How should legal firms document and evidence their source of funds checks?

Understanding and evidencing source of funds is a core part of due diligence for legal firms. LSAG guidance makes clear that it’s not enough to know the money came from a particular account. You need to understand where the funds used in the matter originated, how the client obtained them and whether the explanation aligns with their profile.

For firms regulated under the Money Laundering Regulations, this isn’t simply a question you ask. It’s something you must be able to document and verify to an appropriate standard, with an audit trail that shows how you reached your conclusion. That’s what regulators expect and it’s what protects the firm when a file is reviewed.

What source of funds means in legal work

LSAG guidance emphasises that source of funds is more than knowing the money came from a UK bank account. You need to understand both the origin of the money used in the transaction and how the client obtained it. 

To identify source of funds you need to collect information such as:

• where the funds originated, for example the sale of an asset, accumulated savings or a loan;
• how those funds reached the client, including payment routes or transfers between accounts; and
• why the explanation fits the client’s profile, supported by risk-appropriate evidence.

If any part of the chain is unclear, incomplete or inconsistent—or if PEPs, high-risk jurisdictions or complex structures are involved—the risk level rises and you may need enhanced due diligence, which might including collecting source of wealth using appropriate documentation.

Identification or verification

One of the biggest weaknesses in source of funds files is failing to differentiate between identifying the source of funds and verifying it.

For identification you need to document a clear and plausible source of funds story, with documentation proportionate to the risk. 

Verification means supporting the client’s explanation by actively checking, verifying and documenting the source of funds. For example:

• Bank statements showing savings building over time
• Completion statements for a recent property sale
• Probate documents for inherited funds
• Loan agreements with proof of drawdown

Where the matter is high risk, LSAG expects legal firms to take proportionate actions to verify source of funds. You can do this by testing the plausibility of the explanation and obtaining deeper or multiple forms of evidence.

Verifying source of funds

Legal firms should move from identification to verification whenever the risk assessment indicates a higher-risk matter. Situations that commonly require verification include:

• High-value or unusual transactions, especially where the payment route is complex
• Clients based in or connected to high-risk jurisdictions
• PEPs, sanctions exposure or layered ownership structures
• Funds inconsistent with the client’s financial profile
• Third-party payments or opaque transfers between multiple accounts

The SRA and LSAG consistently warn that large property transactions, overseas buyers and private wealth structures are higher risk. These require you to apply a risk-based approach and, where relevant, verify the source of funds and potentially the broader source of wealth too. 

What evidence should be on file?

A well-evidenced file should show a clear, logical chain, from explanation and evidence to assessment and decision. Examples of credible evidence include:

• Full bank statements tracing funds from origin to the client
• Evidence of recent asset sales, such as property or shares
• Loan agreements and drawdown confirmations
• Gift evidence, including documents from the donor
• Dividend vouchers or business-profit extraction records

The test is whether the explanation and evidence are consistent with each other and with the client’s known profile. If they do not align, you must probe further and document your reasoning behind acting for, or not acting for, the client.

Source of funds checklist

The SRA’s thematic reviews and AML guidance outline what firms should be able to demonstrate when evidencing source of funds. Using those expectations as a framework, a compliant matter file should answer all these questions:

• Where did the money for the transaction come from?
• How did the client acquire the money used in the transaction or business relationship?
• Do the documents provided match the explanation given?
• Does the transaction make sense in the context of the client’s profile?
• Was it necessary to carry out the checks based on the level of risk?
• Has the firm clearly documented the checks undertaken, or documented why checks were not necessary and why the approach was proportionate to the risk involved?
• Is there anything unusual or suspicious about the source or movement of funds?

Final thoughts

Source of funds checks are about understanding the story behind the money in each transaction and being able to show that the story makes sense. When you document your reasoning, verify appropriately and keep the evidence organised, you protect your firm and strengthen your overall AML framework.

If something doesn’t feel right, ask more questions and dig deeper. Strong source of funds evidence protects your clients, your firm and your professional reputation.