Source of Funds (SOF) and Source of Wealth (SOW): Key Differences and Compliance Requirements

Customers often struggle when asked to provide Source of Funds (SOF) and Source of Wealth (SOW) information—​​largely because the distinction between the two isn’t always clear. Nevertheless, understanding where a customer’s money comes from and how their wealth was accumulated is a core requirement of Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

To clarify these concepts and highlight why they matter, we have prepared this practical guide on SOF and SOW: what they are, why they’re required, and how to collect them effectively.

What is Source of Funds?

Source of Funds (SOF) refers to the origin of funds that an individual or entity uses in a specific transaction or investment.

Businesses need to collect this information from their customers as part of the KYC/CDD process to ensure that transactions aren’t made for money laundering purposes. This is a key part of anti-money laundering regulatory compliance in most jurisdictions.

Whether a Source of Funds check is required depends on factors like the customer’s risk profile and the guidelines provided by the relevant regulator.

Examples of Source of Funds

During a SoF check, a financial institution looks for incoming transactions—or a series of transactions—that can be reasonably explained. To do this, it typically requires bank statements showing these transactions, along with supporting documentation that explains their origin.

For example, if a user states that their source of funds comes from employment, the financial institution will usually request bank statements where the salary payments are visible, as well as an employment contract or payslips to confirm the employer and the amount paid.

Other SOF examples include:

• Proof of Savings
• Salary
• Bonuses and dividends
• Sale agreements (property, assets, investments)
• Inheritance documents or wills
• Winnings from betting/lotteries
• Cryptocurrency transaction records (exchange histories, wallet records)

Whether it’s a bank assessing a prospective homeowner’s mortgage eligibility or a business meeting routine compliance requirements during account opening or transactions, financial institutions may request different types of Source of Funds (SoF) documents. The level of detail required typically depends on the context and the amount involved, ranging from self-declarations for low-risk or small transactions to documentary evidence for larger or higher-risk amounts. Here are some types of SOF documents that can be requested: 

• Financial Documents: Bank statements
• Business Documents: Official documents proving the ownership of the company, company registration documents, stock records, promotional materials, website addresses, any records proving the sale of a business (or dividend payments), and valuation of a business
• Investments: Proof of investment/securities accounts, bank statements, and stock certificates
• Employment: Employment contracts, payslips, and bank statements
• Gift: Documentary proof that funds were received as a gift from a friend, family member, or other entity, bank statements
• Loan: Proof that funds were obtained through a loan from a financial institution, individual, or other sources
• Inheritance: Documents such as a Grant of Probate or a Will
• Real Estate: Documents on real estate purchase/sale, valuation of owned real estate, lease documents on property producing lease income
• Other Source: Documentation on divorce, inheritance, lawsuits, etc.

All of the above documents must explain the source of funds in detail and from various angles. For example, if the customer claims that their funds came from a “gift,” a simple note from the person who “gifted” it will not be enough.

This individual will also have to submit:

• Documented proof of funds transfer
• A personal statement explaining the details and circumstances of how the gift was presented
• A signed declaration by the donor explaining what the gift is and its purpose
• Documents proving the source of funds of the individual who made the gift
• Tax return on the gift

In any case, SOF verification is an extremely important aspect of client onboarding, and it is in your power to make it quick and effortless for users.

What is Source of Wealth?

Source of Wealth (SOW) is a document that provides companies with a broader understanding of the customer’s assets and the financial activities that led to their acquisition. An SOW investigation will look at how a customer’s wealth was accumulated over time. 

Source of Wealth is a more extensive check than Source of Funds and is usually conducted when SoF documents are not sufficient to explain a user’s deposit.

For example, if a user deposits €5,000 into an account, the bank may ask where the money comes from. If the user provides an employment contract, payslips, and bank statements showing regular salary payments that align with the deposited amount, this is typically considered a clear and straightforward case.

However, if a user deposits €150,000, the bank will again ask about the origin of the funds, but the user must explain how they accumulated such a large amount. This could include savings built up over several years, proceeds from the sale of property, an inheritance from a deceased relative, or similar sources.

Examples of SOW may include:

• Employment
  • Name and address of the employer
  • Annual salary and bonuses for the last couple of years
  • Last three months /recent payslip (this will depend on the relevant regulation)
  • Confirmation from the employer of the annual salary
  • Latest accounts or tax declaration if self-employed
  • Bank Statements showing transactions
• Business gains from a company sale 
  • Copy of the contract of sale
  • Internet research of the Company Registry
  • Name and Address of Company
  • Total sales price
  • Clients’ share participation
  • Nature of business
  • The sale date and the receipt of funds
  • Media coverage
• Inheritance of a family fortune
  • Name of deceased
  • Date of death
  • Date it was received
  • Entire amount
  • Solicitor’s details
  • Tax clearance documents

Demanding SOW is part of Know Your Customer measures, enabling businesses to: 

• Expose when clients act for another individual, corrupt official, or family member of a corrupt official
• Provide a bigger picture of the client’s background.

Source of Funds vs Source of Wealth

Source of Funds and Source of Wealth investigations are used in different situations and serve different purposes. While SOF checks are easier to carry out than SOW checks, both require obtaining information that’s substantive, relevant, and capable of establishing the origin of the funds and the circumstances in which they were acquired.

Source of Funds and Source of Wealth investigations: A side-by-side comparison

	Source of Funds	Source of Wealth
Purpose	Identify the source of funds for a specific transaction	Understand the sources of a customer’s complete wealth
Verification depth	Limited (but dependent on the customer’s risk profile)	Extensive (looking at the origins of a customer’s total assets)
Examples of types of documents required	Bank statements, payslips, loan agreements etc.	Bank statements, tax returns, employment history, investment statements, business ownership records, inheritance documents etc.

Follow the money: Why SOF and SOW matter for AML compliance

There are several reasons why it’s important to establish SOF: 

1. It confirms that the individual in a given transaction is authentic. 
2. It enables businesses to ensure safety, fight fraud, and avoid being linked to illegal activity. 
3. It’s one of the mandatory Anti-Money Laundering (AML) requirements that must be fulfilled before carrying out certain transactions. Plus, SOF is closely observed by jurisdictional regulators when deciding on the eligibility of a business to operate as a financial company.

How SOF and SOW fit into AML compliance

SOF is a natural component of any AML procedure relating to financial transactions. However, if companies fail to establish SOF as part of their AML procedures, they leave themselves exposed to fraud, reputational damage, and substantial fines. In particular, SOF has to be verified when a customer’s finances are in question or in cases that pose a higher risk from an AML perspective.

SOW checks are one of the essential procedures of Enhanced Due Diligence (EDD) under AML regulations. Companies have to follow a risk-based approach when establishing requirements for proof of Source of Wealth, applying reasonable measures to the extent, depending on the client’s money laundering and terrorist financing risks.

The checks usually get triggered when the system spots abnormal patterns or transaction patterns. For example, a customer may exceed a certain threshold. Then this customer needs to prove that the acquired funds have a legitimate source. In case suspicions arise, a company must file a Suspicious Activity Report.

How SOF and SOW feature in AML regulations around the world

Anti-money laundering regulations vary around the world, but checking customers’ Source of Funds and Source of Wealth is a common requirement. Some regimes distinguish clearly between “source of funds” (for a transaction) and “source of wealth” (overall net worth). Others may only require SoF—or apply SoW only in high-risk cases (e.g., PEPs, high-value clients).

Below are the examples of how SOF and SOW feature in AML guidelines and regulations around the world:

• The FATF Recommendations. These provide internationally recognized standards for best practices in combating money laundering and terrorist financing. Recommendation #10 covers customer due diligence requirements, including checking customers’ Source of Funds where necessary as part of a risk-based approach. Part 12 deals with measures for Politically Exposed Persons (PEP), including Source of Funds and Source of Wealth checks.
• The EU’s 6th Anti-Money Laundering Directive (AMLD6). This requires EU member states offering investor residence schemes to carry out effective risk-monitoring programs for applicants, including SOF and SOW checks. It also includes a requirement to identify Ultimate Beneficial Owners (UBOs) of assets, addressing a potential way for criminals to obscure the Source of Funds for purchasing assets such as property.
• The EU’s Markets in Crypto-Assets Regulation (MiCA). This introduced a new regulatory framework for crypto-assets not covered by existing financial regulations in the EU. Under MiCA, Crypto-Asset Service Providers (CASPs) must implement AML/KYC procedures, including SOF and SOW checks where appropriate.
• The UK’s AML Regime. For regulated entities (including gambling operators, certain financial services), UK AML rules require due diligence on “source of funds” and “source of wealth,” especially when dealing with higher-risk clients or politically exposed persons (PEPs). Under UK guidance, “source of wealth” refers to how a customer accumulated their total wealth, while “source of funds” refers to the origin of specific funds used in a transaction.
• Australia’s AML/CTF Regime. Under Australia’s AML/CTF regime, firms must include in their AML/CTF programs rules for verifying a customer’s source of funds and, where relevant, source of wealth. The requirements are risk-based: SOF/SOW scrutiny is heightened in higher-risk situations (e.g., large transactions, PEPs, complex corporate structures). 

What does Source of Asset mean, and is it different from SOF and SOW?

Source of Assets typically refers to where a business’s assets originate from, such as owner equity, retained earnings, commercial loans, or income generated from operations. The term is more commonly used in accounting, corporate finance, or financial reporting contexts rather than as a formally defined AML/KYC concept.

In contrast, Source of Funds (SOF) focuses on the specific origin of a particular transaction or deposit, while Source of Wealth (SOW) examines how an individual or entity accumulated their overall wealth over time.

In compliance practice, “Source of Assets” is not a standard regulatory term, and its meaning can vary depending on context. While it is sometimes used informally as a synonym for Source of Wealth, this usage is inconsistent and relatively uncommon in formal AML frameworks.

How to verify Sources of Funds and Wealth

There are three steps to establishing proof of SOF and SOW:

1. Obtain information on net worth:

A client’s net worth should be established through relevant documents obtained from the client. It is not necessary to obtain the exact amount (an approximation may be sufficient). 

2. Obtain information on where their net worth came from:

Companies should determine the SOW (whether it’s inheritance, employment, business, investment, etc.). Generally, no single source is likely to account for the total value of net worth. However, it is often difficult to identify wealth from all possible sources, so the level of detail should be based on the client’s risk profile.

3. Verify the information on a risk-sensitive basis:

Companies have to obtain proof of wealth documents from a reliable, independent source that confirms how the wealth was generated.

If a customer is a Politically Exposed Person (PEP), businesses must take reasonable measures to establish the customer’s SOW. Doing this is part of Customer Due Diligence (CDD) procedures for private banking.

Source of Funds examples include income from employment, inheritances, loans, and investments.

Source of Wealth examples include income from employment, profits and dividends from business investments, asset sales, and inheritances.

Examples of acceptable proof for SOF and SOW

Source of Funds and Source of Wealth can be established through a combination of sources, such as: 

• Bank statements
• Salary payment documents
• Property sale records
• Investment statements
• Publicly available property registers
• Past transactions
• Internet searches
• Evidence of title
• Copies of trust deeds
• Tax returns

Common red flags and mistakes when dealing with Source of Funds and Source of Wealth:

When dealing with Source of Funds and Source of Wealth checks for AML, red flags can include:

• Unverifiable income 🚩 Such as large deposits that do not fit the usual pattern of transactions in a customer’s accounts.
• Vague or inconsistent documentation 🚩 For example, where different documents contain conflicting information or funds have non-specific, unverifiable sources, such as ‘gifts’ from unregistered businesses.
• Lack of transparency 🚩 Such as where a customer is reluctant to supply requested documentation, documents are unclear, or they are missing.
• Evidence of tampering 🚩 For example, where there are clear signs that documents have been altered.

Mistakes by institutions when carrying out SOF and SOW checks can seriously undermine the integrity of AML processes. Common errors can include things like:

❌Assigning an inaccurate risk profile to a customer, so the proper level of checks is not carried out.

❌ Failing to request or properly verify the necessary documents.

❌ Not checking non-standard sources, such as crypto-assets.

❌ Making the process too complex for customers, slowing down the process, and creating the potential for further mistakes.

❌ Not staying up-to-date with the latest regulatory requirements.

❌ Relying too heavily on manual checks, which slows down the process and creates bottlenecks.

Best practices for SOF and SOW checks

To simplify the process both for companies and customers, it’s essential to build an efficient yet simple KYC process. This includes both the onboarding stage and the rest of the customer journey. This way, companies will be able to keep a high onboarding rate, as clients won’t drop out of the registration process halfway through. 

Some other tips include simplifying the data collection process, implementing a user-friendly dashboard, and providing enough context to customers during the submission process. 

Another issue companies face is an overflow of customers who need to provide proof of SOW and SOF. If these checks are done manually, companies will run into various issues, such as errors, delays, and financial losses. That’s why companies should eventually implement automated solutions that automatically detect all suspicious patterns and inform the necessary personnel.

Automation and compliance tools for Source of Funds and Source of Wealth verification

Checking Source of Funds and Source of Wealth has to be carried out consistently and in full compliance with the regulatory requirements of each jurisdiction where you operate. This can be time-consuming, and the potential for human error can create a significant risk of non-compliance.

Automating Source of Funds and Source of Wealth investigations can help you meet your AML verification requirements cost-effectively while cutting the administrative burden on your team and reducing costly errors.

Sumsub offers a range of solutions to help you achieve consistent, cost-effective SoW and SoF checks. This includes an automated KYC solution that allows you to deploy questionnaires to collect additional information from applicants during pre-KYC and other stages of your AML processes, as well as seamless orchestration through the workflow builder.

Our Crypto Monitoring solution can also complete Source of Funds checks using multiple data sources to give a complete picture of where a customer’s assets come from. Using Crystal Blockchain as its foundation, this tool is widely recognized within the industry.

FAQ

• What does Source of Funds mean?

  Source of Funds (SOF) is the origin of an individual’s funds upon the commencement of a business relationship/transaction. Businesses need to collect this information from their customers to ensure that the transactions aren’t made for money laundering purposes.

• What is the difference between Source of Funds and Source of Wealth?

  Source of Funds means where the funds come from for a particular translation. Source of Wealth refers to how a customer’s total assets were accumulated.

• Why are Source of Funds and Source of Wealth important in AML?

  SOF and SOW are important for Anti-Money Laundering purposes because they help to show that a person’s assets come from a legitimate source or sources, and not from the proceeds of crime. Carrying out SOF and SOW checks is also a regulatory requirement in most jurisdictions.

• What documents prove Source of Funds?

  Documents that can prove Source of Funds include bank statements, salary payment documents, property sale records, investment statements, inheritance records, and tax returns.

• What are examples of Source of Funds (SOF)?

  SOF examples include:

  • Interest from savings
  • Salary
  • Bonuses and dividends
  • Winnings from bettings/lotteries

• What is an example of Source of Wealth (SOW)?

  Examples of Source of Wealth may include:

  • Employment
  • Inheritance
  • Investments
  • Ownership of a business