Amidst property searches, chains and deadlines, there’s always that lingering question at the back of the conveyancer’s mind: “Where did this money really come from?”
Source of Funds (SoF) and Source of Wealth (SoW) checks aren’t just tick-box exercises: they’re a useful frontline defence against money laundering. They may seem like an unsolvable puzzle at times but, as someone who deals with these scenarios every day, I can explain some common misconceptions and share some best practice advice.
Source of Funds versus Source of Wealth
Although these terms are often used interchangeably they have distinct meanings:
Source of Funds (SoF)
This is about where the money for this specific transaction has come from. Think about the bank account it’s sitting in. Did it come from the sale of another property? Was it a loan, or could it be a gift?
Source of Wealth (SoW)
This digs deeper, focusing on how your client accumulated their overall wealth. This could be from employment, business profits, inheritance, investments, or even gambling winnings.
The SRA is quite clear however: you need to understand both, especially for higher-risk transactions like property conveyancing.
The ‘clean’ money myth
One of the biggest pitfalls we see conveyancers fall into is assuming money from a regulated UK bank account is automatically ‘clean’. As the Law Society aptly puts it, just because funds are in a UK bank doesn’t mean they’re clean or consistent with your client’s profile.
Due diligence doesn’t stop at the bank statement – you need to understand the story behind those funds. Is the amount consistent with what you know about your client’s income or background? If your client is a student buying a multi-million-pound property, you would certainly need to ask more questions than if they were buying a modest flat.
Beyond the bank statement: What to ask for
A ‘risk-based approach’ is key here. For every client, you need to assess the level of risk and then tailor your evidence gathering.
For your standard, lower-risk transactions, you might start with:
- Bank statements: These are crucial for showing the money’s journey into the account used for the transaction.
- Payslips/P60s: If employment income is the source.
- Sale of property completion statements: If funds came from another property sale.
For higher-risk scenarios, or when the story doesn’t quite add up, you’ll also need additional evidence.
- For gifted deposits: Detailed gift letters, evidence of the donor’s SoF/SoW (and their ID), and proof of funds coming from the donor’s account. This is a huge area for scrutiny, so it’s essential to be thorough.
- For business profits: Company accounts, tax returns, evidence of business activities.
- For inheritance: Grant of probate, will, estate accounts, copy of solicitor’s letter distributing the funds to you (if applicable).
- For investments or savings: Investment statements, withdrawal confirmations.
- For loans: Loan agreements, evidence of how the lender received their funds.
The aim is to build a clear, logical picture that explains how the funds were generated and transferred. Don’t be afraid to ask for further evidence if you’re not satisfied. It’s far better to ask now than to face an SRA investigation later.
The art of the tricky conversation
Asking a high-net-worth client how they acquired their millions may feel awkward, but it’s a necessary part of your professional duty. Approach it calmly and professionally. Explain why you’re asking – it’s a regulatory requirement designed to protect both the firm and the client from financial crime. Frame it as part of your commitment to maintaining the highest standards of integrity.
Remember, if something feels off, it probably is. Instinct is a powerful tool in AML compliance.
Bringing it all together: Best practice
Following a plan and strategy for AML best practice is your key to feeling safe.
Standardised policies
Have clear, documented firm-wide policies for SoF/SoW. This ensures consistency and clarity for all staff.
Risk assessments
Conduct thorough client and matter risk assessments and keep them updated. This acts as a guide to the level of due diligence you need.
Training, training and more training
Ensure all staff, from fee earners to admin, understand the importance of SoF/SoW checks, how to conduct them and what red flags to look for.
Document everything
If you asked for it, why you asked for it, what you received and your assessment of it; document it meticulously. If you don’t record it, it didn’t happen in the eyes of a regulator.
Be proactive
Integrate SoF/SoW checks early in the client onboarding process. Don’t wait until exchange to realise you have a problem.
Mastering Source of Funds and Source of Wealth verification is a continuous journey. It requires vigilance, robust processes and a willingness to ask the necessary questions.
Baljeet Harley is an associate at Teal Compliance
