All Reporting Entities have an obligation to determine the source of high risk customers’ funds and wealth. This task can become more complex when criminals employ sophisticated tactics to obscure the origins of their unlawful revenue.
AUSTRAC has released guidance to assist Reporting Entities in conducting the necessary checks and verifying that a customer’s funds and wealth are not associated with money laundering (ML) or terrorism financing (TF).
What are the source of funds and source of wealth checks about?
Source of funds relates to how and where a customer has obtained the funds used for a transaction. In seeking to identify the source of the funds, Reporting Entities need to determine:
- the explanation for the transaction; and
- whether there are any indicators that the customer’s funds are derived from criminal activities.
Source of wealth refers to the customer’s entire body of wealth and assets and where these have come from. In determining the source of wealth, Reporting Entities should consider:
- where the customer’s assets have come from;
- why they customer has these assets; and
- how the customer acquired or generated the assets.
What does this mean for Reporting Entities?
Your AML/CTF Program should include risk-based systems to determine when source of funds and source of wealth checks are carried out. You should conduct an assessment of your customer base and the risks faced by the types of customers serviced.
Your AML/CTF Program should identify various triggers for undertaking source of funds and source of wealth checks, including:
- As part of the initial onboarding customer identification and verification checks;
- When carrying out enhanced customer due diligence in relation to:
- a beneficial owner;
- high risk customer; or
- politically exposed person;
- as part of your ongoing customer due diligence procedures.
When a Reporting Entity’s risk-based systems and controls identify that source of wealth and source of funds check should be carried out for a customer, the Reporting Entity must take reasonable measures to determine the source of a customer’s wealth and funds. This means you must do what is practical and necessary in line with your identified ML and TF risks.
Steps to take when source of funds or wealth checks are triggered:
- review information already held by your organisation about the customer and their beneficial owners;
- where appropriate, consider collecting additional information to identify how the customer accumulated their wealth and source of funds;
- after collecting additional information from the customer, consider on a risk-sensitive basis, whether to apply reasonable measures to verify the information for accuracy by using reliable and independent sources.
Collection and Verification of Information
Reporting Entities should also consider the type of information they will collect to determine the source of a customer’s wealth and funds. This may include:
- information already provided as part of the onboarding process;
- requesting the customer make a formal declaration as to the source;
- secondary sources such as internet searches, commercial databases, etc;
- information collected as part of a credit check.
Verification of the information you have collected is the more challenging aspect of the requirements. For source of funds checks, Reporting Entities are required to verify where the funds have come from. This is more than simply confirming the financial institution and that the name on the account matches. The information you collect to verify the source needs to confirm where the customer has obtained the funds from.
The data and documents Reporting Entities may use to verify a customer’s source of wealth will depend on the ML/TF risk the entity faces generally, the type of transactions undertaken by the customer and the risk the particular customer poses. Verification should support the source of wealth information collected.
Verification sources can include:
- Publicly available information;
- Reputable sources or documents issued by reputable third parties;
- Company registry information;
- Accountants and lawyers;
- Commercial databases; and
- Sanctions lists.