Source of Funds vs Source of Wealth: what is the difference and what the bank actually wants to check

Opening a bank account for an individual or a business has long ceased to be a simple procedure. Today, almost every international bank conducts comprehensive client due diligence in accordance with AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements. It is during this process that two concepts most often arise, which many people confuse: Source of Funds (SOF) and Source of Wealth (SOW).

At first glance, they seem similar, but for the bank, they are completely different categories. A misunderstanding of this difference often causes delays in compliance checks or even refusals to open an account.

What is Source of Funds?

Source of Funds is the confirmation of the origin of specific funds that a client plans to deposit into an account or use within a specific transaction.

In other words, the bank wants an answer to the question: "Where exactly did this money come from?"

For example, the source of funds can be:

• salary;
• sale of real estate;
• sale of a business;
• dividends;
• return on investment;
• inheritance;
• profit from cryptocurrency operations.

At the same time, simply stating the source of income is not enough. The bank expects documentary proof.

What is Source of Wealth?

Source of Wealth is an explanation of how a person has accumulated their capital over a lifetime or through a company's activities.

In fact, the bank asks another question: "How did you become the owner of this property or capital?"

For example, Source of Wealth can be confirmed by:

• long-term entrepreneurial activity;
• sale of several companies;
• systematic investing;
• receiving dividends over many years;
• inheriting significant property;
• a successful career with a high official income.

Thus, Source of Wealth describes the general financial history of the client, whereas Source of Funds relates to a specific amount of funds.

What is the main difference?

It is precisely because of a misunderstanding of this difference that clients often send the bank documents it does not expect to receive.

What documents can the bank request?

Depending on the situation, the bank may ask for:

To confirm Source of Funds:

• bank statements;
• sale and purchase agreements;
• tax returns;
• income certificates;
• brokerage reports;
• dividend payment documents;
• history of cryptocurrency transactions.

To confirm Source of Wealth:

• financial statements of companies;
• tax returns for several years;
• business sale documents;
• contracts for significant assets;
• information on the ownership structure;
• confirmation of investment activity.

Why do banks pay so much attention to this?

International banks are responsible for complying with financial monitoring requirements. If they cannot explain the origin of a client's funds to the regulator, it creates significant legal and reputational risks.

That is why compliance specialists analyze not only the documents themselves but also their logical consistency.

For example, if a client declares multimillion-dollar capital, but their official income over the past few years has been minimal, the bank will almost certainly ask additional questions.

Specifics for cryptocurrency assets

Following the implementation of MiCA and the tightening of international AML requirements, banks are checking the origin of digital assets much more carefully.

If the source of funds is cryptocurrency, the bank may request:

• transaction history from exchanges;
• blockchain analytics;
• proof of passing KYC;
• information on the initial acquisition of assets;
• tax documents regarding the profit received.

Special attention is paid to the absence of links to sanctioned addresses, mixers, and other high-risk services.

How to prepare for the check?

Practice shows that most problems arise not due to a lack of a legal source of income, but due to insufficient preparation of documents.

Before contacting the bank, you should:

• form a separate package of documents for Source of Funds;
• prepare explanations regarding Source of Wealth;
• check the consistency of information across all documents;
• conduct preliminary AML and sanctions screening in advance;
• if necessary, obtain a legal opinion on the structure of the origin of funds.

Such an approach significantly reduces the time for compliance checks and minimizes the risk of receiving a refusal.

Why should you contact "Prikhodko & Partners"?

The international corporate law and FinTech practice of the "Prikhodko & Partners" law firm regularly supports the opening of accounts for individuals, international business, investment funds, FinTech companies, CASPs/VASPs, and private investors.

Our lawyers help prepare Source of Funds and Source of Wealth packages, structure documents in accordance with the requirements of a specific bank, pass the AML/KYC check, and minimize the risks of refusal. Thanks to our practical experience interacting with banks in various jurisdictions, we know what documents the compliance department actually expects to see.

Do you not know how to properly confirm the origin of funds or capital for a foreign bank? Entrust your compliance procedure to the professionals at the "Prikhodko & Partners" law firm. We will help structure documents for Source of Funds and Source of Wealth, which will minimize the risk of refusal and speed up the account opening. Leave a request on the website for a professional consultation!