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Understanding where customers got the money they use to transact and invest is an important part of the Know Your Customer (KYC) process and an integral part of AML/CFT compliance. As money launderers use increasingly sophisticated methods to conceal the source of illegal money, establishments must work harder than ever to establish the source of funds and wealth. In practice, this means that institutions must implement a set of KYC measures and controls such as customer due diligence (CDD) and transaction supervision order to protect both their assets and their customers and thus contribute to the global fight against financial crime.

Understand where funds come from and where wealth comes from

In order to examine Source of Funds ( SOF ) and Origin of Wealth (SOW), it is important to understand the distinction between these terms. While the origin of wealth refers to the volume of wealth accumulated by a person, the source of funds (SOF) refers to the origin of the money or assets used in a transaction or specific business relationship. To establish the source of the funds, financial institutions must seek to understand not only where the funds come from (i.e. from which account they were transferred), but also the activity which made it possible to generate these funds, for example, a job, the sale of real estate or an inheritance.

  • Examples of sources of wealth: inheritances, investments, shareholdings in companies and income from employment
  • Examples of sources of funds: personal savings, payment of pensions, sales of shares and dividends, sale of real estate, gambling winnings, inheritances and gifts or even damages and interest paid following court decisions.

Although the source of the funds may be more immediately relevant in the context of AML/CFT compliance efforts , both the source of the funds and the origin of the wealth must be taken into account in establishing the possible involvement of a client to criminal activity. When a client is flagged as “high risk” and an investigation is initiated to find out the source of their funds, the source of wealth can be used to support a decision regarding the source of the funds.

The importance of AML investigations on the source of funds

Being able to identify the source of funds and the origin of wealth is essential for the fight against money laundering and the financing of terrorism because both can be good indicators of the involvement of customers in criminal activities. In cases where the source of funds and source of wealth do not match a client’s risk profile or established transactional activity, financial institutions should use this information to support their AML/ FT and when communicating suspicious activity reports (SAR) to the competent national authorities.

An investigation into the source of funds in the context of the fight against AML must include the following measures and considerations :

  • Source of funds inquiries should be conducted based on the client’s risk profile. High-risk customers should be screened more thoroughly.
  • Financial institutions should gather documentary evidence to support the investigation of the source of funds, but also seek an explanation from the customer.
  • Institutions should carefully review customer bank statements to support the investigation of the source of funds.
  • Institutions must also document each step of the procedure on the source of the funds in order to inform subsequent investigations by the authorities.

Not every suspicious financial transaction and activity warrants an investigation into the source of funds, and financial authorities do not recommend it for every suspicious incident. The Australian Transaction Reports and Analysis Center (AUSTRAC) for example points out that customer identification discrepancies and other identification issues can best be resolved by taking enhanced due diligence (EDD) measures rather than launching an investigation . on the source of funds.

Possible reactions depending on the conformity of the source of funds

If there are concerns about the source of a client’s funds, the institution should be prepared to take the necessary compliance actions to address a potential compliance risk. Depending on regulatory requirements, source of funds compliance responses may include:

  • The decision to terminate a transaction with the customer
  • The decision not to enter into a business relationship or to terminate an existing business relationship
  • Enhanced supervision of a client’s transactions
  • Supervision by senior management employees

When a review of the source of a client’s funds reveals suspicious activity, an institution must submit a Suspicious Activity Report (SAR) to the relevant authorities. In the United States, for example, a suspicious activity report must be filed with the Financial Crimes Enforcement Network (FinCEN).

Compliance of source of funds in terms of AML

In order to effectively establish the source of funds, institutions must define and implement relevant KYC measures to understand who their customers are and the activity they carry out.

As part of the risk-based approach to AML compliance recommended by the Financial Action Task Force (FATF), these KYC measures should be commensurate with the risk each customer poses. This means that high-risk customers should be subject to enhanced compliance measures while low-risk customers may be subject to lighter measures.

The KYC process should be built around the following measures and controls:

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Publié initialement octobre 13, 2021, mis à jourjanvier 25, 2023

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