In this essential compliance deep dive, Oliver welcomes Jack Knott to SmartSessions to unravel the complexities of Source of Funds (SoF) and Source of Wealth (SoW). They tackle the staggering risk of money laundering—estimated at over £100 billion in the UK—and the colossal inefficiency of traditional, paper-based verification, which Jack describes as looking for a "needle in a haystack."
Learn why the SRA is pushing for modernisation and how SmartSearch's new, FCA-regulated electronic solution is designed to give firms a competitive advantage. Jack explains how the tool accesses over 90% of banking data, intelligently prioritises high-risk transactions, and provides a robust audit trail, ultimately saving conveyancers valuable time and drastically reducing the risk of human error and devastating reputational damage.
Find out how electronic tools improve, rather than replace, the essential human decision-making process in compliance.
Oliver Telfor: Welcome to SmartSessions, a podcast by SmartSearch where we talk about all things AML, RegTech, and everything that fits into our world. Today we're gonna talk about source of funds, and we've recently released a product that's gonna address this need for a lot of our clients, and potentially prospects. Joining me today is Jack, so if you introduce yourself and we'll get through source of funds.
Jack Knott: Yeah, of course. So I'm Jack Knott, I'm a key account sales executive here at SmartSearch.
Oliver Telfor: So let's start at the beginning. For those who don't know what Source of Funds is or what Source of Wealth is, can you give us an overview of what it is, how clients use it, and actually how people use it.
Jack Knott: Yeah, yeah. More than happy to do so. So Source of Funds, essentially breaking it down as to where did the client money come from. So if someone's purchasing a property for 300 grand, how have they got this money to begin with? Sure. Source of Wealth goes a step further, essentially identifying how did this person come to have this level of wealth? What was their career, business interests? How did they earn it? Through an inheritance? How did they come to a position, employment, where they could purchase this? So I'd say the way to describe it is the Source of Funds is this transaction, and the Source of Wealth is the history of how it came to that place.
Oliver Telfor: Fine. Easy to remember. So from a traditional perspective and how this works, obviously those slightly differ. Can you talk through what that traditional method looks about and then what our solution is to embed into that?
Jack Knott: Yeah, definitely. So I think the best way to start with it from a traditional standpoint, start with an analogy and it's looking for a potential needle in a haystack. It is obtaining dozens and dozens of pages over months of bank statements. And it is then for the conveyancer to sift through it to potentially find the said needle. They've gotta look through everything with a fine-tooth comb and identify if there's a potentially risky transaction or anything that might be identified as a red flag. So from a time consuming basis, it's exorbitant on a yearly basis. You've got high level members of the team that will be looking into this, or there'll be a case that they're delegating it to junior members of staff who may not have the experience or the knowledge to identify said red flags. So this is where human error becomes a big factor and a big risk associated with this. It was a growing problem for a long time and the SRA have basically come out with a recommendation that modernisation is needed. I think they don't have the specific figures. They reckon roughly about 25% of firms within the UK are still utilising the traditional methods of verification. And essentially what this is, is that the issues that I've identified have become more and more prevalent. The National Crime Agency in 2024 has identified that roughly over a hundred billion pound is laundered through criminal proceeds within the UK. So the need is greater now more than ever for source of funds to be done effectively, efficiently, and anchored correctly. This is where with the SRA’s recommendation for modernisation is a need for electronic verification tools to be put in place.
Oliver Telfor: So I guess with all of that, and myself and Joe spoke about this topic as well in terms of SmartSearch, yeah, we're an AML provider. But actually what we are also here to do is to give companies a competitive advantage. We can help our operations flow by taking, as I said, that 25% of businesses are still using traditional methods, freeing them up to do different things, paying you to do X, not Y. So in terms of our solution, can you talk us a bit about what our Source of Fund solution is and how that will then ultimately benefit those businesses that do the traditional methods, but also if there's businesses that are using source of funds in another way, how it might differ to that and how it benefits them as well.
Jack Knott: Yeah, definitely. I think it's very exciting that we're gonna be bringing in our analytics to assist us with this key requirement. One just due to the vast benefits and enablements that it puts in place, both for our users, but also from a client journey perspective within our platform. Now having a Source of Funds feature essentially establishes us as an all-in-one centralized solution to our clients. When it comes from starting the check from an AML credit perspective, doing the ID verification and finalizing from a source of funds element, this is what's gonna be establishing complete compliance and adherence to the money laundering regulations. Specifically Reg for 28. Reg 33 is establishing a necessity of compliance that is required from all of our clients. The benefits when it comes to Lytics as a provider in this space is that one, they're FCA regulated. What this means is that they've got one of the strictest regulatory bodies in place to monitor their actions and ensure there is complete compliance with their expectations. It also means that they're able to access roughly over 90% of all banking data in a legal, unprotected format. The way they've structured their checks is that it mirrors our own from our SmartDoc journey where a link is provided and it's completed through a browser. No app is needed to complete this. It's aligned with our centralized solution. I think probably the biggest unique selling point when it comes to our analytics is the fact that when it comes to the transactional history, it will prioritize those that it deems to be the highest risks. So going back to my analogy at the beginning about needle in a haystack, this is essentially sifting through said haystack to identify where the needle could be in a more efficient manner. I think it's been proven by one testimonial they've had that it's saving the one conveyance practice one to two hours per completion. So you've got a significant use case there where time is being saved, but it's also in that unique position where it's both safer, compliant, and quicker. The prioritisation there is improving life much more efficiently for them.
Oliver Telfor: Good. I mean, it's a great overview that, really, really good. But in terms of more common questions that clients might ask about this, what does that look like? And how are we then answering those questions?
Jack Knott: Yeah. So I think some questions that I dealt with is, one is the biggest factor in this is the fact that this doesn't replace the actual decision making process with this. No, it does need a human element. The SRA, HMRC, they are hard-lined in the fact that it needs a human decision in place with this. So the purpose of this is it's a productivity tool. It is to improve the decision making process, not to replace it. Some other key questions I think are important is how far back does a client need to go when requesting the bank statements for it? Again, it's built down to the internal firm's risk aversion policy with this. So typical practice is say three to six months. However, there's no dictated start timeline and structured process for that. It is what you are comfortable with. If you need nine months, 12 months, 24 months, you need to obtain as much data to come to a conclusion that this is all correct, this is legitimate, there is no risk associated with this. We are now happy to proceed with this client.
Oliver Telfor: With this new solution, what does it basically give to clients in terms of trustworthiness from SmartSearch, but also a solution that they know will find those needles in the haystack and will, as you said, do them in an order of priority and not just go after everyone at once?
Jack Knott: Yeah. So I think the key benefit with this is the fact that we're a trusted provider for a number of years now. We have a vast level of existing clients. This decision hasn't been taken lightly. We've established probably one of the best source of funds providers in the industry that has some of the most robust practices in place. And it mirrors our action plan and our position when it comes to other products. With the UK individual checks, the UK business checks, the Smart Doc journey. What this does is a complementary factor that essentially establishes that from the beginning of the onboarding of a specific client, you are able to take them through the entire process from a residential conveyancing perspective and get it to a point of completion. The fact that it can all be centralised into one specific platform that's with us who have been trusted for a number of years to provide this factor, means that it's an even greater, more complementary service for our users that's gonna be in a more seamless and enjoyable function.
Oliver Telfor: That's fine. So we've talked more about Source of Funds and Source of Wealth, but also from a property perspective. Let's flip it and look from a legal side to cover those points as well. What does this do for our legal clients and what does it also do for people who work in that industry as well?
Jack Knott: Yeah. So, especially from a law firm's perspective, this is a mandated exercise. Sure. There is some obscurity when it comes to other areas. From an SRA's perspective, it is a massive necessity. The SRA identified a number of lacklustre excuses made when it comes to the source of funds. One is longevity, knowing the client. So, "I've known X for 20 odd years," "I am the robust test that they have not committed any issue from a source of funds perspective." It's not sufficient. This is where we can come into place to reduce those risks, elevate the fact that this is a requirement, and also, I think from an educational standpoint, ensure that people understand these checks need to be done. But they also need to be done in an evidence-based and risk-averse perspective as well. The fact that Lytics is able to provide a sufficient audit trail with identifying any risk factors within this check itself, means from a legal standpoint that they're gonna be adhering to the regulatory requirements. They'll be doing the enhanced due diligence expected of them, but also in an ible format as well on top of that. Exactly.
Oliver Telfor: Because I guess it's also, yeah, you've known that client for 20 years, but you probably want to go and win new clients as well. So I guess it adds that to their arsenal.
Jack Knott: Well, that's the thing, and the risk law firms find now in this day and age is obviously there is a number of, the SRO have increased their visitations from roughly 300 to 500 over the next 12 months. They're gonna be investigating businesses, they're gonna be ensuring that their client due diligence is sufficient. If they are found to be at fault, then it'll be escalated further and it could come up with fines, it could come with personal risk to the specific members of the team. But I think the most important part is the reputational element. If your firm allowed a money launderer or anyone to have acted maliciously in relation to source of funds, and it's been caught and it's been reported on from a reputational standpoint, it's too dangerous to even consider. And I think this is where obviously our all-in-one centralized solution where we're finding the needles that might be in the haystack, means that we're eliminating the risks that inaction is gonna create from them.
Oliver Telfor: I mean, that's a really good overview and it's really good to talk about source funds and actually understand where we stand and how our solution will come in. So thanks for that. And if you wanna know more about our solutions and find more needles in your own haystacks, head to smartsearch.com and you can see all the solutions we provide and the industries that we work in. And if you wanna talk to more experts, hit that talk to an expert button on our website. You can talk to someone like Jack about anything you might need. And until next time, take care. Thanks.