Source of Funds

What is Source of Funds (SOF)

A Source of Funds (SOF) check is a process used by financial institutions, businesses and organisations to verify the origin of the funds used in a financial transaction. It ensures that the money being used is legitimate and not linked to illegal activities.

These checks are a compulsory part of AML compliance and are a key part of the Know Your Customer process. 

Why are SOF checks Important for AML Compliance?

Identifying the origin of a customer's funds is essential when preventing money laundering and financial crime. Effective Source of Funds checks can identify if income is made legitimately, where regular payments come from and the risk level of transactions. 

Not only do SOF checks help to keep your businesses and the economy safe from terrorist financing and illicit activity, but this process also protects your company from penalties and reputational damage.

These checks are required by law by any financial institution, and failure to complete checks or do so effectively can result in legal action, fines and reputation damage. 

How do Source of Funds checks work?

Source of Funds checks begin by accessing customer transaction data and identifying the source of this money. During the onboarding process, a customer provides their banking and personal details, where AML officers can track the origin of funds, such as salaries, and incoming and outgoing funds. This data is then assessed to identify where funds relate to hobbies, employment or business expenses. 

If the source of funds cannot be identified or there is suspicious activity surrounding transactions, the customer onboarding process is halted, and this information is escalated for further investigation and assessment. 

Source of Funds vs Source of Wealth

Although Source of Funds and Source of Wealth are both part of AML checks, these are two different processes. 

Source of Funds: These checks focus on the origin of finances and money used in transactions.

Source of Wealth: These checks assess how customers have accumulated wealth over time and look into the origin of savings. 

SOW is a more general assessment of wealth accumulated over time, whereas SOF is based on specific transactions. 

What documents are used to verify the source of funds?

To verify the Source of Funds, documents are requested from customers, including:

• Bank statements
• Payslips
• Business statements
• Loan agreements
• Employment contracts
• Financial records
• Proof of sales - home sales, asset sales

Businesses or individuals may not need to provide all of these documents,s and the level of evidence will depend on the identified risk levels. 

When are SOF checks required?

These checks are part of Customer Due Diligence and are needed throughout the customer journey. They initially begin during the onboarding process,s but once a customer is on your system, they need periodic reviews via ongoing monitoring. 

This involves reevaluatingthe source of funds and wealth, as risks are ever changing and sanction statuses can also evolve over time. 

The Benefits of Source of Funds Checks

SOF checks are not only crucial in protecting your organisation from financial and reputational harm, but they are also essential in keeping the economy safe and stable. The many benefits of effective Source of Fund checks include:

• Reduced risk of financial crime - Identifying potential criminals or suspicious behaviour can prevent money laundering or fraud before it occurs. 
• Greater compliance with regulations - SOF checks combined with AML and KYC processes allow for the maximum protection against fines, penalties and scrutiny from regulatory bodies.
• Better reporting and record keeping - Documenting Source of Funds checks makes compliance easier to prove and also makes ongoing monitoring faster and more efficient. 
• Greater risk assessments - Keeping transactional data and regularly screening customers with SOF checks makes it easier to identify risk levels and know the telltale signs of suspicious activity. 
• More efficient processes - Automation is commonly used for SOF checks, which helps to save time and resources and allows firms to allocate man-power more efficiently.

Robust Source of Funds checks with SmartSearch

By using SmartSearch’s Source of Funds solution, you can keep your business safe in just 60 seconds. Our service not only enables your clients to quickly and accurately identify any suspicious activity and prevent fraud, but also ensures they are meeting all their regulatory requirements.

The process is so quick and efficient and improves customer onboarding both in terms of customer experience and speed, by drastically reducing the workload and errors associated with manual checks.

Request a free demo of our AML software today and see how our SOF checks can help your business.