Identifying an Individual's Source of Wealth
AML Services Manager
Wealth is often considered a measure of success or status. However, during the client due diligence process for regulated transactions, it is crucial to identify the source of an individual's wealth. This information is an essential piece of the puzzle.
Source of wealth due diligence checks will indicate the overall volume of wealth the client would be expected to have and a picture of how the person acquired such wealth. Once a fee earner has this information, an alignment should be drawn between the source of funds for the transaction and the nature of the transaction being undertaken for that client. Ultimately, does it make sense? Are the ultimate origins clean and consistent with risk and the transaction?
In this blog, I want to explore the key factors that can be considered when identifying an individual's source of wealth: personal and professional background, financial statements and tax returns, and public records and reputation. It’s worth bearing in mind, that depending on the client and their circumstances, the evidence you look to obtain will be different. Evidence could include any reliable documents or information that provide a level of comfort as to the client's wealth level and where it originated from.
Only the rich have wealth
Many people believe that wealth means having a lot of money, but this is actually a common misunderstanding. Every individual possesses a unique financial profile and wealth, regardless of their socioeconomic status. The difference is merely the varying levels of wealth that each person holds.
What is source of wealth?
The Legal Sector Affinity Group Guidance document states that:
The source of wealth refers to the origin of a client’s entire body of wealth (i.e., total assets).
SoW describes the economic, business and/or commercial activities that generated, or significantly contributed to, the client’s overall net worth/entire body of wealth.
You should seek to answer the question:
Why and how does the individual have the amount of overall assets they do – and how did they accumulate/generate these?
Source of funds and wealth are distinct concepts
It's important to understand that there are two distinct concepts: Source of Funds and Source of Wealth. Source of Funds means the specific funds used for a particular transaction and where they originated from. The term "Source of Wealth", on the other hand, means the origin of a client's total wealth and assets, encompassing more than just one transaction.
It's essential to remember that the purpose of gathering information about a client's Source of Wealth is not to determine their net worth. Instead, it's to better understand the activities that have contributed to the accumulation of their wealth and to assess any potential risks associated with these activities.
Examples of sources of wealth
Family and generational wealth and personal background - examples family wealth, inheritance, gifts, divorce settlements, pension etc
Income, Revenue and business activities - examples employment status, salary, bonus, commission, dividends
Investment activities - examples include selling and purchasing real estate and other acquisitions of investments, businesses and shares.
Personal and Professional Background
One of the main factors in identifying an individual's source of wealth is their personal and professional background. An individual's background can provide valuable insight into their level of education and career. By examining an individual's CV, LinkedIn profile or by talking to them directly about their background and life, you can gain insight into their professional experience, education, and business ventures. Additionally, researching an individual's business ventures or investments can provide insight into their sources of income.
Always be mindful that a person's CV and LinkedIn profile are created and editable by themselves and independent verification on a risk-based approach may be required.
For example, an individual with a background in finance may have a higher income than someone in hospitality. Similarly, an individual who has founded or invested in successful businesses may have a higher net worth than someone who has not. However, it is essential to note that an individual's background does not always accurately reflect their current sources of income and overall worth. For example, an individual may have changed careers, invested in a new business venture, or received a large inheritance or divorce settlement. The publicly disclosed profile may not reflect these examples.
Financial Statements and Tax Returns
Another factor that could give further insight into identifying an individual's source of wealth is their financial statements and tax returns, depending on the client. These documents can provide a comprehensive overview of an individual's income and assets, including salaries, bonuses, dividends, and capital gains. By analysing financial statements and tax returns over time, you can build a picture and determine whether an individual's income is steady, fluctuating, or derived from one-off sources. Additionally, examining an individual's tax returns can provide insight into their investment strategy and whether they have engaged in tax avoidance or fraud.
Public Records and Reputation
Public information and reputation are further factors in identifying an individual's source of wealth, including media coverage, legal disputes, public filings, credit score and adverse media.
Finally, an individual's reputation in their industry or community can provide insight into their level of success and sources of income.
In conclusion, identifying an individual's source of wealth requires a comprehensive analysis of their personal and professional background, financial statements and tax returns, and public records and reputation.
By examining these factors, you can gain insight into an individual's income sources and determine whether they are legitimate or potentially fraudulent. It is essential to conduct this analysis carefully.
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