Source of funds (SOF) verification is one of the most practically demanding aspects of AML compliance for solicitors. Unlike identity verification — which has clear document requirements and established processes — SOF checking requires professional judgment about what constitutes a satisfactory explanation of where money has come from. Get it wrong, and you may be facilitating the laundering of criminal proceeds. Ask for too much without justification, and you risk delaying transactions and frustrating legitimate clients.

This guide sets out when SOF checks are required, what they must cover, what evidence is acceptable, and how to handle the difficult situations that arise in practice.

What Is Source of Funds Verification?

Source of funds verification means establishing and confirming the specific origin of the money being used in the transaction you are handling. It is not the same as source of wealth (which addresses how the client built up their overall assets), though the two are closely related for EDD purposes.

In a residential conveyancing matter, SOF means: where did the deposit come from? Where is the mortgage coming from? Is there any bridging finance? In a corporate acquisition, SOF means: where are the funds for the purchase price originating? In a trust establishment, SOF means: what is the source of the assets being settled?

The Money Laundering Regulations 2017 do not use the phrase “source of funds” explicitly in every context — they refer to obtaining “information on the source of funds” as part of enhanced due diligence under Regulation 33. But LSAG guidance and SRA inspection findings make clear that SOF verification is expected as a matter of standard practice in higher-risk transactions, and is explicitly required for all EDD scenarios.

When Are Source of Funds Checks Required?

Mandatory SOF Verification

SOF verification is mandatory in the following scenarios:

Enhanced Due Diligence situations. Whenever EDD is required — for PEPs, high-risk third country transactions, or other higher-risk circumstances — obtaining information on the source of funds is a prescribed EDD measure.

Where the SOF is the risk flag. If the source of funds itself raises a concern — for example, funds arriving from an unexpected third party, or a client who explains their funds came from sources that do not match their stated profession — SOF verification is required to resolve the concern.

Recommended SOF Verification

Even outside mandatory EDD situations, LSAG guidance and SRA practice strongly encourage SOF verification in:

All residential conveyancing transactions above a certain value threshold (many firms set this at £200,000–£300,000, though some apply it to all transactions)
All commercial property transactions
Any transaction where the payment profile seems inconsistent with the client’s stated circumstances
Any transaction involving third-party funding (someone other than the named buyer paying the deposit or purchase price)
Transactions involving large cash movements through client account

The Law Society’s AML guidance states clearly that best practice includes obtaining SOF evidence for all property transactions, regardless of value. Given the volume of SRA enforcement action related to conveyancing without adequate SOF checks, following this best practice is prudent.

What Constitutes Acceptable Source of Funds Evidence?

The quality of SOF evidence required is proportionate to the transaction risk. For a low-to-medium risk transaction involving a regular employed client purchasing a property with a mortgage, bank statements showing the accumulation of funds combined with salary slips may be entirely sufficient. For a PEP purchasing a £5 million property with cash, a much higher standard is required.

Funds from Employment Income

For clients whose purchase funds derive from employment:

Bank statements for the most recent three to six months showing salary credits
Recent payslips (typically the last three months)
An employment contract or letter confirming salary for higher-value transactions
P60 or equivalent for annual income verification

The principle is that the bank statements should tell a coherent story: regular salary payments accumulating over time, consistent with the stated employment and salary level.

Funds from Self-Employment or Business Income

For sole traders, partners, or company directors drawing down business income:

Business bank statements for three to six months
Personal bank statements showing drawings or dividends
Most recent two years’ accounts or HMRC tax returns
Dividend vouchers where the source is company dividends

Business income sources require more scrutiny than employment income because of the greater scope for manipulation. The accounts should be plausibly consistent with the size and nature of the business.

Funds from Property Sales

Where the purchase funds include proceeds from a previous property sale:

The completion statement from the previous sale
Bank statements showing receipt of the net proceeds
Land Registry evidence of the previous ownership

This is typically straightforward to verify and is one of the cleanest SOF explanations in property transactions.

Inherited Funds

Where the client has received an inheritance:

Probate grant
Solicitor’s letter or court order confirming the distribution
Bank statements showing receipt

The level of verification required should be proportionate: a modest inheritance from a deceased parent is low risk; a substantial inheritance from a foreign estate requires more scrutiny, particularly if the deceased was in a high-risk jurisdiction or held a public position.

Investment or Savings Withdrawals

Where the client is using funds from savings or investments:

Bank or investment account statements showing the balance and withdrawal
Evidence of the original source of the savings (particularly for large sums)
ISA or bond redemption documentation

The question to consider is not just where the money is now, but how it got into the savings account in the first place. For large savings pots, tracing back to the original source is important.

Mortgage Funds

Where part of the purchase price is a mortgage:

Mortgage offer from the lender
Identity of the lender (must be a regulated UK lender or recognised international institution)

Mortgage funds from a regulated UK lender present low SOF risk — the lender has itself completed extensive credit and AML checks. However, bridging finance from unregulated sources, or loans from private individuals, require careful scrutiny.

Gifts

Third-party gifts towards a property purchase — common in residential conveyancing where parents contribute to a child’s deposit — require particular care:

A signed gift letter confirming the sum is a gift (not a loan requiring repayment)
Bank statements from the donor showing the source of the gift
SOF verification for the donor applies the same standards as for the buyer

Gift transactions are a recognised vehicle for money laundering — criminal proceeds passed to a family member who then purchases property “legitimately.” The gift letter is not sufficient on its own; the donor’s own SOF must be explored.

Difficult SOF Scenarios

Funds From Overseas

Overseas sources of funds require additional scrutiny, particularly where the source country has elevated corruption or financial crime risk. In addition to standard SOF documentation, consider:

Whether the overseas country is on the FATF high-risk list
Whether the funds have transited through multiple jurisdictions
Whether the banking documentation is from a regulated institution in the overseas country
Whether the amounts are consistent with the client’s stated career or business background in that country

Funds from certain offshore financial centres (BVI, Cayman, Channel Islands) should prompt questions about the original source, even if the client explains the funds were “savings” or “investment proceeds.”

Large Cash Deposits

Large cash deposits appearing in client bank statements — particularly deposits without an obvious explanation — are a significant red flag. Cash is the hardest SOF to verify and the most common vehicle for introducing criminal proceeds into the financial system.

Where a client’s bank statements show unexplained large cash deposits, the firm must seek an explanation. If no satisfactory explanation is provided, that is a red flag requiring serious consideration of whether to proceed, and possibly requiring an SAR.

Funds From a Third Party

Where the purchase funds are coming from someone other than the named buyer — a parent, friend, relative, or business partner — the firm must:

Identify the third party
Verify the third party’s identity (applying standard CDD)
Verify the source of the third party’s funds (applying SOF checks to the third party)
Understand the commercial or personal rationale for the third-party funding

Third-party funding is a recognised technique for placing criminal proceeds at one remove from the criminal — the “clean” client purchases with funds provided by the criminal. This does not mean all third-party funding is suspect, but it requires thorough investigation.

No Documentary Evidence Available

Occasionally clients genuinely cannot produce documentary evidence — for example, funds accumulated in cash over many years, or assets built up informally in jurisdictions without reliable banking infrastructure. These situations are difficult. The inability to document a source of funds is not itself proof of criminality, but it does create risk for the firm.

Where documentary evidence is unavailable, the firm should:

Seek the fullest possible narrative explanation from the client
Consider whether the explanation is internally consistent and plausible given the client’s background
Assess whether the explanation is consistent with any information already held about the client
Make a documented risk decision about whether the level of comfort achieved is adequate to proceed
Consider whether the remaining unexplained risk should be the subject of an SAR

If the firm cannot reach a level of comfort that the funds are legitimate, it should decline to act.

Documenting SOF Checks

Documentation is essential. For every SOF check, the client file should contain:

The documents or information provided by the client
The firm’s assessment of whether the documentation is satisfactory
Any queries raised and the responses received
The fee earner’s (and MLRO’s, where involved) documented conclusion
The date the check was completed

The SRA expects to see a clear audit trail. Where a SOF check is completed without documentary evidence (e.g., because the firm relied on client narrative), the documented reasoning is particularly important.

SOF and the SAR Decision

Where SOF verification reveals genuine concerns — funds that cannot be explained, explanations that are internally inconsistent, or documentation that appears unreliable — the firm must consider whether the threshold for a Suspicious Activity Report has been reached. The threshold is suspicion, not certainty. If the fee earner or MLRO honestly suspects the funds may be the proceeds of crime, an SAR must be filed.

Importantly, the SAR defence under POCA operates as a “consent” mechanism for property transactions: filing the SAR and awaiting NCA response is what gives the firm a defence against committing a money laundering offence. Proceeding without filing — on the basis that the concern might be nothing — exposes the fee earner and the firm to criminal liability.

Obiter prompts fee earners to request source of funds documentation at the point of client onboarding, tracks which documents have been received, and flags matters where SOF is incomplete before the relevant stage of the transaction — so your conveyancing and corporate teams are never caught without adequate checks at the moment they matter most.

Source of Funds Checks: A Practical Guide for Solicitors