Verifyo executive says bank statements cannot prove clean funds

Anti-money laundering teams that rely on bank statements to clear source-of-funds checks may be proving only that money moved, according to Victor Mendez, CMO and co-founder of Verifyo. Mendez said firms subject to enhanced due diligence must be able to show a risk-based assessment of the money’s legitimate origin, a point with direct consequences for banks, law firms, estate agents and fintechs.

Mendez distinguished source of funds from source of wealth, two terms he said are often merged in onboarding records. Source of funds concerns the origin of money used in a particular transaction. Source of wealth concerns how a customer built their overall financial position. HM Revenue & Customs’ economic-crime supervision guidance treats those as separate questions, according to Mendez.

Risk triggers determine the depth of checks

The Money Laundering Regulations 2017 set enhanced due diligence requirements for higher-risk situations. Mendez cited regulation 33, which requires enhanced customer due diligence and enhanced ongoing monitoring where a customer is established in a high-risk third country, where a politically exposed person is involved, or where the firm identifies a higher money laundering or terrorist-financing risk.

For politically exposed persons, regulation 35 requires adequate measures to establish both source of wealth and source of funds, Mendez said. He also noted that 2024 amendments set UK domestic politically exposed persons at a lower starting risk than non-domestic ones, while still requiring firms to assess the particular relationship.

International standards point in the same direction. Mendez cited Financial Action Task Force Recommendation 19 on higher-risk jurisdictions and the European Banking Authority’s risk-factor guidelines, both of which call for enhanced measures scaled to risk.

Documents need reconciliation

A bank statement can show that funds were present or passed through an account. Mendez said it does not, on its own, establish that the money was legitimately earned. A pay slip may evidence employment income from a named employer, while inheritance records, loan agreements, audited accounts and company documents can support other explanations. Each document still needs to be checked against the customer’s stated account and the amount being transacted.

HMRC guidance says no single document is conclusive proof of legitimacy, according to Mendez. The regulatory test is therefore not the size of the file, he said, but whether the firm can explain why the evidence supports the claimed origin and why the level of inquiry was proportionate to the risk.

The Financial Conduct Authority’s Financial Crime Guide expects source-of-funds and source-of-wealth information to be documented and challenged during due diligence, Mendez said. Regulation 28 of the 2017 rules also requires firms to understand the purpose of a business relationship and carry out ongoing monitoring, including scrutiny of high-risk transactions against the firm’s knowledge of the customer and risk profile.

Suspicion links checks to reporting duties

Mendez linked weak provenance checks to the Proceeds of Crime Act 2002. Section 340 defines criminal property by reference to benefit from criminal conduct and the relevant person’s knowledge or suspicion, he said. If credits do not fit the customer’s explanation and the payment route does not justify the sum, the regulated firm may face a suspicion requiring consideration under suspicious activity reporting rules.

Suspicious activity reports are made to the UK Financial Intelligence Unit at the National Crime Agency. Mendez said that reporting decisions are distinct from the earlier evidence-gathering process, but depend on the quality of the reconciliation and recorded judgement behind the source-of-funds assessment.

This story draws on original reporting from Finextra Research.