Posted by Yazad Bajina, chief commercial officer at Legal Futures Associate Checkboard [1]
Bajina: Firms need a proper audit trail
It’s a familiar story: a PDF of a bank statement lands in your inbox, your client leaves a cursory note explaining what some of the transactions mean, and you close the file, feeling confident you’ve done your due diligence.
This runs into the same problem I wrote about last month [2]. Too many firms are using documents alone to verify source of funds.
But if documents alone don’t verify identity, they don’t verify the source of funds either. And by trusting simple document uploads, you’re exposing your firm to serious due diligence breaches—and all the risks that come with them.
Source of funds requires a more robust, data-led approach.
The harder question
Source of funds isn’t about confirming who your client is. And a client-supplied bank statement is, in effect, just the client’s word in document form. You have to trust what you’re seeing, and you can’t verify what’s on the page from the page itself
So, how can you confirm the money moving through your firm has a legitimate origin?
That’s a different question, and it requires substantively different evidence.
It’s also a much more important question than you might realise.
Source of funds has been in the spotlight over the last few years, particularly in the case of global giant Dentons, which was found by the Solicitors Disciplinary Tribunal to have breached the Money Laundering Regulations in relation to a politically exposed person’s source of wealth.
After a long appeals process, the case is now being reheard. Although last month’s Court of Appeal ruling [3] clarified that a breach must be “sufficiently serious” to amount to misconduct, the case underscores the seriousness with which source of funds is being treated.
Regardless of the ruling, the Solicitors Regulation Authority’s (SRA) appetite to test source of funds failings is an important signal to law firms.
Why standard practice falls short
The standard practice of PDF-and-explanations falls seriously short of SRA expectations.
PDFs can be easily fabricated. Generative AI has lowered the bar for doctoring a letter or statement, which raises the bar for the firms reviewing them.
Simple explanations like ‘inheritance”, ‘gift’, or ‘property sales’ are easy to claim and hard to verify by sight – yet clients aren’t being asked to back them up with hard evidence.
Moreover, most firms don’t separate source of funds from source of wealth, producing a confused and contradictory paper trail that goes against explicit Legal Sector Affinity Group guidance.
What evidence actually looks like
So, what evidence should firms actually be providing? Robust source of funds due diligence is based on the kind of data a client can’t easily provide.
With the right partner, firms can access a wealth of information that gives real heft to their source of funds checks, including:
- HM Land Registry details of property sales, parties and prices;
- Companies House evidence of share transfers, disposals and dividend history;
- Probate records confirming the existence and scale of an inheritance; and
- Credit and financial footprint data showing whether stated wealth is consistent with reality.
This isn’t about creating more paperwork, but about providing a record that doesn’t just rely on information provided by the client. It sidesteps any potential dishonesty or obfuscation, instead producing a reliable, cross-referenced audit trail a regulator can follow.
The direction of travel
The most recent SRA report [4] highlighted incomplete source of funds checks as one of the top two reasons for SRA referrals.
Furthermore, the Financial Conduct Authority’s eventual supervisory model – when it arrives – is data-led and effectiveness-focused, with much less tolerance for well-documented intent unsupported by evidence.
It speaks to a regulatory regime moving towards proper processes that stand up to scrutiny, built on robust evidence and an auditable data trail.
Identity verification tells you who walked through the door; source of funds tells you whether the firm should have let them in. Firms need to adopt the kind of processes that keep that door closed for the wrong clients.