The Importance of SOW/SOF Checks as They Relate to MLR
Completing Source of Wealth and Source of Funds checks with every client isn’t just about going the extra mile, both are mentioned in the Money Laundering Regulations (MLR) of 2017. In fact, there are two areas of the Regulations where these checks are mentioned:
In Regulation 28 (S11 (a))
“…scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile”
In Regulation 35 (S5 (b))
“…take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person;”
Practical Application of Source of Funds Checks
With the above extracts from the MLR as a guide, applying SOF checks in real world situations becomes easier. For one, the law does not actually require you to have to prove that your client’s funds are clean. However, you do need to be sure that those funds do not indicate any possible hint of money laundering activities tied to them.
There are several considerations or factors that can help you to determine when SOF checks are essential:
- You have some concerns with regards your client’s net wealth and/or source of funds due to information received that might link the client’s funds to possible illegal activities or sources.
- Your client is a PEP or Politically Exposed Person.
- Your client hails from a jurisdiction considered to be high risk (crime, money laundering, terrorism).
- One or more shareholders involved in the client’s business or enterprise do not hold any form of online presence that can be evaluated or corroborated in any way.
- Where purchasing of property is involved.
- The pending transaction is of a significantly high value.
- The funds are located in an area or jurisdiction where Combating the Financing of Terrorism regulations or Anti-Money Laundering regulations are limited.
- If you are acting as an executor or on behalf of executors and all relevant funds need to be checked.
- If the funds that have been acquired and put forward, were earned in any foreign jurisdictions.
- If any assets are located in or have been earned in any territories listed as suspect territories, and further investigation or checks are required for further due diligence.
Establishing Source of Wealth
You will not need to run a SOW check if your client clearly demonstrates that their wealth was acquitted legitimately either through the sale of a house or property, through legitimate investment, or by means of a legitimate inheritance.
However, if in doubt, running SOW checks for the following is advisable:
- If your client obtained their wealth through entrepreneurial means, reviewing their website (they should have one), online profile, business or company name is recommended. Recording these details, along with a succinct description of the business is also recommended.
- If the client obtained their wealth as an entrepreneur, but sold their business on to a third party. Obtaining the date of sale as well as the name of the party that bought the business, is recommended.
