Source of funds vs. source of wealth: two different questions

Bank compliance teams work with two related but distinct concepts. Source of funds is the origin of a specific sum moving through a specific transaction, say, a $200,000 wire into a new company’s account. Source of wealth is the origin of a client’s entire net worth: how the person built the fortune of which this transaction is only a slice. Banks check the first almost every time and escalate to the second only when the risk profile warrants it.

Source of funds for a US business sits squarely in the first category. The bank needs to trace one specific flow of money from its origin to the company’s account, not obtain a full picture of the owner’s finances. The distinction matters in practice: a client does not need to lay bare an entire financial history, only to build a provable chain for the sum being contributed to the business. Collapsing the two levels produces a predictable result: the client sends over a far larger pile of documents and receives more questions in return.

The legal framework: from the Bank Secrecy Act to private banking due diligence

A bank’s duty to trace money rests on several overlapping rules. The foundation is the Bank Secrecy Act (BSA), codified at Title 31 of the United States Code (U.S.C.) § 5311 and following. Under it, the Financial Crimes Enforcement Network (FinCEN) adopted the Customer Due Diligence Rule (CDD Rule), which requires a bank to identify the beneficial owners of a legal entity customer and to understand the nature and purpose of the relationship (Title 31 of the Code of Federal Regulations (C.F.R.) § 1010.230).

The second layer is Section 312 of the USA PATRIOT Act, codified at 31 U.S.C. § 5318(i), and this is where commentary frequently goes wrong. The provision reaches two categories of account: correspondent accounts a US financial institution maintains for foreign financial institutions, and private banking accounts held for non-US persons. For the second category, the statute names ascertaining the source of funds deposited into the account as a minimum due diligence standard, alongside identifying the nominal and beneficial owners. An account qualifies as a private banking account at an aggregate deposit threshold of $1 million (31 C.F.R. §§ 1010.605, 1010.620).

Two practical consequences follow. First, the demand for source-of-funds documentation is neither a particular bank’s initiative nor a reaction to a Russian passport. It is a statutory minimum the bank cannot waive. Second, the larger the contribution, the likelier the relationship falls into enhanced due diligence (EDD), where what the bank asks for changes in kind rather than merely in volume.

A separate factor is practical rather than statutory. A wire out of Russia almost always routes through a correspondent bank in a third jurisdiction. If the SWIFT payment message leaves the sender or the purpose ambiguous, the correspondent can hold or return the wire before the receiving bank’s compliance desk ever opens the file.

The sanctions layer: why source of funds for a US business is reviewed differently

For Russia-connected clients, a second and independent review runs alongside anti-money laundering (AML) diligence: sanctions screening. It asks a different question. AML asks whether the money was lawfully earned. Sanctions screening asks whether a person blocked by the Office of Foreign Assets Control (OFAC) holds an interest in it. Money can be entirely lawful and still be blocked.

The governing program is the one established by Executive Order 14024 and implemented at 31 C.F.R. Part 587. The mechanism that matters most here is the 50 percent rule: an entity owned, directly or indirectly, in the aggregate, 50 percent or more by one or more blocked persons is itself blocked, even though it never appears on the SDN List.

If the capital being contributed came from the sale of an interest in such an entity, from dividends it paid, or as payment under a contract with it, the money is blocked property. A US bank in that position does not decline the wire; it blocks it and reports to OFAC within ten business days (31 C.F.R. § 501.603). Releasing the funds afterwards requires a specific OFAC license, a process measured in months and with no predetermined outcome.

This is why documenting the income alone is not enough. Alongside proof of earnings, the ownership chain on the payer’s side and behind the income itself has to be reconstructed before the wire moves, not after the money has come to rest on a correspondent account.

Building the evidence base by income type

The documentation set changes substantially depending on what specifically funded the capital contribution.

• Employment income and dividends: the employment agreement, a personal income and tax certificate (the form that replaced the former 2-NDFL), dividend-distribution resolutions, and tax filings covering the accumulation period
• Sale of real estate or a business interest: the purchase-and-sale agreement, proof of the title transfer, evidence of tax paid on the sale, and a bank statement showing the buyer’s payment landing
• Inheritance or gift: the certificate of inheritance or the gift agreement, together with proof of payment of the applicable tax or of a lawful exemption from it
• An investment portfolio: brokerage statements showing the liquidation, a multi-year deposit history for the account, and proof of the source of the original contributions
• Cryptocurrency: a blockchain-analytics report tracing the funds’ origin and route, the KYC records held by the exchange where the fiat conversion took place, and proof of control over the wallet by signed message or test transaction

One requirement runs across all of these. Documents drawn up in Russian are accepted as certified English translations, and official documents need an apostille, Russia being a party to the 1961 Hague Convention. A translation the client produced personally is not, as a rule, something a compliance desk will work on.

What every scenario has in common is this: the bank has to document source of funds for a US business at the level of the actual transaction, not accept a general description of where the client’s money comes from.

The mistakes that send a file back for more questions

A significant share of denials and stalled reviews are caused not by the character of the money but by how its path looks on paper.

• A wire from a third party. The sender is not the company’s owner but a partner, a relative, or a friendly firm. To the bank that is a break in the chain, one that has to be explained separately and sometimes cannot be explained at all.
• A gap between declared income and the size of the contribution. The client evidences employment income and then contributes a sum that income could not have accumulated. This is the single most common trigger for the bank to escalate to source of wealth.
• Transit through an account in a third jurisdiction with no explanation. An intermediate account is not itself a problem; the problem is an intermediate account that appears in the statements with no document explaining why it was needed.
• Splitting a transfer into several parts. This reads as an attempt to stay under control thresholds, even where the reason was purely operational.
• Round sums with nothing behind them. A wire of exactly $300,000 with no contract or calculation attached looks like a figure that was assigned rather than earned.
• Funds from an entity the client does not own. Beyond the AML questions, this puts the payer’s ownership structure and the 50 percent rule directly in the reviewer’s path.

What a source-of-funds memorandum actually contains

When the capital history spans several sources or crosses several jurisdictions, a verbal explanation or a loose stack of documents is not enough; the bank needs one coherent record. We build that memorandum around a fixed five-part structure: (1) a narrative summary of who the client is and the overall capital history; (2) a chronological table of the money’s movement, with dates, amounts, and intermediate accounts; (3) an exhibit list cross-referenced to each row of that table; (4) a section on the ownership structure behind the source of the funds, addressing directly the absence of any nexus to persons or entities on the SDN List, including indirect ownership under the 50 percent rule; (5) a closing client certification attesting to the completeness and accuracy of what has been submitted.

Structured this way, the memorandum reconstructs source of funds for a US business chronologically and without gaps from the point the income was earned in Russia or elsewhere to the point the capital lands in the US company’s account, so nothing is left for the compliance officer to fill in unaided. It is prepared before the application goes in, and the timing carries weight: a bank that receives the memorandum with the application works from a stated account of events, while a bank that requests an explanation after its first doubts works from an account it has already called into question.

What this changes in practice

In the end it is the quality of that documentary reconstruction, and not the client’s Russian citizenship as such, that determines whether a bank can accept source of funds for a US business without extended back-and-forth. We have separately covered what banks actually ask foreign nationals opening a US bank account, and why banks deny accounts to Russian citizens in the first place. This piece addresses the narrower and, in practice, earlier question of how to build the evidentiary record before that conversation with the bank even starts.

Fesenko, P.C. Law Offices prepares source-of-funds memoranda for Russian-origin clients ahead of their approach to a bank, tailored to the specific institution’s requirements and to sanctions-compliance considerations.