TheWolfsberg Group has issued Guidance in the form of Q&As to assist institutions in identifying, managing and mitigating the risks of money laundering/terrorist financing, by effectively identifying the Source of Wealth (SoW) and the Source of Funds (SoF) of their clients. Although this Guidance is addressed to financial institutions it is useful for application by other regulated entities as well.

A risk based approach (RBA) is primarily followed, the risk rating of each client will dictate the level of due diligence (DD) that will be applied to ascertain, inter alia, the SoW and SoF and obtain information and documentation commensurate to the level of risk of that particular client. It is important to ensure that the information obtained is properly documented and enables the financial institution to understand the client’s background and how capital was generated and to confirm that the transactional activity of the client is the type of activity that would reasonably be expected of that client. If not, then the possibility that the activity is suspicious should be evaluated. Any information collected should be in line with the institutions policies and procedures.

Source of Wealth

According to the Guidance, SoW generally refers to a description of the economic, business or commercial activities which generated or significantly contributed to the clients overall net worth (assets minus liabilities) and acknowledging that the general composition of wealth may change as new activities may contribute to additional wealth being accumulated. The purpose of obtaining SoW information is for the financial institution to assess the client’s “wealth generating activities” in general and where relevant, those of the beneficial owners in instances where a personal investment vehicle is used.

It is important for SoW information to be collected at account opening and refreshed periodically. Corroboration of information from different sources is useful and significant in ascertaining SoW, consideration should be given as to whether the SoW appears legitimate and the information provided by the client is reasonable with regards to the overall wealth and other information collected. According to the Guidance this should not be seen as a documentary exercise.

A plausible construction of the wealth accumulated throughout the years, in a chronological manner should be sought. Corroboration with external parties or conducting independent enquiries is a way forward to bridge any gaps apparent in order to create a coherent picture of the client, establish their SoW and have that reasoning along with information and documentation available for review by an independent party.

Information could come directly from the client or from other sources, including available, reputable, credible, relevant public information from independent reliable publishing institutions, independent practitioners, banks or company registries. The level of reliance to be placed on evidence used for corroboration requires the exercise of judgement and is determined by the source, type and verifiability of the evidence provided.

According to the Guidance, an estimate of the client’s net worth should be included to objectively review the information on how that SoW was obtained or accumulated and contribute to the understanding of how the client acquired their SoW and whether the explanations provided by the client are indeed plausible.

Source of Funds

In general, SoF aims to identify where the particular funds for a particular purpose are coming from or how a specific account will be funded with a specific focus on the amount to be transferred by a client and the specific means method by which the transfer will occur. Particular importance should be placed on the purpose of each specific account and institutions should understand the origin of the initial deposits or inquiring on any subsequent funding, depending on the risk.

Consistent with the SoW, SoF should be understood in the context of the attributes of the client’s personal and financial background. Following the application of a RBA, the SoF exercise may include looking into the amount or value and type of financial instruments or assets used to fund the account, the method of transfer, looking into the remitting party and information on where the transfer originated from or the country from which the funds have been sent.

Another important factor is to ascertain whether the account will be funded or is expected to be funded by any third party. If so, then additional due diligence should be undertaken to ascertain the relationship and rationale of the relationship.

Where a client presents a higher risk for money laundering or terrorist financing then further investigation is required as to the SoF of that client, such cases may include instances where there are inconsistencies with the client’s background, existence of cash element, higher industry or sector risk. According to the Guidance, evidence that has been used to corroborate the SoW can be used to corroborate the SoF as well.

General observations

Where the financial institution is not satisfied with the evidence collected, the financial institution may deny or terminate the relationship with the client. If not, the financial institution may choose to elevate the risk of that specific client and monitor the relationship closer. This for instance may be achieved by placing restrictions on the account usage such as setting limits and monitoring each transaction. Whatever the case, the institution should document the steps taken to obtain and corroborate the information and the reasons as to why information is not available. The reasons as to why the relationship manager became comfortable with opening or maintaining the accounts should also be recorded amongst other things.

Further, the Guidance states that financial institutions should update and review the SoW/SoF as necessary during the lifecycle of the relationship, on a RBA, including when periodic reviews are scheduled or an event-driven review is triggered by changes in the client’s circumstances. The focus of any update should be to incorporate the new information and obtain supporting evidence to validate it.