Every law firm knows the importance of source of funds checks, but that doesn’t make them any easier. From sifting through documents to verifying unusual sources like cryptocurrency, it can be an arduous and complex task.

So, how can firms stay compliant and prevent financial crimes without drowning in admin? This guide explores what source of funds checks involve, why they’re essential, and how to streamline the process to save time and ensure compliance.

What Is ‘Source of Funds’?

Source of funds refers to the specific origin of money used in a specific transaction. It could be a salary, savings, proceeds from a property sale, or even a gift. For example, if a client is purchasing real estate or setting up a trust, you need to verify where the money funding that transaction has come from.

It’s important to distinguish source of funds from source of wealth. While source of funds focuses on the immediate origin of the money being used, source of wealth looks at the broader accumulation of an individual’s total assets—like an inheritance, business ownership, or investment portfolio. For law firms, both are relevant, especially in high-risk transactions, but the focus will vary depending on the matter at hand.

Typically, verifying the source of funds involves collecting financial documents like bank account statements, pay slips, or tax returns. These provide evidence of where the money originated and whether it aligns with the client’s declared financial profile. However, not all sources are straightforward. Funds from, gambling winnings, or cryptocurrency holdings often require additional scrutiny and documentation to ensure compliance.

Why Source of Funds Checks Are Crucial

Source of funds checks are more than a regulatory box to tick—they’re a vital safeguard for law firms. These checks ensure that money used in financial transactions isn’t linked to criminal activities, protecting both your firm and the wider financial system.

Under UK anti-money laundering (AML) legislation, including the Money Laundering Regulations 2017 (MLR) and the Proceeds of Crime Act (POCA), law firms are legally obligated to verify a client's source of funds. Section 327 of POCA makes it a criminal offence to handle property derived from criminal conduct, meaning law firms must demonstrate that they’ve taken reasonable steps to avoid facilitating such activities.

Beyond legal compliance, thorough source of funds checks allow law firms to identify red flags early on in the business relationship. Undisclosed income, unexplained transactions, or financial behaviour inconsistent with a client’s profile can all signal deeper issues. Catching these early not only protects your firm but also prevents criminals from exploiting the legal system to legitimise their gains.

By carrying out these checks and documenting the process, law firms can prove their due diligence to regulators. In turn, this keeps staff, the firm, clients, and the wider community safe by preventing criminals from benefiting from their crimes.

Key Components of Source of Funds Verification

Effective source of funds verification involves more than just collecting documents—it’s about building a clear and consistent picture of where the money comes from. Gathering evidence such as bank statements, pay slips from the customer's employment history, or tax returns provide the foundation for verifying a client’s financial activity.

It's essential that firms adopt a risk-based approach. Not all clients pose the same level of risk, so tailoring the verification process to a client’s profile is crucial. Higher risk clients, like politically exposed persons (PEPs) or those from high-risk jurisdictions, require enhanced due diligence to ensure every potential red flag is addressed. However, lower risk clients don't require this level of scrutiny.

Firms should also look for consistency within the documentation. In other words, the documents provided should align to form a coherent story about the source of funds and the client's financial assets. Any gaps or inconsistencies need to be resolved to ensure the legitimacy of the particular transaction. This step helps identify anomalies that may indicate potential risks.

Leveraging technology can significantly streamline this process. Automated tools collect and cross-reference documents, assess risk levels, and flag inconsistencies in real-time, reducing manual effort and human error. This allows firms to focus their resources on more complex or high-risk cases.

Last but not least, firms should maintain comprehensive audit trails. This is vital for compliance. Detailed records of the verification process not only demonstrate adherence to the Money Laundering Regulations but also provide the necessary evidence during regulatory reviews or even if the police come knocking. These records protect the firm and reinforce confidence in its compliance measures.

Challenges in Source of Funds Verification

Verifying source of funds isn’t always straightforward. Complex financial profiles, high-risk clients, and evolving regulations can make the process time-consuming and challenging. Here are some of the key obstacles law firms face:

• Non-standard sources: Verifying funds from sources like the sale of expensive watches and jewellery, gambling winnings, or cryptocurrency can be particularly complex. These often require additional documentation and careful scrutiny to ensure legitimacy.
• High-risk clients: Clients such as politically exposed persons (PEPs) or those from high-risk jurisdictions demand enhanced due diligence. This adds extra layers of checks, increasing time and effort. Firms must therefore apply appropriate risk-based systems for each client.
• Balancing compliance with client experience: Striking the right balance between thorough verification and a smooth client experience can be difficult. This is especially true in time-sensitive transactions, where delays can frustrate clients.
• Manual processes: Reliance on manual processes increases the risk of errors and distracts lawyers from billable work. Gathering, reviewing, and cross-referencing documents by hand can slow down compliance efforts and strain resources.
• Evolving regulations: Staying up to date with changing AML regulations requires constant vigilance. Adapting to new rules adds complexity to an already demanding process.

Addressing these challenges requires a combination of expertise, a risk-based approach, and the right tools to streamline and strengthen the verification process.

How Legl Simplifies Source of Funds Verification for Law Firms

Legl takes the complexity out of source of funds verification with cutting-edge tools that save time, improve accuracy, and ensure compliance. Here’s how Legl supports law firms:

• Automated, AI-powered document collection: Clients can securely upload documents like bank statements and pay slips directly through Legl’s platform. Using AI, Legl identifies the most relevant source of funds, reducing manual effort and expediting the verification process.
• Open banking integration: Legl leverages open banking to directly validate financial information from clients’ bank accounts. This ensures data accuracy and minimises the risk of falsified or incomplete bank statements.
• Watchlist screening: Legl automatically cross-references client information against international watchlists, including PEPs and sanctions lists. This feature flags potential risks early, enabling firms to act quickly and confidently.
• Centralised data management: All client documentation and data are consolidated into Legl’s platform, providing law firms with a unified, easy-to-access view. This simplifies compliance reviews, audits, and ongoing monitoring.

Final Thoughts

Source of funds verification is a vital step to prevent money laundering, protect your firm from financial crime, and ensure compliance with AML regulations. However, manual methods no longer meet the demands of modern compliance. They’re slow, prone to errors, and can put unnecessary strain on your team.

Legl transforms source of funds verification with automated workflows, open banking integration, and AI-powered risk assessment tools. Ready to streamline your source of funds checks and protect your firm? 

Book a demo with Legl today to see how we can help.