Source of funds evidence for business payments, with examples by client type

What source of funds means

Source of funds refers to the origin of the particular money involved in a transaction or a series of transactions. If a company receives EUR 250,000 and asks for it to be converted and sent to a supplier in Hong Kong, the source of funds question is simply where that EUR 250,000 came from, and whether that is consistent with what the provider knows about the client.

A provider asks about source of funds at two points. At onboarding, it wants to understand the expected sources of money that will flow through the account, and usually evidence of the first funding. During the relationship, it monitors payments against that expectation and may ask for evidence for a particular payment that looks different from the pattern.

Source of funds questions are routine. A request for the invoice behind a payment is how the provider documents that it understood the transaction, and it implies nothing about the client.

How it differs from source of wealth

The two concepts are easy to mix up, so it helps to put them side by side.

A company's source of funds can be perfectly clear while its owner's source of wealth remains an open question, and the reverse is also possible. A provider generally needs both to be adequately understood. Our guide to source of wealth evidence covers the other half.

The general types of evidence

Whatever the business, evidence for source of funds usually falls into a few groups:

• Commercial documents: invoices, purchase orders, contracts, bills of lading, delivery notes.
• Corporate documents: board resolutions approving dividends, loans or capital contributions; shareholder loan agreements.
• Financial records: bank statements from the remitting account, management accounts, audited financial statements.
• Transaction documents: sale agreements, completion statements, loan facility letters and drawdown notices.
• Regulatory documents: licences or permits that show the activity generating the funds is authorised.

The strongest evidence links three points: the paying party, the reason for payment and the amount. A bank statement showing EUR 80,000 arriving from a German customer, an invoice for EUR 80,000 addressed to that customer, and the supply contract between the two together tell a complete story.

Example: an international trading company

Consider an illustrative case. A Hong Kong-registered trading company, owned by a BVI holding company, buys consumer electronics components from manufacturers in mainland China and sells them to distributors in Poland and Germany. It expects to receive EUR from European customers and pay suppliers in USD and CNH.

At onboarding, the provider will typically ask for:

• A description of the trading model, main suppliers and main customers.
• Sample contracts or framework agreements with key customers and suppliers.
• Recent financial statements showing turnover broadly consistent with the expected volumes.
• A few recent invoices on both sides, showing the margin structure.
• Bank statements from the company's existing account showing the current flows.

During the relationship, if the company suddenly receives a payment from a customer in a country it has never mentioned, or pays a supplier that is not a manufacturer, the provider may ask for the invoice and contract behind it. Having a process to produce these quickly, for instance a shared folder of invoices organised by counterparty, keeps payments moving. The trade industry page describes how these flows usually work in practice.

Example: a trust making distributions

Trusts tend to have fewer, larger and less regular payments. Imagine a discretionary trust with a professional trustee in the Cayman Islands, holding an investment portfolio and a property in London. The trustee wants to pay a distribution to a beneficiary in Canada and settle school fees for a beneficiary's child in Switzerland.

For these payments, the provider will want to see:

• The source of the trust's cash: for example, a statement from the investment manager showing the sale of securities, or rental income from the London property.
• A trustee resolution approving the distribution or the payment of fees.
• Identification of the beneficiary receiving the distribution, if they were not already identified at onboarding.
• For the school fees, the invoice from the school.

Where the trust receives a new contribution from the settlor, the provider will look at the settlor's source of funds for that contribution as well. A settlor adding EUR 5 million should be able to show where that money came from, and the answer should be consistent with the source of wealth story given at onboarding. For more on these structures, see our pages on trusts and fiduciaries.

Example: a licensed gaming operator

A licensed iGaming operator has a different profile again. Its funds come largely from player deposits processed through payment service providers, offset by player withdrawals, and it pays out to platform suppliers, game studios, affiliates and marketing agencies.

Where a provider deals only with business-to-business flows, as CCYFX does, it will not handle player money directly. The operator's account would typically receive settlements from its payment service providers and pay its business suppliers. Evidence at onboarding usually includes:

• The operator's gaming licence and the markets it covers.
• Settlement reports from the payment service providers, reconciling to the amounts received.
• Contracts with key suppliers such as the platform provider and game aggregators.
• Management accounts showing gross gaming revenue and the main cost lines.
• An explanation of how player funds are segregated, where the licence requires it.

Ongoing, an analyst may compare monthly settlements with gaming revenue reported in the accounts. A sudden rise in receipts that is not matched by a rise in reported revenue, or payments to affiliates in countries outside the licensed markets, would usually lead to questions. Our iGaming page sets out how we work with licensed operators.

Evidencing the first funding

The very first payment into a new account gets particular attention. It tests whether what the client said at onboarding matches what actually happens. Common scenarios:

• Funds from the client's own bank account. The simplest case. A statement from that account showing the balance and the outgoing transfer is usually enough.
• Funds from a parent company. Provide the intercompany loan agreement or capital contribution resolution, plus evidence of the parent's own funds.
• Funds from a customer. Provide the invoice and contract.
• Funds from a third party with no obvious connection. This needs a clear explanation and documentation. Many providers will not accept third-party funding without a strong commercial reason.

If the funding will come from a newly opened account elsewhere that has no history yet, explain where that account was funded from. The chain needs to reach a point where the origin of the money is clear.

Loans, dividends and intercompany transfers

Not every payment is a sale or a purchase. Holding structures move a great deal of money internally, and these flows need evidence too, although the documents differ.

• Dividends. A board resolution declaring the dividend, supported by accounts showing distributable reserves. If a Cyprus subsidiary pays a dividend up to its BVI parent, the provider may want both the resolution and the subsidiary's latest financial statements.
• Shareholder loans. A signed loan agreement setting out the lender, borrower, amount, interest and repayment terms. Repayments should follow the agreed schedule, or the change should be documented.
• Capital contributions. A resolution or subscription agreement, with evidence of the contributing shareholder's own funds.
• Intercompany service charges. A services or cost-sharing agreement between the group companies, with invoices that match it.
• Treasury movements. Transfers between the client's own accounts at different institutions, evidenced by statements from both ends.

Analysts pay particular attention to round-sum transfers between related companies with no supporting document, and to loans that are never repaid or are written off shortly after being made. These can be entirely legitimate, but they look like a way to move value without a commercial reason unless the paperwork shows otherwise. A one-page group funding note, describing how money normally moves between the entities, helps the analyst read these flows correctly from the start.

Keeping source of funds evidence ready

The clients who experience the fewest payment holds tend to share a few habits:

1. They tell the provider in advance when something unusual is coming: a one-off large receipt, a new market, a change of supplier.
2. They keep invoices and contracts organised so they can respond within hours.
3. They use payment references that match their invoices, which helps both sides reconcile.
4. They avoid using the account for flows that were not described at onboarding, or update the provider before starting them.
5. They keep the provider's record of their business current, which also makes periodic reviews quicker.

A request for documents on a particular payment is normal and does not mean the account is under suspicion. Responding promptly and completely is usually all that is needed.

Getting help

This article is general information and is not legal or regulatory advice. What a provider needs for a particular payment depends on the client, the transaction and its own risk assessment.

If you want to understand how payments are reviewed at CCYFX, the how it works page explains the process from instruction to settlement, and the international payments page covers the payment types we support.