Source of Funds/Source of Wealth in the Private Wealth Management sector - Thematic Review (2020-07-07)

Summary

This is a Guernsey Financial Services Commission thematic review report, published 7 July 2020, examining how firms in the private wealth management sector establish and understand customers' Source of Wealth (SOW) and Source of Funds (SOF) as part of enhanced customer due diligence (ECDD). It summarises findings from a 2019 review of 47 firms (with on-site visits to 22) and 107 high-risk customer relationships, and sets out good and poor practice examples.

• Scope of review: Covered private banks, trust and corporate service providers, investment managers and lawyers supporting private wealth structures, focusing on high-risk and foreign PEP relationships.
• Findings: 90% of firms asked all customers how they generated their wealth; six firms had deficiencies requiring remediation programmes and one was referred to the Enforcement Division.
• Underlying legal requirement: Restates the existing mandatory ECDD obligation (Schedule 3 to the Criminal Justice (Proceeds of Crime) Law and Handbook section 8.3) to take reasonable measures to establish and understand the source of funds and wealth of high-risk customers and PEP beneficial owners.
• Recommended three-step approach: The Commission encourages firms to (1) gather SOW/SOF information from the customer at outset and when significant new funds enter the relationship, (2) apply a risk-based approach to corroborating that information using customer, country, product/service and delivery channel risk factors, and (3) sense-check the information against the firm's wider knowledge of the customer.

The report is guidance/thematic feedback rather than new binding rules, but it reinforces existing Handbook obligations and signals the Commission's supervisory expectations and enforcement priorities for the sector.

Key obligations

• Firms must take reasonable measures to establish and understand the source of funds and source of wealth of high-risk customers, including all foreign PEPs and beneficial owners who are PEPs, as required by Schedule 3 and Handbook section 8.3.
• Firms should apply a risk-based approach, calibrating the extent of corroboration of SOW/SOF information to the risk factors present in each relationship (per Handbook section 3.17.1).
• Firms should ascertain at the outset of a relationship, and when significant new funds are received, how the customer generated their total net worth and the specific funds involved.
• Firms should consider SOW and SOF separately (not conflate them) and reassess SOF when new or higher-risk funds/activities enter an existing relationship.
• Firms should maintain effective ongoing monitoring controls to detect changes in customer activity that affect risk rating and trigger further SOW/SOF review.
• Where deficiencies in SOF/SOW controls are identified through supervision, firms must remediate affected customer relationships within a set timeframe, and in some cases commission third-party reviews.

Applies to

private banks, trust and corporate service providers, investment managers, lawyers/legal sector firms supporting private wealth structures, financial services businesses subject to the Schedule and the Handbook on Countering Financial Crime and Terrorist Financing