Source of funds and source of wealth: what law firms need to check

The rules

Money Laundering Regulations 2017, regulations 28, 33 and 35

The guidance

LSAG anti-money laundering guidance, section 6.17 (April 2025)

Both always needed for

Politically exposed persons, their family and close associates

Supervisor for SRA-regulated firms

The SRA

What is the difference between source of funds and source of wealth?

Source of funds is the money used for this transaction, and how and from where the client got it: a mortgage, savings, a sale or a gift. Source of wealth is the origin of the client's entire body of wealth: how they came to own everything they have, such as a career, a business or an inheritance.

The two overlap. To understand where savings came from you may need some idea of the client's wealth, especially when money has been mixed in one account.

What is source of funds?

The funds being used for the specific transaction. The LSAG guidance says the question isn't only where the money came from, but how and from where the client got it. Knowing it came from a UK bank account isn't enough, and neither is checking that the name on the account matches.

Record the amount, the currency and the account it's coming from, and how the client came to have it, such as salary, a gift or a sale. Where a lender is financing the purchase, the lender is the source of that part. If someone else is contributing, look at where their money came from too, more closely as the risk rises.

What is source of wealth?

The origin of the client's entire body of wealth: the work, business or other activity that built what they own. The question is why and how the client has the assets they do.

You don't need to account for every asset. LSAG asks for a reasoned picture that the wealth makes sense for this client and was obtained legally. In lower-risk matters, asking and recording how the client built their wealth, or checking their business interests in public records, may be enough.

When do you need to check source of funds and source of wealth?

Source of funds on most matters in scope, to the extent the risk calls for. Source of wealth when you apply enhanced due diligence to a PEP or a FATF call-for-action country, on a risk basis in other high-risk cases, and when the source of funds raises questions.

1. 01Every matter in scope: scrutinise the source of funds where necessary to make sure the transaction fits what you know of the client (regulation 28(11)). How far you go depends on your firm-wide risk assessment and the risk of the matter.
2. 02Politically exposed persons, their family and close associates: adequate measures to establish both, with senior management approval (regulation 35(5)). UK PEPs start from a lower risk than foreign ones (regulation 35(3A)).
3. 03A client or party in a country on the FATF's call-for-action list: information on both, as part of enhanced due diligence (regulation 33(3A)).
4. 04Other high-risk matters: enhanced due diligence, with source of wealth checked on a risk basis.
5. 05When the source of funds raises questions: look at source of wealth too.

If you decide a check isn't needed, record why. The SRA expects that reasoning on the file. Our AML checks guide sets out when enhanced due diligence applies.

What evidence should you ask for?

It depends on where the money came from. The higher the risk, the more complete and reliable the evidence should be. Documents the LSAG guidance and the SRA mention include:

Salary or savings

Bank statements and full payslips

Sale of a property or business

The sale agreement

Inheritance

The will or other estate documents

Business income or dividends

Audited accounts showing the money paid to the client

A gift from family

The same evidence from the person giving it

A mortgage

The lender is the source of that part of the funds

Ask at the start and say why; it saves chasing later. You can pass the cost of these checks on to clients if your terms say so, which a client care letter can cover.

What goes wrong with source of funds checks?

The SRA's thematic review of November 2025 looked at more than 5,800 files from 2024 to 2025. Its findings, and the gaps the LSAG guidance warns about:

1. 01No check at all: 11% of files that needed one had none.
2. 02Documents collected but not read: 18% of files reviewed weren't adequately scrutinised.
3. 03Money arriving from somewhere unexpected, unnoticed: on 8% of files the ledger didn't match the evidence, such as funds expected from a lender arriving from a private individual.
4. 04No record of what was checked, what it showed, or why no check was needed.
5. 05Stopping at the bank: knowing which account the money came from, but not how the client came to have it.
6. 06Missing third-party money, such as a family gift towards a deposit.

If you can't complete customer due diligence, including source of funds where it's needed, regulation 31 says you must not carry out the transaction or set up the relationship, must end any existing one, and must consider making a report. There are limited exceptions for legal advice and court work. Talk to your MLRO.

How should you record source of funds checks?

Keep copies of what you obtained (regulation 40) and be able to show the SRA that what you did fitted the risk (regulation 28(16)). LSAG suggests a file note of the checks, the evidence and your conclusion. The SRA publishes an optional form, and a file note or your case management system works as well.

Can AI help with source of funds checks?

It can do the reading: compare statements and documents with the client's explanation, flag gaps and mismatches, and draft the request letter. Whether the explanation holds up, and anything that looks like a suspicion, stays with the fee earner and your MLRO. Use only tools your firm has approved for client information.