Understanding Source of Funds Checks

Why Conveyancers Need to Verify Your Source of Funds

When you embark on the journey of purchasing a property, it's not just about finding your dream home; it's also about navigating a complex legal and regulatory landscape. A crucial, and sometimes perplexing, part of this process is the requirement for your conveyancer to verify the source of your funds. This isn't a mere bureaucratic hurdle; it's a fundamental obligation rooted in anti-money laundering legislation and designed to safeguard the integrity of the property market.

As legal professionals, conveyancers are bound by strict rules, including those set by the Solicitors Regulation Authority (SRA) and the Money Laundering Regulations 2017. These regulations mandate that firms actively work to prevent their services from being used for illicit activities, such as money laundering. Residential conveyancing, with its significant financial transactions, is unfortunately viewed as an area with a higher risk profile. Therefore, to mitigate this risk, conveyancers must meticulously check where the money for a property purchase originates.

This process is not about questioning your personal finances unnecessarily; it’s about fulfilling a legal duty to ensure that the funds being used are legitimate. The UK government has placed increasing emphasis on these checks, with guidance in January 2021 introducing 'source of wealth' checks. This means conveyancers need to ensure that your general income and wealth are consistent with the value of the property you are buying, making the overall transaction seem sensible and not indicative of criminal activity. The stark increase in money laundering figures in the UK, rising from £40 billion in 2018 to a staggering £100 billion in 2021, underscores the critical importance of these measures.

The Legal Framework: Why It's Not Optional

The requirement to prove the source of funds stems directly from regulations like The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. Specifically, Regulations 27 and 28 place a duty on law firms to conduct thorough 'customer due diligence.' This involves not only verifying your identity but also obtaining concrete proof of the origin of the funds you intend to use for your property transaction. Failure to comply with these regulations can have serious consequences for legal firms, including hefty fines and reputational damage.

Furthermore, if you are obtaining a mortgage, your conveyancer also has a duty to your mortgage lender. By verifying your identification and source of funds, they confirm that the information provided in your mortgage application is accurate and truthful. This provides reassurance to the lender that they are not inadvertently financing a property purchase linked to criminal proceeds. For instance, if you’re receiving a gifted deposit or have paid a substantial reservation fee for a new build property, these details need to be transparent and verifiable.

It’s understandable that being asked for such detailed financial information might feel intrusive. However, it’s a standard procedure that virtually all solicitors will follow to meet their legal obligations. The aim is clear: to prevent criminals from exploiting the legal system and the property market to launder illicit gains.

What Evidence Will You Be Asked to Provide?

The specific documentation required can vary depending on the source of your funds, but a general list of what conveyancers typically request includes:

1. Identity Verification:

• Valid Photo ID: This is usually a current Passport or a UK Driving Licence.
• Proof of Address: Typically, a utility bill or a bank statement dated within the last three months, showing your full name and current address.

2. Proof of Funds:

This is where the specifics become more detailed, depending on how your deposit is funded:

• Savings: If your deposit comes from savings, you'll generally need to provide at least six months of bank statements. These statements should clearly show your salary or other income being paid in regularly, and how the savings have accumulated over time. If you’ve moved savings into a separate account, statements for that account are also required for the same period.
• Sale of Another Property: If you’re selling a property to fund your purchase, and the same firm is handling both transactions, they will likely receive the sale proceeds directly. If a different firm handled your sale, you’ll need to provide a copy of the completion statement from that firm and a bank statement showing the funds being received.
• Gifted Deposits: This is a common scenario, especially for first-time buyers. In addition to your own proof of funds and ID, you’ll need to provide information from the person gifting you the money. This includes their ID verification, proof of address, and evidence of the source of their funds (similar to your own requirements). Crucially, the donor will also need to provide signed paperwork confirming they have no legal or beneficial interest in the property as a result of the gift.
• Inheritance: If you’re using funds inherited from a will, you’ll need to provide a copy of the letter from the executors confirming your entitlement and a bank statement showing the funds being received.
• Release of Pension: For funds coming from a pension release, you’ll need to submit your pension statement and a bank statement showing the funds credited.
• Sale of Shares/Investments: If you’ve sold shares or other investments, you’ll need a certified copy of the share release schedule and a bank statement showing the funds received.
• Dividends from a UK Company: Proof here typically involves a certified copy of your dividend certificate, relevant company accounts, and a bank statement showing the receipt of funds.
• Compensation Awards: For funds received as compensation, a letter confirming the agreed amount from a solicitor or court, along with a bank statement evidencing receipt, will be required.
• Gambling Winnings: While possible, proving the source of cash winnings can be difficult. If winnings are banked, a receipt and bank statement showing the deposit are needed.

Cash:

It is important to note that cash is generally not accepted as a source of funds for property purchases. This is due to the extreme difficulty in verifying its origin and the high risk of it being linked to illicit activities.

Special Considerations: Help to Buy and International Funds

The New Help to Buy Scheme:

The government’s updated Help to Buy scheme has introduced more stringent requirements for proof of funds. You may be asked to provide original or certified copies of your ID and source of funds documentation. For example, electronic bank statements are often not accepted because they can be easily manipulated. You may need to request paper statements from your bank or obtain certified copies from a branch.

International Funds:

If your funds originate from or are connected to a country outside the UK, additional scrutiny will be applied. Conveyancers must assess the country of origin. Currently, countries deemed high risk for money laundering purposes exclude Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Japan, Republic of Ireland, Italy, Luxembourg, Malta, The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK, or the USA. If your funds are from or linked to any other country, your conveyancer may need to conduct more extensive checks, and in some cases, may have to decline to act if the risk is too high.

What Happens If Funds Cannot Be Proven?

If the source of your funds cannot be satisfactorily proven, your property purchase will not be able to proceed. Your conveyancer is legally obligated to ensure all requirements are met. Furthermore, if there is a suspicion that the funds are proceeds of crime, the conveyancer is legally required to report this to the relevant authorities. It’s always better to be prepared and provide as much documentation and information as possible upfront to ensure a smooth transaction.

Streamlining the Process

To make the source of funds verification process as smooth as possible, consider the following:

• Start Early: Gather all necessary documents well in advance.
• Be Organised: Keep your statements and identification documents in a safe and accessible place.
• Communicate Clearly: If you’re unsure about what’s required, ask your conveyancer for clarification. They are there to guide you through the process.
• Be Transparent: Provide honest and complete information. Any discrepancies can cause delays or halt the transaction.

While the requirement for source of funds checks might seem like an added complexity, it is a vital component in maintaining the integrity of the property market and combating financial crime. By understanding the reasons behind these checks and preparing the necessary documentation, you can ensure your property purchase proceeds without unnecessary delays.

Frequently Asked Questions

Q1: Do I have to prove the source of my money?
Yes, conveyancers are legally required to verify the source of funds used in property transactions under anti-money laundering regulations.

Q2: Why do I need to verify the source of my funds?
This is a legal obligation to prevent money laundering and ensure that the funds being used for property purchases are legitimate and not linked to criminal activity.

Q3: What kind of documents do I need to provide?
Typically, valid photo ID, proof of address, and detailed bank statements (often for six months) showing the accumulation of funds. Specific requirements vary based on the source of the funds (e.g., savings, gifts, inheritance).

Q4: What if my deposit is a gift?
If you receive a gifted deposit, you will need to provide the same identification and source of funds documentation for the donor, along with a signed declaration from them.

Q5: Can I use cash for my deposit?
No, cash is generally not accepted as a source of funds because it is extremely difficult to prove its origin and carries a high risk of being linked to illicit activities.

Q6: What happens if I can't prove the source of my funds?
Your property purchase cannot proceed, and if suspicious activity is detected, your conveyancer is legally obliged to report it to the authorities.

Q7: Are there different rules for Help to Buy?
Yes, the Help to Buy scheme often requires original or certified copies of documents, and electronic bank statements may not be accepted.

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