Source of funds and source of wealth in your AML/CTF policies

Your anti-money laundering and counter-terrorism financing (AML/CTF) policies must set out when you’ll collect, or collect and verify, information on source of funds and source of wealth during initial and ongoing customer due diligence (CDD). 

This could include, for example:

• when you’ll do this as part of enhanced CDD
• if you identify potential ML/TF risks related to the customer’s source of funds or source of wealth during initial or ongoing CDD
• to help you establish the nature and purpose of the occasional transaction or business relationship you’ll have with the customer
• as part of ongoing CDD, particularly if there’s an unusual transaction or behaviour, or a change in the customer’s ML/TF risk
• when you’re suspicious that the money, property or other assets involved are derived from criminal activity
• if the designated service you’re providing could result in concealing or disguising money, property or other assets
• if the designated service has no apparent economic or legal purpose
• if the designated service would involve unusually complex or large transactions
• if the designated service would involve an unusual pattern of transactions.

There are specific circumstances when you must establish on reasonable grounds or hold information about the source of funds and source of wealth of your customers and other specified persons. 

Learn more about enhanced customer due diligence.

Source of funds

Source of funds refers to how and where the funds were obtained from for a specific transaction.

Collecting and verifying information about a customer’s source of funds helps confirm that the funds used in a designated service come from a legitimate source. This information can also help you make sure that the transaction aligns with what you know about the customer and why they’re using your designated services. 

Some examples of sources of funds for a transaction include:

• salary and wages
• business income
• dividends and investment income
• proceeds from sales of real estate or personal property
• gifts or inheritance.

The source of funds doesn’t mean where the customer transferred the funds from. It relates to how they obtained the funds. 

For example, if a customer transfers funds to your business using a bank transfer the source of funds isn’t ‘the customer’s bank account’. The source of funds is the underlying source, such as their salary and wages or business income.

Source of wealth

Source of wealth refers to where the customer’s entire wealth and assets comes from. This can be from economic, business or commercial activities, along with other circumstance that generated, or significantly contributed to, the customer’s overall net worth.

A source of wealth check may be appropriate if there’s doubt about a customer’s overall financial background and how they accumulated their wealth.

Like source of funds, a customer may have accumulated their wealth over time from a range of sources, including the sources of funds listed above.

A customer’s source of wealth may change over time. Considering a customer’s source of wealth over the course of a business relationship enables you to determine if their ongoing use of your designated services, rather than a single transaction, is consistent with what you know about the customer and their expected activity. 

How to establish the source of funds and source of wealth

Establishing the source of funds and source of wealth could involve:

• reviewing information you already hold about the customer. For example, that you obtained in your onboarding process
• collecting, where appropriate, additional information to identify how the customer obtained the funds for the designated service or accumulated their wealth
• verifying, where appropriate, any of the information using reliable and independent sources.

The information you collect and verify must be appropriate to the customer’s ML/TF risk. When collecting and verifying this information, you aim to establish both if: 

• there’s a legitimate source for the customer’s funds or wealth
• the customer’s funds or wealth may be from unlawful activity. 

We expect the steps you take to establish a customer’s source of funds and source of wealth to be:

• targeted to your customer’s specific ML/TF risks
• proportionate to the risk level
• effective at managing and mitigating the risk
• appropriate to the duration of the risk. For example, you may need to apply enhanced CDD on an ongoing basis if the risk relates to ongoing activity or behaviour.

In some cases, the source of funds or source of wealth may be clear without needing to collect and verify more information. For example, a buyer using a loan from a bank to finance a real estate purchase. 

Questions to consider when establishing the source of funds and source of wealth

When collecting and verifying information about a customer’s source of funds and source of wealth, consider the following questions:

• Why and how does the customer have the amount of assets they do?
• Can you easily explain the customer’s source of wealth or source of funds, such as through their occupation, inheritance or investments?
• Is there a reasonable explanation for the customer to conduct this transaction or request this designated service, particularly if it involves the use of cash?
• Are there any indicators that the customer derived their funds or wealth from the proceeds of crime?
• Is the customer’s background consistent with what you know about their former, current or planned business activity, their business’ turnover (if applicable), the source of funds and source of wealth?
• Are you able to confirm that the information and documentation obtained as part of the source of funds and source of wealth checks are consistent with what you know about the customer from your due diligence, including open-source checks?

Collecting information on source of funds and source of wealth

It will be helpful to use a range of information when establishing the source of funds and source of wealth of a customer. For example, this could include:

• information you got during initial CDD or ongoing CDD
• information you collected about or from the customer for other purposes. For example, providing another service (whether or not it’s a designated service)
• asking the customer or requesting they make a formal declaration about their source of funds or source of wealth
• secondary sources – such as internet searches, media reporting, published lists of prominent persons, commercial databases. This information may be more readily available for politically exposed persons (PEPs) and high-net-worth individuals.

This is separate from verification, which involves checking the information provided by the customer against documents or other evidence. Read examples of documents and data to verify the source of funds and source of wealth.

Verifying information on source of funds and source of wealth

You must verify information you collect about the customer’s source of funds and source of wealth as appropriate to their ML/TF risk.

For example, we expect you to conduct more detailed verification when the customer’s:

• ML/TF risk is high
• transaction activity or behaviour doesn’t align with the information you collected
• funds or wealth come from sources that are less common or may be more open to criminal exploitation.

In some cases, you may be satisfied without having to independently verify the information you have collected about the source of funds or source of wealth. In other cases, you may have to verify information obtained by using other reliable sources.

We expect you to consider the information from independent sources and whether it's consistent with the customer’s explanation or raises further questions.

If an explanation is consistent with the customer’s risk profile and you don’t have other concerns about the transaction, it may be appropriate to simply document the explanation and monitor the customer to confirm that future activity is consistent with the explanation provided. 

Examples that could trigger the need to verify information you’ve collected could include:

• the customer or their beneficial owner is a PEP
• either party to a transaction is established in a high-risk country
• the customer’s transactions or other activity are inconsistent with what you know about the customer
• the transaction is complex, unusually large, forms an unusual pattern of transactions, or has no apparent legitimate purpose, whether commercial, legal or otherwise
• there are discrepancies between the information provided by the customer and other information available to you
• there’s adverse media reporting or other reliable information that’s relevant to the customer’s source of funds and/or source of wealth
• there has been a material change in the customer’s circumstances.

Source of funds

Verifying the source of funds involves:

• confirming where those funds came from
• how the customer obtained them
• if this is consistent with what you expect of the customer.

The type of evidence needed to verify the source of funds is dependent on the specific source. Evidence to verify the customer’s source of wealth could also verify the source of funds, when these are indistinct.

The information you obtain should show how the customer has acquired the funds. For example, if a customer declares they received funds for a transaction from a third party, it would be appropriate for you to record information about that original transaction. You could verify this by requesting bank statements or other documentation relating to the transfer.

In some cases, it may be difficult to determine the source of funds without some understanding or knowledge of the customer’s source of wealth.

Source of wealth

Verifying a customer’s source of wealth can be more challenging, as their wealth may include funds or assets that you don’t hold on behalf of the customer.

Consider the source and type of evidence you collect and determine if it’s sufficient to support the information the customer has provided about their source of wealth.

Unexplained wealth

Where a transaction is large or unusual it may be appropriate to conduct a source of funds and source of wealth check. If the customer is unable or unwilling to provide satisfactory explanations for their source of funds or source of wealth, consider if you need to submit a suspicious matter report (SMR). 

Customers using cash for transactions

It can be challenging to verify the source of funds for cash transactions. For example, a bank statement showing a large withdrawal doesn’t mean the cash the customer is using was from that withdrawal. Likewise, a bank statement showing a large cash deposit doesn’t prove where the cash came from.

Sometimes, a customer can’t or won’t produce any documentation to verify where the funds came from. 

In these circumstances, you may need to consider if: 

• the transaction or behaviour is consistent with what you know about the customer
• you have information that suggests the funds could be proceeds of criminal activity.

If the customer’s funds or wealth don’t align with what you know about the customer and don’t have a clear explanation, we expect you to:

• review the customer’s ML/TF risk in accordance with your AML/CTF policies
• submit an SMR to us if you’ve reasonable grounds for a suspicion.

Documents and data to verify the source of funds and source of wealth

Examples of documents and data you could use to identify the source of funds or source of wealth include:

• bank statements
• payslips
• tax returns
• a probated will
• court order (such as a divorce settlement)
• loan agreements
• compensation/insurance payouts
• investment/capital gains statements
• a trust deed and trustee distribution minutes
• sale/purchase agreements
• extracts from share registries
• evidence of the receipt of royalties
• records relating to business ownership
• trading receipts
• proof of gifted funds – such as a written document signed by the gifter
• gambling winnings
• property or land registers
• business and company registers
• audited financial accounts or statements
• written confirmation from a legal practitioner or accountant
• formal and witnessed declarations (using a statutory declaration in the absence of any other supporting information).

If you can’t establish the source of funds or source of wealth

If you can’t establish a customer’s source of funds or source of wealth, when required, during initial CDD, you must not provide the designated service.

Learn more about when you’re required to do this, in enhanced CDD.

In other circumstances where you can’t establish the source of funds and source of wealth and propose to continue providing designated services, we expect that you:

• consider if you need to submit an SMR
• document why you think it’s appropriate to continue providing designated services
• take steps to manage and mitigate any ML/TF risks of providing designated services in accordance with your AML/CTF policies. 

If you decide to continue the relationship, it may be appropriate to raise the customer’s ML/TF risk and monitor the relationship more closely. For example, it may be appropriate to:

• increase the frequency of reviews of the customer’s know your customer (KYC) information and ML/TF risk
• monitor the customer’s transactions and behaviours more closely
• apply enhanced CDD measures.

Reporting suspicious matters

If checks reveal that the customer has no legitimate source of funds or source of wealth, this may suggest they’ve obtained these through illegal activities. 

If you form a reportable suspicion on reasonable grounds about a customer or transaction while performing source of funds or source of wealth checks, you must submit a suspicious matter report.

Example: Unexplained wealth

Online Betting Company (OBC) has a business relationship with a customer. During initial CDD, OBC collected KYC information from the customer, including information about their occupation and income.

While monitoring the customer as part of ongoing CDD, OBC gets alerted to regular, unusually large bets the customer is making, that are well beyond their means based on their occupation and income. The OBC decides it’s appropriate to conduct a source of funds and wealth check. 

OBC contacts the customer saying that they must periodically update customer information. OBC asks the customer to provide updated information about their source of funds and their source of wealth. 

The customer responds and acknowledges that they’ve been conducting many large bets. They say their wealth comes from the sale of a business several years ago. However, they’re only able to provide rudimentary records that look like the customer created them for the purpose of providing information to OBC. The records also don’t support the level of wealth that the customer would need for their betting amounts.

After considering other information about the customer and their transactions, OBC decides they have reasonable grounds for a suspicion that the customer may be engaged in ML activity and submits an SMR to AUSTRAC. After speaking to their senior management, OBC also decides to exit the customer. OBC does not tell the customer they are suspicious of their conduct to avoid tipping off.

Related pages

• Initial customer due diligence
• Ongoing customer due diligence
• Enhanced customer due diligence
• Suspicious matter reports
• Politically exposed persons.