Borrowers seeking a mortgage to purchase or refinance a home must be approved by a mortgage lender to get their loan. Banks need to verify the borrowers financial information and may require a proof or proof of deposit (POD) form to be completed and sent to the borrowers bank. As proof of deposit, the borrower may need to show the mortgage lender at least two months of bank statements.
Anti-money laundering (AML) rules say that banks and other financial institutions have to check where the money coming from for certain transactions. This helps make sure that the money is coming from legal sources and not being used for illegal things like fraud, money laundering, or funding terrorism.
What is Source of Funds?
The source of funds is where the money for a financial transaction comes from. A “paper trail” will be made to show where the money came from and how it was obtained.
Some common sources of funds include:
- Income from employment
- Business revenue
- Sale of assets like property or investments
- Inheritance or gifts
- Loans or credits
- Lottery/gambling winnings
Why Do Banks Check Source of Funds?
Banks and financial institutions check the source of funds for several important reasons:
Compliance with AML regulations: Checking source of funds is a key part of customer due diligence mandated under AML laws like the Bank Secrecy Act. It helps detect suspicious transactions that may be tied to criminal proceeds.
Risk management: Knowing where the money comes from helps banks figure out how likely it is that a customer or transaction will be used to launder money. This information guides strategies for reducing risk.
Reputational protection: Making sure that the sources of funds are real keeps banks from unintentionally helping criminals, which could hurt their reputation.
Financial security: Ensuring funds are from legal sources safeguards the integrity and stability of the financial system by preventing injection of illicit money.
Customer relationships: Asking clients about fund sources is an opportunity to better understand their overall financial dealings and build trusted relationships.
When Do Banks Check Source of Funds?
Banks don’t verify the source for every single transaction. The main scenarios that require source of funds checks include:
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New customer onboarding: New clients must provide information on where their funds and overall wealth come from. This is part of standard KYC (know your customer) procedures.
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Large transactions: Transactions above a certain threshold trigger enhanced due diligence including verifying source of funds. Thresholds vary across institutions.
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Suspicious activities: Any transactions that seem irregular or potentially tied to illicit sources based on customer profiles prompt additional verification.
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High-risk clients: Clients categorized as high-risk like PEPs (politically exposed persons) mandatorily require source of funds verification.
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Wire transfers: Cross-border wire transfers, especially into higher risk countries, necessitate confirming source of funds.
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Loans: Lenders must verify source of funds used as collateral or loan repayment amounts above a set limit.
How Do Banks Check Source of Funds?
Banks use a variety of methods to check source of funds:
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Customer declarations: Requesting clients to formally declare the source of transaction monies. This declaration must be verified.
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Supporting documents: Customers may provide documents like pay slips, tax returns, property deeds, inheritance paperwork to support their declared source of funds.
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Bank statements: Reviewing bank statements to match declared sources and check for any red flags. Statements help establish the funds trail.
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Public databases: Checking public records and databases to verify information like home ownership, shareholdings, directorships and confirm legitimacy of stated sources.
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External validation: Corroborating declared sources by contacting employers, accountants, lawyers or other reliable third parties who can confirm account holder details.
Source of Funds Red Flags
Some red flags that may indicate issues with source of funds include:
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Vague, inconsistent sources
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Reluctance to provide supporting documents
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Declared sources not matching client profile or transaction history
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Inability to logically explain large deposits/transfers
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Sources connected with high-risk sectors like cryptocurrency or marijuana
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Funds originating from or moving to high-risk jurisdictions
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Attempts to disguise source through third-party transfers
Challenges in Verifying Source of Funds
Banks face certain challenges in verifying source of funds:
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Privacy laws may limit access to account statements and income records
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Lack of documentation for cash transactions or funds received long ago
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Complex cross-border transactions with multiple jurisdictions
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Sophisticated techniques used to disguise sources
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Resource intensive process depending on manual checks
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Over-reliance on customer declarations
Role of Technology in Enhancing Source of Funds Checks
Advanced technologies like artificial intelligence and machine learning can significantly enhance source of funds verification for banks:
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Automate collection and analysis of documents, bank records, and databases to establish funds trail
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Quickly analyze transaction patterns to identify source of funds red flags
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Provide holistic view of customer relationships by integrating KYC, transaction monitoring, and external data
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Continuously update risk profiles by detecting changes in customer behavior
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Rapidly process large volumes of transactions to identify high-risk funds sources
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Learn to detect increasingly complex money laundering typologies
Checking the source of funds is a key pillar of AML compliance programs. It allows banks to prevent injection of illicit funds, manage risks, and avoid involvement in financial crimes. While traditional checks face limitations, advanced technologies can make source of funds verification smoother, faster, and more accurate.
Banks are legally obligated to understand where customer funds originate from before accepting or processing transactions. By leveraging the latest solutions and applying robust source of funds verification, banks can stay atop evolving money laundering schemes. This proactive approach keeps the financial system secure and customers protected.
How Do Mortgage Lenders Verify Bank Statements?
Some lenders ask you to submit bank statements that they will go over manually or electronically, while other lenders might call your bank directly and ask for verification.
Understanding How Lenders Verify Bank Statements
Banks and mortgage lenders underwrite loans based on various criteria, including income, assets, savings, and a borrowers creditworthiness. When buying a home, the mortgage lender may ask the borrower for proof of deposit. The lender must verify that the funds required for the home purchase are in a bank account and accessible to the lender. This is the proof of deposit (POD).
For example, in a typical mortgage, a borrower might put 20% down toward purchasing a home. If its a $300,000 home, the borrower would have to put down $60,000 upfront. A proof of deposit would show the mortgage lender that the borrower has $60,000 in their bank account for the down payment. Also, the lender will need to ensure adequate funds are available to pay the closing costs associated with a new mortgage. Closing costs are additional costs that can include appraisal fees, taxes, title searches, title insurance, and deed-recording fees. A mortgage calculator can show you the impact of different rates on your monthly payment.
The borrower typically provides the bank or mortgage company with two of the most recent bank statements. Then, the company will contact the borrowers bank to verify the information.
What is Source of Funds | Why is Source of Funds required | Documents to use for SoF – AML Tutorial
FAQ
What happens if I can’t provide a source of funds?
Regulations say that you have to show proof of where the money comes from because conveyancing deals involve big amounts of money. If you can’t prove where the money for your purchase came from, you won’t be able to make the purchase.
Can a bank ask for a source of funds?
there is no obligation to ask about source of funds once identity checks have been carried out. if there are concerns about the source funds, it must be proved that the money is clean.
How is source of funds verified?
Source of funds (SOF) is verified by requiring customers to provide documentation that proves where their money came from. This can include bank statements, payslips, loan agreements, or records of asset sales.
Do you have to prove where money comes from?
It’s not enough to prove that you have the money to buy property, you have to prove where that money has come from and that it is not the proceeds of crime.