Why do banks ask for source of funds?
Why do banks ask for source of funds? This article discusses AML-KYC and “Source of Funds”
The source of funds requirement is an important aspect of Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance in the banking industry. The purpose of this requirement is to ensure that the funds being deposited into a bank account are derived from legitimate sources and are not the proceeds of illegal activity.
To comply with the source of funds requirement, banks must collect information about the origin of the funds and the customer’s source of wealth. This information can be obtained through customer due diligence processes, which may include documentation, interviews, and other forms of verification.
For example, a bank may request proof of income, such as pay stubs or tax returns, to verify that the customer’s source of funds is from a legitimate source. The bank may also ask for documentation to support the source of funds for large or unusual transactions, such as the sale of a business or the receipt of an inheritance.
In addition to collecting information about the source of funds, banks must also evaluate the information to determine the risk posed by the customer. If the bank determines that the customer poses a high risk, it may apply enhanced due diligence or take other measures to manage that risk, such as monitoring the account more closely or declining to do business with the customer.
The source of funds requirement is an essential component of AML-KYC compliance and helps to protect the integrity of the financial system by ensuring that illegal funds are not laundered through the banking system.