POSOF and POSOW: validating SOF and SOW responses

In our previous article we looked at how onboarding applications to a bank, crypto exchange, or other financial institution, are usually accompanied by requests for source of funds (SOF) and source of wealth (SOW) information. In this article we will build on this by exploring how SOF and SOW responses are validated through proof of source of funds (POSOF) and proof of source of wealth (POSOW) documentation.

Whether POSOF and/or POSOW is requested during an application depends on factors such as the applicant’s risk profile, jurisdiction/country of registration and operation, company age, nature of the clients business, expected account activity etc. However, most individuals and businesses operating in the crypto industry are considered high risk clients especially by traditional financial institutions and therefore there is a high likelihood that applicants from the crypto industry will be asked to provide a POSOF and POSOW to validate the SOF and SOW responses they provided in their application.

How SOF/SOW are validated through POSOF/POSOW documentation

In our previous article we noted that a SOF request asks where the applicant's money is coming from to fund that specific account. So if an applicant says its SOF will come from income earned through its business activities the SOF could in turn be validated through documentation such as a bank statement or other payment service provider statement from an existing account in the applicant's name. This would be considered an acceptable POSOF as it shows an existing financial account in the applicant's name which is used to support its business operations and it is also consistent with the client's stated source of funds. Note, it will be expected in most cases that a POSOF document should at least show a positive balance in the applicants name.

In our previous article we noted that a SOW request seeks to establish how an applicant's wealth has been accumulated over time, or it will want to establish the source of an applicant's initial wealth if it is a newly formed company or company with no revenues. So if a corporate applicant says its SOW has been accumulated from retained earnings over the years it has been operating the SOW in turn could be validated through documents such as financial statements, tax returns and investment account statements. These documents would be considered as acceptable POSOW as they tend to reflect the accumulated assets/income and validate the company operations over a longer period of time. Note, if a corporate applicant is less than one or two years old the applicant could be asked to provide a POSOW that validates the initial source of wealth that supported the company formation and initial operations.

Some key points regarding POSOF and POSOW

• •There can be significant nuance in what is considered as acceptable SOF/SOW and POSOF/POSOW and this will be linked to the clients overall profile.
• •In some cases the same documentation can be accepted as POSOF and POSOW i.e. a recently formed company’s SOF and SOW are both derived from a shareholder loan thus the POSOF and POSOW could both be validated by a loan agreement.
• •A document provided as POSOF should show a positive balance and transaction activity consistent with the expected deposit and transaction volumes on the account. For instance, if the applicant says it expects to deposit funds of more than $1m USD per month on the account but provides a bank statement as POSOF with a balance of $100 USD and minimal transaction activity this will be questioned.
• •A document provided as POSOW should try to be consistent with the net worth figure provided in the application. Most financial institutions will request an estimate of the applicants net worth at onboarding so the POSOW documentation should try to align with this. The POSOW does not need to validate the exact net worth but should avoid an obvious discrepancy as this will lead to more questions from compliance teams. For instance, a stated net worth of more than $2m USD but a POSOW which only shows total assets of $10k USD.
• •Crypto asset service providers should accept crypto specific POSOF and POSOW such as a signed message on a crypto wallet address but most traditional financial institutions are unlikely to accept this as POSOF/POSOW. (In a forthcoming article we will discuss how crypto wallet addresses can be used to validate POSOF and POSOW for BTC, ETH and SOL).
• •What is accepted as SOF/SOW and POSOF/POSOW can vary significantly between financial institutions.
• •Corporate account applicants are expected to provide POSOF and POSOW in the company name unless there is a specific reason why they cannot be provided (see worked examples 2 and 3 below). SOF/SOW and POSOF/POSOW for individual applicants and corporate applicants are not the same thing.

Worked examples

Acceptable POSOF and POSOW document types

Below is a non-exhaustive example list of documents that are commonly accepted as POSOF and POSOW. Again note numerous document types can be accepted as both POSOF and POSOW.

POSOF

• •Bank Statements.
• •Payslips, salary advice slips, or employment income documents (more relevant to individual account applications).
• •Investment, brokerage, or securities statements.
• •Sale and purchase agreements/contracts.
• •Tax returns or official income tax assessments/statements.
• •Audited, reviewed, or independently prepared financial statements/accounts.
• •Loan agreements, facility letters, or drawdown/advance notices.
• •Gift letters or written declarations from a donor.
• •Written confirmations or letters from accountants, solicitors, or regulated professionals.
• •Grant of Probate, Letters of Administration, Will extracts, or estate distribution statements.
• •Signed Message on a crypto wallet address.
• •Account statement from a recognised crypto exchange.

POSOW

• •Tax returns.
• •Audited financial statements or accounts.
• •Corporate/share ownership records.
• •Historical bank statement records.
• •Historical employment records.
• •Investment, brokerage, or securities statements.
• •Dividend, profit distribution, or business revenue records.
• •Sale and purchase agreements/contracts.
• •Written confirmations or letters from accountants, solicitors, or regulated professionals.
• •Trust deeds, trust accounts, or distribution minutes/statements.
• •Signed Message on a crypto wallet address.
• •Account statement from a recognised crypto exchange.

How Lucent Compliance can help

Collecting and reviewing POSOF and POSOW documentation can be one of the most time-consuming parts of a financial institution onboarding. Lucent Compliance helps crypto businesses prepare clear, consistent evidence packages and advises on the documents most likely to satisfy banks and crypto exchanges. If you are preparing an application or have had documentation rejected, our services include fixed-price support and tailored consultancy to help you move through the process more quickly.