What is the difference between sources of wealth and sources of funds?

Why the distinction matters

The Solicitors Regulation Authority (SRA) and the Legal Sector Affinity Group (LSAG) make clear that law firms are required to establish and evidence both a client’s source of wealth and source of funds. This ensures you can demonstrate that financial and other assets have not been obtained through criminal activity.

Both SRA and LSAG guidance emphasise that firms must understand how a client accumulated their wealth and where the money for a particular transaction is coming from. Regulators expect you to evidence both clearly. If you fail to do so, you may face regulatory enforcement, reputational harm, or in serious cases, prosecution under the Proceeds of Crime Act.

Source of wealth vs Source of funds

What is Source of wealth? 

Source of wealth describes how a client, or their family, has acquired their total wealth, for example, you will need to look at the activities that have generated or contributed to the accumulation of their financial and other assets.

Examples of sources of wealth:

• Inheritance
• Investments
• Ownership of a business
• Employment

What is Source of funds? 

Source of funds refers to the specific funds used in a given transaction. Unlike source of wealth, it focuses on the immediate origin of the money being paid or transferred. 

Examples of source of funds? 

• Savings
• Release of pension
• Sale of shares
• Sale of another property
• Inheritance
• Dividends from a UK company
• Lottery/gambling winnings
• Compensation award
• Gift from a relative

Evidence regulators expect 

Regulators require you to obtain appropriate evidence to show that you have carried out client due diligence and for the purposes of source checks this can include:

• Savings - six months' bank statements showing how the client gets paid from their employer, pension, annuity and the money growing in their bank account over time. Where there are multiple client bank accounts six months' bank statements will be required for each of the accounts.
  
  
• Release of pension - a copy of the client’s pension statement and a copy of their bank account statement showing the money being received from the pension company.
  
  
• Sale of shares - a copy of the share release schedule and a copy of the bank account statements showing the money being received from the company.
  
  
• Sale of another property - a copy of the completion statement from the client’s solicitor and a copy of their bank statement showing the money being received from their solicitor following completion.
  
  
• Inheritance - a copy of the letter from the executors stating how much the client is being paid as a beneficiary and a copy of their bank statement showing the money being received from the solicitor/executor's bank account.
  
  
• Dividends from a UK company - a copy of the relevant dividend certificate(s), a copy of the company's accounts and a copy of the bank statement showing the money being received from the company.
  
  
• Lottery/gambling winnings - a copy of the receipt/cheque proving the client’s winnings and a copy of their bank statement showing the money being received from the lottery or gambling company. Proving where cash from gambling has come from will not be easy so you will need to ask additional questions and/or make additional enquiries.
  
  
• Compensation award - a copy of the letter confirming the client’s compensation settlement and a copy of their bank statement showing the money being received.

Read the full SRA's full guidance here. 

Applying a risk-based approach to source of funds checks 

While evidencing is essential, firms should also take a proportionate, risk-based approach when carrying out source of funds checks. Not every client or transaction presents the same level of risk, and regulators expect you to assess factors such as client profile, transaction type, jurisdiction, and complexity.

Risk assessment should also include AML red flags—indicators that deeper scrutiny is required, such as evasiveness, atypical transaction patterns, or third-party pressure to bypass normal procedures. Recognising and acting on red flags is as important as gathering evidence.

For guidance on applying these strategies effectively, see our dedicated articles:

• Taking a risk-based approach to source of funds checks
• AML red flags for law firms to be aware of

The role of the MLRO

Every regulated firm must appoint a Money Laundering Reporting Officer (MLRO). The MLRO is responsible for overseeing the firm’s anti-money laundering framework, receiving internal reports of suspicious activity, and determining whether these should be escalated to the National Crime Agency.

Where a client refuses to provide information, the MLRO must consider whether this refusal indicates a higher risk of criminal activity. In such circumstances, the firm may need to decline to act and submit a suspicious activity report. 

Communicating with clients

Some clients get aggrieved at being asked for what they consider to be sensitive and confidential financial information. It is important to explain that these checks are regulatory obligations. By communicating clearly why you need the information, clients should hopefully be more understanding and provide what you are asking for.

However, if a client still refuses to cooperate, you should consider whether to decline acting for them. You may also need to report the situation to your Money Laundering Reporting Officer (MLRO). Withholding information is a potential ‘red flag’ that could indicate criminal activity or an attempt to launder proceeds from crime.

Are you exposed? Risks of non-compliance 

If you and your colleagues fail to carry out effective checks into a client’s source of funds and wealth you could be exposed to regulatory enforcement action and potentially criminal prosecution, so make sure everyone in your firm is aware of what they need to do and why! 

The good news is that firms who prepare thoroughly and invest in training can demonstrate compliance with confidence. For example, Morecrofts Solicitors, a multi-disciplinary firm operating across six offices in the Liverpool city region, faced an SRA AML audit. They needed to show that their staff had completed mandatory AML compliance training. By leveraging Access Legal Learning's Governance, Risk and Compliance (GRC) for law firms package, they were able to easily generate reports demonstrating that all staff had completed the required training. This proactive approach helped them successfully pass the audit and reinforced their culture of compliance.

Read the full story here: How Morecrofts Solicitors passed their SRA AML audit

Next steps for firms

To strengthen compliance in this area, firms should:

• Use an AML compliance checklist to benchmark existing processes.
• Provide training so that staff understand the difference between source of wealth and source of funds with our market-leading Governance, Risk and Compliance (GRC) for law firms training courses. 
• Implement legal software that streamlines client onboarding and AML checks.