The latest Solicitors Regulation Authority (SRA) report on Money Laundering (2 March 2018) refers to the steps taken by law firms to establish the source of funds and wealth for transactional matters. Many people often confuse source of funds and source of wealth.
The two terms are different and should be treated as such. When we refer to source of funds we are referring to where the client’s funds are received from e.g. a UK bank account. Source of wealth, on the other hand, relates to how the client came to have the funds in question e.g. via inheritance, house sale, or investment. Source of wealth plays a particularly important role when conducting your money laundering risk assessment. If you are clear about the legitimacy of a client’s source of wealth, the risk of money laundering is significantly reduced.
The Money Laundering Regulations 2017 mention the source of funds in two places:
Regulation 28 (S11(a))
“…scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile;”
Regulation 35 (S5(b))
“…take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person;”
The law does not require you to prove that the money is clean, but you should be satisfied the funds are consistent with the risk profile of the client without raising any suspicions to money laundering. There are some types of work where it is important for you to review source of funds, this may include (but is not limited to) where:
This may include situations where client money is expected to be received e.g.:
Consider whether the estate assets have been earned in a foreign jurisdiction and whether the wide nature of the offences of ‘acquisition, use and possession’ in S329 of Proceeds of Crime Act (POCA) apply. Also consider whether estate assets have been earned or are located in a suspect territory and if so, whether you need to carry out further checks regarding the source of those funds, as S328 offence “entering into or becoming concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person”, may also be relevant.
Regulation 28(11) requires that you conduct ongoing monitoring of a business relationship. Consider procedures for record keeping any ongoing monitoring, being sure to scrutinise transactions undertaken throughout the course of the relationship.
When investigating source of funds, you may ask for documents, for example:
If you have acted for the client before, communicate with other departments as they may have all the information you need without requesting this again from the client. Review the documents as part of your risk assessment to consider whether additional information is required to clarify.
Finance/Account teams can also help by monitoring whether funds received from clients are from credible sources. Questions they may ask include:
If a person’s wealth is clearly derived from legitimate means such as an inheritance, house sale or investment, and they are engaging in a transaction which is consistent with that wealth, you are not required to request evidence of this by trawling through reams of bank statements to prove the point.
Below are some examples of when and how you can establish the source of wealth:
You should also be aware that Regulation 40 requires you to keep records of your Customer Due Diligence (CDD) documents and information, and sufficient supporting records in respect of a transaction (whether or not an occasional transaction) which is the subject of CDD or ongoing monitoring to enable the transaction to be reconstructed. This includes information and documentation obtained in connection with source of funds checks and the process of the transaction itself.
A broad range of information from diverse sources is needed to understand and verify source of wealth and source of funds. For example, you may need to map out a corporate structure in order to identify beneficial owners, understand the business and family connections of an individual, or run credit checks through established agencies. This all requires accessing and analysing various sources of data – often from multiple jurisdictions.
The process of gathering and analysing data, acting on it and comprehensively recording all actions and decisions taken for audit purposes often takes several hours for simple cases, and days for more complex ones. This can negatively impact the client experience as well as the time taken to recognise revenue.
In order to streamline the client onboarding process and improve client experience throughout the duration of a relationship, firms must now look to technology. intelligent process automation, such as that offered by encompass, can precisely replicate the processes used to gather, extract and analyse data, compile comprehensive client files that include relevant documentation, and dynamically construct complete audit trails.
Learn more about intelligent process automation and the benefits over manual processes in this Encompass blog post.
Amy worked for many years as a solicitor before moving into compliance and eventually launching her own firm. A leading figure helping law firms adapt to the changing legal landscape, Amy is also the author of The Law Society’s Elearning and Toolkit on the Bribery Act, and current Chair of their Anti-Money Laundering Task Force.
Amy specialises in AML regulations mainly professional services and runs ABC Consultancy.
Connect with Amy on LinkedIn.
Encompass’ intelligent process automation conducts live document and data collection, analysis and integration from public and premium sources to bring transparency to complex corporate structures and ultimate beneficial ownership, delivering the most accurate and complete KYC on demand.