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Source of Funds and Source of Wealth – are we asking for too much?

  • Introduction;
  • Differentiating between SoF and SoW;
  • Why we ask for this information;
  • When do we ask for this information;
  • Categories and common example of SoW;
  • SoW and SoF in the context of Customer Risk Assessment;
  • How to treat SoF/SoW in the context of On-Going Monitoring;
  • Conclusion;

Introduction.

Compliance Officers and practitioners are often faced with the conundrum of how to request Source of Funds (‘SoF’) and Source of Wealth (‘SoW’) information to a prospective customer/client in a manner that provides comfort, discretion and confidentiality.

Inasmuch as local Anti-Money Laundering regulations request both SoF and SoW in certain scenarios (there are specific situations where SoF/SoW is not always required to be collected/corroborated), the ‘art’ of obtaining this sensitive information remains a highly subjective matter. Within this context, Financial Institutions (FIs) and TCSPs (Trusts and Company Service Providers) often adopt different approaches and depending on the client and his/her status, there could also be several intermediaries involved who would obtain and disseminate said information themselves (particularly prevalent in the context of high-ranking Politically Exposed Persons).

Notwithstanding the fact that details are at times hazy and ambiguous (with some clients, on rare occasions, choosing not to disclose information), this article will aim to elucidate the ‘why’, the ‘what’ and the ‘purpose’ of this exercise…and the reason it is so crucial in building up a ‘circle of trust’ between the client and the FI/TCSP.

Differentiating between SoF and SoW.

 For clients that are still grappling with these concepts, they can be explained very clearly as follows. Whenever a request for information pertaining to SoW is made, DWP would seek to identify how a customer accumulated his/her wealth. This relates to the entire economic activity that is generated throughout a person’s lifetime.

On the other hand, Source of Funds will provide the FI/TCSP with an understanding of how and for what purpose an account is going to be funded. This roughly translates as dissecting what ‘source of funding’ will be used to commence this account opening, business relationship or occasional transaction. It is not directly related to the Source of Wealth in that the origin of the funds (which is specific in nature) is what really needs to be surmised and identified.

 Why do we ask for this information?

Having a thorough and comprehensive understanding of the SoF and SoW of any particular customer/client will allow an FI or Service Provider to better comprehend the client’s wealth and (more importantly) funding sources – which will in turn ensure that the customer’s risk is assessed appropriately. To note that FIs and TCSPs should adopt a Risk-Based approach (as per FATF Recommendations) with respect to the amount of information collected for SoW and SoF purposes. The type of customer and the risk rating often entails different forms of Due Diligence.

Obtaining SoF and SoW helps DWP for the following reasons:

  • Understanding the customer’s background and financial history allows us to construct a better picture of his/her needs and business plans. We will be able to comprehend expectations based on either previous success in a particular field or embrace the start-up nature of a project.
  • In this connection, a comprehensive appreciation of what it took you to get to this position allows us to align ourselves thoroughly with your projections and company vision.
  • We will be in a better position to understand where and how capital was generated. This would serve us in good stead whenever we are faced with an Internal Audit or inspection by any Relevant Authority. Local Maltese Authorities have also placed an emphasis on being able to ascertain how and when capital was accumulated throughout one’s lifetime.
  • Throughout on-going monitoring (a legal necessity especially within the context of business relationships), having sufficient SoF and SoW information will allow us to identify any transactional activity which might not be in line with what would be reasonably expected based on pre-collated information.
  • To this end, we would not only be protecting our reputation as a service provider, but we’d serve as a second line of defence in case you are unaware of any transactions (inflows & outflows) or scams of which you have no knowledge of – but are discovered throughout the course of Transaction Monitoring.
  • As subject persons, we are under an obligation to assess transactions (commensurate to the size and nature of our business) and report any potentially suspicious activity – and this is in line with all local AML Regulations. It certainly helps if the information we had obtained in the first place was sufficient as it would help any unit formulate a comprehensive understanding.

 When do we ask for this information?

Each FI’s and TCSP’s AML Manual (Policies and Procedures) should normally state that SoW Due Diligence should be conducted either at account opening (or at on-boarding) and assessed periodically (e.g. annually) commensurate to the Risk given by the Compliance and AML Unit.

What is important to consider is that the Due Diligence exercise should be exhaustive enough to sufficiently create a coherent picture of the customer (which more importantly can be reviewed & understood in a logical and transparent manner by any Relevant Authority).

Similarly, SoF information should be gathered in accordance with the AML Manual (considering also the Risk Based Policies & Procedures). The Compliance Officer will seek to understand the ‘origin’ and ‘means of transfer’ of any currency which is deposited with the FI/TCSP – taking cognisance of the ‘method’ used for that transfer.

In other words, SoF will relate closely to the ‘nature and purpose’ of the account opening (or e.g. establishment of a business relationship). Moreover, SoF in particular should involve (1) the amount/value being transferred (2) the method of transfer (3) remittance and origin and (4) country from where the funds originated.Categories and Common

Examples of Source of Wealth.

As already hinted, Source of Wealth information is at times bordering on the ‘personal’ and ‘high confidential’. Obtaining both a thorough understanding and description as to the economic, business and/or commercial activities that generated the customer’s overall net worth is at times often difficult to holistically ascertain. (This is why at times, it is often necessary to verify Source of Wealth statements by asking for supporting documentation).

Within this context, it must be stated that the purpose of SoW information is not to verify an exact and precise amount of the overall net worth. Rather, any FI and TCSP should be comfortable enough to assess the wealth generating activities. To this end, this is often presented in a form which is filled in by the customer.

Some common examples of SoW ‘inter alia’ include:

  • Family Wealth (very prevalent in SoW declarations, which generally speaking, includes inheritance, family gifts, pension or retirement scheme pay outs.
  • Personal Backgrounds (e.g. casino or lottery wins, any sales from real estate, antiques, artworks or any other activity that has augmented the SoW).
  • Income and Business Activities (this is often linked to business ownership, operations, employment income, any other business activity etc…). Salaries, Bonuses and Commissions are often included here and should be declared.
  • Investment Activities (e.g. income from any sale of shares, real estate, intellectual property etc.).

SoW and SoF in the context of Customer Risk Assessment (CRA).

More often than not, the Compliance/On-Boarding Officer will inform the Customer that the purpose of gathering this information is to also help construct a ‘Client-Specific’ Risk Profile. This information is therefore factored into a Customer Risk Assessment. Once SoF and SoW Due Diligence has been carried out, the assessment of the customer’s risk to the FI/TCSP and the corresponding Risk Rating should reflect each of the enquiries in a holistic manner.

In the course of compiling the Customer Risk Assessment, the Compliance Unit will factor in:

  • Whether or not the overall net worth of the Customer has been properly documented in the On-Boarding process. (Also applicable to Source of Funds).
  • Whether the on-going SoW/SoF of the customer have been sufficiently corroborated.
  • Any inconsistences in the SoW and SoF information.
  • Any adverse media ‘hits’ on the Customer.
  • Checks on the Customer’s Reputability and Integrity.
  • Any SoW/SoF connections to a High Risk or Non-Cooperative Jurisdiction.
  • Whether the Customer is (or becomes) a PEP.

How to treat SoF/SoW in the context of On-Going Monitoring

The AML/Compliance Unit are often tasked with ensuring that SoW (where applicable) declarations are reviewed and updated throughout the course of the business relationship (although this could also be subject to period reviews or even triggered by changes in customer circumstances (e.g. change in residence or status).

The level of corroboration of SoW and SoF information during a review process should be risk-based and consider inter alia:

  • Any material changes or new events affecting the on-going SoW or SoF of the customer which had been obtained at on-boarding stage;
  • For how long the customer been a client of DWP;
  • Any new risk indicators;
  • Any previous transaction monitoring enquiries;
  • Whether the account records are in line with the expected activity which was earlier described in previous SoF/SoW declarations.

Concluding Remarks.

Are we asking for too much? If the customer collaborates and fully understands the essence of the on-boarding process (or request for updated information), then any SoW and SoF exercise will be a seamless process. Notwithstanding the ubiquitous clash between privacy and compliance, it is never too much to ask for accurate and up-to-date information. Inasmuch as Clients have a duty to provide such information (for wholly legitimate reasons), any FI and TCSP is equally obliged to protect both its’ reputation and the credibility of the jurisdiction from where it operates.

As previously hinted, trust is at the forefront between a Service Provider and a Customer and the information presented should display a level of maturity & honesty which ultimately will need to stand the test of time.

Disclaimer*

The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet with up with any of our representatives to seek further information, please contact us for an appointment.

 

Keywords: Source of Funds, Source of Wealth, Customer, On-Boarding, Risk Management.

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Author of the post

Dr. Michael Calleja

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