Source of Funds: The AML Step Most Law Firms Get Wrong

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If I had to pick one area of AML that law firms consistently underestimate, it would be Source of Funds. Not because it’s particularly technical. Not because it’s new. It feels simple and that’s exactly where the problem starts. 

On paper, it’s a straightforward question: Where is the money coming from? 

It’s rarely that clean. And when you stop to think about what you’re being told, what you’ve been given, and whether it all lines up… that’s where things can get uncomfortable. 

Which is also why it’s one of the first places regulators will look. 

 “It’s not about where the money is, it’s how it got there" 

One of the most common assumptions I hear is: “It’s come from an Australian bank account, so it’s fine.” 

It’s not. A bank account tells you where the money is sitting today. That’s all. It doesn’t tell you how it got there, how long it’s been there, or whether the story behind it actually makes sense. And this is where a lot of firms unintentionally take shortcuts. 

There’s an underlying belief that the bank has already done the heavy lifting, so there’s less for you to worry about. But that’s not how AML works. 

Banks have their obligations. You have yours. They are not the same, and one doesn’t replace the other. 

If you’re involved in the transaction, you need to understand the source of the funds in the context of what you’re doing, not just accept that it’s passed through a system somewhere along the line. 

The bit people avoid: actually asking the question 

In practice, Source of Funds often gets treated as something to come back to later.  It sits somewhere between onboarding and completion, and only really gets attention if something doesn’t feel quite right. But by that point, you’re already committed. The matter is moving. There’s pressure and it becomes much harder to step back and ask the right questions properly. The simplest answer and the one that makes the biggest difference is asking upfront. 

Every client. Every matter. Early.  Not in a confrontational way, just as part of how you work. 

Where are the funds coming from? 

Then pause long enough to listen to the answer. 

“With Tranche 2 landing on 1 July. It’s not about collecting documents — it’s about understanding them.

This is where I see the biggest disconnect. Firms will ask the question. They’ll collect documents. They’ll upload everything neatly into a system. And then… that’s it but AML isn’t about having documents on file. It’s about what those documents tell you. 

If someone says their funds are coming from a property sale, you’d expect to see a contract or a settlement statement. If it’s salary, then payslips or employer confirmation. If it’s business income, then accounts or tax returns.  None of that is particularly controversial.  What matters is whether what you’ve been given matches the explanation. 

Does it all line up? 

Is anything missing? 

Is there anything that doesn’t quite sit right? 

Because simply having a document doesn’t mean you’ve understood it and if you haven’t understood it, you can’t really say you’ve assessed the risk. 

The small things that cause big problems 

When things go wrong in this space, it’s rarely because of one big mistake.  It’s usually a series of smaller ones that, on their own, don’t seem like a big deal: 

• Accepting explanations that are a bit vague 

• Not asking the follow-up question 

• Uploading documents without really reviewing them 

• Not writing down why you were comfortable to proceed 

  
  

At the time, it all feels reasonable. The matter moves forward. Nothing immediately flags as an issue but if that decision is ever questioned later, you’re relying on memory rather than evidence. And that’s not a great place to be, because the question you’ll be asked isn’t “did you collect something?”  It’s much more direct than that - what did you understand, and why did you proceed? 

This is where judgement comes in 

Source of Funds is one of those areas where process alone isn’t enough. You can have a checklist. You can have a form. You can have a system but at some point, someone still needs to apply judgement. 

• Does this make sense in the context of the client? 

• Is this proportionate to the transaction? 

• Do I feel comfortable standing behind this if I had to explain it? 

And importantly, that judgement needs to be applied consistently not one approach for one client, and something completely different for another, without a clear reason. Risk should drive the level of scrutiny. Higher risk matters should naturally lead to more questions and more evidence. Lower risk matters can be more straightforward but “straightforward” doesn’t mean switched off. 

Why this matters now 

With Tranche 2 coming into effect, this isn’t something that can sit on a to-do list for much longer. Source of Funds isn’t a bolt-on, it’s not something you can fix with a template the week before go-live.  It needs to be built into how your firm operates — how you onboard clients, how your team asks questions, and how decisions are made and recorded. 

Because once this is live, it becomes part of your day-to-day.  And if your process only works when someone is paying close attention, it won’t hold up for long. 

Final thought 

Source of Funds gets dismissed as admin far too often. In reality, it’s one of the most important judgement calls your firm will make under AML and it’s exactly where tick-box approaches start to show their limits. If your current process feels a bit inconsistent, a bit unclear, or overly reliant on “we’ve got something on file” — it’s worth taking a proper look at it now before you’re in a position where you have to explain it. 

Want a practical starting point? 

If you’re not quite sure whether your current approach would stand up to scrutiny, we’ve put together a free AML data collection tool to help you sense-check it. 

You can download it here: https://www.amlsorted.com/resources/aml-data-collection-tool 

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