Understanding the origin of the funds used by your customers to finance their acquisitions and investments is crucial in complying with anti-money laundering and countering the financing of terrorism (AML/CFT) regulations. As criminals adopt increasingly intricate means to evade detection of unlawful funds, it becomes imperative for regulated organizations to diligently trace the origin of funds. Implementing robust KYC measures and controls, such as Customer Due Diligence, Risk Assessments, Sanctions & PEP Screening, Transaction Monitoring, is essential to protect your organization and contribute to the global fight against financial crime. 

I. Quick Highlight – Source of Funds (SOF) & Source of Wealth (SOW):      

Source of Funds, (SOF) – refers to the origin of the money your customer, may it be an individual or an organization, uses to finance a particular transaction or series of transactions. The best way to determine it is to collect relevant financial documentation such as bank statements, investment & inheritance statements, pay stubs to carefully evaluate the information it contains. You will then be in a better position to confirm if the funds being used by your customer are legitimate.    

Source of Wealth, (SOW) – on the other hand, pertains to the origins of your customers’ total assets, their overall financial position. It involves understanding how and why the latter generated and accumulated their total wealth.  This will be done again by gathering and reviewing specific documentary evidence to evaluate your customers’ financial history, maybe through business ownership, inheritances, investment returns, intellectual property, royalties & licensing proofs, among others.  

It is important to treat these two concepts separately, as they serve different purposes. It is also good to keep in mind that in higher risk circumstances, it is highly recommended to gather evidence on both the SOF and SOW. 

II. Why is it important to carefully screen the SOF and SOW: 

• Identifying Potential Money Laundering and Terrorist Financing: Understanding the source of funds and wealth helps detect inconsistencies and red flags that may indicate suspicious or criminal activities.
• Assessing Customer Risk: Scrutinizing SOF or / and SOW enables us to assess the risk associated with a particular customer or transaction, ensuring appropriate compliance measures are in place.
• Compliance Reporting: A clear understanding of the source of funds and wealth assists in preparing and submitting accurate and timely suspicious activity reports (SARs) to regulatory authorities.
• Supporting Law Enforcement: Thoroughly documented SOF and SOW can aid law enforcement agencies in their investigations, contributing to the fight against financial crime.

III. Industries the most exposed to AML/CFT risks where proper SOF and SOW screenings are appropriate.

Several industries are particularly vulnerable to money laundering and terrorist financing risks due to their nature and large financial transactions. These include; 

• Financial Services: Financial institutions themselves handle significant funds, necessitating diligent monitoring of SOF / SOW to mitigate risks.
• High-Value Goods and Luxury Assets: Businesses dealing with luxury assets like cars and artwork can inadvertently facilitate money laundering activities.
• Legal and Professional Services: DNFBPs, such as lawyers and accountants, can unintentionally facilitate money laundering if they do not thoroughly scrutinize SOF / SOW.
• Non-Bank Financial Institutions: Money services businesses and currency exchange services are also at risk of being exploited for illicit financial activities.
• Precious Metals and Stones: Valuable and portable, precious metals and stones can be used to move and conceal illicit funds.
• Real Estate: Luxury properties and land deals attract large sums of money, making them susceptible to money laundering.

IV. Tackling AML/CFT Risks: Effective Measures for Regulated Entities.

To combat AML/CFT risks effectively, regulated entities must accordingly implement robust measures like;  

• Collaboration with Authorities: Foster strong communication and cooperation with law enforcement and regulatory authorities to share information and combat financial crime collectively.
• Customer Identification and Verification / Customer Due Diligence (CDD): Ensure accurate identification and verification processes to establish the legitimacy of customers’ identities, sources of funds and assess their risk profiles.
• Enhanced Due Diligence (EDD): Conduct EDD for high-risk customers, gathering additional information to verify the legitimacy of their accumulated assets.
• Risk-Based Approach: Adopt a risk-based approach to allocate resources effectively and focus on higher-risk customers and transactions.
• Staff Training: Conduct regular training programs to empower employees to identify red flags and report suspicious activities promptly.
• Transaction Monitoring: Utilize advanced transaction monitoring systems to detect unusual or suspicious activities that may indicate money laundering or terrorist financing.
• Ongoing Monitoring and Reviews: Continuously monitor existing customer relationships and operations to identify changes in SOF and SOW that may pose risks.

Effectively combating money laundering and terrorist financing hinges on a thorough understanding of the source of funds and source of wealth. By meticulously screening both elements when necessary and implementing robust measures, regulated entities can leverage technology to ensure AML/CFT compliance. This proactive approach safeguards not only themselves but also stakeholders and the broader financial system from the perils of illicit financial activities. If you would like to discuss further about it and understand how SonarPulse can effectively help you on your AML.CFT obligations, please do contact us.