Accurately identifying the Source of Funds and Source of Wealth is one of the most critical and often misunderstood elements of Enhanced Due Diligence (EDD) in Anti-Money Laundering (AML) compliance.

While they may sound similar, these two concepts serve distinct purposes in customer risk assessments, and misunderstanding the difference can lead to incomplete profiles, missed risks and regulatory issues.

Source of Funds vs. Source of Wealth: The Core Distinction

At the most basic level:

• Source of Funds refers to where the specific money used in a particular transaction originated. It explains the immediate origin of the funds involved.
• Source of Wealth refers to how an individual or entity accumulated their overall assets and financial standing over time. It builds a broader picture of their financial history and legitimacy.

Understanding both is essential, particularly in higher-risk scenarios that require enhanced due diligence.

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Common Pitfalls When Documenting Source of Funds and Source of Wealth

A recurring issue in customer files is the tendency to confuse transaction flows with true sources.

For example:

• Capital injection
• Loan from a group company
• Transfer from a related party

These explanations describe how money moved between parties but fail to explain where the money originally came from.

The immediate flow of funds is not enough; you must understand and document the underlying source.

Similarly, a one-off investment return or a large fund transfer is not sufficient to establish a customer's Source of Wealth.

The question is not just where the funds are today, but how the individual or company built their financial position over time.

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Why This Matters for Enhanced Due Diligence

When conducting enhanced due diligence, compliance officers are not simply collecting paperwork, they are building a risk profile. A strong profile answers key questions:

• Does the customer's story make sense?
• Is there a logical connection between the customer's business, employment or investments and the funds they use?
• Are there any red flags that require deeper scrutiny?

Both Source of Funds and Source of Wealth need to align, be clearly documented and pass the professional judgment test.

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Challenges in Practice

One major challenge is obtaining accurate Source of Funds information from existing clients during remediation exercises. Many mistakenly lean too heavily on open-source data - which may be outdated, incomplete or inaccurate. While open-source information can be useful for verification, the primary confirmation must come directly from the counterparty. Only they can truly attest to the origin of their funds or the accumulation of their wealth.

Another challenge is that for professionals new to anti-money laundering compliance, the differences between Source of Funds and Source of Wealth are easy to confuse. Targeted training and clear internal guidelines can help avoid these common mistakes.

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Best Practices to Strengthen Your Approach

• Always distinguish between fund movement and fund origin during reviews.
• Request clear evidence for both Source of Funds and Source of Wealth - for example: payslips, business ownership documentation or inheritance records.
• Use open-source verification carefully, as a secondary step, rather than a primary source.
• Train your teams regularly to understand and apply the differences accurately.

Accurate documentation of Source of Funds and Source of Wealth is not just a regulatory requirement; it's a vital tool for uncovering hidden risks and protecting your organization from financial crime.

Professional judgment, client engagement, and a clear understanding of these key concepts are essential for every compliance team aiming to raise the standard of their enhanced due diligence process.

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