The Australian Transaction Reports and Analysis Center (AUSTRAC) has issued new guidance aimed at helping firms identify and verify sources of funds and wealth, as part of their know your customer (KYC) processes.
A firm’s processes that set out how it establishes a customer’s source of funds and source of wealth are central to a risk-based KYC approach. This should include the source of funds and wealth of any beneficial owners.
AUSTRAC’s guidance includes clear definitions of both terms:
Source of funds – How and where the customer obtained the funds for a particular transaction or service. Verifying the source of funds will help in applying risk-based systems and controls and includes determining if the funds could be proceeds of crime or relevant to the investigation of a criminal offense.
Source of wealth – Refers to where the customer’s entire body of assets came from – not just those involved in a particular transaction. It describes the economic, business or commercial activities that generated the customer’s net worth.
AUSTRAC also provides examples of instances that would require a firm to verify source of funds or source of wealth information:
- Transactions or other activity that are inconsistent with what a firm knows about a customer
- Discrepancies between the information provided by the customer and other available information
- Adverse media reporting or other information relevant to the customer’s source of funds and/or source of wealth
- A material change in the customer’s circumstances
- Risks associated with providing the designated service to the customer are deemed to be high or have increased
Verification could take the form of bank statements, payslips, a will or trust deed, audited financial accounts, sale/purchase agreements, receipts of transactions, or documents detailing shares, business activities, bequests, inheritances, gambling winnings, trading in digital currencies etc.
Source of Funds and Wealth for PEPs
This new guidance underlines the importance of a risk-based approach, including examples of customer types and control structures that present a higher risk – such as foreign politically exposed persons (PEPs), domestic PEPs with a higher ML/TF risk, complex corporate or trust structures, high-net worth individuals where visibility into the source of funds is limited, and customers acting as intermediaries.
The Financial Action Task Force (FATF) has been monitoring Australia’s progress on PEPs in its mutual evaluation reports. It noted in its third assessment that Australia was rated non-compliant on Recommendation 6, as PEPs were not dealt with under the AML/CTF regime in place at that time.
In subsequent follow-up reports in 2006-7, the FATF noted that some progress had been made through the adoption of the AML/CTF Act and AML/CTF Rules, as amended in 2014.
Part 4.13 of Australia’s AML/CFT rules states that firms should “take reasonable measures to establish the politically exposed person’s source of wealth and source of funds.” This latest guidance will provide a benchmark for firms as to what AUSTRAC considers “reasonable”.
The FATF’s wider guidance on politically exposed persons is also helpful for compliance teams looking for more information on PEPs. You can also read more about source of funds and source of wealth.
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Originally published February 25, 2022, updated February 25, 2022
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