Customers often face obstacles when submitting Source of Funds (SoF). Many ask themselves: “What does Source of Funds mean?” and “How does it differ from Source of Wealth”? In this article, we provide you with a clear definition of the term and explain what documentation is needed.
What is the Source of Funds?
Source of Funds (SoF) is the origin of an individual’s funds upon the commencement of a business relationship/transaction, while Proof of Sources of Funds (PoSoF) is one or several documents providing information on the origin of such funds, covering all deposits made via the funding method in question.
Why is Source of Funds important?
There are several reasons why it’s important to establish Source of Funds. First, it confirms that the individual in a given transaction is authentic. Second, it enables businesses to ensure safety, fight fraud and avoid being linked to illegal activity. Third, it’s one of the mandatory Anti-Money Laundering (AML) requirements that must be filled before carrying out certain transactions. Plus, SoF is closely observed by jurisdictional regulators when deciding on the eligibility of a business to operate as a financial company.
Source of Funds in AML
SoF is a natural component of any AML procedure relating to financial transactions. However, if companies fail to establish SoF as part of their AML procedures, they leave themselves exposed to fraud, reputational damage, and substantial fines. In particular, SoF has to be verified when a customer’s finances are in question or in cases that pose a higher risk from an AML perspective.
Examples of Source of Funds
Whether it’s a bank determining the mortgage eligibility of a prospective homeowner, or a business seeking to weed out illicit funds coming from a suspicious customer, there are multiple types of SoF documents that can be requested:
- Financial Documents—Complete tax returns and audited financial statements;
- Business Documents—Official documents proving the ownership of the company, company registration documents, stock records, promotional materials, website addresses, any records proving the sale of a business, and valuation of a business;
- Investments—Proof of investment/securities accounts over the past three years, bank statements, and stock certificates;
- Employment—Contracts, licenses, and reference letters proving employment;
- Real Estate—Documents on property mortgage, real estate purchase/sale, valuation of owned real estate, lease documents on property producing lease income;
- Other Source—Documentation on divorce, inheritance, lawsuits, and gifts.
All of the above documents have to explain the source of funds in detail and from different angles. For example, if the customer claims that their funds came from as a “gift,” a simple note from the person who “gifted” it will not be enough.
This individual will also have to submit:
- Documented proof of funds transfer;
- A personal statement explaining the details and circ*mstances of how the gift was presented;
- Documents proving the source of funds of the individual who made the gift;
- Tax return on the gift.
In any case, source of funds verification is an extremely valuable aspect of client onboarding, and it is in your power to make it quick and effortless for users.
Difference between Source of Funds and Source of Wealth
Source of Funds (SoW) is the origin of funds or assets used in a specific business transaction between a client and financial institution, while Source of Wealth (SOW) looks at the total assets of parties participating in the transaction.
You can learn more about Source of Wealth by reading our guide.
