As a law firm operating in a highly regulated environment, it is crucial to maintain rigorous compliance standards to protect your clients, your reputation, and your firm from potential legal and financial risks. Anti-Money Laundering (AML) regulations play a critical role in safeguarding the integrity of financial transactions.
Among the core components of AML compliance is the verification of the source of funds (SOF) and source of wealth (SOW).
One particular area that has received increased scrutiny from regulators in recent years is the verification of the source of funds (SOF) in financial transactions.
In this guide, we will delve into the expectations of regulators when it comes to carrying out source of funds checks and provide practical guidance to help your law firm navigate these requirements with confidence.
This guide also highlights the importance of leveraging AML compliance technology, such as Verify 365, to simplify and streamline the SOF and SOW verification process, while maintaining a focus on the needs and expectations of regulators and clients.
Understanding the Importance of Source of Funds and Source of Wealth Checks
To ensure robust AML compliance, law firms must establish the original source of funds being used in a transaction and not merely the availability of funds in a client’s bank account. Understanding the source of wealth, i.e., how the client accumulated the funds, is also crucial.
Regulators have identified the need for law firms to implement robust SOF checks in order to prevent money laundering, terrorist financing, and other illicit activities. By understanding the origins of funds used in transactions, law firms can ensure that they are not facilitating illegal activity and can provide evidence of compliance to regulatory bodies.
Regulators expect law firms to have a comprehensive understanding of their clients’ financial backgrounds and to establish the legitimacy of funds used in transactions.
What do the regulators say?
Regulators emphasise the importance of building a clear picture of how clients accumulate their funds for a transaction. The Solicitors Regulation Authority (SRA) mandate that this assessment varies on a case-by-case basis, reflecting the risk level identified in the client and/or matter risk assessment. Going back several years may be necessary for some clients, while for others, six months may suffice.
A source of funds check aims to answer the question, “how did the client accumulate the funds for this transaction?” This goes beyond identifying the origin of the funds and investigates the reasons behind the money (e.g., salary, gift). Identifying the source of funds is crucial to protect law firms from money laundering and terrorist financing risks.
Paper or digital copies of statements can be used for the check, although both may be susceptible to fraud. Some services allow clients to share relevant information directly from their bank accounts while maintaining privacy, which can be helpful.
Source of funds checks are particularly valuable when there is a higher risk of proceeds of crime being involved, such as when dealing with politically-exposed persons or clients established in high-risk third countries. Firms are required to undertake source of funds checks “where necessary,” based on a risk-based approach that considers firm, client, and matter risk assessments.
These checks may be required even if no money passes through the client account. However, they are not needed for payment if it is an “adequate consideration” as defined in the Proceeds of Crime Act 2002.
A source of wealth check provides a broader assessment of how a client generally accumulates their wealth. This check is mandatory when dealing with politically-exposed persons or their close relatives or associates, or when the client or counterparty is based in a high-risk third country.
How Verify 365 can help with Source of Funds and Source of Wealth
By leveraging Verify 365, law firms can efficiently navigate the complex compliance landscape and adhere to AML regulations with minimal disruptions to their clients.
Conducting comprehensive client due diligence (CDD)
Verify 365’s technology simplifies the CDD process by automating data collection through FCA regulated Open Banking technology, and AI analysis. This helps law firms to efficiently gather necessary client financial information, assess risk levels, and maintain an updated client database for ongoing monitoring.
This efficient gathering of necessary client financial information, along with streamlined risk assessment, allows lawyers to focus on their core tasks while maintaining an updated client database for ongoing monitoring.
Identifying and assessing risks associated with the source of funds and wealth:
Verify 365’s risk assessment capabilities enable law firms to easily identify potential red flags or inconsistencies in the client’s financial history. This allows for a more informed decision-making process and helps mitigate the risks associated with money laundering and other financial crimes.
By efficiently gathering necessary client financial information, along with a streamlined risk assessment, lawyers to focus on their core tasks while maintaining an updated client database for ongoing monitoring.
Streamlining the verification process through secure, digital platforms
Verify 365’s digital platform facilitates secure document submission and storage, ensuring that sensitive client data remains protected. This eliminates the need for manual document handling and reduces the risk of human error, leading to a more efficient and accurate verification process.
This eliminates slow and risky processes, reduces human error, and leads to a more efficient and accurate verification process.
Ensuring the authenticity of the provided documentation
Verify 365’s core verification technology can cross-check the submitted documents against various databases and sources, ensuring the validity and authenticity of the information provided by clients. This helps law firms to detect any potential forgeries or discrepancies in the documents, thus enhancing overall AML compliance. This helps detect potential forgeries or discrepancies, enhancing overall AML compliance.
Facilitating ongoing monitoring and record-keeping
]Verify 365’s platform allows for easy tracking and updating of client information, ensuring that law firms can maintain accurate records and stay in compliance with regulatory requirements. Automated alerts and notifications can also be set up to notify law firms of any changes or potential risks, enabling a proactive approach to AML compliance.
Providing Sufficient Evidence for Source of Funds and Source of Wealth Verification
Verify 365 assists law firms and their clients in providing the necessary evidence to fulfill due diligence requirements. By utilising Verify 365, clients can easily submit the required documentation that shows their source of funds such as:
a. Earnings/salary details and bank statements: Clients can provide employment information, including position held, time of employment, and annual salary. Verify 365 enables clients to securely connect mobile banking apps or upload bank statements that show salary deposits and corresponding payslips, streamlining the process of validating their income sources.
b. Self-employment income records and tax returns: For self-employed clients, Verify 365 facilitates the secure submission of bank statements that show the accumulation of funds, along with copies of their most recent tax returns.
c. Savings statements from financial institutions: Clients can submit statements from their savings accounts, providing a clear view of their financial history and savings activities.
d. Property sale completion statements and bank records: Verify 365 allows clients to upload property sale completion statements and bank statements that show the proceeds from the sale or remortgage being deposited into their account.
e. Sale of shares/investments and corresponding bank transactions: Clients can provide valuation documents, investment portfolios, and bank statements to demonstrate the receipt of funds from the sale of shares or investments.
f. Inheritance documents, estate accounts, and bank statements: Clients can submit estate account documents and bank statements that show the distribution of inherited funds, proving the source of their wealth.
g. Company sale/dividend details and related bank transactions: Verify 365 enables clients to provide documents such as contracts of sale, confirmation of sale, relevant minutes, and bank statements to demonstrate the receipt of funds from company sales or dividends.
h. Divorce settlement documents: Clients can submit court orders or settlement confirmations to verify the source of funds received as part of a divorce settlement.
i. Lifetime/Help to Buy ISA account statements: Clients can provide account statements to demonstrate the source of funds in their ISA accounts, whether they are claiming a bonus or not.
j. Rental earnings records and tenancy agreements: Verify 365 allows clients to submit digital bank statements that show monthly rental income, as well as copies of relevant tenancy agreements.
k. Lottery/gambling winnings documentation and payment evidence: Clients can provide confirmation from lottery companies, winnings receipts, and bank account evidence to prove the receipt of funds from lottery or gambling wins.
l. Gifted deposit letters and giftor’s SOF/SOW documentation: Verify 365 assists clients in submitting gifted deposit letters, which confirm that the funds are non-repayable gifts. Additionally, the platform enables clients to securely submit the giftor’s source of funds and source of wealth documentation, ensuring a thorough verification process.
Are you ready to revolutionise your firm’s client onboarding and compliance processes?
Verify 365 is the ultimate solution to streamline, automate, and enhance your AML due diligence efforts, ensuring comprehensive risk management and regulatory compliance. Imagine a world where client verification, source of funds and source of wealth checks are seamlessly integrated into your workflow, allowing you to focus on what truly matters – serving your clients.
By choosing Verify 365, you’re not only embracing cutting-edge technology but also joining a community of forward-thinking firms committed to delivering the highest standards of service and compliance. With just a few simple steps, you can get started on your journey towards a more efficient, compliant, and secure future.
Don’t let cumbersome manual processes hold your firm back any longer. Our dedicated team of experts will guide you through the setup process, ensuring a smooth transition and providing ongoing support to help you unlock the full potential of our powerful platform.
Don’t wait another minute – seize the opportunity to elevate your firm’s client onboarding and compliance processes. Book a demo with Verify 365 today and discover firsthand how our platform can transform your approach to AML compliance.