Source of funds checks are a core part of AML due diligence, yet they remain one of the areas where conveyancing firms most commonly fall short.
Here is what the obligation actually requires, what good evidencing looks like, and the red flags that should prompt further questions.
Why Source of Funds Trips Firms Up
Of all the AML checks a conveyancing firm carries out, source of funds is the one most likely to feel like it has been done when it has not. A bank statement has been received, a box has been ticked, and the matter moves on. But receiving a document is not the same as scrutinising it, and scrutiny is what the obligation requires.
The SRA’s supervisory findings consistently identify source of funds as an area of weakness. The most common failures are not firms ignoring the check entirely; they are firms accepting documents at face value, failing to follow up on inconsistencies, or not asking for evidence in the first place when the client’s profile and transaction give good reason to.
What the Obligation Actually Is
The requirement to understand source of funds sits within the broader customer due diligence obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Firms must take reasonable steps to understand where the money used in a transaction originates and whether it is consistent with what they know about the client.
“Reasonable steps” is not a fixed standard. It scales with risk. For a straightforward residential purchase funded by a mortgage and a modest deposit from a current account, a bank statement showing the funds may be sufficient. For a cash purchase, a high-value transaction, an overseas client, or any situation where the source of funds is unclear or unexpected, considerably more is required.
Source of funds is distinct from source of wealth, though the two are related. Source of funds focuses on the specific money being used in the transaction. Source of wealth is broader and considers how the client accumulated their assets overall. In higher-risk matters, both may need to be established.
What Good Evidencing Looks Like
Good source of funds evidence answers a simple question: can the money be traced to a legitimate, plausible origin?
For most residential transactions, this means bank statements showing the deposit funds building up over time, or a clear single event such as a property sale, an inheritance, or a gift that explains their arrival. The statement should be recent, unredacted in the relevant sections, and consistent with what the client has told you.
Where funds come from a property sale, the completion statement from that transaction is the natural supporting document. Where funds are a gift, a signed letter confirming the amount, the relationship, and that it is not a loan is standard. This should be supported by evidence that the donor actually holds the funds.
Where funds originate overseas, the bar is higher. Exchange rate movements, international transfer records, and the regulatory environment of the originating country all become relevant. A foreign bank statement should not be accepted without considering whether additional verification is appropriate.
Red Flags in Bank Statements
Receiving a bank statement is the beginning of the process, not the end. When reviewing statements, certain patterns should prompt further questions.
Large, unexplained deposits can indicate layering, where illicit funds are introduced into an account to appear legitimate. Multiple smaller deposits from different sources may suggest structuring, where funds are broken up to avoid detection thresholds.
Inconsistencies with the client’s profile should also be treated carefully. Funds that appear disproportionate to what is known about the client’s occupation, income, or circumstances warrant further enquiry rather than acceptance.
Any indication that documents have been altered, cropped, or are incomplete should be treated as a serious concern. Original documents, or verified electronic statements from the bank, are preferable where there is any doubt.
When to Ask More Questions
A useful test is whether the explanation of funds feels plausible when set against everything else known about the client. If it does not, that instinct is worth acting on.
The obligation is not to prove that funds are clean, but to take reasonable steps to be satisfied that they are. Where something does not add up, further questions are required. If a satisfactory explanation cannot be obtained, the matter may need to be referred to the MLRO.
Proceeding without adequate source of funds evidence exposes the firm to regulatory risk and, in some cases, criminal liability.
Ultimately, source of funds checks are not about collecting documents, but about forming a clear and defensible understanding of where money has come from. The standard applied should reflect the level of risk, increasing where transactions are higher value, more complex, or less predictable. Where firms fall short is not usually in starting the process, but in stopping too early. The SRA’s expectation is clear: scrutiny matters, and if something does not make sense, it is not enough to record it and move on.
