To conduct further financial relationships or engaging in a transaction with a client it can be one of the regulatory KYC requirements to prove the legitimacy of the person’s wealth. Be it an inheritance, property sale or startup investment, there has to be evidence of the source.
Source of Wealth (SOW) is the origin of the applicant’s entire body of wealth that draws a picture of how the customer acquired such wealth, for example:
- ownership of a business.
If the customer is a politically exposed person businesses have to take reasonable measures to establish the customer’s or beneficial owner’s source of wealth. SOW is also a part of requirements and due diligence for private banking, where expectations are higher.
Demanding the proof of wealth is a part of KYC measures which address the money laundering risks that arise in wealth management:
- Exposes acting for another individual or family member of corrupt official;
- Provides a bigger picture the business party background;
- Backs up monitoring to spot what is not right.
Establishing the source of wealth as part of Enhanced Due Diligence
Companies have to follow a risk-based approach when establishing proof of wealth applying reasonable measures to the extent depending on the client’s money laundering and terrorist finance risks.
Three steps to follow when establishing source of wealth:
Obtain information on net worth
- Indication of client’s net worth should be obtained through representations obtained from the client.
- It is not required to obtain the exact amount and might be impractical to do so
Obtain information on where that net worth came from
- With the client’s net worth established, companies should obtain information on where it came from (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; but categories are likely to be few and generally well understood. It is often difficult to specifically identify the wealth from all the different sources, and there is no expectation to do so. The level of detail should be based on the client’s risk profile (reasonable measure).
Verify the information on a risk sensitive basis
Companies have to find evidence of 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: publicly available property registers, past transactions, internet searches, evidence of title, copies of trust deeds, documents confirming salary, tax returns and bank statements.
What can be a proof of wealth
SOW can be established through a combination of sources, provided by the customer such as evidence of title, official documents, copies of trust deeds (detailing dividends), audited documents, receipts, documents confirming salary, tax returns, bank statements.
Examples of sources of wealth and and proof of wealth documents:
- Inheritance of a family fortune
- Name of deceased
- Relationship to client
- Date of death
- Date it was received
- Entire amount
- Solicitor’s details
- Tax clearance documents
- Nature of employer’s business
- Name and address of the employer
- Annual salary and bonuses for the last couple of year
- Last month/recent pay slip
- Confirmation from the employer of annual salary
- Latest accounts or tax declaration if self employed
- Business gain from a company sale
- Copy of the contract of sale
- Internet research of Company Registry
- Name and Address of Company
- Total sales price
- Clients’ share participation
- Nature of business
- Sale date and the receipt of funds
- Media coverage
Outlining the differences between proving source of wealth and source of funds
Source of Funds is the origin of the certain funds or assets which are used in a particular business transaction between a client and a financial institution, as opposed to the source of wealth where regulators question the total assets of parties participating in transaction.
SOF is easier to establish than a source of wealth but this should not simply be restricted to knowing from which bank or financial institution the funds may have been received. The information obtained should be substantive, relevant and be able to establish the origin of funds and the circumstances they were acquired.
Examples of SOF can be a parent’s saving account or a bank account owned by a company.
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