AUSTRAC has released proposed guidance on source of funds and source of wealth.
It provides some useful extra information on what AUSTRAC expects reporting entities to consider and document.
What’s the difference between ‘source of funds’ and ‘source of wealth’?
Identifying the source of funds and source of wealth is an important part of ensuring your customer’s money isn’t linked to criminal activity.
Identifying the source of funds is about knowing where your customer obtained the funds for a specific transaction.
On the other hand, source of wealth, is about the bigger picture. Identifying the source of wealth is about knowing where your customer’s (or a beneficial owner’s) entire body of wealth and assets came from.
When you’re collecting and verifying information about a customer’s source of wealth, you’re aiming to answer why and how the customer has the amount of overall assets they have.
This means you need to understand and verify the economic, business or commercial activities that generated or significantly contributed to the customer’s overall net worth.
Why does AUSTRAC want you to understand the source of funds and source of wealth?
Establishing the source of funds and source of wealth is an important part of understanding your customer’s financial circumstances, background and position.
This knowledge is critical to making an informed assessment of the risks associated with providing designated services to that customer.
When do you have to verify source of wealth and source of funds?
You’re required to collect and verify source of funds and source of wealth information taking a risk-based approach.
You must collect and verify this information for certain higher risk customers/beneficial owners, including:
- Foreign PEPs; and
- High ML/TF risk domestic or international organisation PEPs
You should also collect and verify source of funds and source of wealth information for all customers/beneficial owners with a high ML/TF risk, including those where a red flag triggers enhanced customer due diligence.
In most cases, this won’t mean additional work. Most advisory firms already collect source of funds and source of wealth information as part of their fact-finding process to understand the customer’s full financial situation, needs and objectives.
Collecting and understanding this information will help you identify unusual or unexpected transactions or activity. This may then trigger the need to establish their source of funds or source of wealth, which may include verification.
What sorts of activities might trigger the need to verify source of wealth and source of funds?
AUSTRAC’s proposed guidance gives the following examples of activities that could trigger the need for verification:
- The customer’s interactions or other activity are inconsistent with what you know about the customer
- There are discrepancies between the information you have collected and other information available to you
- There is adverse media reporting or other information that is relevant to the customer’s source of funds and/or source of wealth
- There has been a material change in the customer’s circumstances
- You determine that the risks associated with providing the designated service to the customer are high or have increased which makes it appropriate to verify the customer’s source of funds and/or source of wealth
Which customer types and control structures could warrant enhanced due diligence?
Example customer types and control structures which present a higher ML/TF risk and would warrant enhanced due diligence include:
- Foreign PEPs and high ML/TF risk domestic or international organisation PEPs requiring source of wealth due diligence
- High-net-worth individuals moving funds into or out of Australia for the purposes of gambling or other cash intensive services where there’s limited visibility of the source of funds
- Complex corporate or trust structures that don’t appear to have a legitimate economic purpose (these structures may be used to conceal the financial activities of the individual beneficial owners seeking to move and use funds without detection)
- Customers acting as intermediaries for another person (can be used to obscure the activities of the individual they are acting for)
In all cases, understanding your typical customers helps you take a risk-based approach
Example 1: your typical customer earns a regular salary and wages, and their wealth consists of a family home, savings, and other ordinary investments or inheritance. These customers are low risk and there may be less need to collect and verify information about these customers’ source of funds and source of wealth.
Example 2: Your typical customer funds themselves or has higher levels of wealth from higher risk, less common or less transparent activities. These customers are higher risk and you must take more intensive steps to collect and verify their source of funds and source of wealth to understand their financial position.
Updating your AML/CTF Program and checklists
Once guidance is finalised Enhanced Customer Due Diligence processes should be updated by businesses. For Clients of Kit Legal this will be done for them by our team and reflected in their AML/CTF Program and Enhanced Due Diligence Checklist to provide some further detail around methods they can use to verify source of funds and source of wealth for high ML/TF risk customers.