Source of Funds vs. Source of Wealth (SoF vs. Sow)

• July 31, 2024
• Rachna Pandya

SoF refers to the origin of the funds involved in a transaction, while SoW pertains to the total accumulation of a customer’s wealth over time.

In the context of SoF vs. SoW, banks, and financial institutions place significant emphasis on both the source of funds and source of wealth parameters as part of their AML/CFT compliance. SoF and SoW help institutions to:

• Assess risks related to money laundering and terrorist financing

• Provide insights into the origins of the funds in transactions and the customer’s overall financial background.

At the same time, identifying source of funds vs. source of wealth (SoF vs. SoW) is essential because it enables AML-obligated businesses to detect suspicious activities and effectively mitigate illegal financial operations.

Are you ready to apply this knowledge for better compliance and risk management? Let’s get started!

SoF vs. SoW—What’s The Main Difference

The primary difference— source of funds vs. source of wealth—lies in their scope and purpose.

SoF focuses on the origin of the money used in a specific transaction, answering the question, “Where did this money come from?”

In contrast, SoW looks at the broader financial history of a customer, answering, “How did this customer accumulate their wealth?”

What is the Source of Funds (SoF)?

Source of funds is the origin of the money used in a specific transaction. It details how and from where the funds are derived, such as employment income, property sales, or loan receipts.

Source of Funds Use Cases:

• Funds used for purchasing artworks or luxury goods.

• Receiving funds from the sale of property.

• Inheritance proceeds used for a transaction.

• Salary payments deposited into an account.

• Loan proceeds used to fund a purchase​​.

What is the Source of Wealth (SoW)?

Source of wealth describes the overall origins of a customer’s total wealth, explaining how the customer has acquired their total net worth over their lifetime. This includes wealth gained through activities such as business earnings, investments, or inheritance.

Source of Wealth Use Cases:

• Wealth held by politically exposed persons (PEPs).

• Accumulation of assets from a long career in business.

• Growth of wealth through investments in stocks and real estate.

• Wealth inherited over generations.

• Wealth generated from successful entrepreneurial ventures​.

Source of Funds vs. Source of Wealth: Key Differences

SoF is transactional and specific, whereas SoW is holistic and cumulative.

SoF requires documentation for the specific transaction, such as sale receipts or loan documents. SoW requires broader documentation, such as tax returns or investment portfolios​.

Here’s the source of funds vs. source of wealth (SoF vs. Sow) comparison chart.

SoF vs. SoW—How Are They Related?

SoF and SoW are interconnected in that verifying one can often support the verification of the other.

For example, when conducting enhanced due diligence on a high-risk customer, understanding both the specific funds used in a transaction (SoF) and the broader accumulation of wealth (SoW) provides a comprehensive risk profile​.

How To Conduct SoF/SoW Checks

Here’s the sequence of how AML compliance officers and financial auditors conduct SoF/SoW checks.

1. Customer Identification: Verify the customer’s identity using reliable, independent source documents.

2. Document Collection: Collect documents for SoF (e.g., transaction receipts) and SoW (e.g., tax returns, business ownership records).

3. Verification: Cross-check the provided information against independent and reliable sources.

4. Risk Assessment: Assess the information for any red flags or inconsistencies.

5. Identify High-Risk Customers: Use KYC protocols to flag PEPs or individuals from high-risk countries.

6. Enhanced Due Diligence (EDD): Apply EDD measures for higher-risk scenarios, such as obtaining legal declarations or conducting site visits.

7. Documentation: Maintain thorough records of the checks and verifications conducted.

8. Ongoing Monitoring: Continuously monitor transactions and customer profiles for any changes or suspicious activities.

The sequence of the SoF/SoW checklist varies depending on different use cases and AML compliance priorities.

SoF vs. SoW—Compliance Challenges and Best Practices

Both SoF and SoW checks come with specific challenges and require best practices to ensure thorough verification and risk mitigation.

SoF/SoW Regulatory Considerations [Compliance Challenges]

Financial institutions face several challenges when implementing SoF and SoW checks:

➤ Difficulty in obtaining accurate and complete documentation.

➤ Complexity in verifying non-traditional assets like cryptocurrencies.

➤ Variability in customers’ financial histories.

➤ Variability in the depth of required documentation based on the risk profile of the customer.

➤ Keeping up with regulatory changes and requirements.

How to Perform SoF/SoW Verification Effectively [Best Practices]

To address these challenges and ensure effective SoF and SoW verification, institutions should adopt the following best practices:

✔ Implement robust KYC (know your customer) procedures.

✔ Adopt a strong AML compliance program that includes continuous monitoring and regular updates.

✔ Use technology for effective data collection and analysis.

✔ Regularly update and train staff on AML/CFT regulations.

✔ Establish clear policies and procedures for SoF and SoW verification​.

✔ Utilizing advanced AML software to streamline SOF and SOW checks.

The above approach not only ensures compliance with AML/CFT regulations but also strengthens the institution’s overall risk management framework.

Wrapping Up SoF vs. SoW in AML

On a final note, both source of funds and source of wealth verifications are integral to a comprehensive AML strategy. They help financial institutions ensure that the funds and overall wealth of their clients are legitimate, thus protecting the financial system from being exploited for illegal activities​.

If you liked reading this piece on SoF vs. SoW, and seek more updates on AML-CFT and RegTech compliance, follow ThePerfectMerchant. Businesses are welcome to connect with us for industry-specific discussions and information exchange.

Top FAQs on Source of Funds vs. Source of Wealth

What does SoF stand for in banking?

SoF stands for source of funds, referring to the origin of the money used in a transaction.

What is SoF in business?

SoF in business refers to identifying and verifying the origin of funds used for business transactions to ensure they are legitimate.

What is source of funds and source of wealth in AML?

Source of funds (SoF) pertains to the origin of money for a specific transaction, while source of wealth (SoW) relates to the overall accumulation of a customer’s total wealth over time.

What is SOF compliance?

SoF compliance involves the procedures and policies financial institutions use to verify the origin of funds in transactions, ensuring they are not derived from illegal activities.

What is a SoF document?

A SoF document is a record used to verify the origin of funds in a transaction, such as bank statements, payment receipts, or loan agreements.

What are SoF documents?

SoF documents include bank statements, payment receipts, loan agreements, and any documentation that verifies the source of money used in a transaction.

What is a SoW in due diligence?

SoW in due diligence involves verifying the source of wealth to ensure that the customer’s wealth has been accumulated through legitimate means.

What are the sources of wealth verification?

Sources of wealth verification include tax returns, business ownership records, investment portfolios, and property deeds.

What is considered a source of wealth for AML requirements?

Sources of wealth for AML requirements include employment income, business profits, investments, inheritance, and property sales.

What is the source of money for money laundering?

Funds used for money laundering usually originate from illicit endeavors such as drug dealing, bribery, deceptive practices, and tax avoidance.

What are the major sources of funds?

Major sources of funds include salaries, business revenues, investments, loans, and sales of assets.

Is savings a source of fund?

Yes, savings can be a source of funds, representing money that has been set aside from income or other legitimate sources.