Knowing the distinction between source of wealth vs source of funds is vital in the Anti-Money Laundering (AML) regulations world. Many people can confuse these two terms as they sound the same, but in the process of establishing the validity of financial operations, they are used differently. Misinterpreting these terms may cause financial institutions to go against regulations, resulting in fines or reputational damage.
What is the Source of Funds?
The source of funds is a reference to the origin of a given amount of money in a transaction. It answers the question: Where did this specific amount of money come from? For example, when a client deposits $50,000 into an account, it is important to understand how they obtained the $50,000.
Example of the Source of Funds
Some common source of funds examples include:
- Salary income
- Profit gained from the sale of a property
- Inheritance payouts
- Investment dividends
AML Compliance Need and Value
In AML compliance, verifying the source of funds is important in detecting and deterring financial crimes such as money laundering and terrorism financing. A track record should be maintained to ensure the money is not connected to fraudulent activities. According to FinCEN, more than $300 billion is laundered annually in the U.S. Properly determining the source of funds AML helps address these risks.
What is the Source of Wealth?
Compared to the source of funds, the source of wealth refers to how an individual achieved their overall financial position over time. This could include total assets, investments, business ownership, or long-term earnings. It answers the broader question: How did this individual accumulate their wealth?
Part in AML Compliance
The source of wealth is crucial in AML compliance, particularly during Enhanced Due Diligence (EDD). Financial institutions must evaluate whether the customer’s total wealth aligns with their risk profile. In the case of high-net-worth individuals, offshore clients, or politically exposed persons (PEPs), understanding the source of wealth helps assess the legitimacy of large transactions.
The Significance of the Difference
Another common issue in AML investigations is distinguishing between source of wealth vs source of funds. Both must be documented by financial institutions, especially when dealing with large transactions or high-risk clients. According to the U.S. Department of the Treasury, transparency in financial transactions is essential to prevent the misuse of the system by criminals and sanctioned entities.
The Regulatory Landscape in the U.S.
Several regulatory guidelines apply to U.S.-based financial institutions, requiring extensive proof of the AML source of funds and source of wealth. The Bank Secrecy Act (BSA) and the USA PATRIOT Act mandate that banks and financial institutions implement strict Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures.
In February 2024, FinCEN revised its policies to intensify scrutiny on beneficial ownership and cash-intensive businesses—areas where the source of funds AML is particularly complex. These updates highlight the need for comprehensive documentation.
Best Practice Guidelines for Source Verification
To ensure proper compliance, institutions should:
- Gather documentary proof (e.g., pay stubs, tax returns, sale agreements)
- Conduct risk assessments on high-value or offshore transactions
- Preserve audit trails for all due diligence activities
- Use automated AML tools to identify inconsistencies
Warning Signs to Look Out For
- Unreasonably high transactions
- Unexpected and undocumented increases in wealth
- Use of multiple intermediaries to conceal fund sources
Real-World Examples
In 2023, a New York-based bank was fined $80 million for failing to verify the source of funds of a politically exposed person who transferred millions through shell companies. This case highlighted the necessity of distinguishing between the source of funds (transaction amounts) and the source of wealth (undisclosed overseas business dealings).
Another example involves real estate investments, a common method used for laundering money in the U.S. According to Global Financial Integrity, over $2.3 billion worth of U.S. real estate was purchased with suspicious funds between 2015 and 2021. Verifying the source of wealth of foreign buyers has become a major priority for regulators.
Conclusion
Comprehending the distinction between source of wealth and source of funds is more than just best practice—it is a regulatory requirement. Financial institutions in the U.S. must develop detailed AML compliance systems that verify both components. By clarifying the source of funds meaning and confirming current and historical sources of funds, institutions can reduce risk, ensure compliance, and contribute to a transparent and secure financial ecosystem.
