Source of Funds & Wealth. Verification Requirements

Customer wants to deposit $500,000. Or buy a $2 million property. Or transfer $300,000 offshore. Your first question should be:

"Where did this money come from?"

That's source of funds verification. And for high-risk customers, it's not optional.

Source of Funds vs Source of Wealth

These terms sound similar, but they're different:

Source of Funds (SOF)
The origin of the specific money being used in a transaction. How and where did you get this $500,000?

Examples:
"I sold my house." (Show me the settlement statement)
"It's from my salary." (Show me payslips proving you earn enough to save this amount)
"I inherited it." (Show me the will and executor documents)
"Business profits." (Show me financial statements and tax returns)

Source of Wealth (SOW)
The origin of a customer's entire net worth. How did you accumulate your overall wealth?

Examples:
"I built a successful tech company and sold it for $10 million."
"I've been a surgeon for 30 years, earning high income and investing."
"Family inheritance — my grandparents owned property that appreciated massively."
"Investment portfolio built over decades through stock market returns."

Think of it this way: Source of funds is about the transaction. Source of wealth is about the person.

Why AUSTRAC Cares

Money laundering requires explaining where dirty money came from. Criminals create fake "sources":

• Shell companies that claim to have generated business income (but didn't)
• Fake loan agreements from family members (who never actually lent money)
• Fraudulent invoices claiming business transactions (that never happened)
• Offshore accounts that can't be verified

Source of funds verification forces criminals to provide evidence. Can they prove the funds came from legitimate activity? If not, red flag.

For high-risk customers, source of funds verification is one of the best tools for detecting money laundering.

When You Must Verify Source of Funds

Mandatory for Foreign PEPs
If your customer (or their beneficial owner) is a foreign politically exposed person, source of funds and wealth verification is required. No exceptions.

Why? Because foreign PEPs are at high risk for corruption. That government minister from a high-risk country with $5 million? You need to know it came from legitimate sources, not bribes.

Required for High-Risk Customers
Your risk assessment identified them as high ML/TF risk. Enhanced due diligence applies. That includes source of funds verification.

Risk-Based for Unusual Transactions
Customer normally transacts $10,000 monthly. Suddenly they're moving $500,000. Even if they're not high-risk overall, this specific transaction warrants source of funds inquiry.

When It Doesn't Match Their Profile
Customer's declared occupation is "student" or "unemployed." They're depositing $100,000 cash. Source of funds verification required — because the transaction doesn't match their profile.

Complex Ownership Structures
Customer is a shell company with nominee directors and offshore beneficial owners. Where did the money funding this company come from? You need to verify.

High-Risk Jurisdictions
Funds originating from or transiting through countries with weak AML regimes, corruption, or sanctions. You need to verify the funds are legitimate.

How to Verify Source of Funds

Step 1: Ask the Customer
"Where did these funds come from?"

Their answer determines what evidence you need.

Step 2: Request Supporting Evidence

Depending on their claimed source:

Employment/Salary:

• Employment contract or letter
• Recent payslips (3-6 months)
• Bank statements showing salary deposits
• Tax returns demonstrating income level

Business Income:

• Business financial statements
• Tax returns for the business
• Bank statements showing business revenue
• Contracts or invoices for major customers

Sale of Property:

• Contract of sale
• Settlement statement
• Bank records showing proceeds deposited
• Title transfer documents

Inheritance:

• Copy of the will
• Death certificate
• Letter from executor or estate lawyer
• Probate documents
• Bank records showing inheritance received

Investment Returns:

• Brokerage statements
• Sale confirmations
• Capital gains tax records
• Original investment evidence (to show legitimate source)

Loan or Gift:

• Loan agreement with repayment terms
• Bank records showing loan disbursement
• Gift letter or declaration
• Evidence of the lender/donor's source of funds

Step 3: Verify the Evidence
Don't just accept documents at face value. Check:

• Are the documents genuine? (Not fabricated or altered)
• Do the amounts match? (Payslips should add up to the funds claimed)
• Do the timelines make sense? (Inheritance was 5 years ago but they're depositing "inheritance funds" today?)
• Can you independently verify? (Check employer, contact estate lawyer, verify property sale through public records)

Step 4: Assess Plausibility
Does their source of funds explanation make sense given:

• Their employment and income level?
• Their age and career stage?
• Their transaction history?
• Geographic and economic context?

If something doesn't add up, dig deeper or file an SMR.

Red Flags in Source of Funds Verification

Evasive or Vague Answers
"Where'd the money come from?" "Various sources." "It's complicated." "I'd rather not say."
Legitimate customers can explain where their money came from.

Inconsistent Explanations
First they say it's salary. Then business income. Then inheritance. Story keeps changing.
Red flag. File an SMR.

Can't Provide Evidence
"I sold property but I don't have the paperwork." "My employer doesn't give payslips."
Legitimate transactions have documentation.

Evidence Doesn't Match Amount
Payslips show $50,000 annual income. They're depositing $200,000.
Numbers don't add up.

Source Is Unverifiable
"Funds came from offshore trust I can't name." "Business in a jurisdiction with banking secrecy."
Can't verify = high risk.

Gift or Loan from Unnamed Third Party
"A friend gave it to me." "Family member lent it." But they won't name who or provide evidence.
Could be layering through intermediaries.

Recently Acquired Wealth, No Clear Source
Customer was low-income last year. This year they've got $1 million. No inheritance, no lottery win, no business sale. Where'd it come from?
Suspicious matter report territory.

Source of Wealth: The Bigger Picture

While source of funds focuses on a transaction, source of wealth looks at the customer's overall financial position:

For High-Net-Worth Individuals:
If someone has $50 million in assets, you need to understand how they accumulated that wealth. Not just for this transaction, but overall.

For Foreign PEPs:
A government official shouldn't have accumulated $10 million on a civil service salary. If they have, where'd the wealth come from? Corruption? Bribes? Legitimate business interests? You need to know.

For Complex Structures:
If beneficial owners control multiple entities with significant assets, understanding their source of wealth helps you assess the overall ML/TF risk.

Documentation Is Critical

When you verify source of funds, document everything:

• What source they claimed
• What evidence they provided
• What verification you performed
• Whether you found their explanation plausible
• What decision you made (proceed, request more info, refuse, file SMR)

If AUSTRAC audits your records and asks "Why did you accept this transaction?", you need to show your source of funds verification process.

When You Can't Verify

Customer won't provide evidence. Or their explanation doesn't make sense. Or you can't verify the documents. Now what?

Request additional information
"We need more documentation to proceed. Can you provide X, Y, Z?"

Escalate to senior management
Get approval before proceeding with high-risk transactions where source of funds is unclear.

Apply enhanced due diligence
Increase monitoring, collect additional information, review more frequently.

File an SMR
If you can't verify source of funds and it's suspicious, report it.

Refuse the transaction
If the risk is too high or customer won't cooperate, you can refuse to proceed.

Terminate the relationship
If customer consistently can't or won't explain source of funds, terminate the relationship.

Real Scenario: The Foreign Property Buyer

The Customer: Mr. Li wants to buy a $4 million Sydney apartment. He's a Chinese national, not currently in Australia. Paying with funds from an offshore account.

Source of Funds Questions:
"Where did the $4 million come from?"
"Business income."

Enhanced Verification:
- What business? (Manufacturing company in Guangdong)
- Business financial statements? (Provided, but in Chinese, hard to verify)
- How long in business? (15 years)
- Tax records? (Claims Chinese tax system doesn't provide accessible records)
- Other properties owned? (Several in China, one in Vancouver)
- Source of funds for those? (Business income, unverified)
- Is he a PEP? (Not according to screening, but beneficial ownership unclear)

Risk Assessment:
High-risk jurisdiction, large cash amount, difficult to verify business legitimacy, multiple high-value property purchases, offshore funds.

Decision Options:
1. Refuse the transaction (risk too high)
2. Request additional verification (independent verification of business, source of wealth declaration)
3. Proceed with enhanced due diligence and file SMR
4. Seek legal advice on obligations

This is typical source of funds complexity for Tranche 2 real estate agents. There's no easy answer. You need process, judgment, and documentation.

Tranche 2 Implications

Real estate agents: High-value property transactions will require source of funds verification, especially for foreign buyers, cash purchases, or corporate purchasers.

Lawyers: When managing large sums in trust accounts, you'll need to verify source of funds for client money.

Accountants: Clients setting up structures to hold significant assets will need source of wealth verification to understand ML/TF risk.

Source of funds verification is going to be one of the most challenging aspects of Tranche 2 compliance. It requires judgment, documentation, and sometimes uncomfortable conversations with clients.

The Bottom Line

Source of funds verification is essential for detecting money laundering. Criminals can fake identities and create shell companies. But faking the origin of millions of dollars? That's harder.

When you verify source of funds, you're forcing customers to prove their money is legitimate. And when they can't, you've likely found money laundering.

AUSTRAC expects source of funds verification for foreign PEPs, high-risk customers, and unusual transactions. Document your process. Keep evidence. And when you can't verify source of funds satisfactorily, escalate or refuse.

Because accepting unexplained funds isn't just bad compliance. It's facilitating money laundering.