What is Source of funds (SOF) and why does it matter?

Refers to the origin of the particular funds or assets which are the subject of the business relationship between the firm and its client and the transactions the firm is required to undertake on the client’s behalf (e.g. the amounts being invested, deposited or remitted). Easier to establish than a source of wealth but this should not simply be restricted to knowing from which bank or financial institution the funds may have been received. The information obtained should be substantive, relevant and be able to establish the fund’s origin and the method/circumstances under which the funds were acquired. In short, asking for a source of funds means asking where your money comes from - to show that your hard-earned cash comes from a legitimate source - be it from your salary, profits earned from your business, a loan from the bank and so on. Companies ask for SOF to make sure the money from their clients isn’t from some illegal activities a.k.a. dirty money. 

Source of funds will most often be a bank account that can be related directly to the client but even then, this knowledge is not adequate to confirm that the funds are from a legitimate source and appropriate due diligence procedures should be applied, based on the firm’s understanding of the client’s circumstances and risk profile.

Examples of appropriate information and/or supporting documentation required to establish Source of Funds:

  • Employment Income
  • Savings/deposits
  • Property Sale
  • Sale of shares or other investment
  • Loan
  • Company Sale
  • Company Profits / Dividends
  • Inheritance
  • Gift
  • Etc.

They all need to be proven by documents. Proof of Sources of Funds or PoSoF is one or several documents providing information on the origin of funds that are being used in a particular transaction.

 

When and where clients are asked to submit a proof of source of funds?
 Naturally, these measures are a part of an AML policy necessary for every type of business involving money transactions. Compliance with the anti-money laundering regulations prevents frauds from inflicting reputational damage on the company and eliminates the risk of substantial fines that come along with the accusation.

 

What a valid proof of source of funds does for the company

  • It confirms that the individual in charge of completing certain transactions is you;
  • PoSoF allows businesses to ensure safety, fight fraud and avoid being linked to illegal activities;
  • It is one of the multiple mandatory AML requirements to acquire a PoSoF before carrying out any transactions and is closely observed by jurisdictional regulators deciding whether the business is eligible to operate as a financial company.

 

In many ways, in anti-money laundering (AML) compliance, client identification, and verification are secondary to understanding the source of funds and the purpose of a retainer.

Essentially, AML compliance is about limiting the opportunities for criminals to use the criminal property. If there is no criminal property, then there is no money laundering.

Client identification is included to remove anonymity for criminals and assist in bringing clients who may pose money laundering risks (due to criminal histories or their association with criminals) to the firm's attention.