Industry

Understanding customer source of funds (SOF) and source of wealth (SOW)

Understanding the source of your customers’ funds and wealth is a crucial aspect of KYC and AML.

An icon of a SOF and SOW documents
Read time:
Share this post
Copied
Table of contents
⚡ Key takeaways
  • Source of funds is the origin of the money used in a particular transaction, while source of wealth is the origin of all the money a person has accumulated over their lifetime.
  • SOF and SOW checks are an essential element of KYC measures and part of the AML recommendations laid out by the Financial Action Task Force.
  • These checks provide your team with a clearer picture of the client’s risk profile and financials and help you investigate suspicious activity and inform future decisions.

Understanding where your customers’ money comes from is a key part of Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance. You can protect your business by employing both source of funds (SOF) and source of wealth (SOW) checks. These processes help verify the legitimacy of the funds your customers use, giving you confidence that your customers and their funds do not derive from high-risk, suspicious, or criminal activity. 

What is Source of Funds (SOF)? 

Source of funds is defined as the origin of the money used in a particular transaction. If your customer makes a purchase, what account did their funds come from? And what kind of activity generated those funds in the first place? 

Common legitimate sources of funds include personal savings accounts, employment income, property sales, inheritances and gifts, legal settlements, and even gambling winnings.

What is Source of Wealth (SOW)?

Source of wealth is the origin of all the money a person has accumulated over their lifetime. Essentially, it analyzes the activities that have contributed toward the individual’s total wealth. SOW examples include family inheritances, investments, business ownership, and income from employment. 

Source of funds vs. source of wealth

There are some overlaps between SOF and SOW. For example, a person’s SOF and SOW could both be attributed to employment income. The key difference is the depth of the investigation and whether you’re interested in the money being used or in the individual making the purchase. SOF is a “moment in time” analysis that looks at a given transaction, while SOW considers the total funds collected over the years. 

Why are SOF/SOW important?

SOF and SOW checks are part of the AML recommendations laid out by the Financial Action Task Force. Both processes are also an essential element of KYC measures, including an enhanced due diligence approach. While these are only mandatory for certain regulated industries, SOF and SOW have the power to benefit any business.

Ensuring your customers’ funds come from legitimate sources can protect your business and its reputation and help you avoid illicit activity.

Internally, SOF and SOW will provide your team with a clearer picture of the client’s risk profile and financials and help you investigate suspicious activity and inform future decisions. To truly understand your customer and any relevant risks they may present, you must understand where they obtained their money — and whether it came from legitimate sources. 

Like many AML processes, SOF and SOW can also help identify illicit funds in the global system. If you’re able to identify and report these issues, law enforcement can take appropriate action and help prevent recurring crimes. 

How to conduct SOF/SOW checks 

Your business should take a risk-based approach to SOF and SOW checks. By considering the risk profile of individuals, you can safeguard your business without putting burdensome requirements on regular customers. For example, you may wish to use a more intensive process for high-risk customers such as Politically Exposed Persons (PEPs) and high net worth (HNW) individuals.

Source of funds verification: You’ll need to determine if the money used in a particular transaction or series of transactions came from a legitimate source. 

SOF checks are often triggered after a user’s transactions meet a pre-defined threshold, such as a particular monetary value (e.g. >$100,000) or multiple transactions over a short period of time. These are situations in which a transaction is potentially suspicious, and launching an SOF investigation can be an effective way to determine if the purchase was legitimate. 

There are a number of documents you can ask users to submit to verify their source of funds, including financial documents, proof of investments, or employment contracts and records. 

Source of wealth verification: For this process, you’ll need to verify that your customer’s accumulated wealth comes from legitimate sources. SOW checks are particularly helpful when you’re entering into a new business relationship. The primary goal is to identify any illicit cash flows, such as funds that originated from money laundering. You may need to ask for different documentation depending on their source of wealth.

  • Inheritance: details about the deceased; tax or legal documents that show the transfer of family funds, including dates and amounts. 
  • Business ownership: a description of the business and its industry; income statements or other sales documents.
  • Employment: a description of the job and employer; a recent pay stub; annual salary or tax information; other documentation that provides proof of employment income.

If your business operates in the financial industry, you must continuously monitor the SOF and SOW of each of your customers. If and when you discover suspicious activity, you must file a Suspicious Activity Report (SAR) and report the details to the appropriate entity, such as FinCEN

Chat with a product expert
See how Persona can help streamline SOF/SOW checks

Simplifying SOF & SOW 

Like many KYC procedures, Source of Funds and Source of Wealth verification can be very time-intensive and complex if done manually. It can be a challenge for your business to collect and analyze the necessary documentation in a timely manner. 

Persona’s document verification solution makes it easier to quickly determine proof of income and proof of wealth by automatically extracting data from user-submitted documents such as paystubs, W2s, bank statements, and brokerage account statements. Set custom requirements for submitted documents and keep out fraudsters with document validity checks — all in a secure flow designed with personally identifiable information (PII) in mind.

Persona’s all-in-one KYC

A complete understanding of your customers and their activities is essential to protecting your business. SOF and SOW checks can also help identify and prevent money laundering and other financial crimes. 

Persona makes it easier to verify the source of an individual’s wealth and the source of the money used in a transaction, a key part of AML compliance. See how Persona can help streamline SOF and SOW verification by requesting a free demo today.

Frequently asked questions

No items found.

Continue reading

Continue reading

How digital health apps can overcome four barriers to converting users
How digital health apps can overcome four barriers to converting users
Industry

How digital health apps can overcome four barriers to converting users

New patients might abandon onboarding if they’re confused, frustrated, or overwhelmed. Here are four ways digital health apps can improve conversion.

How to create scalable and compliant international KYB processes
How to create scalable and compliant international KYB processes
Industry

How to create scalable and compliant international KYB processes

Industry experts discuss international KYB and debunk common myths while sharing how to build a scalable global KYB process.

Trust and safety survey insights: Fighting identity fraud in the age of GenAI
Trust and safety survey insights: Fighting identity fraud in the age of GenAI
Industry

Trust and safety survey insights: Fighting identity fraud in the age of GenAI

Persona’s trust and safety survey reveals that although many fraud fighters feel effective, few have the tools to proactively mitigate identity fraud at the scale generative AI has introduced.

Understanding and implementing FATF’s 40 Recommendations
Industry

Understanding and implementing FATF’s 40 Recommendations

Learn how FATF's 40 Recommendations to combat money laundering can impact your policies.

What is AML transaction monitoring?
Industry

What is AML transaction monitoring?

Learn how transaction monitoring works, why it's important, and more.

How to implement the five pillars of AML compliance
Industry

How to implement the five pillars of AML compliance

Learn what a compliant AML program looks like and how to establish one at your company.

Ready to get started?

Get in touch or start exploring Persona today.