The SRA’s latest thematic review on source of funds and source of wealth opens with a line that should make every MLRO wince: “We are concerned by the continued levels of non-compliance…”
The broad review looked at 5,873 files from 833 firms in 2024–25. Of the 5,026 files that should have had source of funds/wealth checks:
- 11% had no source of funds checks at all
- 18% showed inadequate scrutiny of the evidence
- 8% contained inconsistencies between the evidence and the ledger
Things are better than in previous years – but “better” is a low bar when more than one in ten files has no source of funds work on it.
Why are firms still getting this wrong?
The SRA is surprisingly candid about the fact that non-compliance is not always wilful. Firms told them they are still unsure about when and how to do source of funds and, in particular, what “where necessary” in regulation 28(11)(a) actually means. That lack of clarity has been echoed in the Treasury’s recent consultation.
But we should not kid ourselves that this is all about obscure drafting in the MLRs. The review highlights some very familiar pain points:
- Fee-earners gathering documents, but not actually scrutinising them
- Very little on file to explain why the checks done were considered sufficient
- Generic document requests (“send us three months’ bank statements”) that do not speak to the actual risk
- Checks carried out far too late – sometimes on the day the money arrives
Add in the human factors the SRA calls out – time pressure, cost, fear of embarrassing conversations and“upsetting” long-standing clients – and you have a perfect storm.
Back to basics: what source of funds and source of wealth aren’t
The review spends a fair bit of time re-stating the basics, which tells you something about what they are seeing on files:
- Source of funds is not “where the money is now”. The fact the funds are currently sitting in a UK bank account is not enough.
- It is not proof of funds. Showing you can afford the transaction is useful, but not the same as explaining where the money actually came from.
- Source of funds is still relevant where money does not pass through client account – if there is a movement of assets, there is a source to understand. It’s surprising how well embedded this myth is, with corporate lawyers in particular. Also, assets do not have to be cash.
Source of wealth is narrower in scope but higher impact. You need to be in source of wealth territory where:
- you are dealing with a PEP or someone close to them
- the client is based in a high-risk third country
- the client or matter is otherwise high-risk for money laundering or terrorist financing
In those cases, you are looking to understand the overall origin of the client’s wealth, not just the pot being dipped into for this transaction. That is part of enhanced due diligence, and it should feed into whether you proceed at all – and if so, on what terms.
The practical failings the SRA keeps seeing
The review gives some very recognisable examples of how this plays out on real files:
- No supporting evidence for what the client has told you (“it’s savings”, “it’s a gift from family”)
- Evidence that does not match the story or the amount needed for the transaction
- Accepting money into client account before you are satisfied on source of funds
- Treating a standard checklist or a bundle of statements as the end of the job, rather than the start of some analysis
The recurring theme is that firms are often collecting information, but not using it to make and record a judgment. If you are not asking “does this actually stack up?” then your file is unlikely to look good under regulatory or criminal scrutiny.
Helpful resources – and how realistic is it to use them?
In fairness, this review does try to respond to the profession’s plea for more practical support. The SRA has:
- updated its FAQs on source of funds and wealth
- produced a detailed “information gathering form” and internal “record of evidence” form for fee-earners
- drafted a client-facing information sheet explaining why firms have to ask awkward questions
- pulled together case studies showing the sorts of questions and red flags that should arise
Will every fee-earner diligently complete an eight-page record of checks on every file? Of course not. Realistically, these materials are most useful as:
- training tools to help people understand how to do a good source of funds exercise, and
- design inspiration when you are rebuilding your own workflows and templates.
The client information sheet, in particular, is worth a look. Handing clients something official-looking that explains “it’s not just us being difficult” can make those conversations a lot smoother.
Is this the next big focus for SRA AML audits?
If the last few years were all about client and matter risk assessments, this next phase may well be about source of funds. We have already seen:
- a thematic review
- a warning notice on CMRAs
- a steady flow of fines where risk assessments were missing or inadequate
At the COLP/COFA conference, there were some pretty strong hints that future AML inspections will dig far more deeply into how you approached source of funds and wealth on individual matters – not just whether a box is ticked. Expect more “talk us through why you were comfortable with this funding structure” and “show us where you recorded your conclusions”.
Lenders have been doing exactly this with their panel firms for some time. Where they request your CDD and source of funds work, the questions are often forensic:
- Why was this level of deposit considered consistent with the client’s profile?
- How did you get comfortable with that last-minute third-party contribution?
- Can you explain the trail from original source right through to the money landing in client account?
If your answers are vague, or scattered across emails and handwritten notes, you know what the SRA is going to make of that.
What should firms do now?
A few practical steps to take away:
- Revisit your policy and templates. Make sure they distinguish clearly between source of funds and source of wealth, and give concrete examples of each.
- Train fee-earners on scrutiny, not just paperwork. The job is not finished when documents are on file. Build in prompts like “does this make sense?” and “does this match what we’ve been told?”.
- Tighten timing. Ideally, be satisfied on source of funds before money hits client account or the transaction becomes irrevocable. If that is not realistic in your practice area, think about how you will manage the risk.
- Improve your note-taking. A brief file note explaining why you were comfortable – or why you decided to walk away – will often be the difference between “feedback” and “formal investigation”.
The SRA could not be much clearer: source of funds and source of wealth are now front-line AML controls. They are also fast becoming a front-line source of fines.
If you would like us to look under the bonnet of your source of funds and wealth checks – whether that is a spot audit, file testing or training – we would be happy to help.
