a client verified through recognizably acceptable documentation that can be relied on. This process is established to build a level of confidence when engaging in a business relationship that a client is a legitimate person with an acceptable level of risk exposure to the firm or company. Enhanced due diligence (EDD) arises when the level of risk exposure is unacceptable and additional steps are required to mitigate potential risk. Considerations are given to additional information or documentation that seek to reduce the level of exposure. Enhanced due diligence may encompass an endless list of potential requests from the client or independent/third party resources on the client. One of the many standard considerations to satisfy the need for EDD is that of an increased understanding of the client’s source of wealth, and in dire cases the origin of wealth.

Source of wealth has been the topic of many debates but to understand source of wealth, there is a need to understand source of funds. An AML tip is understanding the basic differences between them which can lead to a greater understanding and success rate in appropriately mitigating risk associated to a client’s funds. When should you require the source of funds? Although legislation, regulations and guidance may vary slightly from country to country and industry to industry, at the initial onboarding of a client, each firm should understand a client's source of funds. Whether you are a bank, a corporate service provider or real estate agent, you should have a mechanism in place to understand a client’s source of funds. What is meant by the source of funds? This too varies across the globe, however, the source of funds focuses more so on the transaction in question. Depending on the service being sought, the source of funds is limited to where the funds are being derived from for a partial transaction such as payment of a service or initial deposit. The most common response from clients would be the name of their bank or other financial institution along with their account details. Most firms would consider this sufficient, I’d challenge this in at least understanding the client’s primary income activity to fund the account such as their employment, proceeds of an investment or allowance for which documented verification is generally not required or needed.

Barring general satisfaction with the client's response to their source of funds, source of wealth is applied during the EDD stage where applicable. Such as a high risk individual, a high risk jurisdiction, a high risk transaction, you see the trend here? I would also suggest that you may want to apply to this EDD stage where the source of funds presents uncertainties or discrepancies. Source of wealth can assist in alleviating these discrepancies or risk exposure by verifying the legitimacy of a client’s funds and overall wealth. Understanding client wealth goes beyond a basic transaction. Source of wealth looks at a clients total value or worth. This may also include employment, assets, investments, property and much more, however, it is not in consideration of one of these sources but all. For some of us, employment may answer the question of source of funds and source of wealth but for high net worth individuals this is definitely not the case. The value of wealth may not always be necessary but validating the various claims as to their sources of wealth are often necessary. This is often attained through bank statements, personal accountant statements, evidence of ownership, sale of property, sale of shares and the list is endless and relative to the source of wealth indicated. 

Now it is important to note that gathering the necessary information on a client’s source of funds and source of wealth cannot be examined in isolation. It is important to consider the client’s desired underlying service required and the client themselves. You must ensure a degree of appropriateness regarding the client’s response to their source of funds and wealth. This is where your expertise in your industry and jurisdiction are most important. You are best equipped to understand the reasonableness of a recent high school graduate purchasing a US $2 million condominium. It could easily be answered by an inheritance, a sale of a genius invention in tech or cosigning by her wealthy parents. The main point is in all cases of complying with AML requirements that a degree of reasonableness is considered and applied before signing off on a client onboarding package. This is quite essential in ensuring that the justification given by a client appropriately answers your prosed question to a client of their source of funds and source of wealth accurately. It is often advisable to regulatory compliance consultancy firm to assist with complicated or high-risk clients to ensure prudency in the onboarding process.