Source of funds and source of wealth checks for accountants
Accountants sometimes need to understand where a client’s money has come from before they can be comfortable with the AML risk.
This might involve checking the source of funds behind a particular payment, loan, or receipt. In some higher-risk cases, the firm may also need to understand a connected person’s wider source of wealth.
For AML purposes, source of funds and source of wealth enquiries are part of the firm’s risk assessment. They help decide whether the money involved makes sense in the circumstances and whether the firm can continue the relationship.
Key takeaways
- Source of funds checks focus on the money connected to a specific transaction or relationship.
- Source of wealth enquiries examine the wider explanation for how a person built up their assets.
- The trigger comes from the client risk assessment and information identified during the engagement.
- Evidence should support the explanation given for the money or wealth being assessed.
- The AML record needs to show the enquiry, response, and evidence considered, as well as the decision reached.
- Unclear or unreliable explanations require careful internal escalation.
Source of funds vs source of wealth in AML checks
HMRC describes source of funds as the origins of the money used in a specific transaction, while CCAB guidance defines it as the origin of the funds that are the subject of the business relationship.
In an accountancy engagement, this could mean asking where a director obtained the money used for a £75,000 loan into their company. The answer might simply be savings, business income, or proceeds from another identifiable source.
However, source of wealth is wider, as it looks at how a person acquired their overall assets, rather than only the money connected to a specific payment or relationship.
The wider wealth position can require attention if an overseas beneficial owner appears to control significant assets, or when a politically exposed person (PEP) is connected to a client company.
Crucially, the enquiry is about the broad explanation for the person’s wealth instead of every asset behind it.
Source of funds and source of wealth checks in higher-risk accountancy work
These enquiries are most clearly relevant when the AML risk rating points to PEPs or high-risk third-country connections.
In those cases, enhanced due diligence requires a clear view of the funds involved in the relationship and the wider wealth position of the relevant client or beneficial owner.
Rather than being a general request for financial history, these checks are a targeted enquiry into the money or wealth that explains the higher-risk relationship.
Ongoing monitoring can also reveal a source of funds issue when transactions no longer match what the firm already knows about the client. Routine accountancy work can therefore reveal activity that was not visible when the client was accepted.
Risk-based AML triggers for source of funds checks
A targeted source of funds review can be appropriate if a small company records unexplained capital introduced by a director, especially if the director’s known income does not appear to support it.
This problem can also arise in a loss-making company that continues to trade because an owner is funding shortfalls from unclear personal resources.
Third-party funding needs a clear explanation because it sits outside the known ownership and funding arrangements. When someone else pays a client liability, the AML record should identify the payer and explain why that arrangement made sense.
Similar concerns can emerge from routine accountancy work. For example, bookkeeping records might show receipts or payments that differ from the usual trade, while tax work could show a liability settled from resources that do not match declared income.
At that stage, the enquiry is still about the specific money used. Source of wealth only becomes relevant if the firm cannot assess that money without understanding the person’s wider financial position.
Proportionate AML evidence for source of funds checks
The source of funds note should connect the specific money to the explanation given. This means separating the immediate payment trail from the underlying origin of the funds.
For example, a bank statement showing money arriving from an account in the client’s name can help with the payment trail, but it will not be enough if the earlier origin remains unexplained.
Once the payment trail is clear, the evidence should test how the money was generated.
If the explanation is salary savings, the record needs to support both the income and the build-up of savings over time. That said, if the explanation relates to business funds, the records must show how trading activity produced money that could properly be drawn or lent.
Other stated origins should be handled in the same way. Sale proceeds, loan funds, and tax repayments, for instance, are relevant because they explain how money became available before it reached the client.
The level of evidence needed should then be scaled to risk, with less required for an ordinary low-value case than for an unusual payment arrangement or unexplained receipt.
Evidence for source of wealth
Source of wealth evidence supports the overall account of how the person acquired their assets. Depending on the risk, that evidence could come from public information or records showing how the person generated the wealth.
Verification should remain proportionate, as once the firm understands the explanation for the wealth, it can decide what evidence is needed for the assessed risk.
Practical takeaway: The AML record should demonstrate why the explanation is credible enough for the assessed risk, rather than trying to prove every pound of a client’s financial history.
Enquiry records and AML decision-making
The AML audit should be framed by the risk identified. For source of funds, the focus is the specific money being assessed. The record should explain why that money needed checking and whether the evidence supports its origin.
Source of wealth work requires a different but still controlled approach. A broad request to “explain your wealth” is likely to produce an unfocused answer, so the enquiry should be directed at the assets relevant to the client relationship.
The firm can then compare that explanation with its own records and any information reviewed in the public domain.
Those steps should be brought together in the assessment note, which needs to describe what was asked and how the client responded before explaining the evidence reviewed and the conclusion reached.
If the review leaves a gap or changes the risk rating, the note should connect that point to the final relationship decision.
Unreliable explanations and AML escalation
When an explanation is unreliable or creates suspicion, the matter needs internal escalation to the money laundering reporting officer (MLRO) or nominated officer. The firm also needs to take care with communications so it does not risk tipping off.
Moreover, if the concern leaves the firm unable to satisfy required CDD measures, the issue should be escalated through the firm’s suspicious activity report process before the relationship or affected work continues.
In summary
Source of funds and source of wealth enquiries should stay tied to the AML risk identified, so firms should avoid general reviews of a client’s financial history.
The purpose is to decide whether the money or wealth relevant to the relationship has a credible explanation, supported at a level that fits the risk.
A defensible assessment records how the enquiry was handled and why the conclusion was reached.
If the explanation is incomplete, inconsistent, or gives rise to suspicion, the record should identify the escalation route and any controls applied to the relationship or affected engagement.
FAQs
Firms should initially focus on the matter that prompted the AML concern. A source of funds check is usually linked to a particular payment, receipt, loan, or other movement of money. A source of wealth check looks beyond a single payment and can be relevant if the firm needs more information about how a person appears to have accumulated significant assets tied to the client relationship.
Bank records can help show where money came from immediately before it reached the client, but the firm might still need to understand the earlier origin of the funds. For example, if the money is said to come from savings or business income, supporting material should back up that explanation in a way that matches the risk.
The firm’s assessment should establish how the director obtained the money and whether that explanation is consistent with the existing view of the person and the company. The explanation might be straightforward if salary history or sale records explain how the director funded the contribution. However, if the answer does not fit the known profile, the firm should consider whether further evidence or a risk review is needed.
The enquiry needs enough detail to explain the assets relevant to the client relationship. A firm does not usually need to piece together a person’s entire financial history, but the depth of the review should reflect the assessed risk and whether the explanation appears credible.
The enquiry should establish who made the payment, why it was made, how the payer is connected to the client, and whether the payment route changes the firm’s view of the client’s risk. The answer should explain the transaction rather than leave the third-party funding arrangement unresolved.
Treat the issue as an AML concern requiring formal review. Any decision on the relationship or affected engagement should wait until the MLRO or nominated officer has reviewed the facts, with client contact kept neutral. The AML record should explain what failed to add up and why the final decision was reached.
References and Source Material
- HMRC, Risks common to accountancy service providers
- Money Laundering Regulations 2017
- HMRC, Economic Crime Supervision Handbook (ECSH33358 – Source of funds and source of wealth)
- CCAB, Anti-Money Laundering and Counter-Terrorist Financing Guidance for the Accountancy Sector
- ICAEW, Anti-money laundering: knowing a client’s source of wealth
- HM Treasury, Money Laundering Advisory Notice: high-risk third countries
