Should Source of Funds “Always” Be Established for Clients?

One of the recurring questions in the context of Customer Due Diligence (“CDD”) and ongoing monitoring is whether a reporting person is required to establish and obtain evidence of the Source of Funds (“SoF”) for each and every transaction undertaken by a client. The short answer is no, not necessarily. The regulatory framework does not appear to require a reporting person to automatically request fresh SoF evidence every time a client makes a payment, receives funds or undertakes a transaction. However, this should not be interpreted to mean that SoF only needs to be established once, at the commencement of the business relationship, and can thereafter be relied upon indefinitely irrespective of the nature of the client’s subsequent activity.

The Role of Ongoing Monitoring Under the FIAML Regulations

Regulation 3(1)(e)(i) of the FIAML Regulations 2018 requires a reporting person to conduct ongoing monitoring of a business relationship, including scrutiny of transactions undertaken throughout the course of the relationship, including, where necessary, the source of funds, to ensure that the transactions are consistent with the reporting person’s knowledge of the customer and the business and risk profile of the customer. The wording “including, where necessary, the source of funds” is important because it does not create an absolute requirement to establish or verify the source of funds in relation to every individual transaction. Rather, it places the source of funds within the ongoing monitoring framework where the circumstances require further consideration.

Guidance from the FSC AML/CFT Handbook

The FSC AML/CFT Handbook provides further clarification on this matter. It explains that Source of Funds normally refers to the origin of the particular funds or assets which are the subject of the business relationship between the financial institution and its client and the transactions that the financial institution is required to undertake on the client’s behalf, such as amounts being invested, deposited or remitted. In other words, the SoF requirement is concerned with understanding where the funds being used to fund the relationship or transaction are coming from. Importantly, the Handbook clarifies that this does not refer to every payment going through the account. This clarification should be read together with the requirement for appropriate ongoing monitoring under Chapter 9 of the Handbook.

Scrutiny of Complex and Unusual Transactions

Chapter 9 requires the monitoring of business relationships to involve scrutiny of large and unusual or complex transactions, as well as patterns of transactions or activity, in order to determine whether such transactions and activity are consistent with the financial institution’s knowledge of the customer, its business and its risk profile, including, where necessary, the source of funds. Accordingly, the relevant question is not simply whether a transaction has occurred, but whether the transaction or pattern of activity is consistent with what the reporting person knows about the client and whether the existing information provides sufficient comfort regarding the origin of the funds.

Applying a Risk-Based Approach to Routine Transactions

Therefore, where a client’s transactions are ordinary, expected and consistent with its established business, financial profile and risk rating, and the source of the funds supporting the relationship has already been adequately established, there would not ordinarily be a requirement to request fresh SoF evidence for each individual transaction. For example, where a client routinely undertakes transactions that are consistent with its known business activities and the funds originate from a source that has already been satisfactorily established and remains consistent with the client’s profile, requesting the same SoF documentation for every transaction would not, in itself, appear to be the intended application of the risk-based ongoing monitoring requirement.

When Should You Reassess the Source of Funds?

The position changes, however, where the nature or pattern of the client’s activity gives rise to questions regarding the origin of the funds. Large, unusual or complex transactions, transactions that are inconsistent with the client’s known business or financial profile, material changes in transaction patterns, funds received from previously unknown or unrelated sources, or activity involving new jurisdictions or counterparties may require the reporting person to obtain further information concerning the source of funds. In such circumstances, the fact that SoF was established at onboarding does not, by itself, provide sufficient grounds to conclude that the current activity is adequately understood.

Onboarding Evidence vs. Subsequent Funding

This distinction is particularly important where the SoF evidence obtained at onboarding relates only to the initial establishment or funding of the structure. For example, a client may have provided a personal or corporate bank statement at onboarding demonstrating that a particular amount of savings or other funds was available to establish or fund the relationship. That evidence may have been sufficient to establish the source of the funds relevant to the onboarding stage. It does not necessarily follow, however, that the same evidence adequately explains substantial funds received by the client at a later stage from unrelated third parties, new investors, lenders, asset disposals or other sources that were not identified or contemplated at onboarding.

Evaluating Inconsistent Activity and Material Profile Changes

In such circumstances, the reporting person should reassess whether it has sufficient knowledge of the origin of the funds underlying the current activity. If the existing information adequately explains the transactions and remains consistent with the client’s business and risk profile, further SoF evidence may not be necessary. If, on the other hand, the existing information does not provide sufficient comfort or the current activity cannot reasonably be reconciled with the information held on file, additional enquiries should be undertaken and appropriate SoF information and supporting documentation should be obtained and verified where necessary.

The same principle applies where the client’s circumstances or risk profile have materially changed. A change in ownership or control, business activity, financial circumstances, expected transaction profile, risk rating or the nature of counterparties may require the reporting person to revisit its understanding of the client’s source of funds. The objective is not to create an administrative requirement to repeatedly obtain the same documentation, but to ensure that the information held by the reporting person remains sufficiently accurate, relevant and reliable to support effective ongoing monitoring.

Summary of Practical Compliance Principles

Accordingly, the regulatory requirement should not be interpreted at either extreme. It would be inappropriate to conclude that SoF must be established afresh for every transaction, but it would equally be inappropriate to conclude that SoF only needs to be established once at onboarding regardless of subsequent activity. The appropriate approach is risk-based and requires the reporting person to maintain sufficient knowledge of the source of funds relevant to the business relationship and to obtain or verify additional SoF information where the circumstances warrant it.

The practical compliance principle can therefore be summarised as follows: the reporting person is not required to obtain fresh SoF evidence for every transaction, but must be able to demonstrate that it has sufficient knowledge and reasonable comfort regarding the source of funds underlying the client’s activity. Where the existing SoF information does not adequately explain current activity, or where transactions or patterns of activity are large, unusual, complex or otherwise inconsistent with the client’s known profile, additional SoF enquiries and supporting evidence should be obtained where necessary.

In this context, the purpose of ongoing monitoring is not merely to determine whether a transaction has occurred, but to continuously assess whether the activity remains consistent with the reporting person’s understanding of the customer, the customer’s business and risk profile. SoF is therefore not a one-off exercise at onboarding, nor is it necessarily a requirement for every transaction; it is an element of the ongoing risk-based assessment that must be revisited whenever the circumstances warrant it.

Rishiraj Heerasing, LL.M. in Corporate Law

Magellan’s take: Why this matters to you?

• Setting up or taking over a company in Mauritius, opening a bank account, investing: the question of where the money comes from arises right from the start, at onboarding. Magellan is directly involved at these stages — company incorporation, ongoing administration and opening its bank account.
• You won’t need to justify every single transaction. Mauritian regulation requires ongoing monitoring, but proportionate to risk: it is not about rebuilding a documentary file for every payment or transfer.
• A change in your circumstances, however, calls for a fresh review: a new investor or shareholder coming on board, financing from a lender, an asset disposal, or funds received from new counterparties or jurisdictions.
• The practical habit worth keeping: maintain up-to-date supporting documents and flag any change in your circumstances early — ownership, activity, or expected transactions.
• For compliance professionals, the logic set out here follows the FSC AML/CFT Handbook: documenting knowledge of the source of funds, without turning the requirement into a mechanical formality.

This article is provided for general information purposes only and does not constitute legal advice.