Everyday AML Risks in Insolvency and How to Reduce Them

IPA Insolvency Practitioner newsletter AML Digest, August 2025

Article by Tony Walker, Head of Financial Services, Insolvency and Accounting, Armalytix

The regulatory spotlight on Anti-Money Laundering (AML) compliance for Insolvency Practitioners (IPs) has never been more intense. The Insolvency Service’s 2024 Annual Review highlights accelerating regulatory and legislative changes, bringing new requirements for reporting, ongoing monitoring, and data sharing – alongside greater oversight, inspections, and complaints monitoring by Recognised Professional Bodies (RPBs).

With updated sanctions rules, higher expectations for due diligence, and closer scrutiny of routine casework, IPs are under growing pressure to spot and address risks – even in seemingly straightforward matters. Many recent penalties, consent orders, and advisory notices stem not from deliberate misconduct but from “technical breaches” that still influence ongoing risk assessments. In short, regulators now expect IPs to actively demonstrate that AML risks are understood, monitored, and managed at every stage of an appointment.

Where are the hidden AML risks?

Modern insolvency practice presents numerous opportunities for money launderers to exploit established processes. The 2020 National Risk Assessment specifically identified insolvency as a target for money launderers, highlighting how criminals exploit the legitimate movement of assets during formal proceedings. IPs must remain vigilant for specific warning signs that indicate potential money laundering activity.

1. Sale of distressed assets
Realising assets, such as property or machinery, is a routine task. Yet if those assets or their original financing or ownership chain involve criminal funds, you may be unknowingly dealing with criminal property. Be alert to rapid turnover, suspicious ownership chains, or payments from unclear third parties.

2. Director loan account (DLA) settlements
Overdrawn DLAs are common in owner-managed businesses approaching insolvency. A last-minute “set-off” against unverifiable dividends, or a write-off just before liquidation, can point to tax evasion or other offences and should trigger enhanced due diligence. The safest approach is to review bank data directly from the source, rather than relying on financial statements that may have been “tidied up” along the way.

3. Members’ Voluntary Liquidations (MVLs)
On the surface, MVLs seem low-risk. Yet large cash payouts, particularly to shareholders in high-risk areas, carry AML exposure. A quick check on the backgrounds of directors and shareholders before appointment is a smart, low-effort safeguard.

4. Fee payments and expense recoveries
Professional fees are often paid from the estate before full clarity on asset provenance. CCAB guidance stresses that IPs handling tainted funds without a DAML risk are committing a principal offence under POCA. Ensure records clearly document the basis for each drawdown, and have them reviewed independently.

Why legacy processes fail

Many IPs continue to rely on manual bank statements or basic ID checks – approaches that are easily manipulated and often outdated by the time they’re reviewed. Traditional PDF bank statements can be altered, and photo uploads of documents do not verify authenticity.

Fragmented documentation creates another significant vulnerability. When risk assessments are inconsistent across teams or locations, gaps emerge that money launderers can exploit. The CCAB guidance emphasises that IPs must maintain comprehensive records, but fragmented approaches make this challenging to achieve effectively.

The most concerning trend is the prevalence of “tick-box” risk assessments rather than meaningful, ongoing monitoring. Many practitioners conduct basic checks at appointment but fail to refresh these assessments at key transaction stages or when circumstances change. This static approach misses evolving risks and regulatory changes.

Digital tools that make a big difference

Comprehensive facial recognition and liveness ID checks
A quick app-based check against a biometric passport or driving licence can confirm identity in minutes and leave a clear, timestamped record.

Direct bank data access via open banking
Instead of requesting PDF statements and sifting through them manually, open banking lets you pull accurate, unedited transaction data directly from a bank account, eliminating reliance on potentially manipulated PDFs. This addresses the requirement for obtaining proof of funds/wealth as an enhanced due diligence measure.

Smart source of funds analysis
Technology-led solutions can automatically flag unusual transactions or risk indicators that manual checks might miss. Modern platforms can detect patterns linked to potential money laundering, such as rapid fund movements or transactions involving high-risk entities.

Ongoing sanctions and PEP monitoring
Automated daily checks against official watchlists mean you’re alerted as soon as a new risk emerges, rather than discovering it months later.

Integrated audit trails
Having ID checks, up-to-date source of funds analysis and transaction reviews all logged in one place makes it much easier to respond to questions from regulators or creditors.

Key takeaways for IPs

1. Don’t rely on documents and manual spot checks – update to data-driven, real-time monitoring.
2. Review and challenge “business as usual” DD routines, especially source of wealth and unusual fund flows.
3. Adopt tools that create clear, auditable records and automate key compliance tasks.
4. Train staff to spot new red flags and use technology confidently.
5. Remember, robust AML is not just risk reduction, it’s a reputational asset for your firm.

Conclusion

AML risks in insolvency are not new, but what has changed is the regulatory tolerance for inconsistent manual controls. The expectation is clear – AML must be proactive, not reactive. With modern technology offering a pathway to enhanced compliance while improving operational efficiency, persisting with paper-based processes is increasingly difficult to justify.

For more information about strengthening your AML procedures with digital solutions, contact Tony Walker at tony@armalytix.com.

Please note that guest content does not necessarily represent the views of the IPA.