Which of the following is a red flag indicator for The Source of Funds?

• A. Represents unusually high capital in comparison with similar businesses
• B. Stems from large financial transactions that cannot be justified by the corporate purpose
• C. Represents a significant increase in capital for a recently incorporated company without a logical explanation
• D. Stems from a security transferred with an excessively high or low price attached

Answer: (C)

The main idea here is to identify where the money comes from. For the Source of Funds, you’re looking for explanations that trace capital back to legitimate, identifiable origins. A sudden, substantial boost in a newly formed company’s equity with no logical or documented reason is a strong red flag because there’s no established history or credible source to verify where that money came from. In a brand-new entity, you’d expect any capital injection to be clearly tied to founders, investors, or documented funding rounds with verifiable sources. When that justification is missing, it’s difficult to confirm the funds’ origin, which raises money-laundering risk and triggers heightened scrutiny and due diligence.

By contrast, while representing unusually high capital compared with peers can also raise concern, it’s less specific to the source and could have legitimate explanations (different business models, planned capital raises, or strategic investments). Large transactions not justified by corporate purpose point more to how funds are used or presented, not necessarily where they originated. A security transfer with an oddly priced attachment concerns valuation or pricing practices rather than the provenance of the funds.