Source of Funds vs Source of Wealth

Have you ever questioned the difference between Source of Funds and Source of Wealth and the requirement for solicitors to know the ins and outs of your finances? Whilst it may seem like an intrusive request, it is a crucial requirement to ensure our compliance with anti-money laundering regulations, with a key difference between the two.

“Where are the funds for the transaction coming from?”

Source of Funds (‘SOF’) refers to the origin of money being used to fund a transaction to ensure the funds have originated from a legitimate source and to ensure that funds are being received from the client only. Examples can include savings, gifted sums, funding from the sale of a property, lottery winnings evidenced by recent bank statements, or investments evidenced by an investment portfolio statement.

“How did the client accumulate that wealth?”

Source of Wealth (‘SOW’) refers to the accumulation of capital which contributes to your overall net worth. Examples can include savings from salary evidenced by an employment contract and payslips, inheritance evidenced by a certified copy of the will and copy of Estate accounts or business income demonstrated by Company accounts.

Having a detailed explanation of each point is important in providing financial security for lenders as part of their Know Your Customer (‘KYC’) checks. However, different lenders have different requirements; some may have more stringent conditions, some less so. Generally, if you are receiving funding for your transaction from a third party, your lender will need to formalise this agreement to perfect their security. Typically, a Deed of Gift and Declaration of Solvency will be required for gifted funds from family members or friends, whereas a Deed of Postponement / Subordination is likely to be required for any director or intercompany loans. This added security is beneficial to both you and your lender, as these deeds allow the lender to perfect their security and ensure that alternative funding is correctly documented.

A new and exciting funding source is Cryptocurrency! Given the high-risk nature of these funds, we at LA do not accept funds directly from Crypto accounts. Where Cryptocurrency forms part of the client’s SOF or SOW, we are required to obtain specialist internal guidance. This is due to the additional complications with the use of funds derived from Crypto assets as it requires enhanced due diligence. This can include evidencing that your bank account directly links to the Crypto account and will be linked with additional SOW verification on the original funds placed into the Crypto account. Dependent on the value and the complexity of the matter, instructions involving Cryptocurrency will need to be considered on a case-by-case basis.

If you are concerned by your solicitor’s request for information on your finances, do get in touch to discuss this further and rest assured it’s better than the questions are asked at the outset in order to satisfy your lender and so as not to hold up the transaction later down the line.

At Lester Aldridge we aim to work with our clients from the early stages of the transaction to obtain all information in advance of a lender’s requirements being received.  If you have any questions, do not hesitate to get in touch with our Borrower Real Estate Finance team at borrowing@LA-Law.com.