Proof of Funds

The business typically requires proof of funds before the person makes a large purchase. For example, when buying a house, real estate agents heavily rely on proof of funds verification. This confirms that the person not only has the money for it but also has legal access to it, as the proof comes from a trusted, legitimate source, such as a bank. 

Proof of funds checks work as a security measure in many financial institutions. However, this is also a vital compliance procedure and a legal, mandatory requirement in many jurisdictions. For example, POF verification is required by the Bank Secrecy Act (BSA) in the USA. The EU has its own framework, Anti-Money Laundering Directives (AMLDs), which also require proof of funds as a method to prevent financial crime. 

The POF document should have certain details, such as:

• Official bank statement.
• Bank name and address.
• Total balance of all funds.
• Signature of authorized bank personnel.
• Balance of funds in checking and savings accounts.

Proof of funds can be used as a security and verification method in various instances. 

Some key use case examples are:

• For investment opportunities. Investors need to provide POF for business purchases or private placements. 
• Before applying for a loan. This is to assess the borrower’s ability to cover the payments.
• In private, high-value sales. When the transaction amount is large, it is due to the seller buying art or other luxury goods. 
• If a business needs licensing. For example, when the business applies for a permit or a license and needs to demonstrate financial stability.
• Before real estate transactions. This is to confirm the buyer’s ability to complete the purchase.

Customer Due Diligence (CDD) is a set of processes aimed at helping companies assess and identify money laundering risks by collecting information about their customers. In this sense, verifying proof of funds provides evidence of a customer’s transaction log, helping companies confirm they aren’t involved in money laundering. If any suspicious activity is found, businesses should conduct additional checks, which are a part of stricter due diligence, or Enhanced Due Diligence (EDD). 

Proof of funds verification comes with challenges that companies face, such as:

• Fake POF documents. Fraudsters use special techniques that sometimes make it hard to spot the difference between a real and a fake document. As a way to solve this issue, some companies use AI-powered solutions that quickly identify alterations.
• Compliance requirements and privacy laws. Regulated industries, such as fintech, need to implement a compliant proof of funds verification process that complies with all local and global regulations, including data protection laws, such as the GDPR.