On 7 August 2020, the Wolfsberg Group, published new guidance targeted at private banking and wealth management divisions within financial institutions (FIs) to support the undertaking of source of wealth (SoW) and source of funds (SoF) checks.
Based on the principles of the application of a risk-based approach (RBA), different customers will require a different level of due diligence (DD) for SoW and SoF. Ultimately, FIs need to put controls in place commensurate to the risks identified with their customer base to gain comfort that their customers’ wealth and funds do not emanate from illicit activity.
Source of Wealth
SoW is the monetary value which contributes to the customer’s overall net wealth. This may stem from, for example: family/generational wealth or personal circumstances (such as inheritance or lottery wins); income/revenue-based wealth (such as wealth gained through employment or business performance); and investment-based wealth (such as income from the sale of property, securities or patents).
When capturing SoW information, FIs should include an estimate of the customer’s net worth as well as information pertaining to how this net worth was derived. FIs should query any significant gaps in their chronology of wealth accumulation or any material inconsistencies which challenge the plausibility of the estimated net worth. The SoW information captured by an FI should clearly articulate how the customer has acquired their wealth and be available for audit/review if required.
Applying an RBA, FIs may corroborate the SoW information collected. Corroboration of SoW information should be sought from independent, publicly available, reputable sources or supplied by reputable third parties (e.g. company registries, banks, accountants, lawyers or notaries), and FIs are encouraged to critically evaluate the reliability of any evidence obtained.
Source of funds
SoF generally refers to the origin of the funds used to service the account.
FIs should understand, and document as required, how the funds were generated; how they are being transferred into the account; who are they being transferred by; and from where. Further, accounts which are serviced by third parties with no apparent link to the customer should be subject to increased levels of DD.
The type of evidence which can be used for SoF corroboration (if deemed required) is dependent on the SoF itself, however FIs should keep in mind that in some circumstances this may be the same as SoW. For example, a customer’s SoW may be a sale of property, and then may also be using funds from the property sale to service their account. In this example, whilst the source is the same, the corroboration evidence may be different (i.e. the land registry to validate SoW and receipt from a wire payment via solicitors showing fund transfer from the sale to validate SoF).
Practical considerations and impacts on FIs
SoW DD should be conducted by the FI at customer on-boarding and throughout the relationship, including at periodic and trigger-based reviews (such as changes in the customer’s profile, transactional activity or product uptake). SoF DD should also be undertaken at regular intervals, whereby the FI should understand the source of initial deposit and also enquire about subsequent account funding.
If (at any point), the FI considers that the SoW or SoF information and/or evidence does not meet the standards of the firms policies and procedures, it should take action which could (at the firm’s discretion) include: limiting product usage; applying enhanced due diligence (EDD) measures; or denying onboarding/exiting the relationship.
There may be exceptional cases where the FI’s internal SoW/SoF standards are not met, such as where long-term customers no longer maintain sufficient information/evidence or where local customs/practices prevent information exchange. In these instances, FIs should document all steps taken to obtain (and corroborate, if required) SoW or SoF, and capture a tailored risk acceptance narrative explaining why the FI is comfortable to open/maintain the account in this specific scenario.
In addition to these considerations, FIs should also take note of the following to support implementation of a robust to SoW/SoF DD framework:
- Ensure policies and procedures clearly indicate the information capture and corroboration requirements for the FI for SoW and SoF at onboarding and ongoing review.
- Include examples in procedures/guidance of acceptable narratives and corroboration evidence for SoW and SoF, especially where wealth and funds emanate from the same source.
- Provide training to staff to help them to understand the application of a RBA in the context of SoW and SoF understanding and corroboration and the need for critical evaluation.
- Implement specific customer segments in anti-money laundering transaction monitoring to monitor for activity associated with private banking/high wealth customers.
- Engage senior management via escalation channels in cases where SoF/SoW does not meet the FI’s standards or material discrepancies have been identified which cannot be resolved.
- Subject SoW/SoF DD (including any risk acceptances which have been applied) to regular audit/independent review.