Source of Wealth vs Source of Funds in Investigations

Source of Funds vs Source of Wealth: The Short Answer

Source of funds is the origin of money used in one transaction. Source of wealth is how the person accumulated their total net worth, including assets outside the paying account.

AUSTRAC’s definitions describe source of funds as “how and where the funds were obtained from for a specific transaction”. Source of wealth concerns “where the customer’s entire wealth and assets come from”.

In a fictional Australian example, Priya pays a $180,000 house deposit using $120,000 of salary savings and $60,000 inherited from her father: those are the proposed sources of funds. Her source of wealth explanation must also account for the salary, inheritance and other events that built her overall net worth.

A source of funds explanation can be supported while the wider wealth explanation remains incomplete. Conversely, a wealthy client still needs to explain a payment that came from an unfamiliar third party.

Testing Source of Funds on Bank Statements

To test source of funds, trace the payment backwards until the records support how the money was obtained. The account that sends the payment is a starting point.

1. Identify the payment, paying account and account holder. Record the source statement and page beside the transaction.
2. Follow the credits that funded the payment. If money arrived from another account belonging to the person, continue through that account’s statements.
3. Match the proposed underlying source to its supporting record. Salary needs a savings history, sale proceeds need settlement records and a loan needs lending documentation.
4. Reconcile the amounts after intervening spending. Keep an explanation open if a missing period prevents you from establishing how much remained available.

For Priya’s deposit, regular salary credits must support the accumulation of $120,000 after living costs and other withdrawals. The $60,000 inheritance credit must agree with the estate distribution records. An account balance of $180,000 alone answers neither question.

For a gift, identify the donor and supporting gift documentation. If the donor’s financial position is relevant to the risk, follow the explanation beyond the recipient’s account.

Unexplained cash deposits or third-party transfers in the weeks before the payment leave its origin open. A credit labelled ‘loan’ records the payment description, while the loan agreement and lender’s records help test the explanation. Compare the surrounding activity with the money laundering red flags that warrant further investigation.

When statements cover many accounts, FinTrace saves hours of manual review by consolidating the transactions into a searchable Excel ledger. Its findings report flags suspicious transfers and gives you the source PDF filename and page for each finding. Forensic accountants use that evidence to focus their time on the source explanation and their wider analysis.

Testing Source of Wealth Over Years of Records

A source of wealth review connects the person’s assets and liabilities to the events that explain their accumulated net worth. Several years of statements can show how income and asset receipts contributed to that position.

Build a timeline of salary and business income, property settlements, investment receipts and inheritance distributions. Distinguish an asset sale from new wealth: selling a property turns an existing asset into money. A loan increases cash but also creates a liability.

For each material event, retain the record that explains the bank entry. Tax returns help test declared income. Contracts of sale and settlement statements explain property proceeds. A grant of probate identifies the estate administration authority, while estate accounts and distribution records support what the beneficiary actually received.

In Priya’s example, the inheritance record explains one deposit source. A wealth review also tests her other assets and the liabilities against them. Salary credits over time can support savings, but gross income cannot explain net wealth without considering tax and expenditure.

The following fictional source of wealth examples require different supporting histories.

A signed narrative records the person’s explanation. It does not independently prove that salary accumulated, a sale completed or an estate paid the beneficiary. Match each claimed event to the supporting records and reconcile the resulting assets and liabilities. The source of wealth form provides a separate declaration and evidence schedule.

Avoid counting transfers between Priya’s own accounts as fresh income. Carry the same transaction through the timeline once, with references to both sides of the transfer. The records must explain how the person accumulated the wealth listed at the end of the period.

Unexplained wealth investigations address the separate question of legal powers to require an explanation. A bank-statement review supplies evidence for that question without replacing the applicable legal test.

AML Source of Funds Checks in Australia

Australian anti-money laundering and counter-terrorism financing (AML/CTF) obligations make source checks part of customer due diligence in specified circumstances. The Australian Transaction Reports and Analysis Centre (AUSTRAC) regulates reporting entities that provide designated services.

AUSTRAC’s enhanced customer due diligence guidance requires enhanced checks for high money laundering or terrorism financing risk. Unusually large or complex transactions, transactions without an apparent economic or legal purpose and unusual transaction patterns also trigger enhanced due diligence.

Specific source requirements depend on the risk. At initial due diligence, establish source of funds and source of wealth on reasonable grounds where they are relevant to high risk. During ongoing updates and reverification, hold source information where that relevance continues. Foreign politically exposed persons also attract specific requirements.

The tranche 2 reforms extend regulation to certain services commonly provided by lawyers, accountants and real estate agents. Coverage depends on the designated service, rather than the person’s occupation alone. These businesses now face customer due diligence duties when providing covered services.

The reforms have different commencement stages. The Amendment Act’s commencement and application provisions distinguish the legislative stages. AUSTRAC’s reform guidance explains the boundaries for existing and newly regulated entities, including transitional arrangements.

A file recording ‘funds from a bank account’ still leaves the underlying origin unanswered. Apply the source question to the customer’s actual risk and record the evidence supporting the answer. For legal-practice program requirements, use the separate guide to AML tranche 2 obligations for law firms.

The Source and Application of Funds Statement

A source and application of funds statement compares money available during a defined period with what the person spent or retained. It puts each identified inflow against the outflows and closing funds, including cash movements where records support them.

The following fictional statement covers the deposit period in Australian dollars. It treats opening cash as available funds and excludes transfers between Priya’s own included accounts.

The figures balance only after recognising $20,000 of unexplained funding. Identified sources total $210,000, while spending and closing cash require $230,000. Priya’s proposed deposit explanation therefore needs further evidence once the other applications are included.

Opening cash is available for the period calculation, but its own origin can still need explanation. Borrowings belong among funds available even though they do not add net wealth. Keep asset purchases as applications and avoid counting both a cash withdrawal and the same cash spending twice.

Before putting the difference to Priya, test missing accounts, omitted receipts and duplicated payments. If the $20,000 difference remains, ask her to identify its source and supply the records that support it. Record each additional explanation against the funding gap so the next review can show exactly which amount remains unexplained.