.png)
Anyone associated with the financial industry or other affiliated industries has definitely come across the phrases Source of Funds (SOF) and Source of Wealth (SOW), but what do actually these two phrases mean? What are their differences? This article tries to summarize the differences of the two phrases and provides an insight to their meaning and importance.
The battle against money laundering and terrorism funding relies heavily on SOF and SOW and their understanding since they can both point to clients who are engaging in illicit activities.
Companies should utilize this information to support their AML/CFT compliance response and when reporting suspicious activities (SAR) to appropriate domestic authorities when SOF and SOW do not match a customer's risk profile or their established transaction history.
The Know Your Customer (KYC) procedure and AML/CFT compliance both depend on knowing where consumers get the money, they use to conduct transactions and make investments.
On the ground, this implies that KYC checks and controls, such as customer due diligence (CDD), must be implemented by financial institutions in order to safeguard both their assets as well as those of their clients.
There is a difference between the source of funds and the source of wealth. These are two distinct terminologies with distinct connotations. It’s critical to know the difference between "source of funds" (SOF) and "source of wealth" (SOW) before digging into either one.
Source of Funds
Given how closely they resemble one another and how frequently they are used in the same sentence, it can be difficult to keep track of the differences between SOF and SOW.
SOF should be viewed as a transactional model. It can be made up of a variety of sources, such as wages, savings, gifts, and so on. It's all about where the money for a certain transaction comes from, and more specifically, where it originated from in the first place. As a result, transaction monitoring and customer due diligence become increasingly important.
SOF has a far narrower nature than SOW. When dealing with SOF the company should identify how and from where did the client obtain funds for the particular transaction rather than just where did the funds come from. The fact for example that the funds originated from a Cyprus bank account is insufficient.
Source of Wealth
SOW stands for the whole of a person's assets. It encompasses everything included in the aforementioned explanation of SOF and includes non-liquid assets like automobile collections, virtual assets, precious stones, and metals, or anything that would add value to an individual’s wealth. All the aforementioned and many more are all included in the scope of this assessment, which is broader than the scope of the SOF.
SOW is a lifetime representation of how that person generated their wealth. As a result, we would need to inquire about the client's total source of wealth in this scenario and not focus on a particular transaction as in the case of SOF. Clients' responses to this question may vary, and the answers may range from salary at work to inheritance and investments.
Therefore, SOW aims to create a whole picture and reveal the entire fortune and not just the portion of it identifying the total assets of a person. SOW describes the economic, business, and/or commercial actions taken by someone that has created or significantly contributed to its entire wealth.
Do not fall into a trap into thinking that to have a proper account of someone’s SOW the company is obligated to account for every single financial resource but to be able and demonstrate in a logical and probable way that this wealth was generated legally. Having a clear and logical SOW assists the company in understanding SOF of a particular transaction.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
We are a team of experienced professionals, all sharing a unique drive for learning and development through teamwork. The Group utilizes its various core activities to implement customized solutions for its clients. Our collective experience spans the areas of Global Corporate & Fiduciary Services, Assurance & Advisory Services, Fund Administration, Tax Advisory, Corporate Governance, Financial Services, Private Wealth Services and Compliance.
Start a conversation with us today to find out how you can benefit from a relationship with Flexi Group.
Please get in contact with our Head of Business Development:
Mrs Daniella May / Head of Business Development
Tel.: + 357 7000 2 5555 / + 357 22 87 57 55
We also organize calls using Skype. Our flexi Skype ID is web@flexi-group.net
Comments