In the money services business (MSB) and in due diligence processes, the source of funds refers to the origin of the money that is being used in a transaction. This information is typically required to be disclosed in order to comply with anti-money laundering (AML) regulations, which are designed to prevent the use of illicit funds for legitimate purposes.
To determine the source of funds, financial institutions and MSBs may ask customers or clients to provide information about how they obtained the funds and where they came from. This may include information about employment, salary, investments, or other sources of income.
There are a few different reasons why it is important to determine the source of funds:
- To ensure that the funds are not derived from illegal activities: AML regulations require financial institutions and MSBs to verify the source of funds to ensure that they are not derived from illegal activities, such as drug trafficking, terrorism, or money laundering.
- To assess risk: Knowing the source of funds can help financial institutions and MSBs to assess the risk of a transaction. For example, funds that come from a stable and legitimate source may be considered less risky than funds from an uncertain or unknown source.
- To comply with regulatory requirements: Financial institutions and MSBs are required to collect and verify information about the source of funds in order to comply with AML regulations. Failing to do so can result in fines or other penalties.
In summary, determining the source of funds is an important aspect of due diligence and compliance in the money services business. It helps to ensure that transactions are legitimate and that funds are not derived from illegal activities.
This page was last updated on January 6, 2023.