The Wolfsberg Group has recently published a new guidance on how financial institutions (FIs) can identify, mitigate and manage money laundering risks by undertaking source of wealth (SoW) and source of funds (SoF) checks on customers. SoW and SoF are to be considered among the key elements of customer risk assessment and risk management.
Source of Wealth
SoW generally refers to activities that significantly contributed to the customer’s overall net worth (assets minus liabilities). These activities may change over time, as new activities are identified and additional wealth is accumulated. The purpose of obtaining SoW information is not to account for, or verify, the exact value of the customer’s overall net worth, but rather for an FI to assess the customer’s wealth generating activities and, where relevant, those of any material beneficial owners.
Examples of SoW include (but are not limited to):
- Family/generational wealth and personal backgrounds (i.e. inheritance)
- Income, revenue and business activities (i.e. salaries)
- Investment activities (i.e. investments in real estate)
FIs must bare in mind that SoW due diligence should be conducted at customer on-boarding and refreshed periodically in accordance with the risks presented by the customer. However, different customer types will require different levels of SoW due diligence. FIs must ensure that the picture of customer’s SoW is coherent with the information collected. If a FI deems that the SoW or SoF information does not meet the standards of the firms policies and procedures, it can consider terminating relationship with the customer, deny on-boarding, increase the risk rating of the customer, place restrictions on the customer’s products/account usage or other appropriate options.
Source of Funds
A customer’s SoF refers to the origin and means of transfer of currency, financial instruments or other assets deposited with the FI, with a focus on the amount to be transferred by a customer and the specific means/methods by which the transfer(s) will occur. SoW assessments seek to identify how a customer accumulated their wealth, while SoF information provides FI with the understanding of how and for what purpose an account is going to be funded.
The SoF may include (on a risk sensitive basis) the following:
- the amount or value and type of financial instruments or assets funding the account (other than cash), including the activities that generate the funds
- method of transfer
- remitting party and, where applicable, the FI from which the transfer originated
- country from where the fund transfer(s) originated
If an account is materially funded, or is expected to be funded, by a third party, particularly with no apparent link to the customer, then additional due diligence should include establishing and recording the relationship between the customer and the funding parties.
Where required by applicable law and/or regulation, and/or in accordance with the FI’s risk based approach, the customer’s SoF information may need to be further investigated, for example, where SoF represents an increased risk to the FI, such as:
- where the customer already represents a high risk by virtue of the risk factors identified during the due diligence process, and/or is otherwise rated as higher risk
- where SoF represents increased risks (i.e. when material amounts of physical cash are presented, or material amounts of funds are remitted from a gambling institution)
- where there are inconsistencies with the customer’s background and what has been collected as part of the due diligence process.
Prepared by attorney at law Inga Karulaitytė and legal assistant Vilius Neverdauskas