Know your customer (KYC) procedures, including where appropriate, taking reasonable measures to identify the source of a customer’s wealth and the source of a customer’s funds are an important part of any AML/CTF programme.
When undertaken effectively and appropriately this enhanced customer due diligence (ECDD) measure helps to harden the financial system against criminal abuse, and helps you manage your money laundering and terrorism financing (ML/TF) risks.
What is a customer’s source of wealth and source of funds?
A customer’s source of wealth refers to the origin of their entire wealth including the volume of wealth the customer would be expected to have accumulated and how the customer acquired that wealth. A customer’s source of funds refers to the origin of the particular funds or other assets involved in one or more transactions between you and the customer.
Why is it important to know a customer’s source of funds and source of wealth?
Where a customer’s source of wealth or source of funds does not align with their transaction activity, it may indicate the customer is involved in criminal activity. Knowing a customer’s source of wealth and source of funds allows you to ensure the level and type of transactions conducted by the customer is consistent with your knowledge of them. This information should also be used to determine your customer’s ML/TF risk, and if need be, to put controls in place to mitigate that risk.
When would source-of-funds and source-of-wealth enquiries be appropriate?
Source of wealth and source of funds enquiries are not appropriate in every circumstance. For example, a source of wealth and source of funds enquiry may not be appropriate where a customer presents conflicting identification documentation or is unable to provide identification documentation. Instead appropriate enhanced due diligence (EDD) measures would seek to resolve any concerns identified with the customer’s identification.
What are reasonable measures?
“Reasonable measures” means appropriate measures that are proportionate with the ML/TF risks you have identified.
I have undertaken source of funds and source of wealth enquires, now what?
Where there are residual concerns in relation to a customer’s source of wealth and/or source of funds you must take appropriate steps to mitigate and manage the ML/TF risk you have identified. Those steps will depend on the size, nature and complexity of your business. Some steps you may take include considering whether:
- to process a particular transaction
- to continue or cease a business relationship with the customer
- the customer should be subject to transaction monitoring and/or
- the customer should be subject to senior management oversight.
If you have also formed a suspicion as part of this process, you should also lodge a suspicious transaction report (STR) or other equivalent report with the Financial Intelligence Centre (FIC). You must also take measures to mitigate and manage the ML/TF risk you have identified.