A Core Aspect of EDD: Why Source of Funds is Important

When most people hear the phrase Enhanced Due Diligence (EDD), their first thought is usually paperwork, extra forms, longer compliance reviews, and an extended checklist that slows down customer onboarding. But in reality, EDD is not meant to be a bureaucratic burden. It is a lens, one that financial institutions use when the risk is higher, the stakes are greater, and the cost of mistakes could be catastrophic.

At the center of this lens is one question: Where is the money really coming from?

Going Beyond the Usual Checks

Too often, EDD gets watered down into a glorified version of standard due diligence. A compliance team may add a few more identity verifications, ask for extra documentation, and then label it “enhanced.” On the surface, it ticks a box. In practice, though, it leaves out a critical pillar, “the source of funds.”

Understanding the source of a customer’s funds is not just another line item in compliance. It is the foundation that gives every other check its meaning. You can verify identities, scan sanctions lists, and review transaction histories, but without clarity on where the money originated, you are only looking at the surface.

A customer’s funds might appear legitimate when viewed through ordinary KYC measures, yet they could be flowing from illegal activity hidden behind layers of intermediaries, shell companies, or seemingly harmless cross-border transfers.

That’s why regulators worldwide insist that Enhanced Due Diligence must go deeper than CDD. And in Africa, where informal economies and opaque ownership structures are common, the importance of “source of funds” cannot be overstated.

Why Source of Funds Matters More Than Ever

Financial crime today rarely wears a disguise. Onboarding documents can look clean. Digital footprints may seem ordinary. Even transaction volumes can fall within expected limits. The sophistication of money laundering means risk is often buried, disguised as routine business.

Consider layered transfers, where funds pass through multiple accounts in different countries to obscure their origins, or the use of shell companies legally registered entities with no genuine operations to funnel illicit money into the financial system. On the surface, nothing looks suspicious. But when regulators or investigative journalists peel back the layers, the trail of corruption or organised crime becomes undeniable.

This is why source of funds verification is a core part of EDD. Without it, everything else from identity verification, to watchlist screening, and even transaction monitoring becomes secondary.

Around the world, regulators are sharpening their focus. Instead of merely asking, Do you know your customer?, the new expectation is: Do you know where their money has been?

In Nigeria, the Central Bank has repeatedly fined banks for AML failures linked to inadequate due diligence around customer transactions. In Kenya, mobile money operators have been cautioned for overlooking unusual inflows from high-risk jurisdictions. And across South Africa, the Financial Intelligence Centre continues to push institutions toward deeper scrutiny of wealth sources, especially in cases involving politically exposed persons (PEPs).

For financial institutions, this is not just about avoiding fines. It is about safeguarding their reputation, building credibility with international partners, and assuring investors that they take high-risk exposures seriously.

The Hard Part and the Opportunity

Let’s be honest, verifying a customer’s source of funds is one of the hardest aspects of compliance. Unlike a passport number or an address, money flows are not always straightforward to validate.

Documents provided by customers can be vague or misleading. In economies where cash transactions dominate, proof of income can be nearly impossible to verify. And in cases involving international trade or investment, tracing money through multiple jurisdictions is a complex and time-consuming task.

This challenge is amplified by customer resistance. Individuals or companies may hesitate to share detailed financial histories, either out of privacy concerns or because they are intentionally obscuring their tracks. Compliance teams, meanwhile, are under pressure to approve accounts quickly without exposing their institutions to risk. It is a delicate balance: move too fast, and you overlook risks; move too slowly, and you frustrate customers in a competitive market.

But within this challenge lies an opportunity. Technology is transforming how institutions approach EDD. Artificial intelligence, machine learning, and advanced analytics are enabling compliance teams to cut through the noise. Instead of sifting through mountains of raw data, AI-driven tools can flag suspicious transaction patterns, highlight inconsistencies in income sources, and surface hidden red flags that human reviewers might miss.

At Pastel, we’ve seen this shift firsthand. Our EDD module empowers compliance officers with sharper visibility. Rather than drowning teams in unnecessary details, it highlights the areas that matter most, ensuring that reviews are focused and efficient. The outcome is not just faster onboarding, but smarter judgments in the cases where precision is non-negotiable.

Clarifying the Difference Between Source of Wealth and Source of Funds

It’s worth clarifying the difference between source of funds and source of wealth, two terms often confused in compliance conversations. Source of funds refers to the specific origin of money involved in a transaction, such as a salary payment, proceeds from a property sale, or business income. Source of wealth, on the other hand, examines the broader picture of how a customer accumulated their overall financial standing.

EDD requires both, but source of funds is usually the first line of defense. If the funds entering an institution cannot be traced to a legitimate and verifiable origin, the entire customer relationship carries an inherent risk.

The Bottom Line

In high-risk relationships and transactions, source of funds verification, when done well, shields institutions from financial crime, strengthens resilience against regulatory scrutiny, and builds lasting trust with stakeholders.

Institutions must stay one step ahead by asking not just Who is this customer? but also Where is their money coming from?

When compliance teams focus on this core question, EDD becomes more than a checklist. It becomes a proactive defense system. It reassures regulators, partners, and customers that the institution is future-proof.