Look behind the transfer
Source of funds concerns how the money for a particular transaction was obtained. A bank account shows where a transfer came from, but may not explain the underlying origin. The question is about the money's source, rather than simply the payment method.
This differs from source of wealth, which concerns the person's overall accumulation of wealth. One transaction can involve several funding sources. The relevant enquiry should remain tied to the service and risk. Do not assume that every customer must provide the same documents or that a bank transfer proves the origin of the money.
Sources: AUSTRAC: Source of funds; How to establish the source of funds and source of wealth; Federal Register of Legislation: Sections 5-2(2), 6-21 and 6-23.
- Identify the transaction
State which money or assets the enquiry concerns.
- Identify the underlying source
Look beyond the account that sent the payment.
- Separate components
Distinguish material funding sources.
- Examine as required
Apply the relevant duty, risk and policy.
- Explain the result
Connect the source, evidence and conclusion.
Explain the money used in a transaction
A payment route and an underlying funding source answer different questions.
Follow the process from top to bottom.
Distinguish an explanation from a checked conclusion
The customer may describe a funding source. The business then decides what information must be collected and verified under the applicable law and its policies. Rules section 5-2 requires those circumstances to be addressed in the policies. Rules 6-21 and 6-23 contain particular requirements with their own conditions.
Keep the applicable trigger separate from the meaning of the term. Knowing what source of funds means does not answer whether a particular check is mandatory in this case. Equally, when a check is required, a statement such as savings may leave the relevant origin unexplained.
Section 6-21 concerns the customer’s funds and wealth for the specified section 32(a), (b) or (d) triggers, where relevant. Section 6-23 concerns the specified PEP’s funds and wealth. The PEP and customer can be different people.
Sources: AUSTRAC: Source of funds; How to establish the source of funds and source of wealth; Federal Register of Legislation: Sections 5-2(2), 6-21 and 6-23.
Connect the origin to the money being used
A useful enquiry separates three questions: what generated the money, who obtained it, and how it reached the transaction. A transfer statement may answer the last question without answering the first two. The evidence needs to fit the explanation and the risk. AUSTRAC gives examples of different origins and advises targeted, proportionate checks.
Possible evidence depends on the explanation. An asset sale may have a sale agreement and settlement record. Earnings may have income records and an accumulation history. A gift raises questions about the giver and the gift. These are examples of evidence paths, not documents that every customer must provide. Consider information already held before requesting more.
Invented example: reconcile separate funding sources
In this invented example, a customer says a purchase will use proceeds from an asset sale, accumulated earnings and a gift. A bank statement shows a matching total balance. The balance alone does not establish those explanations. The reviewer records each component and its relevant evidence.
Suppose the sale and earnings records support those components. The gift arrived from a company account rather than from the stated giver. The reviewer asks how the company relates to the giver and why it made the payment. The inconsistency is a question to resolve, not proof of wrongdoing.
The final note identifies what was established, what remains uncertain and how that affects the service decision. The reviewer does not describe all funds as verified merely because the largest component is supported. This example does not require a complete lifetime wealth investigation for every funding query.
Sources: AUSTRAC: Source of funds; How to establish the source of funds and source of wealth; Federal Register of Legislation: Sections 5-2(2), 6-21 and 6-23; AUSTRAC: Source of funds; Source of wealth; How to establish the source of funds and source of wealth; Documents and data to verify the source of funds and source of wealth; If you can’t establish the source of funds or source of wealth.
- Asset sale
Match the stated sale to suitable evidence and the funds received.
- Accumulated earnings
Consider evidence relevant to the stated accumulation.
- Gift
Resolve why a company account paid the stated gift.
- Total funds
A matching balance does not resolve an unexplained component.
A balance is not a funding explanation
Invented example. The required checks depend on risk and the applicable provisions.
Separate evidence questions. An answer to one does not settle the others.
Ask a precise follow-up question
A practical follow-up identifies the missing information. Invented example: the file shows receipt of money but does not explain the activity that generated it. Ask for information relevant to that gap and explain the request in language the customer can understand.
Avoid unnecessary collection that does not help resolve the risk. Also avoid treating a large volume of documents as a substitute for a consistent explanation. The final note should connect the transaction, the stated source, the evidence and the conclusion. This method supports review, but does not itself establish compliance with every CDD obligation.
Sources: AUSTRAC: Source of funds; How to establish the source of funds and source of wealth; Federal Register of Legislation: Sections 5-2(2), 6-21 and 6-23.
Explain the remaining gap precisely
A useful request says what the current record shows and what it does not explain. Invented example: the statement shows a payment from the paying company. Please explain its relationship to the stated giver. This is more useful than sending the same generic proof-of-funds request again. Use the approved communication process where a suspicion may be involved.
If the explanation remains inconsistent, record the conflict and assess the next action under the applicable CDD and reporting requirements. More documents are helpful only if they address the question. A lender’s approval, account balance or signed declaration must not be described as proving more than the evidence actually supports.