Where does the “Money Bag” Come from, or Why a Legal Source of Income is Important

Trying to transfer money to your account but the bank is blocking the transaction? It is not uncommon nowadays to experience issues when attempting to set up an account, top it up or withdraw funds, or even to send or receive money, especially in case of international transactions. Just giving an explanation to the bank manager will not always solve the problem – banks block accounts and offer to “confirm the source of funds” with increasing frequency.

But what does it mean and why does it happen? The reason is simple: governments are fighting against money laundering and terrorist financing.

This fight has gained substantial momentum in the last decade, and there is a global tendency towards the tightening of financial legislation. Banks and other financial institutions now must verify the source of funds prior to opening accounts for individuals and entities.

The EU’s fifth directive on preventing the use of the financial system for money laundering or terrorist financing (5th Anti-Money Laundering Directive) was enacted in July 2019.

EU member states will have to adjust their legislation by 2020 – the Directive becomes binding for all European Union banks in January. This step is designed to ensure a safer environment for legal businesses and a significant reduction of unlawful actions associated with the use of financial systems for money laundering.

When facing the question regarding the source of funds, one should also keep in mind a number of other important changes. For example, the emergence of databases that will be used by banks and other financial institutions to check your information – not only at the time of account opening but throughout the account life (e.g. global registry of ultimate beneficiaries and their assets). Furthermore, banks are implementing risk-based verification of all transactions (pertaining both to account opening and subsequent transactions).

This article is a must-read if you are planning to interact with foreign banks, set up personal or corporate accounts or make major purchases; if you are applying for licenses (including financial ones) or considering a change of residency. In all of the above situations you will be required to provide information about the source of your money.

Source of Funds for CIS Residents

What does it mean and why is it important for CIS citizens to take trouble to confirm the source of their income?

Until quite recently, CIS residents rarely faced the issue of opening accounts with foreign banks. The legislative framework – a USSR legacy – complicated the process significantly as it contained a multitude of restrictions applicable to interactions with foreign banks, and the low incomes of most residents rendered the use of European banks’ services irrelevant.

The current trends are quite different: CIS citizens make international transactions and set up accounts with overseas banks with increasing frequency.

CIS residents have always been and remain high risk customers for foreign banks because the global scene associates former Soviet countries with a high level of corruption and poor standards of living. This means that the reply to the question regarding the source of funds should be prepared both by CIS citizens and their companies (even foreign ones) since banks will pay particular attention to them.

The habit to keep money in “suitcases” and to ignore income taxes is a peculiar feature of post-Soviet people. As a result, even honest “suitcase” money cannot answer the question of their source (especially when not all taxes have been paid on them). Moreover, countries all over the world (including CIS states) are implementing cash transaction restrictions, even more complicating the use of sacramental “suitcase” money.

Considering all of the above aspects, we advise you refrain from answering the questions yourself and refer to experts all at once.

Will the Disclosure of Source be Demanded in CIS countries?

The global anti-money laundering trends are already reflected in the laws of CIS countries. Let us consider the most vivid patterns through the example of Ukraine and Russia.

Within the past year almost every 10th Russian resident had their banking card blocked. In most cases cards are blocked after purchases abroad or at online stores. Why does this happen? In September 2019 the Law “On the National System of Payment Cards” was amended, allowing card blockage for up to 30 business days if the funds credited to the card are suspected to be illegal. The point is that even the most seemingly innocent transactions can raise suspicions on the part of banks. Those making major purchases, large transfers or withdrawals, or paying with their card abroad are exposed to the risk of blockage. Unblocking the card (and the money kept therein) is only possible after the bank accepts the proof of legal source of your funds.

As for Ukraine, customer identification had been sufficient for banks to provide banking services before, but the National Bank’s Decree No.42 enacted in 2017 requires banks to verify sources of their customers’ funds. Citizens receiving most of their pay off the books and having a minimum official income (if any at all) are having the toughest time in this case. To confirm their income they would have to present a number of other documents in addition to the salary certificate.

If you are intending to set up a deposit account, transfer funds or place them in an account in Ukraine, with the amount exceeding UAH 150,000 — it is about time to make sure you can confirm your legal source of income and answer the questions the banks may ask!

When is the Source of Funds Looked into?

Let’s consider a scenario: you managed to save up a substantial amount of money in order to buy a house or car you have long dreamed about, or you are planning to move to another country to reside there permanently. And now you are a few steps from fulfilling your dream, you just need to open the door. But to do that, you will first have to explain where you got the money for your dream purchase. And if you fail to provide a convincing explanation and relevant documents, the door may remain closed and you will have to forego your house, car or new place of residence.

For this reason, if the bank becomes suspicious about any transaction you undertake, you must confirm the source of the specific funds so that the bank can determine the transaction’s conformance to your actual incomes.

What are the Legal Sources and How does One Confirm the Origin of Money?

Unfortunately, there is no universal right answer to the question “how to confirm the source of funds.”

The following could serve as proof of funds: salary certificate, tax returns, sales proceeds, sold property, statements or receipts from other banks, gift contracts, inherited assets, lottery wins etc. One should keep in mind that loan agreements are rarely accepted as confirmation because in this event the lender will have to provide proof of the funds’ origin.

Obviously, businessmen taking thorough care of their accounting records (including those pertaining to their personal finances) will find it the easiest to confirm the source of their money for the bank. If your documents are in good order and the transaction involves a moderate amount, you should not experience any source-related issues. But with large sums and no documents to prove the source of funds, the bank will be bound to refuse the financial transaction.

We advise you to do simple things but do them regularly: collect and keep documents which confirm the receipt of money.

But before you tackle the question yourself, ponder the consequences of error. The cost of this error could be high: your transaction might be cancelled and the account blocked, and the information about suspicious transactions undertaken by you could be passed on to the authorities which might initiate an official investigation. So it is best to refer to professionals right from the beginning who will give you appropriate advice and help confirm the source of funds the right way.

We at SBSB deal with requests concerning the origin of funds both for individuals and international companies in various jurisdictions and we know which banks are better and more cost-efficient to work with, and which ones are not worth getting involved with.

Guided by your individual specifications and needs, we will pick the optimum solution for you within the shortest time possible, helping you and your business avoid unnecessary risks which may be inherent in the financial transactions.