Overview
On 5th October 2022, AUSTRAC released guidance on ‘Source of funds and source of wealth’ requirements. This guidance states that for certain high-risk customers, high-risk transactions, or for foreign politically exposed persons (PEP’s), you must identify the source of funds and source of wealth depending on the risk-based system you have adopted.
As part of your AML/CTF program, you must have appropriate risk-based systems and controls that document the trigger circumstances in which the requirement to identify the source of funds and/or wealth is enacted.
Identifying ‘Source of funds’
‘Source of funds’ refers to how and/or where the client obtained the funds for the specific designated service or transaction provided to them. When collecting and verifying information on a risk-sensitive basis, answering the following questions may assist:
- Is there a reasonable explanation for the clients to conduct this transaction (particularly if it involves cash)?
- Are there any indicators that the client’s source of funds is derived from the proceeds of crime?
‘Source of wealth’ refers to where the client’s entire body of wealth/assets came from, considering the economic, business, or commercial activities that generated (or significantly contributed to) the client’s overall net worth. When collecting and verifying information on a risk sensitive basis, answering the following questions may assist:
- Why and how does the client have the amount of assets they do?
- How did they generate or acquire these assets?
NOTE: a client’s source of wealth may change over time and should be considered as part of your ongoing client due diligence process.
Applying a risk-based approach
The risk-based approach considers the nature, size, and complexity of your business, as well as the type of money laundering and terrorism financing (ML/TF) risks you may reasonably face. You must understand and measure risks in a meaningful way and use that information to focus proportionate efforts and controls to mitigate and manage the identified risks.
In practice, comparted with lower risk clients, higher-risk clients are more likely to undergo additional or deeper checks and increased monitoring through frequent ongoing due diligence maintenance, broader screening parameters, and enhanced transaction monitoring.
Your AML/CTF policy outlines the risk-based approach tailored to your business. It outlines parameters for measuring client risk, determining the amount of information collected and where verification is required to assess source of wealth and source of funds.
In higher risk situations, and in accordance with your enhanced customer due diligence (ECDD), you should take reasonable measures to determine the source of the wealth and funds of the client and each beneficial owner.
NOTE: it is important to that you ensure these parameters are applied consistently and in accordance with your risk appetite.
Ongoing and enhanced customer due diligence
As part of your AML/CTF program, you are required to adopt an ongoing due diligence and monitoring program that includes trigger circumstances when it would be appropriate to undertake source of funds and source of wealth checks for a client.
When making a client risk-based assessment, you may consider:
- The overall inherent risk of the client (based on their circumstances, products and service usage, transactional and behaviour activities, and geographic factors)
- The quality and plausibility of the information provided within the due diligence and source of wealth check, the evidence available to verify it, and whether this reduces inherent risk
- Any other information held by your entity on the client, including information held by other lines of the business (subject to relevant privacy or confidentiality provisions)
The steps you take to verify the source of funds and source of wealth should be proportionate to the assessed ML/TF risk. However, you are expected to consider whether the source of funds or source of wealth is consistent with:
- The risk profile of the client
- The ongoing business relationship with the client, and
- The nature and purpose of their business.
Verifying the source
| Source of funds | Verifying the source of funds on a risk-sensitive basis involves confirming where the funds came from, how they were obtained by the client, and whether this is consistent with what you expect of the client. The information you obtain should substantiate how the client has acquired the funds. In some circumstances, it may be difficult to determine the source of funds without some understanding or knowledge of the client’s source of wealth. |
| Source of wealth | Verifying the source of wealth of a client on a risk-sensitive basis can be more difficult as their wealth may include funds or assets that you do not hold on behalf of the client. The data/documents you use to verify the source of wealth will depend on the level of ML/TF risk, the type of transactions undertaken, and the designated services you provide. The information you verify should help to support the source of wealth information you collected. You should consider all the evidence collected and determine whether it is sufficient to support the source of wealth assessment. |
The types of acceptable documents to verify source of funds/wealth will depend on the level of assessed risk, examples may include:
| Bank statements | Payslips | Tax returns |
| A will (or certified copy) | Court order | A trust deed (or certified copy) |
| Share registries | Royalties | Sale/purchase agreements |
| Audited financial accounts showing funds disbursed to client | Receipts of other transaction or similar documentation | Search of publicly available registers, and business and company registers |
| Transaction records | Formal and witnessed declaration | Written confirmation from a legal practitioner/lawyer |
If the client cannot, or will not, produce any documentation to verify where the funds have come from, you should consider if it is consistent with what you know about the client and whether you have information that makes you suspicious that they are criminal proceeds involved.
If you cannot satisfactorily establish source of funds or source of wealth for a high-risk client, and if you assess that they pose an unacceptable ML/TF risk that cannot be appropriately mitigated, then speak with your Senior Manager or Compliance Consultant and you may need to consider whether to continue to provide a designated service to that client.
Conclusion
Different clients will present different risks, depending on their ownership and control structures, industry, and other factors. Understanding the typical profiles of your clients will help you determine the appropriate risk-based systems and controls to apply. The level of verification should be proportionate to the determined level of ML/TF risk.
If you notice unusual activity that raises a suspicion while establishing the customer’s source of funds or source of wealth, you must consider whether to submit a suspicious matter report to AUSTRAC.
GRC Essentials can help
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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