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.

FATF Recommendation 10 sets the international standard for customer due diligence (CDD). It calls for ongoing scrutiny of transactions to check they’re consistent with what you know about the client, their business and their risk profile. This includes identifying the source of funds where necessary.

Most country guidance on source of funds stems from this FATF Recommendation and uses very similar definitions.

What source of funds means in each sector

Each regulated sector applies the same underlying principle: understand where the client’s money has come from and check that it’s consistent with what you know about them. What changes from sector to sector is the type of transaction that triggers the check.

Accountancy sector

Source of funds means the origin of the funds involved in the business relationship or transaction. You’re expected to establish this when:

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

Legal sector

Source of funds needs to show the origin of the money used for the transaction itself, tracing it back through how and from where the client obtained it.

You’re expected to establish source of funds in situations such as:

• high-value or unusual transactions;
• cross-border matters;
• property transactions, whether residential or commercial;
• politically exposed persons (PEPs) and sanctions-related matters;
• cases where a client’s explanation doesn’t match their profile.

Trust and company service providers (TCSPs)

TCSPs are expected to establish source of funds whenever they form, administer or act on behalf of a company, trust or similar legal arrangement for a client.

This applies in situations such as:

• setting up a new company or trust structure on a client’s behalf;
• funds used to capitalise a company or fund a trust;
• layered or cross-border ownership structures;
• funds moving through nominee shareholder or director arrangements;
• client accounts or assets administered on behalf of a legal person or arrangement.

In the UK, this now also includes ‘off the shelf’ firms (see our update on SI 2026/621).

Property sector

Source of funds means the origin of the money funding the transaction. You’re expected to establish this when:

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

Dealers in precious metals and stones (also known as high-value dealers or HVDs)

FATF’s standards apply to HVDs when they engage in cash transactions with a customer at or above the applicable threshold. You’re expected to understand the source of funds used in any high-value cash purchase, particularly 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.

In all sectors, when risk is higher – for example with politically exposed persons (PEPs) or clients connected to high-risk jurisdictions – you might also need to gather evidence of the client’s source of wealth, as part of enhanced due diligence.

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

In practice, regulated businesses 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

FATF guidance sets out the red flag indicators used across the industry to spot potential misuse of the financial system, including:

• 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, 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.