Learn about proof of Source of Wealth (SoW), when it’s needed, and how it can help you minimize the risks posed by illegal activity.
It’s often required for businesses to check where their customer’s funds are coming from before proceeding with a transaction. Be it an inheritance, property sale, or startup investment, there has to be evidence of the Source of Wealth (SoW).
Proof of Source of Wealth (SoW) explains the origins of a person’s wealth and how they acquired it. Examples of Source of Wealth may include:
Demanding proof of SoW is part of Know Your Customer (KYC) measures which address money laundering risks, enabling businesses to:
Source of Funds (SoF) is the origin of funds or assets used in a specific business transaction between a client and financial institution, while Source of Wealth (S0W) looks at the total assets of parties participating in the transaction.
While SoF checks are easier to carry out than SoW checks, they still require obtaining information that’s substantive, relevant, and capable of establishing the origin of the funds and circumstances in which they were acquired.
Examples of SoF can be complete tax returns and audited financial statements or proof of investment/securities accounts.
SoW checks are one of the essential procedures of Enhanced Due Diligence (EDD) under AML regulations. Companies have to follow a risk-based approach when establishing requirements for proof of Source of Wealth, applying reasonable measures to the extent depending on the client’s money laundering and terrorist financing risks.
There are three steps to establishing proof of SoW
Indication of a client’s net worth should be established through relevant documents obtained from the client. It is not necessary to obtain the exact amount (an approximation may be sufficient).
Companies should determine the Source of Wealth (whether it’s inheritance, employment, business, investment, or company’s profits generated from legitimate business and commercial activities). Generally, no single source is likely to account for the total value of net worth. However, it is often difficult to identify wealth from all possible sources, and there is no expectation to do so. The level of detail should be based on the client’s risk profile.
Companies have to obtain proof of wealth documents from a reliable, independent source that confirms how the wealth was generated. SoW can be established through a combination of sources, such as:
If a customer is a Politically Exposed Person (PEP), businesses must take reasonable measures to establish the customer’s SoW. Doing this is part of Customer Due Diligence (CDD) procedures for private banking.
SoW can be established through a combination of sources provided by the customer:
Source of Wealth (SoW) draws a picture of the origin of the applicant’s entire body of wealth and how it was acquired.
Customers have to provide some form of evidence that proves how they acquired their wealth. Usually, customers present financial statements, evidence of gifts, loan agreements, or some other documents, which should be up to date.
The initial Source of Wealth may be represented by documents proving one’s employment, inheritance, investments, and ownership of a business.
A Source of Wealth declaration is a document that provides companies with a description of the customer’s assets and the financial activities which led to acquiring them.