If you're running a small business in the Netherlands and dealing with large payments, new clients, or unexpected financial flows, chances are you've heard the terms Source of Funds (SoF) and Source of Wealth (SoW). They often come up together. They sound similar. But treating them as the same could cost you, legally, financially, and reputationally.
In this article, we’ll help you:
- Understand the difference between SoF and SoW
- Learn when and how to verify each one
- Avoid common compliance pitfalls
- Protect your business from financial crime risk
Let’s get straight into it, no fluff, no fear.
What Is Source of Funds (SoF)?
Definition:
Source of Funds refers to where the money used in a specific transaction comes from.
SoF is transaction-based. It focuses on the origin of the money being used right now, for example, to pay an invoice or invest in a partnership.
Common Examples of Source of Funds:
- Monthly salary or freelance income
- Bank savings
- Proceeds from sale of assets (like a car or house)
- Insurance payouts
- Gambling winnings (high-risk: often misused for money laundering)
Key Point:
SoF is not about how rich someone is. It’s about tracing the path of money used in a particular deal.
What Is Source of Wealth (SoW)?
Definition:
Source of Wealth refers to how an individual or company accumulated their total financial value over time.
SoW is profile-based, not transactional. It looks at someone’s entire financial history, including:
- Long-term savings
- Ownership of property
- Investments, shares, pension funds
- Inherited wealth or gifts
- Valuable items like car collections, crypto wallets, art, or even vintage video games worth millions
Important Note:
SoW includes SoF but goes further. It paints a bigger picture: is this person’s total wealth plausible? Does their lifestyle match what they claim?
How Regulation Applies to SoF and SoW
There’s no blanket law saying you must check both SoF and SoW in every case. But here’s what you need to know:
- SoF is often required for high-value or unusual transactions.
- SoW is expected for higher-risk clients, especially PEPs (Politically Exposed Persons).
- If your client is funding a transaction through a third party (e.g. a trust or relative), you may need to check both.
Risk-Based Approach:
You are expected to assess the risk and act accordingly, not blindly tick boxes. Document your decision-making process and rationale for each case.
Documentation Best Practices for SMEs
Whether you're accepting a €5,000 crypto payment or €50,000 from an overseas investor, documentation protects your business. Here’s what to do:
For Source of Funds:
- Request recent payslips or bank statements
- Ask for transfer confirmations or asset sale receipts
- Always record communication about the payment
For Source of Wealth:
- Request proof of property, shares, or other assets
- Ask how the wealth was built (career, inheritance, business)
- Build a coherent narrative, not a complete list
Pro Tip from Xtroverso:
You don’t need to verify every euro of someone's wealth. You need to build a logical, documented explanation that makes sense, and prove you asked the right questions.
Why It Matters: The Risk of Getting It Wrong
In 2005, the London bombings were partially funded by a schoolteacher who took out a legitimate loan. No red flags. No suspicious transaction. Why? Because no one asked why a schoolteacher needed that money.
And this is the core issue:
SoF and SoW checks are not about control. They’re about responsibility.
You’re not just checking for fraud. You’re blocking:
- Terror financing
- Human and animal trafficking
- Environmental crimes
- Tax evasion
- Organized crime
Common Mistakes SMEs Make
- Confusing SoF and SoW in client onboarding
- Over-reporting low-risk clients out of fear
- Under-documenting decisions
- Failing to ask follow-up questions when something feels "off"
Xtroverso Advice: Use the 3D Rule
Ask. Assess. Archive.
- Ask relevant questions — how was this money earned? What assets do you own?
- Assess the level of risk — is this transaction or client unusual?
- Archive everything — emails, explanations, supporting documents.
This isn’t bureaucracy. It’s your legal and ethical firewall.
Protect Your Company’s Integrity
Whether you're an SME owner in Groningen, a startup in Eindhoven, or a freelancer in Den Haag, you can’t afford to ignore financial risk signals. The goal isn’t to block clients. The goal is to accept them wisely and safely.
Your business is not a laundromat for dirty money.
Let the banks fear the regulators, you focus on doing the right thing, with the right evidence, every time.