Private Banking and Wealth Management KYC: Source of Wealth Checks

Private banks, wealth managers and family offices look after clients with substantial assets, often held through trusts, companies and multiple jurisdictions. That combination is exactly what money launderers and corrupt officials look for, which is why regulators expect more from firms in this sector than basic identity checks. This guide explains what makes private banking and wealth management high risk, what the UK Money Laundering Regulations require for politically exposed persons, how source of funds differs from source of wealth, and what a regulator's thematic review found when it looked at how firms test those answers. It is useful for compliance staff, relationship managers, trainees and accountants who act for wealthy clients.

Why wealth management is treated as higher risk

Regulation 33 of the Money Laundering Regulations 2017 lists factors that may indicate a higher risk of money laundering or terrorist financing. In the version published as at April 2018, which is the text we have checked, the list includes products involving private banking, customers that are legal persons or arrangements used to hold personal assets, companies with nominee shareholders or shares in bearer form, unusual or overly complex corporate structures, products or transactions that might favour anonymity, non-face-to-face relationships without safeguards, payments from unknown or unconnected third parties and links to countries with weak AML systems or significant corruption. The regulation also says that the presence of one or more of these factors does not automatically mean the risk is high, and the Regulations have been amended since, so check the current text when you apply it.

Wealth management typically combines several of those factors in one relationship: a high-net-worth individual, a trust or holding company above them, assets in more than one country and a relationship manager who may rarely meet the beneficial owner. None of that is wrong in itself. It simply means the firm must understand why the structure exists and where the money came from.

Politically exposed persons

Private banks attract politically exposed persons, so the rules in regulation 35 matter. Before establishing or continuing a relationship with a politically exposed person, a family member or a known close associate, a firm must obtain senior management approval, take adequate steps to establish the source of wealth and the source of funds, and carry out enhanced ongoing monitoring. Those measures continue for at least 12 months after the person leaves a prominent public function, or longer if the firm judges the risk warrants it. Since January 2024 the regulation has also said that domestic politically exposed persons start at a lower risk level than non-domestic ones, so they receive less enhanced due diligence unless other risk factors are present. Our guide to politically exposed persons covers the wider rules.

Source of funds and source of wealth are different questions

The two phrases are often used as if they were one. They are not:

• Source of funds is the origin of the specific money going into a particular transaction or relationship, for example the proceeds of a property sale or a bonus.
• Source of wealth is how the customer built their overall wealth over time, through a business, career, inheritance or investments.

A practitioner article from FD Capital describes the usual evidence. For source of funds, property sale proceeds can be supported by a solicitor's completion statement, salary by payslips or an employer letter, and business sale proceeds by the sale agreement. For source of wealth, firms use company registry searches, property registry searches, open-source research on employment history and press coverage, and specialist providers for higher-risk jurisdictions. The same article makes the point that a bank statement credit labelled "property sale" does not by itself prove that a sale happened. The two answers should also be consistent with each other: where they are not, that is a signal for escalation. Our guide to source of funds and source of wealth checks for legal practitioners goes through the same distinction for another profession.

What a regulator found when it looked at private wealth firms

The UK Financial Conduct Authority has published its own thematic work on high-risk customers, but one of the most detailed public reviews of this exact topic comes from Guernsey. The Guernsey Financial Services Commission published its thematic review of source of funds and source of wealth in the private wealth management sector on 7 July 2020, based on work carried out in the second half of 2019. The Commission is a different regulator in a different jurisdiction, so treat its findings as a case study in what good and poor practice look like rather than as UK rules.

According to the report, 47 firms completed a questionnaire, including private banks, trust and corporate service providers, investment managers and lawyers, and 22 received on-site visits. The Commission reviewed 107 high-risk relationships, of which 32, roughly 30%, were connected to a foreign politically exposed person. About 90% of firms asked all customers at take-on how they made their money. Six firms had to start remediation programmes and one was referred to the Commission's enforcement division. The Commission said those firms did not apply a risk-based approach to corroboration and tended to accept explanations at face value.

The review set out a three-step expectation: gather information on source of wealth and source of funds, corroborate it on a risk-based basis, then sense-check it against the firm's wider due diligence. It also expected firms to assess the two separately, apply a higher threshold where a politically exposed person is involved and review the information again when a trigger event occurs, such as new funds from a new source, a change in expected activity or adverse media.

Examples of poor practice

• Accepting open-source confirmation that a customer owned mining companies in a higher-risk country without asking how the customer acquired them or what they were sold for.
• Accepting a consultancy agreement signed by the customer's son and a bank statement with no narrative, when the Commission expected audited accounts, client lists and company register checks.
• Recording the source of funds simply as the sending bank account.
• Obtaining a specialist third-party report on a politically exposed person and filing it without considering its contents.

Examples of good practice

• Matching the level of corroboration to the risk factors in each relationship.
• Using internal committees with senior management, compliance and risk to review politically exposed person relationships.
• Checking a retired judge's salary receipts against published salary bands to obtain independent evidence of his wealth.
• Escalating when an adviser limited access, including meeting the customer directly.

What this means in practice

Whether you work in a bank or in an accountancy practice that acts for wealthy families, the lessons are similar. Treat the customer's own explanation as a starting point, not as evidence. Ask what documents would exist if the story were true and look for them. Record your reasoning in the file, not just the conclusion, because that is what a supervisor will look for. Where trusts or holding companies sit above the individual, our guide to the Trust Registration Service explains the register that can help you see who is behind them. And refresh the picture when something changes: a new source of funds, a change of structure or a news story are all reasons to revisit the file.

Frequently asked questions

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

Source of funds is where the money in a particular transaction came from. Source of wealth is how the customer built their overall wealth.

Is source of wealth always required?

For politically exposed persons, their family members and close associates, regulation 35 requires adequate steps to establish both source of wealth and source of funds. For other customers, it depends on the risk assessment.

Does the Guernsey review apply in the UK?

No. It was published by a different regulator, but its examples of good and poor practice are widely relevant to firms that serve private wealth clients.

Where can I learn more about AML and KYC?

See Learnsignal's CPD courses for finance professionals.