Source of Funds, Source of Wealth, KYC, What Does it All Mean?
An exploration of the verification and terms used in anti-money laundering (AML) and identity checks.
The tech sector is renowned for its use of acronyms. Often, these acronyms cover more than one technology, take IDP, for example. An IDP can mean an ‘Identity Provider’ or ‘Intelligent Document Processing.’ Words and phrases, too, can mean multiple things and become confusing. An example is authentication, which is often defined as ‘verifying the identity of a user.’ This is true to an extent; users authenticating to a service will present some form of authentication, such as a password or a facial biometric. However, authentication is not the same as verification.
In the UK, the Money Laundering Regulations and the Proceeds of Crime Act (2002) require checks on the legitimacy of financial transactions. These checks can include multiple verification events, such as verifying identities, checking the source of funds, and conducting anti-money laundering checks. Organizations such as accountants, financial services businesses, estate agents, and solicitors must comply with these regulations. Here, we provide clarification on the terms used to describe the various processes involved in anti-money laundering (AML) and identity checks under regulations surrounding Source of Funds.
Source of Funds (SoF)
Knowing where money is coming from during a transaction is essential to ensuring it is from a legitimate source. The Home Office report ‘National Risk Assessment of Money Laundering and Terrorist Financing 2025’ estimates that up to £10 billion is laundered annually, via the UK property market.
Source of Funds can originate from many different places, including the following:
- Bank statements (Bank)
- Payslips or employment income records (Employer)
- Property sale contracts (Law firm)
- Inheritance evidence (Law firm)
- Investment account statements (Bank or Investment company)
- Other sources, such as gift letters (Law firm)
Source of Funds checks will be based on one or more of the above. The use of source types can be determined by an orchestration layer that initiates rules-based automation; the rules decide which source or sources are required based on criteria such as the value of the transaction.
Proof of Funds (PoF)
Proof of Funds can be thought of as the next stage beyond Source of Funds. Proof of Funds checks to ensure that an individual has sufficient funds at the source to complete a financial transaction. These checks can be done at the same time as SoF using open banking. Alternatives to open banking include vouching by a solicitor or bank.
Source of Wealth (SoW)
Source of Wealth differs from SoF in scope. A SoW check looks more deeply at an individual’s wealth, how they accrued that wealth, and their financial status. The UK Money Laundering Regulation (2017) section 5 deals with SoW for Politically Exposed Persons (PEP), stating this:
“…take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transaction with that person.”
Locating and capturing evidence of SoW can be labor-intensive. Orchestration with decisioning and rules can help to reduce the time to accrue the SoW data.
Politically Exposed Person (PEP)
Anti-money laundering laws require that individuals be screened to determine whether they are likely to be a Politically Exposed Person (PEP). A PEP is someone who has connections to high-ranking government officials, military officials, or similar, placing them at risk of being a victim of a financial crime. PEP checks involve checking an individual against databases of PEPs.
Know Your Customer (KYC)
Identifying your customer is a core requirement of AML regulations to protect against financial crimes such as fraud, money laundering, and terrorist financing. KYC checks can be basic, such as checking an individual’s name and address. However, for most SoF financial checks, KYC processes involve more comprehensive identity checks based on document IDs (passport, driver’s license, etc.) and often include capturing a facial biometric. KYC checks are typically performed online or via a mobile app. However, in some circumstances, vouching may be used, in which a notarized organization or individual certifies identity documents.
Enhanced Due Diligence (EDD)
Enhanced Due Diligence is a comprehensive and rigorous form of KYC. EDD is typically required for high-value transactions or when dealing with a PEP. Another reason to carry out an EDD is set out in Article 18 of the European Union’s 6th Anti-Money Laundering Directive (6AMLD). This latest AML regulation requires EDD to be carried out on beneficial owners and individuals from FATF-listed high-risk countries.
The UK’s Money Laundering Regulations 2017 also require EDD for high-risk individuals in line with 6AMLD.
EDD processes involve KYC and identity verification, PEP and AML checks, risk assessments, and ongoing monitoring.
AML Screening
Anti-money laundering has reached epic proportions. As a result, SoF checks must take AML screening into account. AML screening checks an individual against global databases for evidence of financial crime. AML checks include PEP checks, sanctions screening, and adverse media screening, e.g., adverse mentions of the person in the media, court filings, and social media. Payment screening is another AML check applied to the transaction, rather than the customer; all aspects of the transaction are checked for signs of suspicious activity. Many checks associated with identity verification, AML screening, and Source of Funds can be performed online. However, in some situations, checks, including KYC and SoF, must be performed F2F. In these cases, vouching is an option. Vouchers are organizations or individuals who have also been verified as part of the process to become vouchers. These entities can then perform the necessary checks upon request. Vouchers, such as law firms, solicitors, banks, and financial advisors, provide documentary evidence, including certifying identity documents and financial statements to prove SoF and KYC.
Avoco Trust provides vouching capability within its processes if required.
Source of Funds Orchestration
There are many forms of orchestration. However, in the context of SoF, orchestration provides connectivity to all required screening and verification services to meet regulatory compliance requirements.
Find out more about identity orchestration.
Orchestration with Decisioning
SoF orchestration provides the capabilities needed to automate KYC, PEP checks, AML screening, and Source of Funds/Wealth. However, without a layer of control on the form of ‘decisioning’, orchestration would simply be a connection layer. Decisioning applies rules set at the service level and enforces them based on the data returned as the process progresses. Rules are there to reflect risk, allowing the service to respond accordingly. Orchestration with decisioning for Source of Funds ensures your service can handle diverse customer types and transactions and maintain regulatory compliance.
Contact us to find out how Avoco Trust can simplify any SoF checks.