To prevent money laundering, terrorism financing, and other serious crimes, it is important to understand where your customers are obtaining their funds and wealth. This involves conducting “source of funds” and “source of wealth” checks as part of a robust anti-money laundering and counter-terrorism financing (AML/CTF) program.
This article explores AUSTRAC’s guidance to help you undertake source of funds and source of wealth checks and mitigate the risk that a customer’s funds relate to criminal activity.
What are ‘source of funds’ and ‘source of wealth’?
“Source of funds” refers to how and where the customer obtained the funds for a specific transaction or designated service you provide to the customer.
“Source of wealth” refers to where the customer’s entire body of wealth and assets came from – not just what is involved in a transaction or business relationship.
When to undertake source of funds and source of wealth checks
Your AML/CTF program should clearly outline the triggers for undertaking source of funds and source of wealth checks, including:
- As part of your applicable customer identification procedures (ACIP) before commencing to provide a designated service to a customer.
- When carrying out enhanced customer due diligence (ECDD) where the customer or beneficial owner is a foreign politically exposed person (PEP).
- When carrying out ECDD for higher-risk customers.
- As part of ongoing due diligence and monitoring of any customer, particularly where there is a change in the ML/TF risk profile.
Establishing the source of funds and source of wealth
Establishing the source of funds and source of wealth involves following several steps, in line with an organisation’s risk-based procedures:
- Review information already held by your organisation about the customer and their beneficial owners.
- Where appropriate, consider collecting additional information to identify how the customer accumulated their wealth and source of funds.
- After collecting additional information from the customer, take a risk-based approach to determine whether to verify the information for accuracy by using reliable and independent sources.
Collecting information
You should draw on a range of information when establishing the source of funds and source of wealth of a customer. This information could include:
- Information the customer has already provided to you for the purpose of other designated services or products.
- Asking the customer or requesting they make a formal declaration about their source of funds or source of wealth.
- Secondary sources such as internet searches, media reporting, published lists of prominent persons, or commercial databases.
Verifying information
After collecting initial information from the customer on their source of funds and source of wealth, the next step is taking a risk-based approach to determine whether that information should be verified by further information to help determine that the customer is not involved in the proceeds of crime.
As part of this approach, higher-risk customers are more likely to undergo additional or deeper checks and increased monitoring compared with lower-risk customers. A risk-based approach should also be applied to the collection of information.
The type of documentation acceptable to verify source of funds/source of wealth will depend on the level of assessed risk. Examples of documents and data you could use to verify the source of funds or source of wealth in higher-risk situations include bank statements, payslips, tax returns, wills, trust deeds, and transaction records, amongst others.
Verifying the source of funds
When verifying the source of funds, it is important to consider the specific source and gather evidence that substantiates how the customer acquired the funds. Merely confirming the financial institution the funds were transferred from and matching personal details is not enough.
Evidence used to verify the customer’s source of wealth may also be used for the source of funds. If the funds were given by a third party, information regarding the original transaction should be recorded and verified through bank statements or other documents.
Verifying the source of wealth
Verifying a customer’s source of wealth can be difficult as it may include assets that you do not hold on their behalf. The data or documents you use to verify the source of wealth will depend on the level of ML/TF risk, the type of transactions undertaken and the designated services you provide to the customer.
Effective verification involves using information from independent and reputable sources such as company registries, banks, accountants, lawyers, commercial databases, sanctions lists, and reputable media sources.
Reporting suspicious matters
If you notice unusual activity that raises a suspicion while establishing the customer’s source of funds or source of wealth, including if you suspect on reasonable grounds that a person or transaction is linked to a crime or may otherwise be relevant to the investigation of an offence, you must consider whether to submit a suspicious matter report to AUSTRAC.
Key takeaways
Undertaking source of funds and source of wealth checks as part of an organisation’s broader AML/CTF program is critical in the prevention of money laundering and other serious crimes. This process involves reviewing information already held by the organisation, and then taking a risk-based approach to determine whether additional information should be collected and verified. Any suspicious matters identified may be reported to AUSTRAC.
