August 09, 2020
Criminals may be locked down, but are we as risk and compliance professionals ensuring they are also locked out of our financial systems? While the cycles of lockdowns and curfews continue based on the impact of COVID-19 across the world, one point is certain – the threat of financial crimes is very present. Financial crime is simply any criminal action related to financial services, such as money laundering, fraud, terrorist financing, information security intrusion, bribery, and corruption. Many of these crimes can be stopped or mitigated if financial institutions (‘FI’) would clearly identify the source of funds (‘SoF’) and, if needed, source of wealth (‘SoW’) from clients during on-boarding and the duration of their relationships.
The Wolfsberg Group in its August 7, 2020 publication of Frequently Asked Questions (FAQ) on Source of Wealth and Source of Funds pertaining to Private Banking/Wealth Management noted:
“SoW and SoF are to be considered among the key elements of customer risk assessment and risk management for certain customers, as defined by each FI. SoW assessment seeks to identify how a customer accumulated their wealth and SoF information provides an FI with the understanding of how and for what purpose an account is going to be funded. SoW/SoF assessments allow FIs to recognise any risks and note any inconsistencies, which should be addressed and either mitigated or escalated for further review.”
The clarification provides above regarding SoW vs SoF is paramount to having an effective customer due diligence process. It is recommended by both the Financial Action Task Force (‘FATF’) and the Central Bank of The Bahamas’ AML/CFT Guidelines that supervised financial institutions (‘SFIs’) should confirm the source of wealth of potential clients once they are deemed to be high risk.
It is against this backdrop and for good governance, that I would suggest you ask yourself, “How strong is our institution’s risk management framework and in particular the risk identification and assessment stage?”
No standard approach
Although there has been guidance supplied by both regulatory bodies and independent inter-governmental bodies, based on my research within this space, there is no standard worldwide ‘approach’ to the corroboration (evidencing) of SoW and SoF. Every client and situation are different. There should be no expectation that fact patterns would be consistent based on the products or services being offered. However, before corroboration can occur, risk and compliance professionals should confirm their policies and procedures surrounding customer identity, establishing if there are any inherent risks, such as being a politically exposed persons (‘PEP’), a sanctioned individual or entity and other risk factors.
Checklists should be avoided
Historically, many tend to lean on ensuring they have documented the items required by statute or guidance. SoW and SoF, in some instances, can be that straightforward and clear. However, in other cases the SoW can be more complex and lack clarity. No matter if the client’s SoW or SoF appear opaque or as crystal clear as the waters of our Bahamaland, risk and compliance professionals should be able to form a reasonable conclusion from the evidence collected confirming the SoF or SoW and document the rationale. The Wolfsberg group states, “FIs should consider all evidence collected and determine whether it is sufficient to support the SoW.”
Source of Wealth Validation
Although there may be overlap acceptable sources, the sources accepted to validate initial SoW will differ from the sources used to validate ongoing SoW. Financial institutions during the on-boarding stages can consider records of external investment, commercial loan agreements, written confirm from a qualified party, grant of probate/certified copy of a will, audited financial statements, etc. On the other hand, some acceptable sources for ongoing SoW may include audited/unaudited financial statements, business bank account statements from regulated financial institutions, pay slips, third-party referrals from regulated financial institutions, annual reports and other sources.
When you have doubts escalate
All employees have an obligation to escalate suspicions when there is any uncertainty. Management must take these escalations seriously. Moreover, money laundering reporting officers (‘MLRO’) have a regulatory duty, to review an internal escalation and determine its validity. If valid, in the MLRO’s opinion, a suspicious transaction report (STF’)’ must be filed with the Financial Intelligence Unit (‘FIU’). I will discuss the role of the MLRO in detail during a separate article series.
Throughout my external audit and internal audit journey along with traveling to conferences and interacting with regional and international risk and compliance professionals, it was made clear that the ‘one size fits all approach’ to SoW would frustrate many stakeholders and in particular the client.
Criminals may be locked down, and its risk and compliance professional’s job to ensure they remain locked out or made to exit of our financial systems.
Wolfsberg Group Frequently Asked Questions (FAQ) on Source of Wealth and Source of Funds pertaining to Private Banking/Wealth Management found - https://www.wolfsberg-principles.com/sites/default/files/wb/Wolfsberg%20SoW%20and%20SoF%20FAQs%20August%202020%20%28FFP%29_1.pdf AML/CFT Guidelines 2018 found - https://cdn.centralbankbahamas.com/download/032474800.pdf
About Derek Smith Jr
This Top 40 Under 40 Leader is the Compliance Officer at a leading law firm in The Bahamas and former AVP, Compliance & Money Laundering Reporting Officer (MLRO) at an international private bank. His professional career started at a ‘Big Four’ accounting firm and has spanned over 15 years including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and executive member of the Bahamas Association of Compliance Officers.