The top six misconceptions surrounding Source of Funds and Source of Wealth for law firms.
AML Services Manager
All regulated firms including, including law firms, have a critical role in Anti-Money Laundering (AML) compliance, and they must have a clear understanding of Source of Funds (SOF) and Source of Wealth (SOW) concepts.
The Legal Sector Affinity Group (LSAG) guidance defines the source of funds as follows:
"Source of Funds refers to the funds that are being used to fund the specific transaction in hand – i.e., the origin of the funds used for the transactions or activities that occur within the business relationship or occasional transaction."
Whereas the source of wealth is defined as follows:
“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.”
However, misconceptions surrounding SOF and SOW in the legal industry could result in non-compliance and reputational risks. In this blog post, we will discuss the top six law firm misconceptions around SOF and SOW.
Misconception 1: SOF and SOW are the Same
One of the most common misconceptions surrounding SOF and SOW is that they are the same thing. SOF refers to the origin of the funds a client wishes to use to fund the specific transaction, while SOW refers to the origin of a customer's overall wealth. Understanding the difference between these concepts is critical in AML compliance. Law firms must ensure that they verify both SOF and SOW during the client onboarding process and ongoing due diligence.
A key feature of these checks is focused on truly knowing the client and ensuring that the funds in their possession to be used in a specific transaction are not derived from criminal activities. To be comfortable that this is the case and ultimately truly know a client, both SOF and SOW must play a part to varying degrees based on the risk.
A client could produce the same evidence concerning numerous transactions. SOW can help mitigate this risk. SOW provides a level of protection and mitigates the risk of mixing funds; this is where a criminal will mix ‘dirty’ money with ‘clean’ money to make it appear legitimate.
Remember, dirty money cannot be ring-fenced. The whole pot is contaminated, for want of a better word.
Misconception 2: Only Large Transactions Require SOF and SOW Verification
Another common misconception is that SOF and SOW verification is only necessary for large transactions. However, this is not true. Transactions of any size can be used for money laundering or terrorist financing. Therefore, law firms must apply a risk-based approach and verify the SOF and SOW for all transactions, regardless of the amount. The question should be more focused on the level of risk attached to the transaction and the information known about the client when assessing SOF and SOW, irrespective of the amount.
Remember, the Proceeds of Crime Act has no general de minimus for money laundering, terrorist financing or fraud.
Misconception 3: SOF and SOW are Not Relevant for Legal Services
Some law firms may believe that SOF and SOW are irrelevant for legal services; this may be the case in certain services. Understanding a client's financial situation often becomes integral to the transaction, especially in many unregulated departments such as family and private client work. In transactional work, Law firms must verify the SOF and SOW of their clients, especially in cases where they are considered high-risk. For example, they are handling large sums of money or assets. Solicitors must also conduct ongoing due diligence to ensure that the origin of their client's funds and wealth is legitimate and that their understanding remains true and accurate. An example where the risk could increase is introducing a third party at the 11th hour.
Remember, you can ask as many questions as needed to be comfortable making your assessment. Tipping off is not a risk until such a time that a disclosure to your Money Laundering Reporting Officer or National Crime Agency has been made.
Misconception 4: Clients are Not Responsible for Providing SOF and SOW Information
Clients may believe it is the law firm's responsibility to determine the SOF and SOW for their transactions. However, clients are legally obligated to provide accurate and complete information about the origin of their funds and wealth. Law firms must obtain and verify this information on a risk-based approach, but clients must provide or support the Law firm in getting this in the first place. Failure to provide accurate SOF and SOW information can result in a firm declining to act, transaction delays, or even legal action.
Therefore, clients must be aware of their responsibility to provide accurate and complete information about the source of their funds and wealth.
Remember, explaining to clients why we make these enquires beyond blaming legislation can get them on board with the underlying purpose.
Misconception 5: SOF and SOW Verification is a One-Time Process
Some law firms may believe SOF and SOW verification is a one-time process. Law firms must conduct ongoing due diligence on their clients to ensure their source of funds and wealth remains legitimate. They must also be alert to changes in their clients' financial activities. Law firms can protect their clients and themselves from financial crime and regulatory penalties by conducting ongoing due diligence.
Remember, SOF is unique to each transaction.
Misconception 6: UK Bank Account Myth
One of the most common misconceptions around SOF is the UK Bank Account myth. This myth suggests that having a UK bank account is sufficient evidence of legitimate SOF. This myth is not accurate. A UK bank account does not provide any information about the origin of the funds. Customers can deposit funds into a UK bank account that are the proceeds of criminal activity, such as money laundering or terrorist financing. Therefore, you cannot rely solely on a client's UK bank account that is in funds as evidence of legitimate SOF.
Remember, you do not know if the bank was suspicious of the account and submitted a suspicious activity report to the NCA.
Law firms must clearly understand Source of Funds (SOF) and Source of Wealth (SOW) concepts and ensure that they verify both during the onboarding process and throughout the life of the transaction. Misconceptions around SOF and SOW can lead to non-compliance and reputational risks.
Law firms must educate their employees and clients on the importance of SOF and SOW and ensure that all transactions are appropriately vetted and verified. Firms must have robust procedures to identify and verify the source of funds and wealth for all transactions, Law firms must clearly understand Source of Funds (SOF) and Source of Wealth (SOW) concepts and ensure that they verify both during the onboarding process and throughout the life of the transaction.
Misconceptions around SOF and SOW can lead to non-compliance and reputational risks. Law firms must educate their employees and clients on the importance of SOF and SOW and ensure that all transactions are appropriately vetted and verified. Firms must have robust procedures to identify and verify the source of funds and wealth for all transactions, including providing staff with practical guidance and baseline policies supporting employees.
Firms must also ensure that the SOF and SOW checks are documented, including any consideration and rationale. By doing so, Law firms can protect themselves, their employees and clients from financial crime, creating a safer world for us all to live and work in. Firms must also ensure that the SOF and SOW checks are documented, including any consideration and rationale. By doing so, Law firms can protect themselves, their employees and clients from financial crime, creating a safer world for us all to live and work in.
Subscribe to our newsletter
Subscribe to our monthly newsletter for recaps and recordings of our webinars, invitations for upcoming events and curated industry news. We’ll also send our guide to Digital ID Verification as a welcome gift.