What’s source of funds?

Source of funds tells you where the money used in a specific transaction came from and how it reached the client. Rather than being about their wider financial position (which is known as source of wealth), source of funds focuses on the immediate origin of the money being used.

Under the UK Money Laundering Regulations 2017 (as amended) (MLRs), firms must take a risk‑based approach to due diligence. That means understanding source of funds in all relevant cases and in higher‑risk situations, such as politically exposed persons (PEPs) or high‑risk third countries, also establishing source of wealth. The MLRs also require you to back both up with appropriate evidence.

All sector guidance follows this principle, and these definitions stem from the due diligence duties in MLRs.

What source of funds means in each sector

Accountancy sector

AMLGAS defines source of funds as “the origin of the funds that are the subject of the business relationship”.

Accountants, bookkeepers and all related businesses are expected to establish source of funds when for example: 

• onboarding a new client as part of understanding the client
• transactions involve unusually large, complex or opaque payment paths
• funds are inconsistent with the client’s profile
• enhanced due diligence is required.

When risk is higher (for example: PEPs, clients connected to high‑risk third countries or complex, unusual arrangements) AMLGAS expects firms to do more than ask about source of funds. You need to gather evidence and, where relevant, understand the client’s source of wealth as part of enhanced due diligence.

Legal sector

LSAG emphasises that source of funds must show the origin of the funds used for the transactions or activities that occur within the business relationship or occasional transaction. The question is not simply “where did the money for the transaction come from?”, but also “how and from where did the client get the money for this transaction or relationship?”. It’s not enough to know the money came from a UK bank account.

Legal businesses need to establish source of funds in situations such as:

• high‑value or unusual transactions
• cross‑border matters
• conveyancing (residential or commercial)
• PEP and sanctions‑related matters
• cases where client explanations do not match their profile.

LSAG also stresses that in higher‑risk matters, especially where PEPs, high‑risk jurisdictions or complex structures are involved, firms should verify both source of funds and, where needed, source of wealth using appropriate documentation, with the depth of checks driven by the risk assessment for the client and the matter.

Property sector

HMRC defines source of funds in its estate and letting agency guidance as the origin of the funding of the transaction.

Property professionals must establish source of funds when: 

• buyers are using savings, asset sales or third‑party transfers
• money originates from high‑risk jurisdictions
• payment paths are complex or involve multiple accounts
• there is a mismatch between the client’s background and the funds presented.

HMRC links this closely to the risk‑based approach. For example, super‑prime properties, buyers who are PEPs or based in high‑risk countries, or clear gaps between the client’s known income and the purchase price all point to high risk. In those situations, you should obtain documentary evidence of source of funds and, where appropriate, source of wealth before proceeding.

High Value Dealers

HMRC guidance for high value dealers expects them to understand the origin of the funds used in any high‑value cash purchase. Source of funds becomes particularly important when: 

• cash payments are unusually large
• customers offer unclear or contradictory explanations
• the payment route involves unrelated third parties
• cash use is inconsistent with the customer’s occupation or business activity.

For high‑risk cash transactions – such as customers from high‑risk countries, PEPs, or complex third‑party payment chains – HMRC expects dealers to verify the source of the cash with clear evidence, and, where needed, to understand the customer’s broader source of wealth as part of enhanced due diligence.

When you need to verify source of funds and source of wealth

In practice, regulated DNFBPs should move from simply identifying source of funds to actively verifying source of funds when:

• the client is a PEP or a family member or close associate of a PEP
• the relationship or transaction involves a high‑risk third country or other clearly high‑risk jurisdictional exposure
• transactions are complex, unusually large, form an unusual pattern or appear to have no clear economic or legal purpose
• there is an obvious mismatch between the funds or asset and the client’s known profile, such as super‑prime property, high‑end goods or large cash purchases that are hard to reconcile with disclosed income
• when red flags are present or there is any suspicion of money laundering, terrorist financing or sanctions evasion.

In lower‑risk, routine cases you still need a clear and plausible source‑of‑funds story, but the amount of documentation can be less. The key is that your file shows why your approach to source of funds and source of wealth was proportionate to the risk.

What credible source of funds information looks like

Source of funds must show where the money came from and how it reached the client. Examples include: 

• bank statements showing accumulated savings
• investment account statements
• evidence of the sale of an asset such as property, a business or shares
• loan agreements, with proof of drawdown
• inheritance receipt documentation
• dividend records or business profit extraction.

Your test is whether the explanation and evidence are credible, risk‑appropriate and consistent with the client’s profile.

Red flags to watch for

Across AMLGAS, LSAG and HMRC guidance, common warning signs include: 

• funds routed through multiple, unexplained accounts
• money originating from high‑risk jurisdictions
• third‑party payments with no clear link to the client
• vague or inconsistent explanations
• reluctance to provide bank statements or transaction evidence
• cash deposits that do not align with the client’s circumstances.

If these appear, enhanced due diligence may be required, you may need to verify both source of funds and, where relevant, source of wealth, and in some cases the relationship may need to be reconsidered or a suspicious activity report submitted.

Final thoughts

Source of funds is essential to understanding whether the money used in a transaction is legitimate. A clear explanation helps you assess risk and ensures the activity is consistent with what you know about the client. When the source is unclear, unsupported or contradictory, it’s often the first sign that closer scrutiny is needed.

A clear explanation, backed up by proportionate evidence, helps you assess risk and ensures the activity is consistent with what you know about the client. When the source of funds is unclear, unsupported or contradictory, it is often the first sign that closer scrutiny is needed and that your risk‑based approach should move from simple identification to full verification.