Illicit financial flows remain notoriously difficult to detect,  with less than 1% intercepted or recovered. Criminal funds often flow through layered networks, shell companies, and cross-border structures that obscure their origin. To assess legitimacy, financial institutions must do more than track transactions. They must understand where funds come from and how they were acquired.

Expectations around source of funds (SoF) and source of wealth (SoW) have grown, especially in high-risk scenarios that trigger enhanced due diligence. Firms face growing pressure from regulators, reputational concerns, and more complex financial crime. As integral elements of anti-money laundering (AML) compliance, both SoF and SoW provide critical context for evaluating risk and support stronger financial crime controls.

Understanding the Difference between SoF and SoW 

Understanding the distinction between source of funds (SoF) and source of wealth (SoW) is essential for effective AML compliance. While often mentioned together, each plays a distinct role in customer due diligence. SoF provides insight into the origin of a specific transaction or deposit, whereas SoW offers a broader view of how a customer or beneficial owner accumulated their total wealth over time.

This distinction becomes critical when dealing with high-risk customers, politically exposed persons (PEPs), or transactions flagged during ongoing monitoring. Firms that fail to accurately distinguish and verify SoF and SoW risk regulatory breaches, reputational damage, and exposure to money laundering schemes. As regulatory scrutiny increases, financial institutions must ensure their compliance teams apply consistent definitions and verification practices across both categories.

Defining SoF and SoW

SoF and SoW capture different aspects of a customer’s financial background. SoF refers to the origin of funds used in a specific transaction and how the customer or beneficial owner acquired them. Examples include employment income, monetary gifts, or recent sale proceeds from a large asset such as a property or business shareholding.

Conversely, SoW refers to the broader financial background behind a customer or beneficial owner’s total net worth. It explains how wealth was accumulated over time, not just which assets are currently held. Examples include long-term investments and dividends, inheritance, divorce settlement, real estate holdings, lottery winnings, or business ventures. 

Failing to distinguish between SoF and SoW can lead to gaps in due diligence and weaken financial crime controls. While supporting documentation may overlap, each serves a distinct purpose.

Obligations to verify SoW and SoF

Assessing SoF and SoW is an important part of customer due diligence, guided by a risk-based approach. SoW is particularly important for enhanced due diligence such as when dealing with politically exposed persons (PEPs), including close associates or family members, high-risk third countries, or high-risk business activities or customer profiles.

Because of their positions, PEPs pose a greater risk of laundering illicit funds or engaging in offences such as bribery, corruption, or funds embezzlement. Foreign PEPs, in particular, are often considered higher risk than their domestic counterparts.

SoF or SoW checks may also be triggered during periodic or event-driven reviews, for example, following a change in business ownership or control or the emergence of relevant adverse media. Depending on the scenario, firms may request different types of documentation. For SoF, this could include recent payslips, sales agreements, or a bank statement. For SoW, it might mean property deeds, inheritance documentation, or trust agreements. In high-risk cases, firms may be expected to take more intrusive and exhaustive steps to corroborate both.

Regulatory Views

As global financial crime threats evolve, regulators are placing growing emphasis on the verification of SoF and SoW, particularly for high-risk clients and transactions. Regulatory bodies such as the Financial Action Task Force (FATF), the UK Financial Conduct Authority (FCA), and the Monetary Authority of Singapore (MAS) have all reinforced the importance of a robust risk-based approach to due diligence, including effective assessment of a customer’s financial background.

Rather than prescribing one-size-fits-all procedures, regulators encourage firms to tailor their due diligence efforts based on risk exposure. This means understanding when to escalate from basic checks to enhanced due diligence and documenting the rationale behind each decision. Regulatory enforcement actions increasingly cite weak or missing SoF and SoW documentation as critical compliance failures. As such, aligning internal practices with regulatory expectations is key to maintaining compliance and preventing financial crime.

The risk-based approach

Firms are expected to take a risk-based approach to AML, applying enhanced due diligence and verifying SoW and SoF where appropriate. The Financial Action Task Force (FATF) defines this approach as identifying, assessing, and understanding exposure to money laundering and terrorist financing risk, then applying proportionate measures in response. 

This framework shapes how firms assess SoW and SoF, with the level of risk guiding the depth of verification. For example, the UK’s Financial Conduct Authority (FCA) recently advised that firms may take less intrusive steps in lower-risk scenarios involving domestic PEPs. This could include relying on transaction records or publicly available data, rather than requesting additional documents,  unless other risk indicators or anomalies arise. 

Firms are encouraged to consider the risk level of the customer, product, or service when deciding how much information to collect and how extensively to verify it supporting a shift from tick-box compliance and towards a risk-based approach.

The growing importance of wealth verification

In the European Union (EU), the latest AML package introduces specific requirements for high-risk customers, including high-net-worth individuals, and expands triggers for enhanced due diligence. As a result, firms may face greater scrutiny over how they collect and corroborate SoW and SoF information, especially in high-risk and cross-border scenarios.

Globally, this focus is reflected in enforcement. The Monetary Authority of Singapore (MAS) recently took regulatory action against several financial institutions for AML breaches, citing failures in how they assessed and corroborated the SoW for high-risk customers. MAS found that many firms missed or failed to follow up on significant discrepancies or red flags in the documentation provided. In some instances, key aspects of the SoW went uncorroborated.

Challenges and the Role of Technology

Verifying the source of funds and wealth is often complex, especially when dealing with offshore accounts, high-net-worth individuals, or clients operating in opaque or high-risk sectors. Manual verification processes can be slow, inconsistent, and resource-intensive. Many firms also face internal challenges, such as differing definitions of SoF and SoW across teams, a lack of standardised procedures, or fragmented data systems.

To overcome these issues, financial institutions are increasingly turning to technology. Integrated compliance platforms that combine data from internal systems with external intelligence sources enable more efficient, accurate, and scalable risk assessments. AI-powered tools and real-time screening technology allow for better detection of anomalies and inconsistencies that may indicate suspicious activity. Technology also supports audit trails, demonstrating that due diligence processes are consistent, proportionate, and in line with regulatory standards.

Common challenges in SoF and SoW

Verification is especially difficult when customers provide limited documentation or operate in opaque jurisdictions. Low transparency sectors, the involvement of professional intermediaries, or complex corporate structures with layered ownership across borders can add further opacity. 

Even within firms, inconsistent internal definitions of SoF and SoW can lead to fragmented assessments. While the risk-based approach allows firms to tailor their checks to different risk levels, clear internal standards are essential for consistency.

To support risk-based assessments, firms should consider guiding questions such as those outlined by the Australian Transaction Reports and Analysis Centre (AUSTRAC):

• Can the SoF and SoW be plausibly explained, for example, employment, inheritance, or investment income?

• Is the customer’s background consistent with their known business activity, account usage, or the size and nature of the transaction?

• Do the documents provided make sense in context when reviewed alongside due diligence, including from open-source checks?

How technology helps

Technology can strengthen how firms meet SoF or SoW requirements. Tools that integrate third-party data, such as beneficial ownership registries, public records, sanctions lists, and PEP databases, help flag potential risks linked to a customer and provide valuable context for assessment. These insights guide decisions about whether additional scrutiny or documentation is needed.

Advanced tools support ongoing monitoring by helping firms stay alert to changes in customer behaviour or risk profile,  including when to trigger enhanced due diligence. Real-time transaction monitoring enables early identification of anomalies or inconsistencies. For instance, unusual electronic funds transfers, such as large, unexpected cross-border payments, can signal a mismatch between a customer's expected financial activity and their actual behaviour. 

In such cases, firms are better equipped to escalate reviews or request and assess additional information to meet compliance requirements.

Supporting Better SoW and SoF Assessments

As regulatory expectations rise and financial crime becomes harder to detect, financial institutions need a proactive, risk-based approach for assessing SoF and SoW, with greater scrutiny in complex or high-risk scenarios. 

Facctum’s end-to-end compliance platform supports this approach by providing real-time access to sanctions, PEP, and corporate ownership data. Tools like transaction monitoring and customer screening help uncover risk early, including complex corporate ownership structures and opaque beneficial owners. This enables faster, more consistent SoF and SoW assessments. 

Contact us to learn how Facctum can help you meet SoF and SoW requirements with confidence.