Enhanced due diligence asks for the source of wealth but not how to judge it. A year-by-year reconstruction gives a number a second reviewer can check.
To test source of wealth, rebuild the wealth the client's documented history could have produced, saved earnings compounded at a realistic return plus proven inheritances and property gains, and compare it with what the client declares. In an illustrative case, a 52-year-old executive declares €2.6m; the reconstruction explains €2,014,061, so €585,939, 22.5 per cent of the declared wealth, is unexplained, above a 20 per cent internal tolerance and therefore a request for more evidence, not yet a suspicion.
Worked in full in The EU AML Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Under the EU's Anti-Money Laundering Regulation, Regulation (EU) 2024/1624, which applies from July 2027, enhanced due diligence measures for high-risk relationships include obtaining additional information on the source of funds and source of wealth, and for politically exposed persons establishing both is required. The rule says what to establish, not how. A plausibility model turns "the client's wealth appears consistent with their profile" into a number that a second reviewer, an auditor or a supervisor can check.
| Career phase | Gross salary, € | Net of tax | Saved | Saved a year, € |
|---|---|---|---|---|
| Age 25 to 34 | 60,000 | 65% | 15% | 5,850 |
| Age 35 to 44 | 120,000 | 60% | 20% | 14,400 |
| Age 45 to 51 | 220,000 | 55% | 25% | 30,250 |
| Input | Value |
|---|---|
| Declared net wealth today | €2,600,000 |
| Nominal return on savings, a year | 5.0% |
| Inheritance received at age 45, probate documented | €600,000 |
| Gain on main residence, purchase and valuation documented | €500,000 |
| Internal tolerance before escalation, % of declared | 20% |
Savings pot: Wt = Wt−1 × (1 + r) + grosst × net % × savings %
Explained wealth = savings pot + documented windfalls grown at r + documented asset gains
Unexplained % = (declared − explained) ÷ declared
In Excel, one row per year of age, with the prior balance in C2, the return in $B$1 and the year's saving in D3: =C2*(1+$B$1)+D3, copied down to age 51.
Step 1, saved earnings. Over 27 working years the client saves €414,250 of net pay. Compounded at 5.0 per cent, the pot reaches €73,581 by 34, €300,977 by 44 and €669,800 today: €255,550 of it is investment growth.
Step 2, documented windfalls. The €600,000 inheritance, grown at the same 5.0 per cent for seven years, is worth €844,260. The house has gained €500,000 on documented purchase and valuation figures.
Step 3, compare. €669,800 + €844,260 + €500,000 = €2,014,061 explained, 77.5 per cent of the €2.6m declared. The gap is €585,939, or 22.5 per cent.
Step 4, apply the tolerance. The firm's policy allows 20 per cent, €520,000, for the imprecision of the model. The gap exceeds it by about €66,000, so the file goes back to the relationship manager with specific questions: bonuses, share awards, a business sale or a second property would each be a plausible and documentable explanation.
| Source | Amount | % of declared |
|---|---|---|
| Saved earnings, compounded | 669,800 | 25.8% |
| Inheritance, compounded | 844,260 | 32.5% |
| Property gain | 500,000 | 19.2% |
| Explained | 2,014,061 | 77.5% |
| Unexplained | 585,939 | 22.5% |
Two reality checks help. Across the whole career the client earned €3,340,000 gross and €1,957,000 after tax; declared wealth is 132.9 per cent of all the net pay ever received, which is only possible with windfalls or high returns. And the documents carry the weight: if the inheritance could not be proven, the unexplained share would jump to 55.0 per cent, €1,430,200, and the conversation would be a different one.
An unexplained gap is a prompt for evidence, not a finding of money laundering. The output of the model is a list of questions and the documents that would answer them, recorded in the file with the reviewer's conclusion.
| Return | Savings 0.8x | Savings 1.0x | Savings 1.2x |
|---|---|---|---|
| 3.0% | 35.6% | 31.4% | 27.2% |
| 5.0% | 27.7% | 22.5% | 17.4% |
| 7.0% | 18.0% | 11.5% | 5.1% |
The result is sensitive to the return assumption, because it compounds on both the savings and the inheritance. To explain everything with no new evidence, the client would need to have earned 8.70 per cent a year throughout, or saved 1.87 times the base-case rates, 47 per cent of net pay in the last phase. Neither is impossible, and both are testable: portfolio statements show the return, and a lifestyle that the file already describes shows whether a near-half savings rate is credible. This is why the firm should fix its default return and savings assumptions in procedure rather than let each reviewer choose, the same discipline that applies to customer risk scoring.
Rebuild wealth year by year from documented earnings, savings and windfalls, compound it at a fixed procedural return, and measure the gap against what is declared: 22.5 per cent here, above a 20 per cent tolerance, so the next step is evidence. The EU AML Handbook sets out how EU firms meet their AML obligations in practice, and the free workbook for this case carries the book's models. For how the result feeds the overall rating, see residual risk in an AML risk assessment.
Source of wealth is how the client accumulated their total net worth: career, business sale, inheritance, investments. Source of funds is where the specific money in a transaction or account came from. In the illustrative case, the reconstruction explains €2,014,061 of a declared €2.6m; that tests source of wealth, and each incoming transfer still needs its own source of funds check.
A fixed, moderate nominal return set in procedure, not chosen case by case, and replaced by actual portfolio statements where they exist. The choice matters: in the illustrative case the unexplained share is 31.4 per cent at 3.0 per cent a year, 22.5 per cent at 5.0 per cent and 11.5 per cent at 7.0 per cent.
Not on its own. A gap above tolerance is a request for evidence such as bonus statements, share award records or sale contracts. Suspicion arises if the client cannot or will not explain it, or the evidence contradicts the file. In the illustrative case the €585,939 gap exceeds a €520,000 tolerance, so the file goes back with specific questions.
This article is one calculation from The EU AML Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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