Source of Funds vs Source of Wealth: Understanding the Difference

Ask anyone working in financial crime or compliance, and they’ll tell you: source of funds and source of wealth are often misunderstood. This confusion doesn’t usually come from carelessness. It’s more often the result of pressure - to move quickly, to meet deadlines, to tick requirements off the list.

But when we don’t take the time to properly distinguish between source of funds vs source of wealth, the customer file ends up full of movement of money rather than origin of money. And that weakens the whole point of Enhanced Due Diligence (EDD).

Let’s take a closer look at what each term really means, and why they matter.

What Is Source of Funds?

Source of funds (SoF) is about the specific origin of the money used in a particular transaction. Not who sent it. Not what account it came from. But the true economic activity that generated that money.

The guiding question here is: How was the money involved in this transaction actually generated?

That might sound straightforward, but too often the answer is incomplete. You’ll see phrases like:

• “Capital injection”

• “Loan from group company”

• “Transfer from related party”

But in reality, these "justifications" tell you how the money moved, not the true origin. Saying a transfer came from a group company, for example, doesn’t explain whether that group company had funds from business revenue, a line of credit, or the sale of an asset. That missing context matters, especially when you're trying to assess the legitimacy and transparency of a transaction.

What Is Source of Wealth?

Source of wealth (SoW) is about understanding how a customer accumulated their overall wealth over time. Not how they funded a specific transaction. Not where today's money is sitting. But the big picture: the origins of their financial standing.

The guiding question here is: How did this person or business build the wealth they have today?

This can include employment income, business ownership, investments, inheritance, property sales, or other long-term means of accumulating assets. It's a narrative of financial history, not just a snapshot of a single payment.

When you’re working on customer files, it’s completely normal to come across descriptions that feel a bit too broad or vague. Things like:

• “Savings”

• “Investments”

• “Business profits”

• “Family wealth”

But these alone don’t paint a clear picture. "Savings," for example, is not an origin - it’s an outcome. What type of employment or business activity generated those savings? "Family wealth" needs context: was it an inheritance? What business or investment activities built that family wealth?

Without this deeper explanation, it's impossible to properly assess whether the wealth is legitimate, proportionate, and reasonable for the customer's profile. Incomplete source of wealth information creates a real gap in understanding financial crime risk.

Why the Distinction Between Source of Funds vs Source of Wealth Matters

When the line between source of funds and source of wealth is not clear, the quality of your due diligence is affected. If you're responsible for verifying a customer's profile, you need to see the full picture, not just parts of it.

Understanding this distinction helps you:

• Ask the customer the right questions

• Identify red flags early

• Make informed decisions

This isn’t about collecting documents just for the sake of it. It's about making sure the information makes sense.

Getting It Right

Strong EDD is built on asking clear questions and applying sound judgment. When we talk about source of funds vs source of wealth, we’re not just using technical labels. We’re making sure that the customer’s financial background and activity make sense when you look at them together.

If something doesn’t align, don’t gloss over it. Clarify it. Your job is to understand the full financial picture, and that begins by knowing what you're actually looking for when you ask about source of funds or source of wealth.