RegTech firm Alessa recently outlined the key definitions of the Source of Funds (SOF) and the Source of Wealth (SOW) in the world of finance.
In the complex world of financial regulation, two terms frequently emerge as cornerstones of anti-money laundering (AML) compliance: Source of Funds (SOF) and Source of Wealth (SOW). These concepts are integral to Know-your-customer (KYC) and customer due diligence (CDD) processes, forming the backbone of effective AML strategies.
SOF refers to the origins of the money used in a transaction. It’s about pinpointing the specific activity that generated the funds a customer employs in a transaction. This scrutiny ensures that the money is not sourced from illegal activities. Financial institutions, when faced with significant transactions, delve into verifying the SOF. This involves requesting customers to furnish concrete evidence, such as bank statements or sale documents, proving the legitimacy of their funds.
On the other hand, SOW encompasses a broader scope, focusing on how a customer has accumulated their wealth over time. This might include an exploration into their employment history, investment ventures, and inheritance among other sources. SOW is particularly pivotal for high-net-worth individuals or complex financial dealings, serving as a safeguard against the use of financial systems for illicit purposes.
While both SOF and SOW are aimed at mitigating risk, they serve distinct purposes. SOF is transaction-specific, answering “Where did this money come from?”, whereas SOW provides a comprehensive look at a customer’s financial history, addressing “How did this customer accumulate wealth?”. The documentation required for each also varies, with SOF focusing on transaction-related proofs and SOW demanding a broader array of financial records.
In jurisdictions like the United States, SOF checks are mandated under specific legislations such as Section 312 of the USA PATRIOT Act, particularly for Politically Exposed Persons (PEPs). Enhanced due diligence (EDD), a more intensive form of investigation, incorporates SOF and SOW evaluations to paint a detailed picture of a customer’s financial activities, aiding in the detection of potential risks associated with money laundering or terrorist financing.
SOF and SOW are not just regulatory requirements; they are essential tools that enable financial institutions to understand their customers better and safeguard against financial crimes. In a world where financial security is paramount, these checks play a critical role in maintaining the integrity of financial systems.
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