Every firm needs to have a process in place to check the source of funds. Without these checks in place, firms are at risk of committing an offence under the Proceeds of Crime Act 2002.
However, in their 2024-2025 annual report, the SRA (Solicitors Regulation Authority) found that 41% of reviewed firms required feedback on their source of funds checks. The issues highlighted included not having source of funds checks on file and having little understanding of how the funds had been accrued in savings accounts.
Therefore, this guide has been created to help gain insight into the source of funds and why it’s important for your firm to have an understanding of them.
Why do firms need to carry out source of funds checks?
Criminals attempt to conceal the proceeds of their crimes so that it appears the money has a legitimate source. These attempts at concealment are, in their own right, offences under the Proceeds of Crime Act 2002.
Source of funds checks are used to limit the opportunities criminals have for using these funds.
What are source of funds checks?
Source of funds checks are there to ensure you understand the source of funds and that the client can prove they are legitimate, in other words, they’re not from the proceeds of crime and that no money laundering is taking place.
The aim of the game here is to answer the question “where did these funds come from?” or “how are they able to afford this transaction?” Common examples include:
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Salary or wages
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Proceeds from the sale of an asset
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Inheritance
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Monetary gifts
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Loans or other credit
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Business income
If the transaction is not consistent with what you know about the client, the funds may be derived from the proceeds of crime.
How can you verify the source of funds?
When beginning your relationship with a customer, it’s not always appropriate to take their word about the source of funds. You also need to verify that what they’re saying is true.
To do this, you can ask for supporting evidence. The evidence needed depends on the customer’s risk level and how consistent the explanation is with what you know about them. Typically, you can ask for:
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Bank statements
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Recently filed business accounts
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Documents confirming the source, such as:
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House sale
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Sale of shares
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An estate bequest
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Gambling winnings
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Receipt of a personal injury award
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This can become tricky when customers use cash for their transactions. For example, a large withdrawal from a bank account doesn’t necessarily correlate with the cash you receive.
In the same sense, a large cash deposit doesn’t give any detail about where the cash came from in the first place. The tricky part is deciding whether this relates to money laundering or whether it’s genuine, based on what you know about the client.
For example, if you have a press article relating to the client being charged with drug offences, it could be reasonable to assume that the cash transactions stem from there.
Therefore, you need to have an understanding of the customer and how their funds are derived. Without this, you could be exposing your firm to money-laundering risks.