Our final note on AML compliance for 2025 looks at the often thorny issues of the checks required on source of funds and source of wealth. This is more or less a constant theme of the many SRA monitoring reviews on AML compliance with which we have assisted this year and the SRA issued a thematic review on this topic in November entitled “Thematic review of source of funds and wealth compliance“.
The two issues of funds and wealth are clearly very closely linked but attempts to understand how much checking is required on each, or both, can prove to be problematic. As a rule of thumb, the source of funds must always be known about in all transactional matters, in other words which bank accounts the monies will be coming from, but the degree to which the source of funds will need to be questioned, and how those funds arrived in that bank or building society account in the first place, will depend up the particular facts and circumstances of each matter. The higher the risk profile of the client and/or the value of the transaction, the more important will be the need to take instructions on, and to investigate, the source of wealth.
These two concepts are dealt with in some detail at 6.17 of Legal Sector Affinity Group AML Guidance Note (LSAG) which describes understanding the nature, background and circumstances of the client as being “a fundamental element of CDD”. The guidance then goes on to stress the need for a risk based approach to be adopted in determining how much additional information will be required in relation to understanding the background to the client’s wealth or resources.
Source of funds
Source of funds is described in LSAG as being that which “pertains directly to the funds that are being used to fund the specific transaction”. (LSAG 6.17.2.1) As to quite what such evidence could be, paragraph 6.17.12 suggests that it is:
“Acquiring bank statements, Wills, full payslips, audited financial accounts showing funds disbursed to the client, sales/purchase agreements, receipts of other transactions or similar documentation may all be useful in establishing source of funds. Establishing income from share capital, business activities, a bequest of gift etc. can also help you.”
All such enquiries and investigations may prove to be quite complex, of course, especially where the origins of funds date back many decades and any relevant records or other data no longer exist. The objective should therefore be to see if any facts emerge which raise suspicions in any given case rather than attempting to find clear proof as to the legitimacy of the funds. In so doing the adviser should be looking to control the possible negative outcomes rather than seeking clear and positive proof that they may safely continue to act.
There seems also now to be a stricter interpretation at recent inspections by the SRA. It now includes sums that can be assumed to be lawful unless suspicions arise in the actual circumstances of the matter. At some point, however, common sense must be applied and demanding that the client should be asked to provide proof that a token contribution was lawfully earned would have to be seen to be unrealistic.
Source of wealth
Source of wealth, on the other hand, refers to the origin of a client’s entire body of wealth and so will comprise the business and economic activities of the client (LSAG 6.17.3). As to the extent of this checking, LSAG provides at paragraph 6.18.3 that “it does not however require you to account for all of the client’s assets but to build a rationale and reasoning as to why to provide assurance that it was obtained through legal means”.
Herein, however, lies the problem. These are value judgments that cannot be made with any confidence that the regulator will approve of the level of checking that has been applied. In their recent review, the SRA have expressed concerns about “the continued levels of non-compliance in relation to source of funds and source of wealth checks”. As is made clear by the review document, the level of awareness of this issue is generally good but still, in their view, non-compliance remains widespread. More specifically the SRA has reported that it has concerns of inadequate scrutiny of relevant documents that might have been collected, and lack of file records to validate the evidence that might have been collected.
In statistical terms the report states that out of more than 5,800 files reviewed in 2024–2025 11% lacked source of funds checks and 18% showed inadequate scrutiny. Furthermore, in 8% of cases, the source of funds recorded in the ledger was not supported by the evidence collected.
The SRA requirements
If the problem of source of funds and of wealth is easily stated, however, knowing precisely how this should be addressed continues to prove more challenging. In the section of the thematic review headed ‘Understanding Source of Funds and Source of Wealth’ there are references to the heightened requirements for such checking where politically exposed persons or high risk countries might be involved. For the majority of firms these are complications that will never arise. Likewise, pointing out that such failures could constitute behaviour that could lead to one of the principal offences at sections 327-329 of the Proceeds of Crime Act 2002 being committed, hardly constitutes helpful guidance as there are no reports of any prosecutions having been brought on such grounds in the more than 20 years of the Act’s history.
More positively, however, there is a helpful checklist which will be founds under “Support, guidance and expectations” as follows:
- Where did the money for the transaction come from?
- How did the client acquire the money used in the transaction or business relationship?
- Do the documents provided match the explanation given?
- Does the transaction make sense in the context of the client’s profile?
- Was it necessary to carry out the checks based on the level of risk?
- Has the firm clearly documented the checks undertaken, or documented why checks were not necessary and why the approach was proportionate to the risk involved?
- Is there anything unusual or suspicious about the source or movement of funds?
Beyond useful guidance for fee earners in relevant departments, this should at least prove to be very helpful when conducting file reviews.
And finally
In looking for a more positive note for our year end it is encouraging that the SRA have also stated in the report that although continued improvement on this issue is expected, they do acknowledge that there has been a positive downward trend in matters being referred for investigation based on these issues.
Firms might also appreciate their reminder that “the costs of customer due diligence, including source of funds and wealth checks, can be passed on to clients”. This, however, is subject to section 8.7 of the SRA Code of Conduct for Solicitors and the requirement that the client is provided with the “best possible information about how their matter will be priced”. It therefore follows that clear costs information will need to be provided to the client on such costs in the retainer letter and perhaps the firm’s terms and conditions as well.