Source of Funds (SOF) Vs Source of Wealth (SOW): When is Which Necessary?

In order to shield your business from risk and stay compliant with Anti-Money Laundering and Combating the Financing of Terrorism regulations, you must understand your customers. And while it’s easy to get lost in the who, what and where, it’s easy to often miss a very crucial question - how?

Source of Funds (SoF) and Source of Wealth (SoW) checks are essential for a strong AML/CFT framework as they provide invaluable information about your customer and their financial history and health. However, knowing when these proofs should be requested is essential for maintaining a good customer experience while also preemptively avoiding risk and preventing financial crime.

In this article, I’m going to discuss both Source of Funds and Source of Wealth in more detail, discuss their importance in the finance world, and offer some advice on how to seamlessly implement these proofs into your KYC/KYB framework.

Understanding Source of Funds (SOF) 

Source of Funds or SOF proofs are requested by financial institutions in order to establish the origin of a specific transaction. This is done to ensure that said transaction can be traced to a legitimate and legal source, thus verifying that the transaction itself is unlikely to be connected to financial crime.

Example: If a person has only made small deposits for five years and then suddenly wants to wire millions of euros overseas, the bank needs to know how this person suddenly acquired these funds. 

When is a Source of Funds check required?

Source of Funds checks will most commonly be used as part of transaction monitoring. For example:

• If a customer suddenly makes uncharacteristically large transactions (as described above)
• If a customer wants to wire large funds internationally
• If a customer wants to use their funds for investment purposes

However, Source of Funds checks can be made at the very start of a bank’s relationship with their customer as well, especially if they’re considered a high risk. Therefore, private banks and wealth managers might request both a Source of Funds and a Source of Wealth check during onboarding in some cases.

On the other hand, SOF can also be used to identify a customer in cases of Simplified Due Diligence in some cases (Source of Funds as evidence in the FCA handbook). Therefore, the specifics of how and when SOF is required will depend on the jurisdiction as well as the risk appetite of the financial institution in question.

Why are Source of Funds checks important?

Establishing the Source of Funds of a given transaction lets financial institutions detect whether a customer is trying to process and legitimise illegal funds, the final stage of money laundering.

Example: In 2024, upwards of £400m was invested in real estate in the UK. However, had the banks in question performed a SoF check, they would have seen that the funds were illegally obtained.

While not always at this large of a scale, similar crimes are rather common. And financial institutions that are caught processing such transactions without performing Source of Funds and similar Customer Due Diligence checks risk non-compliance fines, lawsuits, and reputational damage.

Examples of Source of Funds

To prove one’s Source of Funds, a customer must provide documentation relating to their financial health. For example:

• Bank statements in regard to their salary
• Property sale documentation if they’ve sold real estate recently
• Inheritance documentation
• Investment documentation

Regardless of the exact documentation that is asked/provided, it’s essential that there is a clear paper trail that can verify the funds the customer is wanting to use.

Understanding Source of Wealth (SOW)

Source of Wealth or SOW is like Source of Funds but larger in scope. Namely, instead of focusing on a single transaction, Source of Wealth aims to verify a customer’s entire accumulated wealth. 

Example: If onboarding an ultra-high-net-worth individual, the bank has to determine the Source of Wealth to see how this individual made all of their money.

When is a Source of Wealth check required?

Source of Wealth checks are often required when dealing with high risk clients and performing Enhanced Due Diligence. SOW is especially common during onboarding, as the financial institution in question needs to verify that the customer has earned their wealth in a legitimate and legal way. For example:

• Opening an account for a high-net-worth or ultra-high-net-worth individual
• Opening an account for a Politically Exposed Person (PEP) or an individual closely related to one (RCA)
• Setting up trusts and/or off-shore accounts

However, SOW can also be performed as part of transaction monitoring along with SOF. Therefore, while the two are different in scope, they can often be performed at the same time.

Why are Source of Wealth checks important?

Just like Source of Funds, Source of Wealth checks help financial institutions flag and prevent financial crimes such as money laundering or the financing of terrorism. They can also help catch threat actors even if they aren’t committing financial crimes currently.

Example: In 2011, a trust benefitting the sons of a PEP purchased a mansion. At a first glance, the Source of Funds for the purchase was from a loan. However, upon further examination, authorities realised that the loan was constantly extended with no payments necessary, leading them to believe that the loan was actually a bribe.

As seen in this example, even if an individual transaction seems legitimate, the person in question can still be implicated in financial crime. For this reason, Customer Due Diligence often calls for both a SoF and SoW check.

Examples of Source of Wealth

To verify their Source of Wealth, customers can provide a wide range of documents, depending on how they have made the majority of their income. For example:

• Bank statements regarding their salaries
• Proof of business ownership
• Sale documents regarding real estate or other assets, such as stock
• Documentation regarding their pension fund
• Tax declarations
• Inheritance records 
• Wealth statements regarding off-shore accounts, companies or trusts
• Transaction receipts in cases of money made from gambling, contests, or similar activities

The most important fact is that the Source of Wealth can within reason explain a customer’s current financial health. For example, if a person is only registered as a waiter and sends in their payment slips as the Source of Wealth but wants to withdraw two million euros, the bank must look into how they have come into this wealth.

Key differences between Source of Funds and Source of Wealth

Source of Funds and Source of Wealth are tightly connected concepts, with both common being necessary when opening an account, making large and/or suspicious transactions, or generally working with high risk clients.

However, the two do differ in scope and serve slightly different purposes. Namely, SoF is to ensure that a specific transaction is being made via legitimate means. SoW is to ensure that a person’s overall wealth was achieved through legitimate means.

But both are essential for creating a robust KYC/KYB framework and are used alongside different background checks, verification methods and monitoring practices in order to fight financial crime.

Conclusion

To answer the titular question, Source of Funds and Source of Wealth checks are to be used whenever a customer’s financial health is reasonably put under suspicion, whether that be due to unusual transactions or their risk profile.

As such, SoF and SoW are key parts of a strong Customer Due Diligence framework and are essential for remaining compliant with AML/CFT regulations. If you would like to learn how to more easily stay compliant and ensure that your business can perform KYC/KYB thoroughly every time, get in touch with Atfinity by booking a demo.