Adopting reasonable measures to establish the legitimacy of a customer's source of wealth ("SOW") and source of funds ("SOF") is a regulatory requirement all banks need to comply with. But how much digging does a bank really need to do to get comfortable with a customer's wealth journey? The following summarizes some key points Private Banks should keep in mind in reviewing their approach to SOW:
- The extent of corroboration required should align with a customer's risk rating
Regulators are keen to see banks demonstrate how they are effectively assessing, documenting and mitigating the AML risks of their customers. Adopting a risk based approach, low and medium risk customers typically require less corroboration on SOW. Whereas for PEPs and high risk customers, a greater standard of corroboration is expected to address the additional risk factors which have led to the higher risk rating of these customers. The SOW narrative must be sufficiently informative, coherent and plausible.
- It is not necessary to verify 100% of the stated Total Net Worth
In producing a SOW narrative, some indication as to the customers total net worth should be obtained. It is impractical and unrealistic to try and find evidence to support exact figures. Challenges can arise where the TNW is significant higher than the AUM maintained by a bank. In such cases, banks should not necessarily rely on the TNW provided by the customer, the objective should be understanding and documenting how the customer acquired their wealth and asking – is it plausible?
- Corroboration to be focused on those sources / events that have materially contributed to client's SOW
Corroboration can take many forms and serves as a plausibility check on the information provided by the customer. The information should be independent and reliable, i.e. financial statements, bank statements and confirmation from third party professionals registered in FATF jurisdictions are generally accepted as reliable sources. Similarly, corporate registration websites, journals and media reports also help to corroborate financial estimates of operating companies.
- What does a "good" SOW narrative look like?
Depending on the background of the customer type, the following information should be set out;
- Information on the family background and how wealth was derived (where family wealth relevant);
- Financial Assets (summary including the total relationship AUM, investment history, information on existing assets held and where held if known);
- Business activities (nature, size, profitability, shareholding, location and history). Where Company Searches on the business has been captured at onboarding, this can also serve to corroborate ownership of the company and support the SOW narrative.
- Professional career (e.g. length of career, position held and estimates on annual income). Where necessary, reference to salary surveys and other public information to support estimates can be used.
- Inheritance; the person(s) making the inheritance should be identified and the relationship with the customer established, the legitimacy and reasonableness of the inheritance should be considered.
- Some indication on the customer's Net Worth should be provided.
- Information on the Source of funds (i.e. description on the origins and means of the transfer for the monies that are acceptable for the account opening).
- Leading Practices
Banks should establish the following practices in implementing consistent SOW standards:
- Distribute clear guidance that distinguishes the requirements between HRC/PEPs and Low/Medium risk customers. Higher evidentiary standards are required for higher-risk customers (copies of trust deeds, financial statements, audited accounts and other reliable independent third party information).
- Provide sample write ups and a library of acceptable sources of independent verification options for the front office to demonstrate the standards required.
- Consider commissioning independent reports on higher-risk customers where challenges exist in obtaining documentary evidence.
- Conduct adverse news screening on SOW contributors.
- For historical customers where documentation may be lacking, a clear rationale for risk acceptance is documented.
- Subject commercial / operating accounts to higher scrutiny.
- Require financial statements and site visits for all operating companies where SOW/SOF is derived.
- Ensure documents are properly certified.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.