For example, a proof of funds is generally obligatory for people seeking mortgages as bankers are often more willing to issue them to those who have the sufficient funds to pay their mortgages off as opposed to those who cannot do so. Thus, a proof of funds letter provides the selling or lending party with confidence that the funds are obtainable and legitimate.
A proof of funds is commonly used when commencing commercial transactions between parties who do not know each other. The purchaser’s bank produces evidence in a standard format that their client is good for a transaction up to the value of xx, based on yy item etc. Usually, such letters have to be produced / verified / confirmed by a class A international bank, as local banks do not have the status required by counter-party banks in other countries.
Proof of Funds Versus Proof of Deposit
In commercial banking, proof of deposit is the financial institution’s verification of the dollar amount of a check or draft being deposited. To do so the institution will compare the amount written on the check to the amount on the deposit slip. (This is the second step in the check presentation for payment process, following the sorting of the checks by a reader-sorter machine.) Both proof of deposit and proof of funds are methods that commercial banks use to secure the variety of transactions they process.
Proof of Funds and Commercial Banking
Commercial banks differ from investment banks in that they work primarily with individual, retail customers. Commercial banks accept deposits; offer checking account services; make business, personal and mortgage loans; and offers basic financial products like certificates of deposit (CDs) and savings accounts.
In contrast, an investment bank specializes in large and complex financial transactions, such as underwriting. Investment banks may also act as intermediaries between a securities issuer and the investing public (in an IPO), facilitate mergers and other corporate reorganizations, and act as a broker and/or financial advisor for institutional clients.
Commercial banks make money by providing loans and earning interest income from those loans. The money they use to provide the loans in the first place comes from customer deposits. Net interest income is the amount of money a commercial bank earns via the spread between the interest it pays on deposits and the interest it earns on loans.
Some commercial banks, such as JPMorgan Chase, also have investment banking divisions, following the repeal of the Glass-Steagall Act of 1932 (passed during the Great Depression). At the time, the prevailing thought was that financial markets would be more stable if commercial banking and investment banking were kept separate.
Leased Proof of Funds
A proof of funds can in some cases be borrowed or leased, which is where a client pays a fee for cash to be deposited into their personal or business bank account, but the cash is limited by the bank as the client is not permitted to withdraw it or complete transactions with it. By keeping the funds unable to be used, it safeguards the asset holder and makes them ensure that the cash can solely be used to complete proof of funds transactions based on what the loan agreement dictates.
Blocked Proof of Funds Letter
A blocked proof of funds letter is a letter from a financial institution or government that approves the halting or reserving of a person’s funds on behalf of them. Governments can reserve a country’s funds by restricting the maximum amount of funds that is allowed to be spent at a certain period of time in order to control the country’s cash flow. Other circumstances where funds may need to be blocked may be due to political or emergency reasons such as during war or following the death of an account holder.
A request for a prepaid Proof of Funds letter, or an opportunity to invest in, lease or purchase a proof of funds letter should send the parties to turn to their known legitimate bankers for assistance as there are many scams using this terminology. Some con artists planning a financial scam may request a proof of funds to make sure that they are concentrating their efforts on someone with significant financial worth. Therefore, it is important to make sure that you only give proof of funds to trusted individuals, whom you have thoroughly investigated.
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