Source of funds/source of wealth: Knowing the difference and best practices

Rickett said he hoped the people joining the webinar would, by the end of it, have more questions than answers. The reason being, SOF/SOW is less about binary yes or no answers and more about the application of the risk-based approach (RBA).

Secondly, he hoped everyone would take some time to think about why the subject is so important from a human perspective.

1. Knowing the difference

Source of funds: With the similarity of their nature and how they overlap, not to mention how often they are mentioned in the same breath, it can easily lead to confusion when trying to remember which is which between SOF and SOW.

SOF, James explained, should be looked at as being transactional in nature. It can be made up of income, savings, inheritance, gifts, etc. It’s about the origins of the money that is going into a specific transaction, and to a more precise point, the activity it came from. This leads to more of a focus on transaction monitoring and customer due diligence.

Source of wealth: SOW, meanwhile, represents the entirety of someone’s wealth. It encompasses everything that would be looked at for SOF as well as more historical transactions (e.g., longer-term savings) and looks at nonliquid assets of the person (e.g., car collections, virtual assets, precious stones, and metals) and possibly even things like vintage video games. Rickett cited examples of instances where mint condition Nintendo 64 games sold at auction for as much as $1.5 million.

2. Balancing the risks with SOF

From a regulatory point of view, there isn’t a specified requirement for organizations to obtain proof of SOF, though many businesses set their own expected levels of investigation.

For things like payslips or insurance and savings statements, it can be easy to obtain a paper trail without too much investigation. However, with things like gambling winnings, criminals might be able to falsify their winnings or use them to hide money laundering, such as changing a large sum of money for chips, playing with only a small amount, and cashing back out.

SOF monitoring can be fallible when it comes to countering the financing of terrorism, as it is not uncommon for terrorists to use earnings from legitimate means to fund horrific acts. One example Rickett gave was the 7/7 London bombings, as it was funded in part by a schoolteacher who had a good credit score and was requesting a sensible-sounding loan.

With all these risks, the knee-jerk reaction might be to be overcautious. Referring to a Europol study, Rickett emphasized the United Kingdom registers an unusually high level of suspicious activity reports (SARs). While caution can be seen a safer option by some businesses, it can be a better option to give customers the opportunity to demonstrate their SOF/SOW, rather than to file a SAR that turns out to be an unnecessary waste of time and inconvenience to customers.

3. Documentation is key

With SOW, jurisdictional differences can make it difficult to give sweeping advice, especially when it comes to higher-risk individuals. For instance, there’s a great deal of variation in approach to dealing with politically exposed persons (PEPs)—i.e., if they are still considered a PEP for a set period after their connection to politics or if they are permanently viewed as being a PEP for the rest of their life, which makes assessing their wealth more complicated.

It can also be difficult to assess wealth, especially for things that will fluctuate; are more difficult to predict what they will be worth if they are sold; or that are otherwise not held as monetary assets (e.g., the aforementioned car collections or other valuable items).

It might not be easy to verify documentation from historical sources, or it might be difficult to get bank statements for older transactions. The key thing, as Rickett pointed out, is that it’s not necessary to document the source of every single part of that wealth; what’s more important is to build a rationale for how individuals have accumulated their wealth, obtain assurances it was earned through legal means, and document that instead. If, in the future, the case is raised as having issues and needing to be reviewed, a law enforcement agency can look at this evidence and judge if the decisions made sense.

4. Question, question, question

A lot of the questions raised by viewers throughout the webinar revolved around the same kind of things: “What would be the correct thing to do in x situation?” or “If y happens, should we do z?” It was clear from the tone these questions were all stemming from the same core feeling: What if I get it wrong? The ambiguity of how to approach SOF/SOW leads many to uncertainty and fear of the repercussions for any mistakes.

Rickett was consistent in his answers throughout, advising the way to tackle each case is to consider it through the lens of the RBA and ensure there is thorough documentation of all decisions and evidence to support why they were made. This is the core of his initial statement: that he hoped people would leave with more questions than answers. Rather than looking to an outside source, like regulatory bodies to set strict rule books to follow, the message was to look at each case and ask the right questions based on that situation.

5. Don’t forget why we’re doing this

Finally, Rickett gave an important reminder: Financial crime prevention isn’t just about ticking boxes and going through the motions to meet an arbitrary standard. When reviewing SOF/SOW, it is about reducing the risk of criminals hiding the funds of their crimes and being allowed to profit from their illegal actions. It is about catching people who are trying to profit off horrific actions, like human/animal trafficking or terrorism, that do serious harm and helping bring them to justice.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.