Source of Funds SoF

Source of funds means where the particular money in a particular transaction came from. When a client pays a purchase price, the source of funds is how the client came to hold that sum. It could be savings from a salary, the proceeds of an earlier sale, a bank loan, an inheritance or a dividend.

The question has two parts. One is the activity that produced the money. The other is the route the money takes to reach the transaction, such as the account it is paid from and who holds that account.

The Anti-Money Laundering Regulation (AMLR) uses the term without defining it. The meaning given here is the one in general use in anti-money laundering practice and in international standards. The regulation also speaks of the origin and destination of the funds, which covers the same ground from both ends (Article 26(1)).

A firm must ask before the relationship starts where that is necessary to understand it, and again whenever monitoring or risk calls for it. The AMLR raises source of funds at four points.

The first is the start. Before it enters a business relationship or carries out an occasional transaction, a firm must be sure it understands the purpose and intended nature. To that end it obtains, where necessary, information that includes the source of funds and the destination of funds (Article 25).

The second is ongoing monitoring. The firm scrutinises transactions throughout the relationship to check that they fit what it knows about the client, including where necessary the source of funds (Article 20(1)(f)).

The third is the unusual transaction. A firm must examine the origin and destination of the funds in any transaction that is complex, unusually large, carried out in an unusual pattern, or without an apparent economic or lawful purpose (Article 34(2)).

The fourth is higher risk. Enhanced due diligence may include obtaining additional information on the source of funds and source of wealth of the client and of its beneficial owners (Article 34(4)). For a politically exposed person there is no discretion. The firm must take adequate measures to establish both (Article 42(1)).

The AMLR applies from 10 July 2027 (Article 90). Until then, national anti-money laundering law sets the equivalent duties.

Source of funds is about one transaction. Source of wealth is about the person's whole financial position. The table sets the two side by side, with the points at which the AMLR asks for each.

A client can answer one question without answering the other. A payment from the client's own bank account shows where the funds came from. It does not show how a client with a modest declared income came to hold that balance, which is the wealth question.

Evidence that matches the explanation the client gives. The AMLR does not list the documents. Article 28 gave the EU's Anti-Money Laundering Authority until 10 July 2026 to draft technical standards on the information firms must collect for standard, simplified and enhanced due diligence.

In practice, the document follows the stated source. Salary is shown by payslips or bank statements. A property sale is shown by the completed sale contract with the completion statement. A loan is shown by the loan agreement. An inheritance is shown by the estate papers. A dividend is shown by the company's accounts with the resolution that declared it.

How much evidence is enough depends on risk. Article 20(2) requires a firm to set the extent of each due diligence measure by analysing the risks of the individual client and transaction. Whatever it decides, it must be able to demonstrate to its supervisor that the measures were appropriate (Article 20(4)). The information and documents obtained are kept for 5 years after the relationship ends (Article 77).

The firm cannot go ahead if the gap means it is unable to complete customer due diligence. In that case it must not carry out the transaction or start the relationship, must end an existing relationship, and must consider a report to the financial intelligence unit (Article 21(1)). Article 21(2) sets this rule aside for lawyers, notaries, auditors, external accountants and tax advisors while they ascertain a client's legal position or represent the client in proceedings.

An unexplained source can also be a ground for suspicion in its own right. Article 69(2) lists the origin, destination or use of funds among the circumstances on which a suspicion is based. The firm records what it asked, what it received and what it decided, whether or not it reports (Article 77(1)).