Reviewed by: Tom Devlin, Managing Director at KYC360 
Last Updated 02/11/26

Law firms undertaking work within the Money Laundering Regulations may handle transactions involving substantial funds or valuable assets. Proportionate source of funds checks help establish where transaction money came from and whether it fits the firm’s knowledge of the client and matter. A bank statement may show funds are available without supporting the client’s explanation. The SRA’s 2025–26 report found gaps in scrutiny. Its thematic review notes missing audit trails and decision rationales.  

What Do Source of Funds Checks Require under UK AML Regulations?

Source of funds means the origin of the money used in a particular transaction. Source of wealth describes how a client accumulated their overall wealth. The two may overlap. Savings used in a purchase, for example, may have come from rental income, so a client’s wider financial circumstances may help explain how the money was generated. Evidence showing where money is held or how it reached an account can still leave the underlying source unexplained. The SRA sets out the difference and the role of each check. 

Under regulation 28(11)(a), ongoing monitoring includes scrutinising transactions, including source of funds where necessary, to check that they fit the firm’s knowledge of the client and their risk profile. Regulation 33 requires enhanced customer due diligence in specified higher-risk circumstances.There is no single document checklist for every client or matter. The checks should reflect the client, the transaction and the firm’s assessment of risk.  

What Source of Funds Evidence Should Law Firms Keep on File?

Evidence should support the client’s explanation and show how the money reached the transaction. A bank statement can trace a transfer, but a large recent deposit may need further explanation. 

The SRA’s 2025–26 report found that: 

• 6,592 files were reviewed; 5,349 required source of funds or source of wealth checks. 

• Of those 5,349 files, 9% had no source of funds checks. 

• In 18% of files where firms had collected documents, the source of funds was not scrutinised.

• In 6% of all files reviewed, the information gathered did not match the ledger. 

The report also says that half of the 24 SARs the SRA submitted to the NCA in 2025–26 related to residential property. The transactions and funds involved were worth more than £102 million combined.  On a conveyancing file, evidence should let a reviewer trace the funds from their stated source to the purchase.  

What Should a Defensible Source of Funds File Demonstrate? 

A defensible file allows a reviewer to follow the firm’s reasoning from the client’s explanation to its conclusion. Regulation 28(16) requires firms to be able to demonstrate that the extent of their due diligence was appropriate to the risk. 

In practice, the file should make clear: 

Risk assessment 
The risks identified for the client and matter, and how they shaped the checks. 

Funding picture 
The expected source and amount of funds, and the identity of each person or entity providing them. 

Evidence reviewed 
Which documents were obtained, what they showed, and the accounts, dates and transfers considered. 

Follow-up 
What questions were asked, how inconsistencies were resolved and whether the client’s explanation matched the documents and the funds received. 

Decision 
The firm’s conclusion, why the evidence was sufficient for the risk, and any escalation or approval. 

A file containing documents is not necessarily a record of the checks performed. The SRA’s thematic review recommends a clear audit trail of the enquiries made and why the firm considered its approach appropriate. Regulation 40 requires relevant due diligence and transaction records to be kept for at least five years from the relevant date. After that period, personal data must generally be deleted unless a legal exception applies. 

What Source of Funds Red Flags Require Further Investigation?

A discrepancy between the client’s explanation and the evidence is a reason to ask further questions. The same is true when the funding arrangement changes unexpectedly. The SRA report identifies examples including unexplained cash or large deposits, money from an unexpected third party, and evidence that does not show the client has enough funds to complete the purchase. 

A late change from mortgage funding to a private contribution, or a transfer through several accounts without a clear explanation, may also warrant a closer look. A red flag does not, by itself, establish criminal conduct. Firms should seek a reasonable explanation, reassess the risk where appropriate and document how the matter was resolved. 

When Are Enhanced Checks or Updated Evidence Necessary?

Where money comes through a complex ownership structure, from a higher-risk jurisdiction or from an unexpected third party, it may take more work to understand its origin. If the matter is high risk, regulation 33 requires enhanced due diligence.  Regulation 35 adds requirements for relationships involving politically exposed persons, their family members or known close associates.  

The level of evidence should reflect the risk and applicable requirements. A change in the expected amount, source or provider of funds may alter the firm’s understanding of the matter. The SRA advises firms to investigate unexpected changes and consider whether the client and matter risk assessment needs updating. Beginning enquiries early gives time to resolve questions before completion. As the matter progresses, event-driven KYC monitoring can help prompt a fresh review when funding changes. 

How Can Law Firms Maintain Consistent Source of Funds Records?

Consistency depends on giving staff a clear way to gather information, review evidence and record decisions. A standardised request gives staff a consistent starting point. Follow-up questions can then be tailored to the client’s stated source and the matter’s risk. It should also be clear who follows up on missing information and who records the firm’s conclusion. 

KYC360 onboarding software supports structured information gathering and document collection. Learn more about how we enable law firms to comply and outperform.