AUSTRAC has released a proposed guidance on source of funds and source of wealth document. The document goes into depth about the AML/CTF obligation to determine the source of funds and source of wealth for high-risk clients, PEPs, and trigger events. Determining the source of funds and source of wealth should be an integral part of understanding your client’s financial situation and background. It also helps to mitigate the risk that funds or wealth are derived from criminal activity, and to protect your business from the potential harm associated with money laundering, terrorism financing, and other serious related crimes.
WHAT IS THE DIFFERENCE
The proposal indicates that designated service providers are to determine the source of funds and source of wealth as an important part of understanding a client’s financial circumstances.
Source of funds: how and where the client obtained the funds for a specific transaction or designated service you provide. Verifying their source of funds will assist in applying risk-based system and controls in accordance with your AML/CTF program, as well as transaction monitoring and suspicious matter reporting obligations. Examples could include funds from the sale of assets or property, receipt of a gift or inheritance, or accumulated funds.
Source of wealth: where the client’s entire body of wealth and assets originated – not just what is involved in a transaction or business relationship. It involves the economic, business, or commercial activities that generated, or significantly contributed to, the clients overall net wealth. Verifying a client’s wealth should be considered a part of the ongoing client due diligence as their source of wealth my change over time.
WHEN TO COLLECT AND VERIFY INFORMATION
The collection and verification of source of funds or wealth is on a risk basis, when your client is:
- a foreign politically exposed person (PEP), or
- high money laundering and terrorism financing (ML/TF) risk domestically
- international organisation PEP, or
- immediate family members and/or close associates of any PEP individuals
NOTE: additional checks should be undertaken that are aligned with the risk.
Your AML/CTF program should stipulate standard source of funds/wealth checks, such as:
- as part of your applicable customer identification procedures before commencing to provide a designated service to the client
- when carrying out enhanced customer due diligence for higher risk clients, including PEPs
- as part of ongoing due diligence and monitoring for all clients, particularly for clients that pose a higher ML/TF risk.
EXAMPLE TRIGGER EVENTS
Examples that may trigger the need to verify the information collected about source of funds or source of wealth may include:
- the client’s transactions or other activities are inconsistent with what you know about the client
- there are discrepancies between the information provided by the client and other information available to you
- there is adverse media reporting or other information is relevant to the client’s source of funds/wealth
- there have been material changes in the client’s circumstances
- you determine that the risks associated with providing the designated service to the client are higher or have increased, which makes it appropriate to verify the client’s source of funds/wealth.
COLLECTING AND VERIFYING
You must draw on a range of information when establishing the source of funds and source of wealth. This includes the information clients have already provided, requesting they make a declaration about their source of funds/wealth, and/or accessing secondary sources such as internet searches, commercial databases, or published lists of prominent persons.
Verifying the source of funds/wealth involves confirming where those funds came from, how they were obtained by the clients, and whether this is consistent with what you expect from the client. The information you obtain must substantiate how the client has acquired the funds (sale of a property or assets, gifts, inheritance etc).
Examples of information you could use to establish the source of funds/wealth include:
- bank statements and/or payslips
- sale/purchase agreements
- transaction records
- documents detailing share transactions, business activities, bequest of a gift, insurance payouts, inheritances, gambling winnings etc
- audited financial accounts showing funds disbursed to the client
The level of verification should be proportionate with the level of ML/TF risk. Understanding the nature and purpose of your business relationship with a client will help you to identify unusual or unexpected transactions or activities that may trigger an investigation into the source of funds/wealth.
There are some factors that may influence your exposure:
- different clients will present different risks, depending on their ownership and control structures, industry, and other factors.
- the type of designated services you provide may make you more open to abuse and exploitation by criminals
- how you deliver your services can be relevant when designing your risk-based procedures for verifying sources of funds/wealth.
If you are unable to satisfactorily establish the source of funds/wealth for a high-risk client, you should consider whether to continue to provide designated services to that client.
If you notice suspicious activity while establishing a client’s source of funds/wealth, including if you suspect (on reasonable grounds) that a person or transaction is linked to a crime or may otherwise be relevant to the investigation of an offence, you must consider whether to submit a suspicious matter report to ASTRAC.
For further information, please refer to the proposed guidance provided by AUSTRAC:
GRC ESSENTIALS CAN HELP
If you require any assistance, we can offer training for your personnel and guidance for your AML/CTF compliance questions. Please don’t hesitate to contact us if you have any questions or if we can help you with any of your compliance matters.
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